International Trade
U.S. Customs and Border Protection Faces Challenges in Addressing Illegal Textile Transshipment Gao ID: GAO-04-345 January 23, 2004U.S. policymakers and industry groups are concerned that some foreign textile and apparel imports are entering the United States fraudulently and displacing U.S. textile and apparel industry workers. Congress mandated GAO to assess U.S. Customs and Border Protection's (CBP) system for monitoring and enforcing textile transshipment and make recommendations for improvements, as needed. Therefore, GAO reviewed (1) how CBP identifies potential illegal textile transshipment, (2) how well CBP's textile review process works to prevent illegal textile transshipment, and (3) how effectively CBP uses its in-bond system to monitor foreign textiles transiting the United States.
To identify potential illegal textile transshipments, CBP uses a targeting process that relies on analyzing available trade data to focus limited inspection and enforcement resources on the most high-risk activity. In 2002, CBP targeted about 2,500 textile shipments out of more than 3 million processed, or less than 0.01 percent. Given resource constraints at CBP ports, CBP's textile review process for preventing illegal textile transshipment increasingly depends on information from foreign factory visits that CBP conducts, based on the targeting results. However, CBP's foreign factory visit reports are not always finalized and provided to ports, other agencies, or the foreign governments for timely follow-up. Further, after the global textile quotas end in 2005, CBP will lose its authority to conduct foreign factory visits in former quota countries. U.S. overseas Attache offices and cooperative efforts by foreign governments can supplement information provided to the ports. Under CBP's in-bond system, foreign textiles and apparel can travel through the United States before formally entering U.S. commerce or being exported to a foreign country. However, weak internal controls in this system enable cargo to be illegally diverted from its supposed destination, thus circumventing quota restrictions and payment of duties. Moreover, CBP's penalties do not deter in-bond diversion. Bond amounts can be set considerably lower than the value of the cargo, and violators may not view the low payments as a deterrent against diverting their cargo.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-345, International Trade: U.S. Customs and Border Protection Faces Challenges in Addressing Illegal Textile Transshipment
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Report to Congressional Committees:
January 2004:
INTERNATIONAL TRADE:
U.S. Customs and Border Protection Faces Challenges in Addressing
Illegal Textile Transshipment:
[Hyperlink, http: //www.gao.gov/cgi-bin/getrpt?GAO-04-345] GAO-04-345:
GAO Highlights:
Highlights of GAO-04-345, a report to the Chairmen and Ranking
Minority Members, Committee on Finance, U.S. Senate, and Committee on
Ways and Means, House of Representatives
Why GAO Did This Study:
U.S. policymakers and industry groups are concerned that some foreign
textile and apparel imports are entering the United States
fraudulently and displacing U.S. textile and apparel industry workers.
Congress mandated GAO to assess U.S. Customs and Border Protection‘s
(CBP) system for monitoring and enforcing textile transshipment and
make recommendations for improvements, as needed. Therefore, GAO
reviewed (1) how CBP identifies potential illegal textile
transshipment, (2) how well CBP‘s textile review process works to
prevent illegal textile transship-ment, and (3) how effectively CBP
uses its in-bond system to monitor foreign textiles transiting the
United States.
What GAO Found:
To identify potential illegal textile transshipments, CBP uses a
targeting process that relies on analyzing available trade data to
focus limited inspection and enforcement resources on the most high-
risk activity. In 2002, CBP targeted about 2,500 textile shipments out
of more than 3 million processed, or less than 0.01 percent.
Given resource constraints at CBP ports, CBP‘s textile review process
for preventing illegal textile transshipment increasingly depends on
information from foreign factory visits that CBP conducts, based on
the targeting results. However, CBP‘s foreign factory visit reports
are not always finalized and provided to ports, other agencies, or the
foreign governments for timely follow-up. Further, after the global
textile quotas end in 2005, CBP will lose its authority to conduct
foreign factory visits in former quota countries. U.S. overseas
Attaché offices and cooperative efforts by foreign governments can
supplement information provided to the ports.
Under CBP‘s in-bond system, foreign textiles and apparel can travel
through the United States before formally entering U.S. commerce or
being exported to a foreign country. However, weak internal controls
in this system enable cargo to be illegally diverted from its supposed
destination, thus circumventing quota restrictions and payment of
duties. Moreover, CBP‘s penalties do not deter in-bond diversion. Bond
amounts can be set considerably lower than the value of the cargo, and
violators may not view the low payments as a deterrent against
diverting their cargo.
What GAO Recommends:
GAO is making several recommendations to the Commissioner of CBP to
improve the information available for textile transshipment reviews,
to encourage continued cooperation by foreign governments, to improve
CBP‘s monitoring of in-bond cargo, and to strengthen the deterrence
value of in-bond enforcement provisions.
