BC Business
Getting goods across the U.S. border has never been harder. Finding a good customs broker, as a result, has never been more important.
“It’s a labyrinth, a rabbit hole,” says John Wellwood, describing his efforts to illustrate the process of customs brokerage. Wellwood is designing a book about the import and export business called Business Without Borders: The Story of A&A Contract Customs Brokers, and says he was originally thinking of basing the book’s three-page fold-out about the customs process on a Snakes & Ladders game board – “make one wrong move and you slide back to where you started.”
The problem: there would have been too many snakes and no ladders. When Wellwood pulled back the curtain and attempted to track the progress of a single mandarin orange imported from Yokohama, Japan, to your kitchen, he discovered a Byzantine complexity of rules and regulations that exists on both sides of the Pacific.
Given the complexities of negotiating the passage of goods across Canadian borders and the gauntlet of regulations and red tape that has arisen since 9/11, it’s no wonder that customs brokers such as Surrey-based A&A Contract Customs Brokers Ltd. are experiencing boom times (in A&A’s case, revenue growth of 15 per cent each year since 2001). In the first eight months of 2008, over $27.8-billion worth of goods were imported into B.C. and over $21.8 billion more were exported from the province, according to Statistics Canada. Without the help of customs brokers, many of those products wouldn’t have made it across.
Consider that mandarin orange waiting in a container on the docks at Yokohama. Its journey doesn’t begin without couriered documents (commercial invoice, packing list, bill of lading, exporter statement of origin and certification of fumigation and phyto-sanitation). After three or four weeks crossing the Pacific, it’s greeted by Canada Customs in a five- to 10-day process that examines everything down to the wood packing and soil traces. Then there’s the bonded warehouse delivery process: the importer data; the steamship, agent and customs releases; the shipment data entry; importer details; shipper details; manifest number; transaction number; carrier code; vessel and voyage number; quantity, weight, description of goods; purchase order number; invoice number; BOL number; and container number – to land on just a few of the steps of that metaphorical game board. And don’t misquote the tariff classification number (for a mandarin orange, 0805.20.00). A mistake such as that, or the lack of a label identifying the product as Japanese or an error on any written forms, may cause the importers rejection, more delay or one of over 300 different kinds of financial penalties from $25 to $25,000, often applied retroactively over the previous 10 years.
Navigating this complex maze has become big business. Among the major players in customs brokerage are large multinationals such as Universal Parcel Service of America Inc. (UPS), FedEx Corp. and Bellville Rodair International Ltd. (BRI), followed by Ontario-based Livingston International Inc. On the second tier are local companies such as A&A, which is family-owned and unwilling to divulge annual revenues but counts 2,000 core clients and nearly 4,000 incidental and walk-in clients annually. With offices throughout Canada as well as in Washington state and California, it is widely considered among the largest B.C.-based brokers.
“In reality, there are a lot of different niche players in our industry, but from the customer’s point of view we all do the same thing,” says Graham Robins Jr., A&A’s second-generation owner, as we talk in his sparsely decorated office near the Pacific Highway border crossing on Highway 176. Through the window one can look across the border and see Robins’s 30,000-square-foot warehouse. “Although we’re larger, we like to consider ourselves a boutique firm,” adds the 35-year-old Robins, whose company has grown from 18 employees in the mid-’80s to 220 employees today. A&A offers access to brokers 24-7, an essential service for the importer whose carrier arrives at the border at 3 a.m. or whose agent in Beijing requires information urgently at noon – their time. Robins says that while some small-company owners still brave the borders alone, pen in hand to fill out the required documents, that’s changed dramatically post 9/11.[pagebreak]“The world has become a smaller place,” says Jeff Cullen, North American CEO for BRI. “Buttons in Taiwan, cutting fabric in Italy, sewing a garment in China. Computer chips made in California, assembled in Shanghai, shipped around the world. In a lot of ways we are an invisible industry, but the global economy doesn’t work without us.”
Alan Spetch agrees. Importing without a broker “would overwhelm us,” says the vice-president of branch operations at Cullen Diesel Power Ltd., a Surrey-based company that sells and services diesel engines and imports engines and parts from the U.S. Cullen Diesel uses M&C International Trade for all its local customs clearances, and Livingston for “anything in Eastern Canada” (Livingston acquired M&C in 2006). “If we were a $500-million business instead of a $100-million business, then in-house brokerage might be something we could consider,” he adds. But as Robins and others have observed, the trend – even for the province’s largest businesses – is to focus on core competencies and outsource services, including brokerage.
Which raises the question: how does one choose a customs broker? A small importer of knives and leather goods who used to drive across the border to pick up goods and personally clear them through customs told me he chose his first broker on no greater recommendation than noticing its large sign, Highway Customs brokers (no longer in business), at the Blaine border crossing. That kind of chance connection still occurs, with a lot of it based on personal recommendation. A&A’s Robins explains that truck carriers approaching the border typically recommend two or three customs brokers to first-time importers to help clear goods through customs.
