III Legal Regimes and Custom Regimes 2021

LEGAL REGIMES
&
CUSTOMS REGIMES
IQS School of Management

INTERNATIONAL TRADE
Nr. Class Date Subject Details
Class 1 14.09.2020 Introduction course Presentation professor, students and course, databases
Class 2 16.09.2020 International Business: introduction History, Why international trade,current map
Class 3 21.09.2020 International Business: introduction Geoeconomics,Limits of International Trade (barriers)
Class 4 23.09.2020 The firm facing international trade Why and how exporting
Class 5 28.09.2020 The firm facing international trade What to export, risks, examples
Class 6 30.09.2020 The firm facing international trade Where to export, customs and its functions
Class 7 05.10.2020 Legal Regimes and Customs Regimes HS codes, import duties, quotas
Class 8 07.10.2020 Legal Regimes and Customs Regimes Calculation of customs debt, origin
Class 9 14.10.2020 Legal Regimes and Customs Regimes Special regimes, examples
Class 10 19.10.2020 The Role of Logistics and International Transport Incoterms 2020 strategy
Class 11 21.10.2020 The Role of Logistics and International Transport Incoterms - exercises
Class 12 26.10.2020 The Role of Logistics and International Transport Modes of transport / international transport insurance
Class 13 28.10.2020 The Role of Logistics and International Transport Modes of transport - exercises
Class 14 04.11.2020 Public Institutional Support to Export Activity Busines Diplomacy 6 Institutional bodies
Class 15 09.11.2020 Public Institutional Support to Export Activity Big data - export promotion companies, examples
Class 16 11.11.2020 Public Institutional Support to Export Activity Free trade agreements and zones
Class 17 16.11.2020 Payment and Collection Media International Payment and collection risk
Class 18 18.11.2020 Payment and Collection Media International Documentary methods of payment
Class 19 23.11.2020 Payment and Collection Media International Other methods of payment/guarantees
Class 20 25.11.2020 Payment and Collection Media International International credit Insurances
Class 21 30.11.2020 International Contracts Market analysis &distribution - importance and examples
Class 22 03.12.2020 International Contracts Types of distribution (agent, distributors, franchise,.)
Class 23 09.12.2020 Group project presentations
I. What is Customs?
II. Areas of Operations of Customs
III. Tariff codes
IV. Quotas
Index V. Calculation of Customs Debt
VI. Origin
VII. Special Regimes
VIII. The European Union
Fall 2021 Josep María Cervera & Jan Jonckheere. IQS International Trade. 3
Why is it important?
Nafta - USMCA new trade agreement

+ article Nafta and Mexican trucks
(NAFTA: North American Free Trade Agreement, now
converted to USMCA (ratified December 2019)
https://www.vox.com/2018/10/3/17930092/usmca-nafta-trum
p-trade-deal-explained
Josep María Cervera & Jan Jonckheere, IQS International Trade. 4

Article Nafta/USMCA and Mexican trucks
What do we learn from this article?

How is this related to customs?
 What are the main differences between the Nafta and the
USMCA?
From this article, can you deduct some of the roles of Customs?

So, then why is it important?
Why should you, students of International Trade know about it?
 Sooner or later you will get involved in it

 It may have an effect on your competitivity
 It may cause certain restraints on your operations
 It may have a financial influence

I. What is Customs?
Fall 2018 Jordi Aznar Peyra. IQS International Trade. 7

Customs not only here
to collect tariffs 1/2
Fall 2020 Jordi Aznar Peyra. IQS International Trade. 8

Customs not only here
to collect tariffs 2/2
• Environment & Health. Stopping illegal import of protected wood, contaminated food,
dangerous electrical appliances, etc). 2016: 14,000 goods presenting health risk, 37
million presenting uncompliant product safety.
• Protecting endangered species (Ivory trade, animals, plants) as well as patrimonial
treasures (art).
• Money laundring. Each person, undeclared max €10.000 (576 people in 2016 were
caught travelling with more than 50,000€ undeclared cash)
• Ensuring exports of sensitive technology is legitimate (could it be used to make nuclear
weapons?)
• Helping police in the detection of trafficking of people, pornography, organized crime

