-
- Topic: sustainability
‘Deep origin’ is a phrase coined by Brain Staples. It is a description of the sustainability-focused regulatory environment now being increasingly faced by customs and traders. It goes beyond customs when it comes to implementing sanctions or other prohibitions on importation of endangered goods, goods manufactured by forced labour, or by slavery, or by other undesirable practices. How to operate in this increasingly complex regulatory environment? [1]
Introduction
It is no secret that to be successful in global trade, importing and exporting, you need to be at least customs compliant and meet all the requirements of customs legislation. Why at least? Because today, compliance goes beyond the usual or traditional compliance with the provisions of the Customs Code and other regulations, payment of customs duties, etc. Although we do not underestimate the importance of this. Recently, non-fiscal elements of customs and trade compliance have become increasingly important. These are the well-known new measures around environmental, social and governance policies – CBAM, deforestation, the fight against the use of forced labour and so on. In general, these are not customs issues. Indeed, these requirements use customs language because that’s the language used at the border and therefore have a significant impact on imports and exports. Let’s find out the difference between traditional customs legislation, which we are all used to, and the legislation on import and export restrictions and prohibitions mentioned above.
‘Deep origin’ environment
The new paradigm of global trade, with its emphasis on sustainable development, requires a review of the approaches to legal regulation in this area. The three pillars of customs – classification, origin and value – are being subjected to new requirements, including those of deep origin. It is not enough for traders to know what goods are, how much they cost and where they come from. Now they need to go much deeper and know what has happened and will happen to the product before and after the import or export transaction. For more information on the concept of deep origin, see the article ‘Thoughts on non-preferential & Deep origin’, one of the co-authors of this article.
What is the difference between the old and the new environment? Traditional customs law, based on the principles of GATT (The General Agreement on Tariffs and Trade) and other key international agreements, covers a clearly defined area in which participants in the international supply chain interact with each other. Each of them knows exactly what their obligations are, has a so-called step-by-step instruction on what to do, etc. Failure to meet these obligations leads to liability. Everyone is aware of this and tries to follow the rules. In principle, everything is clear here – the consequences, including negative ones, are the result of your own actions or inactions.
When we talk about extended compliance, which goes beyond the traditional understanding of customs regulations, we are not only talking about different rules, different areas of application, but also about different players responsible for compliance. Currently, the difference lies mainly in the differing approaches to regulation and to defining the obligations of those involved. In particular, we can talk about what is known in Europe as an ‘obligation of result’. The equivalent in Canada would be ‘reason to believe‘. What is the idea?
Let’s start with an example of how international sanctions work. If an exporter sends goods out of the customs territory and those goods are then found in a territory where the prohibitions are in force, the sanctions regulations presume that the exporter should have known the final destination of the goods. For example, the goods are travelling from Europe to Russia. Unfortunately, such cases are not uncommon. A recent case (see here) in which EU-sanctioned products exported by two Finnish companies were suspected of ending up in Russia is one example. In the cases investigated by customs, products were transited through Russia and cleared for export to other locations. The products included electronics, drones and equipment classified as defence material.
There are also import cases involving forced labour in the Uighur region of China. Many countries now ban the import of goods that involve forced labour. Forced labour is deemed to be occurring in the Uighur region of China. Therefore, there is a presumption that the importer of goods must know whether at any point in the production process a prohibited activity was part of that process.
Both examples raise questions about where the new paradigm of deep origin will lead, and what challenges stakeholders will face.
Legal challenges in the new environment
From a legal point of view, this new approach represents a deviation from the principle of the presumption of innocence as one of the fundamental principles of law. It shifts the burden of proof from the prosecution to the accused. In fact, the latter must prove that he did not know that the sanctioned exported goods would end up in the territory where the prohibitions are in force, or that the imported goods were produced with the use of forced labour, etc. In the light of the new legislation of North American countries, an example of this thesis is the Uyghur Forced Labour Prevention Act. There is already a negative presumption in it, a presumption that the goods are made with forced labour. And you have to overcome that presumption.