To market to new clients, A&A has a designated “One Timers” department to help novice importers navigate the border systems, which helps develop longer-term repeat clients. The company’s consulting and compliance department audits current, former and potential customers’ volumes to find errors and, as Robins says, “to squeeze out costs.” On request, they will review volumes for companies over the past six months or several years. This past year, the department found a $300,000 overpayment and refund for a potential client. Finding a $10,000 or a $100,000 overpayment almost guarantees another new client.
But most importantly, the brokerage business is a relational business, with referrals playing a dominant part. “We track every customer that comes into our system and the number one [source for new business] is always referrals,” says Robins, explaining that he and his customers go to the same trade shows, are members of the same industry organizations and mix with the same import/export community.
Joe Calvano, president of the B.C.-based Dollar Giant Inc. retail chain, chose a different path. He partnered with a consultant, a professional Asia importer in the business for the past two decades. “I wasn’t an expert at [customs brokerage], but I was an expert in picking the right consultant,” Calvano says. For Calvano, whose national chain now counts 65 stores, the relationship is similar to the one a company establishes with a lawyer or an accountant – “someone you’re comfortable with, someone you’ve known for a long time.” A single purchase for Dollar Giant might involve “hundreds of thousands of dollars,” it’s frequently seasonal and recovery of monies spent on late or inaccurately invoiced shipments is unlikely. “The inspection of goods, when money is released, the confidence that we are paying for exactly what we get when we get it – that’s really critical.”
A broker’s fees were traditionally based on the value of a shipment: normally one per cent to two per cent of the shipment value, roughly equivalent to the fees in the financial services community. But today, when every item from a tea bag to a turbine that crosses the border is assigned a 10-digit tariff item number, fees tend to be more reflective of the bureaucratic complexities involved. For instance, if you’re importing a truckload of tile, that’s one number – but if you’re importing 800 different doodads for your kitchen store, that’s 800 numbers. The brokerage fee will reflect the extra hours and paperwork involved, but brokers generally do not want to take on this extra work and prefer that customers establish in-house systems where their employees classify tariff numbers. Cullen Diesel designates about half of one employee’s time for this work, says Spetch.[pagebreak]The cost of brokerage fees (or in Dollar Giant’s circumstance, consultant’s fees) is secondary to Calvano, who otherwise is extremely sensitive about price, not surprising considering that he has to find margins in products that retail for a loonie or less. For him “credibility and reliability are the biggest things, no question about it.”
Spetch says he once switched customs brokers in part because of cost, although he adds this was “minor” compared to not being able to get goods through the border. “In our business, if we do get delays because the broker isn’t getting shipments cleared, then that affects our ability to look after our customers – and in essence our business.”
In recent years, there has been an undeniable thickening of security along the Canada/U.S. border, which has greatly affected the way customs brokers operate. Edward Alden, author of the 2008 book The Closing of the American Border: Terrorism, Immigration and Security since 9/11, says that since 2001 the U.S. has more than doubled the number of customs and border employees at Canadian crossings, from about 1,600 to 3,500, “but given the delays, there are still a lot of complaints that these numbers are too small.” The knot is the Security and Prosperity Partnership between U.S. and Canadian customs, which was intended to make commercial trade flow more easily but has instead introduced measures that, according to Alden, “are making commercial traffic a lot more difficult than it was.”
For example, strategies such as the Harmonized System (HS) were introduced, in which every item that crosses the border is assigned a 10-digit HS code. But as technologies constantly change, so does HS. “There wasn’t an iPod 10 years ago,” explains Robins. “What is this device? A computer? A music player? What?” In 2006, to answer questions like that, there was a massive change to HS: some codes were merged, others were changed, new categories were introduced. The bottom line to the importer, Robins says, is that “one day a pencil could have one HS number, the next day a different tariff – and if you get it wrong, that’s a fine and a penalty from Canada Customs.”
In Alden’s opinion, trade issues are unlikely to improve much, if at all, with the new Obama administration. The difficulty facing importers and travellers alike are measures already on stream such as the WHTI (Western Hemisphere Travel Initiative), which mandates that by the middle of 2009 everyone crossing the border must have some kind of secure identification (a passport or some specialized driver’s licence). The slowing global economy might actually help the situation, says Alden, easing the transition to what’s undeniably a more bureaucratic future. “I’m hardly a cheerleader for the recession,” says Alden. But to the extent that lower traffic volumes will shorten lineups, he explains, it should allow “border traffic inspectors some breathing room to work out bugs in these new systems.”
To cross borders efficiently takes information, says Robins. “Basically what has changed since 9/11 is that customs officials want to know what’s arriving before it arrives. That’s the easiest way of saying it.” Importers, exporters, freight companies and drivers register for the CT (Customs Trade Partnership Against Terrorism) pass and FAST (Free and Secure Trade) program – both are like the NEXUS fast lane but for companies – so customs officers know who you are before you arrive and they process your shipments first. Arriving at the border unregistered and unknown, you’re assumed to be high-risk – and, as anyone who’s crossed a border knows, that’s not what you want to be.
But it’s a passage that’s obviously achievable. Think of that mandarin orange you ate this Christmas. It made it. And with a little help from a broker, so will you. n