Functions of customs
• Control
• of incoming and outgoing goods
• compliance with norms (quantitative, qualitative, technical, environmental,
…)
• Collection
• custom duties, special taxes, antidumping rights, …
• Information
• Collection of information, a.o. for statistical use
• Sanction
• if norms are not complied with

Functions of customs
Security Flow of goods Control Collection

12
Who will Customs stop?
13
Fall 2020
• Not all shipments are stopped

• Not all packages are opened
• Not all leters are read
Because as humans we prefer freedom.

How do they We like to take risks than 100% secured but bored at home.
do it? The same way that flying is not prohibited.
If we were to stop all the packages…

then the world as we know would not exist.
It would be a dramatic stop.
But then, how do customs officers select the registered ones?

Googl A hint:
what do
these two
have in common?
e
15
16
THIS: their secret

algorythm
The secret algorythm
For Google, you know all about SEO (how to be on top of the search). For Customs, it’s the same.
Whether to check if there is undeclared stuff (drugs, ivory, etc.) or under-declared stuff (less items,
or items with less value declared). How is it done:
 Even today, it remains a mystery – how import shipments are selected to be inspected by U.S.
CBP (Customs and Border Protection,) as the force has never disclosed criteria.
There is a classified risk factor number assigned to all shipments that are about to enter the U.S.
border, but we do not know the formula used to determine the risk factors leading to inspection.
The law is clear in saying it is at CBP absolute discretion to select one shipment over another
without providing any reasoning.
17
5 reasons that may raise a red flag
1. Type of Commodity. Based on the type of the commodity being imported, further exams
may be required. Pharmaceutical, chemicals, animal products, perishables…
2. Country of Origin. Colombia: very likely that customs officers will be looking for drugs in
their inspection. Embargoed countries/regions: Crimea (a region of Ukraine), Cuba, Iran,
North Korea, Sudan, and Syria – the US government prohibits ALL transactions without a
license authorization.
3. Flagged Shippers. Suspicions that the shipper previously mis-declared their goods under an
HS code that pays less duties, or even undercutting the commercial invoices so that they
will be taxed on smaller amounts. For that reason in particular, there are antidumping
duties imposed, in addition to regular duties
4. Flagged Importers. The same rule applies to the importer, too. If you have a history of
penalties imposed on you because you tried to mis-declare cargo, your next shipments are
going to be inspected. Also, first-time importers are flagged for examination.
5. Random Examination. X-ray, tailgate (open the container but don’t open the packs inside),
partial, or intensive, exam. 18
The current red flag items in Europe
19
The current red items in EU
 Counterfeit medicines
25% of the 36 million articles detained in 2013, worth nearly €770 million
IP rights
2/3 of the detained IP articles come from China
E-commerce: 70% of the detentions were shipped by express or postal services
Drugs precursors.
Chemical substances used in the legal manufacture of, for example, pharmaceutical
products, perfumes, cosmetics, fertilizers and oils

II. Areas of Operations of Customs
A boat container scanner

21
Areas of Operations of Customs
• Export
• sanctioned or controlled goods (f.i. weapons)
• necessity of an Export license
• Import
• everything
• Transit
• transit (on the way to a 3rd country)
• temporary import
• material for trade shows (carnet ATA)

• Export: what about the European Union?

• Is shipping goods from one country in the EU
to another in the EU export?

• What about Brexit??