The Department of Homeland Security agreed with GAO‘s findings and
recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-04-345.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Loren Yager at (202)
512-4347 or YagerL@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
CBP Uses a Targeting Process to Identify Potential Textile
Transshipment:
CBP Has Adapted Textile Review Activities to Changing Environment but
Faces Further Challenges:
Weak Internal Controls Hinder Effectiveness of CBP's In-bond System:
CBP Has Experienced Serious Challenges in Enforcing Textile
Transshipment:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: U.S. Textile and Apparel Trade, Production, and
Employment:
Imports of Textile and Apparel:
Top U.S. Ports:
Textile and Apparel Products Affected by Quotas:
Future Barriers to Trade in Textile and Apparel:
Appendix III: Comments from the Department of Homeland Security:
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: U.S. Trade Partners Visited by Textile Production Verification
Teams, 2000-2003:
Table 2: Total number of In-bond Cases and Assessed Amount for
Liquidated Damages, 2001-2003:
Table 3: CBP Port-Level Exclusions, Penalties, and Seizures of Textiles,
2000-2002 (Dollars in millions):
Figures:
Figure 1: U.S. Textile and Apparel Domestic Production, Employment,
Imports, and Exports, 1993-2002:
Figure 2: CBP's Process for Targeting Textile Transshipment:
Figure 3: CBP's Monitoring of U.S.-Vietnam Trade Indicates Role and
Limitations of Targeting:
Figure 4: An Overview of CBP's Textile Monitoring and Enforcement
Process, with Results for 2002:
Figure 5: TPVT Officials Verifying Production in El Salvador Textile
Factories, in July 2003:
Figure 6: Main Hong Kong-China Commercial Control Point at Lok Ma Chau,
August 2003:
Figure 7: Total In-bond Entries for 11 Major U.S. Ports, January 2002-
May 2003:
Figure 8: Example of In-bond Diversion of Goods Supposedly Going to
Mexico:
Figure 9: Weaknesses in the In-bond Process:
Figure 10: Major Components of Textile and Apparel Imports, 1993-2002:
Figure 11: Share of U.S. Textile and Apparel Imports by Trade Partner,
2002:
Figure 12: Share of U.S. Textile and Apparel Imports by Service Port,
2002:
Figure 13: Employment in Major Sectors of the Textile and Apparel
Industry, 1993-2002:
Figure 14: U.S. Production (Shipments) in Textile and Apparel Sectors,
1997-2001:
Abbreviations:
ACE: Automated Commercial Environment:
ACS: Automated Commercial System:
AGOA: African Growth and Opportunity Act:
ATC: Agreement on Textiles and Clothing:
ATPDEA: Andean Trade Promotion and Drug Eradication Act:
BICE: Bureau of Immigration and Customs Enforcement, Department of
Homeland Security:
CAF—S: Customs Automated Form Entry System:
CBP: U.S. Customs and Border Protection:
CBTPA: Caribbean Basin Trade Partnership Act:
CITA: Committee for the Implementation of Textile Agreements:
FTA: Free Trade Agreements:
FTAA: Free Trade Area of the Americas:
I.E.: Immediate Exportation:
I.T.: Immediate Transportation:
NAFTA: North American Free Trade Agreement:
STC: Strategic Trade Center:
T&E: Transportation and Exportation:
TPVT: Textile Production Verification Team:
USTR: Office of the U.S. Trade Representative:
WTO: World Trade Center:
Letter
January 23, 2004:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max S. Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
The Honorable William M. Thomas:
Chairman:
The Honorable Charles B. Rangel:
Ranking Minority Member:
Committee on Ways and Means:
House of Representatives:
With overall U.S. imports of textile and apparel products running about
$81 billion in 2002, or about 7 percent of all U.S. imports, U.S.
policymakers and industry groups have been concerned that some foreign
textile and apparel imports are entering the United States fraudulently
and displacing U.S. textile and apparel industry workers. Illegal
textile transshipment is one form of such illegal import activity and
occurs when false country-of-origin information is provided for
imported goods in order to evade U.S. textile quotas and customs
duties.[Footnote 1] U.S. Customs and Border Protection (CBP)[Footnote
2] does not have a reliable estimate of the overall amount of illegal
textile transshipment that occurs annually, but restrictive U.S. quotas
and relatively high tariffs on certain textile and apparel products
create incentives to foreign suppliers and importers to avoid these
trade restrictions.[Footnote 3]
Congress included a mandate in the Trade Act of 2002 (P.L. 107-210,
Aug. 6, 2002) directing that we assess CBP's system for monitoring and
enforcing textile transshipment[Footnote 4] and make recommendations
for improvements, as needed. As discussed with representatives of the
Senate Committee on Finance and the House Committee on Ways and Means,
we have focused on answering the following questions:
* How does CBP identify potential textile transshipment?
* How well does CBP's textile review process work to prevent illegal
textile transshipment?
* How effectively does CBP monitor foreign textiles transiting the
United States in its in-bond system before entering U.S. commerce or
being exported? and:
* What challenges, if any, has CBP experienced in using penalties and
other means to deter illegal textile transshipment?
To answer these questions, we conducted fieldwork at seven ports of
entry (New York/Newark, New York; Los Angeles/Long Beach, California;
Laredo, Texas; Columbus and Cleveland, Ohio; and Seattle and Blaine,
Washington) to review how CBP reviews textile shipments at the major
land, sea, and inland ports. Together, these ports represent CBP
service ports that processed 55 percent of textiles and apparel
imported into the United States in 2002. We also reviewed CBP's data
analysis at its Strategic Trade Center in New York, observed a Textile
Production Verification Team conduct foreign factory visits in El
Salvador, and discussed CBP's efforts to coordinate textile enforcement
activities with the customs authorities in El Salvador, Hong Kong,
Macau, Mexico, and Canada. We conducted a survey of 29 CBP ports,
including the 11 largest ports that process textiles and apparel
imports. (See app. I for details about our scope and methodology.):
Results in Brief:
To identify potential illegal textile transshipments to the United
States, CBP targets countries, manufacturers, shipments, and importers
that it determines to be at a higher risk for textile transshipment.