What does this new approach mean? It is obvious that an importer or exporter is dependent on the actions of others in the supply chain, on their conscientiousness, honesty and integrity. Getting your suppliers in other countries to comply with EU or US regulations is unlikely to be effective. In fact, an importer or exporter can be held liable for the wrong actions or inactions of others. This goes against the principle of individualisation of penalties. The main question, then, is how exporters and importers are supposed to know what happens to goods when they are not in possession of them. And there is currently no answer to this question. The only way out is not to buy goods unless you can be 100% sure that they meet all the requirements of your country. To be honest, no one can be sure about every single participant in the supply chain, as there can be a large number of actors. When it comes to large companies, we are no longer talking about a supply chain, which implies a certain linearity, but rather a supply network. It is quite dynamic and its elements can change at any time. In this context, small companies may even have an advantage in that their supply chains are less complex and easier to understand. At the same time, large companies have a better chance of controlling the entire supply chain.
Another large question is how to prosecute those found (or presumed) to be guilty of breaches. Criminal penalties and the associated legal principles are not harmonised across the EU. Each country has its own procedures and scale of penalties. In some, the courts may refuse to convict a person on the basis of presumed knowledge, relying on the national constitution rather than EU regulation. In others, penalties imposed may be very different from those applied elsewhere. Of course, one penalty that is available is to prevent the import/export in question. However, detection of breaches are most likely through audit or post-clearance check, and by that time the goods have already completed their journey and gone into use.
Institutional and resource challenges
It is also clear that legislation to combat forced labour and other negative externalities is not customs legislation. The application of such legislation is not a matter for customs. However, customs cannot stay out of the game because it involves the cross-border movement of goods subject to additional restrictions. It is the closest authority, but not in a functional sense, but in a physical sense. The situation is similar to the involvement of customs authorities in the protection of intellectual property rights and combating counterfeiting. By virtue of their involvement, the customs authorities in this case are simply those who have the ability to influence the situation. However, customs authorities, already overstretched, under-prepared and, in most cases, under-funded, are involved in the implementation of new legislation and far-reaching requirements. The problem of coordinating all these processes is even more acute. Who is going to manage all this, who is going to be responsible for imposing sanctions in case of non-compliance with the rules of ‘deep’ origin? These are definitely not customs sanctions, which are currently not uniform from Member State to Member State, if we are talking about the EU. There should be a uniform approach in respect of fines or other negative consequences of non-compliance. Which European institution will be in charge of all this? The question remains open. In this respect, it would seem appropriate to ensure that these issues are not dealt with exclusively by border authorities. This could be seen as a good change.
On the other hand, this is not the domain of customs persons, who are responsible for customs clearance and customs procedures within a particular company. It is no secret that many companies rely entirely on their customs brokers. They often do not separate customs and non-customs issues and do not go into detail about what the broker is and is not responsible for. They usually have no idea what is happening with their imports and exports, let alone non-customs issues such as deep origin.
This means that the problem of staffing, both in customs (if customs has to deal with it) and in companies, needs to be addressed comprehensively. These should be specially trained people. Acting blindly has never led to a positive result.
Sectoral challenges and technologies
The problems outlined above are not import problems. They are supply chain issues. Depending on the industry, there may be additional challenges. Mining companies, for example, have extensive traceability capabilities that are required by deep origin. In this case, it is easy because you are at the origin of the product and you can see what happens to it afterwards. For the manufacturing sector, which is at the end of the chain or supply chain, this traceability becomes a big problem. This is where companies that offer technological solutions can come in. Many of their solutions are based on mapping, virtual mapping, and digital mapping of supply chains (not necessarily a particular supply chain, but supply chains in general) with the metadata from around the world.