The selling process
Customs Customs
clearance clearance
Customs Customs
Shipment Export Import Customer
Packing
Incoterms Internal Internal
Payment transport transport
conditions International
Documents transport
25
25
26
A train scanner
Checking wagons on railways: a train scanner
at the border between Ukraine and Poland
27
An example of
the Customs
operations of
The Netherlands
28
III. Tariff codes

29
A. Where to find?
Market Access database:

http://madb.europa.eu/m
adb/indexPubli.htm
Fall 2020 Josep María Cervera & Jan Jonckheere, IQS International Trade. 30
A. Where to find?

adb/indexPubli.htm
A. Where to find?

adb/indexPubli.htm
Fall 2020
What is duty
paid value?
Harmonized
System
 21 sections
 99 chapters
Fall 2020 35
 Although usually the 6 first digits are the same
“everywhere”, the rest of the codes (subdivisions) may
be different.
 Example: wine
 Taric: more than 200 subdivisions
 China: only 5 (White wine, red wine, bubble
wine, bottles less than x liters, containers of
more than Y liters).
TARIC
Tariff codes
Tariff codes
1. Wrong code WHY?

A. The company from the country of origin deliberately chooses
a wrong code
B. The company from the country of origin mistakenly puts the

wrong code
C. Ignorance
2. Correct code, but the customs in the country of origins

interprets it in a different way
Tariff codes
1. Wrong code
A. The company from the country of origin
deliberately chooses a wrong code
Þ If customs find out:

 You will be charged with the correct code
 You may be punished => penalty
 Your goods may be blocked (rare, but it may
happen)
Tariff codes
1. Wrong code
A. The company from the country of origin deliberately chooses a
wrong code
Þ If customs find out:

 You will be charged with the duties corresponding to the
correct code
 If the new code implies the same tariff, you may get away with
it and nobody will find out
 However, the day that the tariff changes, you may receive a
disgusting surprise
Tariff codes
1. Wrong code
A. The company from the country of origin
deliberately chooses a wrong code
Fall 2020
anything….
x
But…I have been exporting
during 15 years with this code,
and nobody never told me

Tariff codes
1. Wrong code
B. The company from the country of origin mistakenly

puts the wrong code
=> Same procedure
Tariff codes
1. Wrong code
C. Ignorance
That would be the case when f.i. you put a code with
at the end “and others”, as you did not know where
to put it;
=> Same procedure
Tariff codes
1. Wrong code
C. Ignorance
Tariff codes
2. Correct code, but the customs in the country of

origins interprets it in a different way
Þ You may want to try to prove (with the help of your

customs agent) that you are right
Þ Claim back the extra duties you have had to pay
Tariff codes
2. Correct code, but the customs in the country of origins interprets

it in a different way
Example: code 7306 versus 8708
 Same product, but 8708 is mentioned for the car industry

 Customs will decide in function of the final usage of the product
 REMEMBER: Customs may easily verify who your customer is, and also
what your main activity is
Tariff codes
Recommendations:
1. Check with your importer which would be the correct customs code and make sure he checked
that with the local customs authorities
2. PUT A CLEAR DESCRIPTION IN THE DOCUMENTS
3. If you do not know which code is the correct one, or you doubt, you can ask for a Binding Tariff
Information
https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/what-is-common
-customs-tariff/binding-tariff-information-bti_en
4. If you still doubt, you can put on your invoice the Taric-code for export (clearly indicating that
is for customs clearance at export); you leave the way open for the customs at import to
decide which code it is; if you would put the code for import customs clearance, and it is
wrong….remember you may get a penalty or goods may be refused!
Tariff codes – exercise
Look up the
TARIC code for
floor standing
decorative lamps
IV. QUOTAS

53
Quotas
Remember: Barriers: mainly trade barriers:
1. Quantitative trade barriers

2. Technical trade barriers Imposed by the country’s
3. Administrative trade barriers administration
4. Fiscal trade barriers
5. Cultural trade barriers Not imposed
Quotas
Remember: Barriers: mainly trade
barriers:
 Import duties
 Other taxes
 Quota
WHY??
 Anti-dumping duties
 Certifications, homologations,
licences,…
Quotas
Quotas
What are quota?
 Volumes (litres, metric tonnes,..)