CBP uses a targeting process that relies heavily on analyzing available
trade data and other information to focus limited review and
enforcement resources on the most suspect activity. First, CBP
identifies the countries in which trade flows and other information
indicate a large potential for transshipment. Second, CBP focuses on
selected manufacturers in those high-risk countries for overseas
factory visits, known as Textile Production Verification Teams. The
teams attempt to verify that factories are able to produce the
shipments they have claimed or to discover evidence of transshipment,
such as counterfeit documents. If evidence of transshipment is found,
CBP uses this information to target shipments to the United States for
review and potential exclusions, seizures, or penalties. In 2002, CBP
targeted and selected for review about 2,500 textile and apparel
shipments out of more than 3 million such shipments it processed that
year. CBP also targets importers based on high-risk activity, and
conducts internal control audits that include verifying whether the
importers have controls against transshipment. However, resource
constraints limit the number of foreign factories and shipments that
CBP can target and review annually to a small share of textile and
apparel trade.
CBP's textile review process for preventing illegal textile
transshipment has adapted to the changing security environment, but CBP
faces challenges in its monitoring and enforcement activities. The
textile review process includes analysis of entry documents, inspection
of shipments, and verification of foreign production. CBP ports
increasingly depend on information received from targeting the most
high-risk shipments, the results of CBP's Textile Production
Verification Team foreign factory visits, and other intelligence to do
so, given the decreasing level of resources available at the ports for
illegal textile transshipment enforcement. However, CBP's Textile
Production Verification Team reports are not always finalized and
provided to CBP ports, other agencies, or the foreign governments for
follow-up in a timely manner. With the expiration of the World Trade
Organization's textile quota regime in 2005, CBP will lose its
authority to conduct foreign factory visits in former quota countries.
Additionally, supplementing the enforcement information provided to the
ports will be important because textile transshipment will remain a
concern due to tariff differentials resulting from free trade
agreements and trade preference programs. Information from overseas
Customs Attaché offices, now used on a limited basis, and cooperative
efforts by foreign governments can provide important information for
port inspections.
CBP has not effectively monitored movements of textiles in its in-bond
system, due to weak internal controls that enable cargo to be illegally
diverted from the supposed destination. The in-bond system allows
cargo, including foreign textiles, to be transported from the original
U.S. port of arrival (such as Los Angeles) to another U.S. port (such
as Cleveland) for formal entry into U.S. commerce or for export to a
foreign country. The effect of illegal diversion is that quota
restrictions have been circumvented and payment of duties avoided. For
example, a 2003 CBP investigation of in-bond diversion of foreign
textiles found that the U.S. importer was filing false CBP documents
reflecting export into Mexico when, in fact, the textile shipments were
turned around before reaching the border and diverted into the U.S.
market. Internal control weaknesses include:
* lack of an automated system to track in-bond shipments,
* inconsistencies across ports in targeting and inspecting in-bond
shipments,
* in-bond regulations that allow importers to change in-bond shipments'
final destinations without notifying CBP and allow extensive time
intervals for in-bond shipments to reach their final destination, and:
* inadequate verification that in-bond shipments destined for Mexico
are actually exported.
Although we reported on the in-bond system in 1994 and 1997 and made
recommendations to CBP, not all have been implemented. Since we began
our recent review, CBP has implemented some new measures and has made
some improvements to the in-bond system. However, internal control
problems remain.
CBP has experienced serious challenges in deterring illegal textile
transshipment due to a lengthy and complex investigative process and
competing priorities. CBP has extensive authority to enforce textile
transshipment violations--from seizing the textiles, to penalizing or
prosecuting the violator, to totally excluding the textiles from
entering U.S. commerce. However, CBP relies on exclusions because,
among other reasons, they require less evidence than seizures and
eliminate the need to penalize or prosecute the violator. Furthermore,
enforcing violations under the in-bond system presents challenges due
to CBP's weak internal controls and mitigation guidelines that can
allow reduction of liquidated damages to a fraction of the total
amount. CBP also employs other means to deter illegal transshipment by
informing the U.S. importer community of violations. Additionally, CBP
and the interagency Committee for the Implementation of Textile
Agreements[Footnote 5] maintain various lists of foreign violators, in
part to help deter transshipment by the importer community. CBP also
regularly meets with the textile trade community to keep it informed of
the latest enforcement information.
In this report, we are making recommendations to improve information
available for textile reviews at the ports, to encourage continued
cooperation by foreign governments, and to strengthen CBP's monitoring
of in-bond goods.
We received written comments on a draft of our report from the
Department of Homeland Security, which agreed with our recommendations.
(See app. III.):
Background:
The United States, like the European Union and Canada, maintains annual
quotas on textile and apparel imports from various supplier countries.
When a country's quota fills up on a certain category of merchandise,
that country's exporters may try to find ways to transship its
merchandise through another country whose quota is not yet filled or
that does not have a quota. Transshipment may also occur because
obtaining quota can be very expensive and the exporters want to avoid
this expense. The actual illegal act of transshipment takes place when
false information is provided regarding the country-of-origin to make
it appear that the merchandise was made in the transited country. The
effects of the illegal act of transshipment are felt in both the
transited country (potentially displacing its manufactured exports) and
the United States, increasing competition for the U.S. textile and
apparel industry.
These U.S. quotas, embodied in approximately 45 bilateral textile
agreements, are scheduled for elimination on January 1, 2005, in
accordance with the 1995 World Trade Organization (WTO) Agreement on
Textiles and Clothing. However, U.S. quotas will remain for
approximately five countries that are not members of the WTO and for
specific product categories when trade complaint actions, resulting in
reinstated quotas, are approved. Incentives to engage in transshipment
will also continue due to the differing tariff levels resulting from
the various bilateral or multilateral free trade agreements and
preference programs that the United States has signed with some
countries.[Footnote 6] U.S. tariffs on certain types of sensitive
textile and apparel products range up to 33 percent,[Footnote 7] but
such tariffs can fall to zero for imports from trade agreement
countries. As with quotas, manufacturers from countries facing higher
U.S. tariffs may find ways to transship their merchandise to countries
benefiting from lower or no U.S. tariffs, illegally indicate the
merchandise's country-of-origin, and enter the merchandise into the
U.S. market.
