6. Case Examples
Chemical Co.: The Cross-border Movement of Chemicals Must Clear Many Complex and Poorly Coordinated Regulatory Hurdles
The experience of Chemical Co., a diversified chemical manufacturer, reveals the wide range of unique challenges chemical exporters confront shipping products around the world. Trading in products that come under tough regulatory scrutiny for their security, safety and environmental risks, chemical producers face strict market access barriers that result in costly delays. As the company’s efforts to navigate the very different regulatory requirements of the US and Brazil shows, compliance can lead to lost sales, storage problems and potentially even confiscation of their products.
A diversified manufacturer of chemicals that find a wide range of end uses by its customers around the world in everything from food and textiles to paints and coatings, Chemical Co. encounters market access barriers common to companies in its industry. Because many of its products are inherently dangerous or can have dual uses that make them attractive to terrorists or drug traffickers, the company must comply with regulations imposed by many agencies on both the export and import side of the movement of its products. As the company’s experience in the US and Brazil shows, surmounting the barriers can be cumbersome and costly, and coordination among the authorities that impose them is not always optimal.
In the US, chemical shipments face oversight by many poorly coordinated agencies
For Chemical Co.’s US products that find their way into international trade, the company is subject to the oversight of five different agencies, on average, and never fewer than three. Chemicals that are used in food need to meet safety standards set by the Food and Drug Administration (FDA). Other compounds used by international drug cartels are subject to regulations set by the Drug Enforcement Agency (DEA). Some products that risk falling in the hands of international terrorist groups are policed by the Department of Homeland Security and the Commerce Department’s Bureau of Industry and Security (BIS). Communication among the agencies is limited, saddling chemical producers with the heavy burden of navigating their way through the regulatory thicket. The coordination challenge results in delays which in turn result in excess costs for storage and demurrage fees.
In the case of acetyl products, a lack of coordination between customs and the DEA results in the delay of nearly 30% of inbound shipments. A major reason for the delays is the DEA’s outmoded license application procedures, which require that hard copies of documents need be faxed rather than transmitted digitally. The paperwork holdup can last a month, burdening Chemical Co. with steep costs. For example, when a bulk vessel carrying more than 8,000 metric tonnes of material fails to unload in time, it will face demurrage charges of US$ 60,000 per day. Usually after one day the vessel loader will return the shipment to a plant in Mexico as “dead freight”. When a shipment is not cleared after eight days, officials can even seize it as contraband.
One particularly cumbersome requirement the company faces is the need to obtain export licenses for many of the products it ships – most commonly for exports of acetyl products, one of Chemical Co.’s biggest sellers. Controlled by the DEA, half of all Chemical Co. acetyl product shipments need a license, which can only be obtained after a customer signs a purchase contract. The license must identify the customer by name and location and specify the quantity of product to be sold and the date the contract became valid. Because the process can take between three and five months from the time of sale to the issuance of the license, Chemical Co. runs the risk that the customer will tire of waiting and acquire the product from another supplier outside the US that is not subject to the license requirement. Cancelations happen in nearly 5% of sales due to export license delays.
Further adding cost and inefficiency for chemical shippers is a US security programme called the Customs-Trade Partnership Against Terrorism (C-TPAT), launched in the wake of the 9/11 attacks. Participation in the programme required Chemical Co. to equip over 50 of its facilities with fences and monitoring equipment and to hire a specially qualified consulting firm to help with certification at a cost of US$ 60,000 per facility. Nominally a voluntary programme, companies like Chemical Co. are expected to join, although some competitors that have not done so have been able to avoid the cost.
In Brazil, the chemical industry faces higher tariffs and import barriers
Brazil’s market access regulations are tight and getting tighter. Duties on chemical imports increase yearly, with tariffs on more than 100 products rising last September. The new charges hit three Chemical Co. products, with duties on one of them jumping from 14% to 25% and cutting deeply into the company’s volume and profits. Brazil also has approximately 40 anti-dumping cases under investigation against producers in China, South Korea, the EU, Mexico and Argentina. By contrast, other South American countries have only around 20 dumping investigations underway.
Procedures for moving goods through customs are costly and create delays. Paperwork requirements are onerous, with most importers needing to go through nine registration processes before they are qualified to begin actively trading. Registration can take between four and six months to complete and many of the steps require annual renewal. Each company and product type must obtain separate authorization, and documentation requirements are so exact that importers usually hire specialists to monitor license applications. Brazil has made it easier for importers to coordinate the requirements of the government agencies in charge of imports through its well-established Sixcomex system that automates interagency communications.
For goods crossing into Brazil, the government uses a four colour system based on the product being imported, the value of the shipment and the importer’s historical performance to determine how long the process will take. For example, “green channel” products are eligible for automatic clearance, typically within 6 to 12 hours. Chemical Co. products generally qualify for green clearance. Imports required to pass through the “yellow” or “red” channels can clear customs within as little as 48 or 72 hours, respectively, but usually require from three days to as long as three months. Products steered to the “grey” zone must be physically inspected and have their documentation audited, procedures that can take from as little as one week to as much as four months, depending on the availability of customs staff.
Importing companies can choose between two main zones to process incoming goods (see figure). In the primary (customs) zone, they pay just 50 cents per kilogram for goods that clear within three days. After three days, however, customs will seize unclaimed products, requiring the owner to restate their ownership and pay storage during the delay. Sometimes the seized goods end up being lost in the system. Because delays resulting from labour union activity are common, many importers choose to move their goods through the secondary (private) zone. These imports face a far-higher clearance fee, equivalent of 2% of CIF (cost, insurance and freight) for the first ten days and another 2% if delayed longer. But the shipper has 30 days to clear customs before the unclaimed product is seized – a longer time that most importers are willing to choose as a precaution.
Note: Based on a shipment of 20 metric tonnes and a value of US$ 1.5 million.
Source: Company interview.