 Maximum volumes that can be imported
 Without having to pay duties
 Once you pass the quota, you have to pay another category of duties…
 …or no more product is allowed into the country
Observation:
quota do not create any direct income for the state, as do tariffs
V. CALCULATION OF CUSTOMS DEBT

60
Determination of the customs debt
Customs debt= import duties + taxes

Import duties
 customs value = tax base
 which type to apply – depends of:
 country
 product
 origin
 Import duty = customs value x type
 Taxes (VAT and others)
duties
 Ad valorem: percentage on the customs value: most common used type
Specific: specific amount per unit or weight measure
Mixed: type ‘Ad valorem’ plus a specific type
Composed: ‘Ad valorem’ type with a maximum or a minimum of a specified
type

Import duties
Which ones: VAT, antidumping rights, special taxes
Tax base: = customs value + duty CAREFUL!!
Type of VAT
Tax to be paid = tax base x VAT type (or other tax)
 How to calculate customs value?
The value of the goods on the moment of introducing the goods in the customs
territory
Value of the goods = Transaction value (invoiced Price + additions – discounts) to
get to + CIF value
FOB? => add transport cost and insurance (if you took an insurance)
CFR? => add insurance (if you took insurance)
DAP? => deduct local costs and interior transport
CUSTOMS DEBT = IMPORT DUTIES + VAT
Exercise:
Customs value: 48000 €
Weight of the goods: 10.500 kilos
Type: 6,5%
Type VAT: 21%
Calculate the customs duty
VI. ORIGIN

66
ORIGIN OF THE GOODS
Why is it important??? Determination of the customs debt

Import duties
 customs value = tax base
 which type to apply – depends of:
 country
 product
 origin
 Import duty = customs value x type
ORIGIN OF THE GOODS
Due to international commercial agreements between nations or regions, the

origin of your goods may determine whether you fall under:
• Preferential rules of origin

• Non-preferential rules of origin
Consequence: less (or none) quantitative trade barriers will be applied or

others (more restrictive = more costly) barriers will be applied
ORIGIN OF THE GOODS
• Origin <> provenance
• A merchandise whose origin is China, can have a provenance from Istanbul, just because
the merchandise stopped there
• The tariff is applied on Origin, nor Provenance
• Origin = place where the Good was produced or most transformed
ORIGIN OF THE GOODS
Origin of the goods = “nationality” of the goods
Problem: in a global, interconnected world, where goods are produced,

using components from a lot of other countries, it may be difficult to define
which is exactly the origin of certain goods
=> You may have to prove what exactly the origin of your goods is
THE RULES OF ORIGIN
ORIGIN OF THE GOODS
ORIGIN OF THE GOODS
Again: do not get confused:
Provenance: place where the goods are initially shipped from
EU: Customs status of the goods:

- Communitary goods
- Non-communitary goods
THE ORIGIN OF THE GOODS NEVER CHANGES!!!
ORIGIN OF THE GOODS
Preferential rules
Rules of origin:
of origin
 Goods fully obtained in one country
 Goods partially obtained in one country
 Change in Taric/HS code = change of classification
 % of added value created in a country
 The processing the goods have undergone in a country
ORIGIN OF THE GOODS
Preferential rules
Rules of origin:
of origin
 Goods fully obtained in one country
 "Last substantial transformation or processing, economically
justified, carried out in a company equipped for this purpose, and
which has led to the manufacture of a new product or that
represents an important manufacturing level"
ORIGIN OF THE GOODS
Example:
 Leather wallet from Peru – 42.02