Imports Nearly Double over Past Decade, While Production and Employment
Decline:
Over the past decade, U.S. imports of textile and apparel products have
grown significantly, while domestic production and employment have
declined. For example, textile and apparel imports in 2002 were about
$81 billion, nearly double their value in 1993.[Footnote 8] The largest
suppliers to the U.S. market in 2002 were China (15 percent), Mexico
(12 percent), and Central America and the Caribbean (as a group, 12
percent). See appendix II for more information on textile and apparel
trade, production, and employment.
While imports have grown over the decade, domestic production and
employment have declined. Figure 1 shows U.S. domestic production,
imports, exports, and employment in the U.S. textile and apparel
sector. From 1993 through 2001 (latest year available), textile and
apparel production (as measured by shipments to the U.S. market or for
export) declined by 11 percent, and employment fell by 38 percent.
However, the United States still maintains significant production (over
$130 billion) and employment (about 850,000 jobs) in the textile and
apparel sector.
Figure 1: U.S. Textile and Apparel Domestic Production, Employment,
Imports, and Exports, 1993-2002:
[See PDF for image]
Note: Data on production (shipments) was not available for 2002.
Production, import and export values are in current dollars, not
adjusted for inflation. Producer price changes in the domestic textile
products and apparel sector were low over this period.
[End of figure]
U.S. Government Roles in Monitoring Textile Transshipment:
CBP has responsibility for ensuring that all goods entering the United
States do so legally. It is responsible for enforcing quotas and tariff
preferences under trade agreements, laws, and the directives of the
interagency Committee for the Implementation of Textile Agreements
(CITA) involving the import of textiles and wearing apparel. CBP has
established a Textile Working Group under its high-level Trade Strategy
Board that prepares an annual strategy for textiles and apparel. This
annual strategy establishes national priorities and an action plan to
carry out its goals. Within the framework of this overall strategy, CBP
administers quotas for textiles, processes textile and apparel imports
at U.S. ports, conducts Textile Production Verification Team (TPVT)
visits to foreign countries, provides technical input for trade
agreement negotiations, and monitors existing trade agreements. In
addition to staff at CBP's headquarters, officials at 20 Field
Operations Offices[Footnote 9] and more than 300 CBP ports of entry
oversee the entry of all goods entering the United States. CBP has a
specific unit, the Strategic Trade Center (STC) in New York City,
assigned to analyze textile trade data and other information sources
for the targeting process.
In addition to CBP, the departments of Commerce, Justice, State, and
Treasury, and the Office of the U.S. Trade Representative (USTR) also
play a role in transshipment issues. Further, as an interagency
committee, CITA determines when market-disrupting factors exist,
supervises the implementation of textile trade agreements, coordinates
U.S. administration efforts to combat illegal textile and apparel
transshipment, and administers the phase-out of textile and apparel
quotas on WTO countries required under the 1995 Agreement on Textiles
and Clothing.
CBP Uses a Targeting Process to Identify Potential Textile
Transshipment:
CBP's process for identifying potential illegal textile transshipments
depends on targeting suspicious activity by analyzing available data
and intelligence. Due to increased trade volumes and shifted
priorities, CBP seeks to focus its limited enforcement resources on the
most suspect activity. CBP targets countries, manufacturers, shipments,
and importers that it determines to be at a higher risk for textile
transshipment. First, CBP identifies the countries in which trade flows
and other information indicate a high potential for transshipment. CBP
then targets selected manufacturers in those high-risk countries for
overseas factory visits. Information from the factory visits is then
used to target shipments to the United States for review and potential
exclusions or penalties. Finally, CBP also targets importers based on
high-risk activity and conducts internal control audits that include
verifying that controls against transshipment exist. However, CBP
selects only a small share of foreign factories and shipments for
review due to limited resources.
Targeting Is Essential, Due to High Trade Volumes and Shifting
Priorities for Resources:
In response to a rapidly growing volume of trade at the border and
limited resources for enforcement, CBP relies on a targeting process to
identify shipments that have a high risk of being transshipped.
According to CBP officials, trade growth and expanding law enforcement
efforts have nearly overwhelmed its staff and resources. In addition,
CBP's modernization of its processes and technology, as called for in
the Customs Modernization and Informed Compliance Act of 1993,
recognizes that the nearly 25 million entries (shipments) CBP processes
annually cannot all be inspected.[Footnote 10] Furthermore, since the
terrorist attacks of September 11, 2001, CBP has shifted resources to
security concerns as its priority mission. Inspection and some other
port-level staff have been diverted from detecting commercial
violations to ensuring security. In addition, during higher alert
levels (such as code orange and above), additional staff is also
refocused to assist in port and national security.
CBP Targets Risky Countries, Manufacturers, Shipments, and Importers:
CBP's process of targeting high-risk activity begins by identifying the
countries that supply textile imports that pose the greatest risk of
illegal textile transshipment.[Footnote 11] Applying a risk-management
approach, CBP targets shipments for review based on trade data, such as
sudden surges of products restricted by quotas from nonquota countries,
production data, results of past factory and port inspections,
suspicious patterns of behavior, and tips from the private sector. CBP
then reviews the targeted shipments for evidence of transshipment,
while expediting the processing of nontargeted shipments. From its
country-level review, CBP targets 16 countries per year on average, and
actually visits 11 of them on average. For the countries CBP selects,
it targets on average about 45 high-risk manufacturing plants to visit.