But technology is not a panacea. It is a kind of signalling system. It can signal issues, but it is extremely difficult, if not impossible, to refine any data system or statistical analysis to accurately reflect the infinite variety of human activity. Moreover, not everyone can afford such solutions. So it is always necessary to take a closer look at the reported risk.
Trade facilitation challenges
Another important issue related to the implementation of the concept of ‘deep origin’ is its interaction with the concepts of Authorised Economic Operators (AEO), Trusted Traders and other similar programmes operating under different names in different countries. Indeed, we all know how much effort it took to implement these programmes and to encourage economic operators to participate in them. Today, it is unclear how these programmes will function in the new reality. Is this the way for companies to protect themselves from the shocks of this new environment? On the one hand, in theory, the benefits of AEO should work under all conditions. On the other hand, in practice we have universal rules and sanctions, mostly in the form of prohibitions. These are not financial sanctions, not loss of benefits, not other restrictions. They are prohibitions, unconditional and absolute. If there’s an import ban, you can’t argue due diligence or reasonable care because there’s no de minimis in the legislation. There could be a good example where you have a shirt import and six inches of sewing thread made from Uighur cotton can stop the whole shipment. And nobody can argue with that, it’s an absolute liability. It would probably not be a good idea to change the liability approach to that.
Another aspect of this issue is the inclusion of small businesses in the AEO programme as part of the EU customs reform. Although this issue has not yet been finalised, the question is whether small traders will be able to apply for this version of AEO? There has always been a problem in the EU that small businesses are not always able to take advantage of AEO. So if we go down this route of companies that are AEO and benefit from certain assumptions about their due diligence in terms of sustainability, best practice, some of the additional policy measures, then by default we are discriminating against smaller companies.
Conclusions and suggestions
‘Deep origin’ is still a very much evolving environment and it requires the development of practical implementation strategies. And it also requires some monitoring of the implementation experience of companies, after which there will be responses and undoubtedly some refinement and perhaps better targeting of some of the rules.
What could be done at this stage to overcome the initial challenges? As mentioned above, many ‘deep origin’ regimes feature what can be called ‘absolute liability‘ that apply penalties and/or import prohibitions if imports are made in whole or in part from with restricted materials or from restricted manufacturing processes. Absolute liability without any de minimis measures is a rather blunt tool that does not recognise or take into consideration bona fide due dilligence efforts. In this context, does absolute liability encourage sharing of potential violations when uncovered by compliance oriented companies? The short answer is – not really: the most likely result is that the sale of such goods will be diverted to another destination that does not feature such restrictions (with little or no positive impact on the violations under consideration). Would it not be more effective to create mechanisms that encourage the private and public sectors to confidential share of information about potential violations and thereby eventually squeeze out bad actors from the market place?
There is a strong need for standardisation in the area of origin. As previously discussed, ‘deep origin’ regimes are proliferating rapidly and putting serious data pressure on buyers and suppliers alike. Could be a standardised bill of materials to facilitate trade? One that the manufacturer would fill in, indicating where all the components of the product they are producing come from. Then you could simply overlay one of these non-fiscal systems regimes on top of the standardised bill of materials.
These steps will not fundamentally change the situation or solve all the problems, but they will have a real impact on the practical implementation of the new requirements.
Overall, while there are many questions to be answered, it is clear that the use of ‘sustainability‘ as a basis for restricting trade with certain countries is here to stay.
————————-
[1] Notes:
The article is an overview of the conversation among Brian Staples, Anthony Buckley and Dr. Anna Jerzewska within Episode 6 ‘Sustainability and ‘deep’ origin of goods’ of the Customs Knowledge Institute podcast, prepared by Dr Ilona Mishchenko.
Latest updates on the EU forced labour law: On 5.3.2024 The Council and the European Parliament have reached a provisional deal on the regulation prohibiting in the EU market products made with forced labour, learn more here.
- Market: Global
- Copyright of the journal: CC Learning, UAB