 Bovine tanned leather originating in Peru - 41.04
 Polyester sewing thread originating in Peru -54.01
 Decorative accessory from China -83.08
The material which is not from origin from Peru (83.08)

changes from classification (42.02), for which the Origin from
Peru is accepted
ORIGIN OF THE GOODS
• Your company, based in Arras (France), needs
to purchase spent batteries.
• As you work in the purchasing department,
you must order 20 tons of spent batteries.
• They are packed in correctly labelled
cardboard boxes and all the batteries are
individually protected against a short circuit to
prevent leaks and fires.
• This order can fit on 18 pallets each wrapped
in a plastic film (a little less than 3 quarters of a
40-foot container).
ORIGIN OF THE GOODS
• Different foreign suppliers made the following
offers:
1. A seller in the USA (East coast) offers
batteries used and collected in the USA.
2. Another seller in the USA (West coast) offers
batteries used and collected in Canada.
3. A seller in Australia offers batteries used and
collected in Australia (75% of the shipment)
and New Zealand (25% of the shipment).
• Determine the custom’s origin of the batteries
offered by the three sellers (explain your
reasoning).
VII. SPECIAL REGIMES

78
SPECIAL REGIMES
Customs regime:
a set of customs regulations defining the status of goods and

means of transportation in accordance with the objectives of a
business transaction and designation of goods.
Customs destinations are classified in:

1. Customs regimes
2. Other destinations
SPECIAL REGIMES
1. Customs regimes:
It’s definite!
Final regimes
a) Import The usual

b) Export duties and taxes
will be applied
SPECIAL REGIMES
1. Customs regimes: May be temporary
Suspensive regimes (with economic impact)

a) transit
b) customs warehouse No duties, taxes or
c) inward processing = active processing economical
d) processing under the customs control measures are
e) outward processing = passive processing applied
f) temporary import
SPECIAL REGIMES
1. Customs regimes:
Inward/active processing:
You import goods which will

undergo certain operations of
transformation or processing,
and which afterwards will
leave the country again.
SPECIAL REGIMES
1. Customs regimes:
Outward/passive processing:
You export goods which will

undergo certain operations of
transformation or processing,
and which afterwards will
enter your country again.
SPECIAL REGIMES
2. Other destinations: May be temporary
1. Free Zone
2. Duty-Free Shop
3. Reexport
4. Destruction No duties, taxes
5. Refusal for the benefit of the state or economical
measures are
applied
SPECIAL REGIMES
SPECIAL REGIMES
If your customs regime or destination

changes (you can change from one to
another), taxes, duties and other economical
measures may apply.
VIII. THE EUROPEAN UNION

90
THE EUROPEAN UNION
WHAT IS IT?
THE EUROPEAN UNION
Minus UK of course!!!
THE EUROPEAN UNION
 Political and Economic Union
 Customs Union The four

• No internal borders freedoms!
• Export = intracommunitary traffic
• One common external border
• One single customs policy
• Free circulation of goods, services, capital and people
THE EUROPEAN UNION
Customs Union
No import duties or quantitative trade barriers between

member states
The same entry rules apply to all member states = import duties or
quantitative barrriers are the same, nondependent of where in the
EU the goods enter
Agreements made by the EU with other countries or regions
(f.i. Free Trade Agreements) are compulsory for all EU
member states
THE EUROPEAN UNION
EFTA:
 The European Free Trade Association:

Norway, Switzerland, Iceland and
Lichtenstein
 EFTA + EU: EEA: European Economic
Area
 Four freedoms apply
 IS NOT A CUSTOMS UNION Switzerland
is not a part
of the EEA
THE EUROPEAN UNION
Free trade agreements:
= Free trade agreements regulate tariffs and other trade restrictions

between two or more countries.
= Together these countries form a Free Trade Area
1. Unilateral agreements – rather rare