These visits seek to find evidence of transshipment or to verify that
the factories are in compliance with U.S. trade laws and regulations
regarding the origin of the goods exported to the United States. If
problems are found, CBP uses that information to target shipments
(entries) entering the United States for possible detention and
exclusion. CBP targeted 2,482 shipments in 2002. CBP has begun to
target high-risk importers' shipments for review while also conducting
internal audits of selected importers. Figure 2 shows the general
process CBP uses to target suspicious activity.
Figure 2: CBP's Process for Targeting Textile Transshipment:
[See PDF for image]
[End of figure]
CBP Targets about 16 Countries Annually:
Before the beginning of each fiscal year, CBP analyzes trade and
production data, as well as other available intelligence, to assess the
relative risk of each major U.S. trade partner for engaging in illegal
textile transshipment. CBP generally identifies 16 countries a year on
average as being at high risk for transshipment or other trade
agreement violations and updates its assessment at least once during
the fiscal year. The risk level (high, moderate, or low) is based
largely on the volume of trade in sensitive textile categories, such as
certain types of knit apparel and fabric, and the likelihood of
transshipment through that country. For example, as of November 1,
2003, quotas on men and women's knit shirts and blouses were
approximately 80 percent or more filled for China, India, and
Indonesia. This situation creates an incentive for producers in those
countries concerned that the quotas will close before the end of the
year to transship their goods. CBP may increase its monitoring of trade
in these products through neighboring countries. The likelihood of
transshipment is a qualitative judgment that CBP makes based on
available intelligence.
Countries with high production capabilities and subject to restrictive
quotas and tariffs, such as China, India, and Pakistan, are considered
potential source countries. These countries could produce and export to
the United States far more textile and apparel products than U.S.
quotas allow. Countries that have relatively open access to the U.S.
market, either through relatively generous quotas (Hong Kong and Macau)
or trade preferences programs (Central America and the Caribbean, and
sub-Saharan Africa) are considered potential transit points for textile
transshipment.[Footnote 12] CBP focuses its efforts on targeting and
reviewing goods from these transit countries rather than source
countries because any evidence that goods were actually produced
elsewhere, such as closed factories or factories without the necessary
machinery to produce such shipments, would be found in the transit
country.
After selecting the high-risk countries, CBP then selects a subset of
these countries to visit during the year to conduct TPVT factory
visits. During the past 4 years, CBP conducted 42 TPVT visits to 22
countries. Cambodia, Hong Kong, Macau, and Taiwan in Asia, and El
Salvador in Latin America received three or more visits between 2000
and 2003. Table 1 shows the U.S. trade partners that CBP visited on a
TPVT trip in those years, along with their share of U.S. imports of
textile and apparel products in 2002.[Footnote 13] For some U.S. trade
partners, their share of overall textile and apparel trade may be
relatively low, but for certain products they are significant
suppliers. For example, although Thailand is the tenth largest supplier
overall, it is the fifth largest supplier of cotton bed
sheets.[Footnote 14]
Table 1: U.S. Trade Partners Visited by Textile Production Verification
Teams, 2000-2003:
Partner: All Countries;
Number of TPVT visits, 2000-2003: 42;
Rank in U.S. textile and apparel imports, 2002: [Empty];
U.S. imports 2002 (million US$): $80,864;
Share of U.S. imports 2002: 100%.
Partner: Hong Kong;
Number of TPVT visits, 2000-2003: 6;
Rank in U.S. textile and apparel imports, 2002: 3;
U.S. imports 2002 (million US$): 4,099;
Share of U.S. imports 2002: 5.
Partner: Macau;
Number of TPVT visits, 2000-2003: 4;
Rank in U.S. textile and apparel imports, 2002: 20;
U.S. imports 2002 (million US$): 1,149;
Share of U.S. imports 2002: 1.
Partner: Taiwan;
Number of TPVT visits, 2000-2003: 3;
Rank in U.S. textile and apparel imports, 2002: 8;
U.S. imports 2002 (million US$): 2,483;
Share of U.S. imports 2002: 3.
Partner: El Salvador;
Number of TPVT visits, 2000-2003: 3;
Rank in U.S. textile and apparel imports, 2002: 16;
U.S. imports 2002 (million US$): 1,713;
Share of U.S. imports 2002: 2.
Partner: Cambodia (Kampuchea);
Number of TPVT visits, 2000-2003: 3;
Rank in U.S. textile and apparel imports, 2002: 21;
U.S. imports 2002 (million US$): 1,062;
Share of U.S. imports 2002: 1.
Partner: Honduras;
Number of TPVT visits, 2000-2003: 2;
Rank in U.S. textile and apparel imports, 2002: 7;
U.S. imports 2002 (million US$): 2,513;
Share of U.S. imports 2002: 3.
Partner: Thailand;
Number of TPVT visits, 2000-2003: 2;
Rank in U.S. textile and apparel imports, 2002: 10;
U.S. imports 2002 (million US$): 2,322;
Share of U.S. imports 2002: 3.
Partner: Guatemala;
Number of TPVT visits, 2000-2003: 2;
Rank in U.S. textile and apparel imports, 2002: 18;
U.S. imports 2002 (million US$): 1,676;
Share of U.S. imports 2002: 2.
Partner: Vietnam;
Number of TPVT visits, 2000-2003: 2;
Rank in U.S. textile and apparel imports, 2002: 22;
U.S. imports 2002 (million US$): 960;
Share of U.S. imports 2002: 1.
