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March 21, 2008
Guest Post: Security, Chinese Imports and American Ports: the Current Status of the American C-TPAT Initiative
[Editor's note: The safety of consumer products imported from China now makes national news. But what of national security? Directly after 9/11, news reports on poor security oversight of major American ports flooded the media. Many federal programs, it seemed, were proposed to combat the gaping hole in American armor. Then silence.
To what extent have these programs succeeded? Indeed, no terrorist activity -- or none we know about -- has arrived on American shores via the container yards. Surely it would appear that the federal government has been most successful in deterring hostile activity.
Containers from China may or may not present significant security problems, but due to their number, the perception is, perhaps, too frightening to ignore entirely. We’re grateful to Juli Schwartz of Stein Shostak Shostak Pollack & O'Hara LLP for today's post on the C-TPAT program with regard to China. C-TPAT stands for Customs-Trade Partnership Against Terrorism. For more information on the program, click here.
The firm practices exclusively in the areas of customs and international trade law. Ms. Schwartz was joined in this article by colleagues Elon Pollack, Jason Li and Brian Murphy.]
China signaled its willingness to enter into an MOU [Memorandum of Understanding] on C-TPAT validations in late 2007, following Customs Commissioner Ralph Basham's meeting with his Chinese counterpart, Mu Xinsheng. [Editor's note: “A C-TPAT validation is a process through which the U.S. Customs and Border Protection (CBP) C-TPAT program meets with company representatives and visits selected domestic and foreign sites to verify supply chain security measures contained in the C-TPAT participant’s security profile are accurate and are being followed.”]
However, it does not appear that a final agreement has yet been reached. Negotiations are, ostensibly, ongoing, so an announcement later in the year may be forthcoming. Since 2003, however, there has been a cooperative agreement between the United States and China in place with respect to the Container Security Initiative (CSI). As implemented, the program affords CBP [US Customs and Border Protection] limited access to participating ports upon information that certain containers are high risk.
When these identifications are made, CBP may request that General Administration of PRC Customs (GACC) liaisons conduct electronic inspections of U.S. bound cargo. (CBP officials, however, are not allowed to perform law enforcement functions, including such inspections, directly.) The CSI program has been operational in the ports of Shanghai and Shenzhen since 2005. See this page.
Initially (for obvious reasons, given China's sensibilities), Chinese officials bristled at requests to permit factory inspections under the auspices of C-TPAT. Partially in response to this reluctance (and partially due to CBP personnel constraints), U.S. Customs developed a pilot program to outsource factory validations in China to private, third party companies that are properly vetted. There is nothing controversial about this program; many companies openly engage in similar in-house practices to secure their supply chains, anyway.
But while this solution may circumvent Chinese concerns about national sovereignty/extraterritoriality, the program remains underutilized; only eleven importers have registered under the pilot program. If China does enter into an agreement on CBP validations with the United States, C-TPAT inspections could potentially become as routine as, say, U.S. Department of Commerce visits made in the course of anti-dumping investigations.
Nonetheless, unless C-TPAT participation becomes mandatory, Chinese suppliers generally have little incentive to comply with C-TPAT requirements -- especially in view of the large number of intermediaries, such as trading companies, involved in China trade. In cases involving large U.S. buyers registered for C-TPAT, such entities have the bargaining power to force its suppliers to allow onsite inspections, but cost allocation (of validation fees, security upgrades, etc.) remains problematic. Anecdotally, the firm has at least one client that has confronted this realization as a result of its experience with C-TPAT.
In short, the prospects for greater C-TPAT acceptance in China are less than rosy. This projection notwithstanding, it is not the case that only those few ocean containers subject to C-TPAT requirements will be under increased scrutiny from U.S. Customs. In January of this year, CBP announced its proposed rule on the Advance Data Elements Project (a.k.a. "10 + 2" Security Filing), in which U.S. importers must supply ten additional data fields through electronic manifest, including, for example, the "container stuffing location." See this page. Under the proposed rule, failure to provide complete and accurate information may result in "no load" instructions.
Given the fluid and -- from the importer's perspective -- nebulous sequence of export processing functions in China, such an onus could pose a considerable challenge to parties on both ends of the transaction.
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