2. Bilateral agreements
3. Multilateral agreements
THE EUROPEAN UNION
Economic Integration Agreements:
- The purpose here is to eliminate in a progressive way the economical borders

between countries
- First: eliminate trade barriers (import duties, quota)
- Next: liberate production factors (work, capital, land)
- …
- Finally: collaboration mechanisms
THE EUROPEAN UNION
Decrease in tariffs and other commercial advantages between Preferential Agreements
countries that signed the agreement.
Elimination of trade obstacles (tariffs, import quotas, etc..) Free Trade Zones
among member countries.
Elimination of tariffs among member countries and application Customs Union
of the same tariff vis-à-vis third countries.
Freedom of movement of production factors of production: work, Common Market
land and capital.
Common single currency and supranational monetary institution that Monetary Union
carries out the exchange rate and interest rate policy.
Coordination of macroeconomic objectives and policies and Economic Union
search of the balance of the regions of the member countries.
Complete integration of common economies and policies Political Union
foreign affairs, defense, justice and interior.
THE EUROPEAN UNION
Free trade agreements:
 NO quantititive limits on flows of goods between the member

countries of the FTA
 However, no common policy from the individual members

towards the outside world
=> Every member can choose individually how much import

duties to impose on certain products
THE EUROPEAN UNION
USMCA is a Free Trade Agreement
Mercosur is a Customs Union
THE EUROPEAN UNION
 Have a look at the video

 Think about the consequences
this may have for customs for
both the UK and for the EU
 Is this good or bad for the UK?
THE EUROPEAN UNION
And…what
about
Brexit??
So now you know. We’re watching YOU.
Fall 2020 Josep Maria Cervera & Jan Jonckheere. IQS International Trade. 103

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LEGAL REGIMES

IQS School of Management

Nafta - USMCA new trade agreement

Josep María Cervera & Jan Jonckheere, IQS International Trade. 4

Article Nafta/USMCA and Mexican trucks

What do we learn from this article?

Josep María Cervera & Jan Jonckheere, IQS International Trade. 5

So, then why is it important?

Why should you, students of International Trade know about it?

 Sooner or later you will get involved in it

Josep María Cervera & Jan Jonckheere, IQS International Trade. 6

Fall 2018 Jordi Aznar Peyra. IQS International Trade. 7

Fall 2020 Jordi Aznar Peyra. IQS International Trade. 8

Josep María Cervera & Jan Jonckheere, IQS International Trade. 9

Josep María Cervera & Jan Jonckheere, IQS International Trade. 10

Security Flow of goods Control Collection

Josep María Cervera & Jan Jonckheere, IQS International Trade. 11

• Not all shipments are stopped

Because as humans we prefer freedom.

do it? The same way that flying is not prohibited.

If we were to stop all the packages…

Josep María Cervera & Jan Jonckheere, IQS International Trade. 14

THIS: their secret

Josep María Cervera & Jan Jonckheere, IQS International Trade. 20

A boat container scanner

Josep María Cervera & Jan Jonckheere, IQS International Trade. 22

• Export: what about the European Union?

Josep María Cervera & Jan Jonckheere, IQS International Trade. 23

• What about Brexit??

Josep María Cervera & Jan Jonckheere, IQS International Trade. 24

A boat container scanner

Market Access database:

Market Access database:

Market Access database:

1. Wrong code WHY?

B. The company from the country of origin mistakenly puts the

2. Correct code, but the customs in the country of origins

Þ If customs find out:

Þ If customs find out:

Josep María Cervera & Jan Jonckheere, IQS International Trade. 42

B. The company from the country of origin mistakenly

=> Same procedure

=> Same procedure

2. Correct code, but the customs in the country of

Þ You may want to try to prove (with the help of your

Þ Claim back the extra duties you have had to pay

2. Correct code, but the customs in the country of origins interprets

Example: code 7306 versus 8708

 Same product, but 8708 is mentioned for the car industry

A boat container scanner

Remember: Barriers: mainly trade barriers:

1. Quantitative trade barriers

 Volumes (litres, metric tonnes,..)

A boat container scanner

Customs debt= import duties + taxes

Customs debt= import duties + taxes

Calculate the customs duty

A boat container scanner

Customs debt= import duties + taxes

Due to international commercial agreements between nations or regions, the

• Preferential rules of origin

Consequence: less (or none) quantitative trade barriers will be applied or