Partner: Nicaragua;
Number of TPVT visits, 2000-2003: 2;
Rank in U.S. textile and apparel imports, 2002: 31;
U.S. imports 2002 (million US$): 434;
Share of U.S. imports 2002: 1.
Partner: Lesotho;
Number of TPVT visits, 2000-2003: 2;
Rank in U.S. textile and apparel imports, 2002: 38;
U.S. imports 2002 (million US$): 321;
Share of U.S. imports 2002: [A].
Partner: Korea;
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 6;
U.S. imports 2002 (million US$): 3,275;
Share of U.S. imports 2002: 4.
Partner: Dominican Republic;
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 12;
U.S. imports 2002 (million US$): 2,252;
Share of U.S. imports 2002: 3.
Partner: Philippines;
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 13;
U.S. imports 2002 (million US$): 2,066;
Share of U.S. imports 2002: 3.
Partner: Bangladesh;
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 15;
U.S. imports 2002 (million US$): 2,017;
Share of U.S. imports 2002: 2.
Partner: Sri Lanka (Ceylon);
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 19;
U.S. imports 2002 (million US$): 1,553;
Share of U.S. imports 2002: 2.
Partner: Mauritius;
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 44;
U.S. imports 2002 (million US$): 255;
Share of U.S. imports 2002: [A].
Partner: Republic of South Africa;
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 46;
U.S. imports 2002 (million US$): 220;
Share of U.S. imports 2002: [A].
Partner: Kenya;
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 54;
U.S. imports 2002 (million US$): 126;
Share of U.S. imports 2002: [A].
Partner: Madagascar;
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 62;
U.S. imports 2002 (million US$): 90;
Share of U.S. imports 2002: [A].
Partner: Swaziland;
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 63;
U.S. imports 2002 (million US$): 89;
Share of U.S. imports 2002: [A].
Partner: Botswana;
Number of TPVT visits, 2000-2003: 1;
Rank in U.S. textile and apparel imports, 2002: 108;
U.S. imports 2002 (million US$): 6;
Share of U.S. imports 2002: [A].
Sources: U.S. Department of Commerce official trade statistics and CBP.
[A] Indicates less than 1 percent of total U.S. imports of textile and
apparel products. Imports are general imports measured at the entered
Customs value.
[End of table]
The number of countries CBP visits each year has varied, but from 1996
through 2003 CBP visited 11 countries per year on average. Although the
overall size of trade is an important factor in targeting countries,
CBP also looks at a range of information in making its determination.
For example, several relatively small suppliers, such as Nicaragua,
Swaziland, and Botswana, were visited because they receive special
preferences as developing countries. Also, Vietnam, which only
accounted for about 1 percent of U.S. imports in 2002, was selected
partly due to trade anomalies occurring during a period when Vietnam's
quota-free access to the U.S. market made it a potential transit
country.[Footnote 15] Figure 3 describes the case of Vietnam as an
example of the role and limitations of the targeting process. However,
Canada and Mexico are both top U.S. trade partners and designated as
high-risk countries, but CBP has not made any TPVT visits. Under the
NAFTA, producers in these countries are subject to visits to verify
NAFTA eligibility. However, these visits do not focus on transshipment
specifically and although CBP has sought to send a TPVT visit to
Canada, it has not yet been successful in persuading the Canadian
government.
Figure 3: CBP's Monitoring of U.S.-Vietnam Trade Indicates Role and
Limitations of Targeting:
[See PDF for image]
[End of figure]
CBP Visits About 45 Manufacturers Per Country:
CBP targets about 45 factories on average per country visit, although
this number varies depending on the characteristics of each country.
For example, the proximity of factories to one another and the length
of trip (1 to 2 weeks) will affect the number of factories that can be
visited. The importance of the trade partner in U.S. textile and
apparel trade will affect the length of the trip and number of
factories targeted. On the November 2003 Hong Kong TPVT trip, for
example, CBP visited over 200 factories. Before undertaking a TPVT
visit in a foreign country, CBP conducts a special targeting session to
identify the manufacturers in that country that it suspects may be
involved in textile transshipment. Similar to its targeting of
countries, CBP import and trade specialists consider the recent trade
flows, available intelligence, experience from past factory visits, and
reviews of merchandise at U.S. ports in order to narrow down from the
total list of factories in the country to a list of the highest-risk
factories that they will target for a visit.[Footnote 16] The process
involves collaboration between the STC trade specialists, the port-
level import specialists that will travel to the factories, and
headquarters staff.
During the past 4 years, CBP found that about half the manufacturers
that it targeted as high risk were actually found by TPVT visits to
have serious problems. These problems included actual evidence of
transshipment, evidence that indicated a high risk of potential
transshipment, permanently closed factories, and factories that refused
admission to CBP officials. Each of these problems is considered a
sufficient reason to review and detain shipments from these factories
as they reach U.S. ports. In addition, some factories were found to
warrant additional monitoring by the STC. They were listed as low risk
and their shipments were not targeted for review when they reached U.S.
ports.
Although the share of targeted factories found to have problems is
relatively high, the factories that CBP targeted were those that
generally had some indication of risk, based on intelligence or trade
data analysis. Also, the targeted manufacturers that were visited
(about 1,700) during the 4-year period generally make up a small share
of the total number of manufacturers in each country. However, for
smaller trade partners, such as those that receive trade preferences
under the Caribbean Basin Trade Partnership Act (CBTPA) or African
Growth and Opportunity Act (AGOA), CBP can visit a sizable share of the
factories within the country because their overall number of factories
is smaller. For El Salvador and Nicaragua, CBP has visited about 10
percent of the factories, and for Swaziland and Botswana, CBP has
visited about 22 and 28 percent of the factories, respectively.
Due to the small share of factories that CBP can actually visit, the
STC says it is developing evaluation tools to improve CBP's process of
targeting foreign manufacturers for TPVT visits. Currently, the STC
tracks the number and results of the TPVT visits in order to assess
whether the targeted factories were actually found to have problems by
the TPVT visits. CBP says it is developing a database to keep track of
the specific criteria it used to target manufacturers for TPVT visits.
It plans to use the results of the TPVT visits to identify which
criteria were most useful in its targeting process.
CBP Identified More Than 2,400 Shipments in 2002:
In 2002, CBP identified 2,482 high-risk shipments (entries) for greater
scrutiny or review--less than one-tenth of 1 percent of the more than 3
million textile and apparel entries that year. CBP actually reviewed 77
percent of the shipments that were identified.[Footnote 17] Of the
shipments reviewed, about 24 percent resulted in exclusions from U.S.
commerce, 2 percent in penalties, and 1 percent in seizures. To choose
shipments for review, CBP headquarters uses information collected from
TPVT factory visits as well as other intelligence information to create
criteria for its targeting system. When shipments match these criteria,
they are flagged at the ports for a review.[Footnote 18] For instance,
when a TPVT visit finds that a foreign factory has been permanently
closed, CBP will place this information in its automated system to be
used as criteria for targeting any shipments destined for entry into
the United States that claimed to have been produced in that factory.
In addition, other information such as prior shipment reviews or
intelligence information concerning possible illegal activity by
manufacturers, importers, or other parties can be entered as criteria
to stop shipments. Criteria can be entered nationally for all ports, or
individual ports can add criteria locally that only affect shipments to
their own port.
CBP Identifies High-Risk Importers for Review and Audit:
CBP has recently begun to increase targeting of U.S. importers of
textile and apparel products who demonstrate patterns of suspicious
behavior. For example, CBP identified more than 40 importers in the
past year who have a pattern of sourcing from foreign manufacturers
involved in transshipment. According to CBP officials, they can pursue
penalties against these companies, because this pattern of behavior may
violate reasonable care provisions[Footnote 19] of U.S. trade laws. CBP
also uses this information and other intelligence it collects to target
for review shipments that these importers receive. In addition to this
targeting, CBP's Regulatory Audit division has traditionally conducted
internal control audits of importers, and it uses a separate targeting
process to identify the importers that it will audit. One component of
its audits focuses on whether the importer has and applies internal
controls for transshipment. The STC has also provided information about
the companies it targets to Regulatory Audit for its own investigations
or audits.
Number of Targets Identified Is Limited by CBP Resource Constraints:
Although CBP's textile transshipment strategy relies on targeting,
resource constraints limit both the number of targets that CBP
generates and the type of targeting analysis that CBP can conduct.
First, the number of foreign factories and shipments targeted is
limited by the ability of CBP to conduct the reviews.[Footnote 20] As
previously discussed, CBP is able to visit only a small share of the
foreign factories exporting textile and apparel products to the United
States. The results of these visits then provide key information for
targeting shipments for review as they arrive at U.S. ports. Similarly,
CBP targets only a small share of textile and apparel shipments to U.S.
ports for review. CBP officials with whom we met said CBP limits the
number of shipments it targets for port reviews because port staff are
unable to effectively examine a significantly larger number of
shipments.[Footnote 21]
In addition to resource constraints due to security (previously
discussed), reviewing shipments for textile transshipment is labor
intensive and involves more than a simple visual inspection of the
merchandise. Unlike cases involving narcotics in which physical
inspections alone can lead to discovery of the drugs, physical
inspections of textile or apparel products rarely provide sufficient
evidence of transshipment. Port staff generally needs to scrutinize
detailed production documentation, which is time consuming, to
determine a product's origin and assess the likelihood of
transshipment.[Footnote 22]
Second, staff constraints restrict the extent to which CBP can utilize
and develop its targeting process. As of December 2, 2003, the STC had
25 percent of its staff positions unfilled (3 out of 12 positions),
while its responsibilities are growing as trade agreements are
increasing. For each new trade agreement, STC staff monitor trade and
investment patterns to detect whether anomalies are developing that
should be targeted. Consequently, CBP officials said that resource
constraints have meant that several types of analysis that the STC
planned on conducting have either been delayed or not conducted at all.
These included analyses of high-risk countries, improvements to
existing targeting processes, and studies of alternative targeting
techniques. Despite these resource limitations, CBP and the STC, in
particular, have made regular improvements to the targeting process.
For example, CBP's targeting of countries and manufacturers for TPVT
visits has become more systematic, relying on trade data and other
intelligence to select factories for visits.
CBP Has Adapted Textile Review Activities to Changing Environment but
Faces Further Challenges:
CBP has consolidated textile functions at headquarters and has adapted
textile review activities at the ports to changing resource levels. In
response to national security priorities, CBP inspectors at the ports
are being shifted to higher-priority duties, leaving import specialists
at the ports to play the critical role in making decisions on excluding
or seizing illegal textile shipments. CBP now relies on TPVT visits as
an essential part of its targeting process, but CBP has not always
finalized these TPVT results and provided them to CBP ports, CITA, and
the foreign governments for follow-up in a timely manner. With the
expiration of the WTO global textile quota regime in 2005, CBP will
lose its authority to conduct TPVTs in the former quota countries, and
supplementing the enforcement information provided to the ports will be
important. Information from overseas Customs Attaché offices and
cooperative efforts with foreign governments can provide additional
important information for port inspections.
CBP Has Consolidated Its Textile Activities Amid National Security
Priorities:
CBP has moved most textile functions into a single headquarters
division to foster a coordinated agency approach to monitoring textile
imports and enforcing textile import laws, but it must still depend on
its port staff to identify and catch illegal textile transshipments. As
CBP inspectors are shifted to higher-priority functions, such as
antiterrorism and drug interdiction efforts, import specialists at the
ports are playing an increasingly central role in scrutinizing the
growing volume of textile imports. They review the entry paperwork for
all textile imports covered by quotas or needing visas[Footnote 23] in
order to exclude shipments that are inadmissible or to seize those that
are illegal, according to port officials. However, resource constraints
at the ports have forced them to depend increasingly on STC targeting,
results of TPVTs, and information from headquarters to identify suspect
shipments and enforce textile laws.
CBP Has Centralized Textile Transshipment Activities, but Ports Still
Key:
In 2001, CBP consolidated oversight of most of its textile operations
into one headquarters division in the Office of Field Operations,
creating the Textile Enforcement and Operations Division. One important
exception to that consolidation was the Textile Clearinghouse in the
New York STC, which remained in the Office of Strategic Trade. The
Textile Enforcement and Operations Division is responsible for
monitoring and administering textile quotas; providing technical input
to textile negotiations; overseeing implementation of textile import
policies at the ports; and for planning, reporting, and following up on
TPVT visits. It uses the results of targeting by the STC, the findings
of the TPVTs, and input from the ports to oversee the daily
implementation of textile policy at the ports. It also works with CITA,
the domestic textile industry, the importing community, and the Bureau
of Immigration and Customs Enforcement (BICE).
Notwithstanding this, the critical point in identifying and preventing
illegally transshipped textiles from entering the United States is at
the ports. There are more than 300 CBP ports across the country--
including seaports, such as Los Angeles/Long Beach, California; land
border crossings for truck and rail cargo such as Laredo, Texas; and
airports handling air cargo such as JFK Airport in New York, New York.
The top 10 of 42 CBP service ports that processed textile imports
accounted for about 75 percent by value of all shipments in 2002,
according to the official trade statistics of the Commerce Department.
The key staff resources for textile enforcement at the ports are the
inspectors and the import specialists.
Figure 4 provides an overview of CBP's textile monitoring and
enforcement process, including targeting, port inspections, and penalty
investigations. The figure also provides data for the results obtained
at each stage of the process in 2002. CBP processed about 3 million
entries in that year, with 2,482 entries triggering targeting criteria,
of which 981 entries were detained, 455 excluded, and 24 seized.
Figure 4: An Overview of CBP's Textile Monitoring and Enforcement
Process, with Results for 2002:
[See PDF for image]
[A] Data was not available on the number of criminal investigations and
cases specifically involving textile transshipment.
[End of figure]
As national security and counternarcotics concerns have become CBP's
top priorities, CBP inspectors' roles have shifted away from textile
and other commercial inspection. The result is that, even at the larger
ports, fewer CBP inspectors are knowledgeable about a specific
commodity, such as textiles. These inspectors now have less time and
expertise to inspect textile shipments. For example, at all but one of
the ports we visited, inspectors were mainly pulling sample garments
from shipments for import specialists to examine rather than acting as
an additional, knowledgeable source on textiles who could do a first
level of review.
As a result, the import specialists have become more critical in
preventing textile transshipment. About 900 import specialists work at
the ports, of which approximately 255 are assigned to work on textiles,
according to a senior CBP official.[Footnote 24] These specialists have
always been central to determining whether illegal textile
transshipment has occurred, because visual inspection is usually not
sufficient. While physical clues such as cut or resewn labels can
provide an indicator that a garment should be further examined, in many
cases nothing about the garment itself indicates that a problem exists.
To establish textile transshipment, import specialists must request
production documents from the importer (who, in turn, requests them
from the manufacturer) and review them to see if they support the
claimed country of origin. This is a highly complex, technical, and
labor-intensive process.[Footnote 25]
Import specialists (or at some ports, entry specialists or inspectors)
review the basic entry paperwork for all textile shipments arriving at
the ports that are covered by quotas or need visas.[Footnote 26] They
will place a hold on a textile shipment:
1. if there are "national criteria," that is, if headquarters has
entered an alert in the Automated Commercial System (ACS), CBP's
computer system for imports, based on targeting, TPVT findings, and
other risk factors, to detain all shipments from that manufacturer or
to that importer and request production documents;
2. if there are "local criteria," that is, the port has entered an ACS
alert based on concerns particular to that port;
3. if the port has conducted its own targeting on shipments arriving at
the port and found questionable entries;
4. if there are abnormalities in the paperwork that warrant further
review; or:
5. if there is other information that may be provided by domestic
industry, the Office of Textiles and Apparel at the Commerce
Department, CITA, foreign governments, or informants.
In most cases, shipments with national criteria will automatically be
detained, a sample pulled from the shipment, and production
verification documents requested. For shipments held due to local
criteria, port targeting, abnormalities, or other information, the
import specialist may request that the CBP inspectors pull a sample
from the shipment, which must be done within 5 days. The import
specialist examines the sample garments and determines whether
shipments being held can be released or require further review. If
further review is warranted, they detain the shipment and send the
importer a detention letter, in which they ask the importer to provide
the production verification documentation for an in-depth review. CBP
must receive and review the documents within 30 days, or the shipment
is automatically excluded.
Based on the in-depth review of the documentation, the import
specialist decides whether to release the goods into commerce, exclude
them if found to be inadmissible, or seize them if found to be illegal.
Goods are inadmissible and are denied entry when the importer has not
provided sufficient information to substantiate the claimed country of
origin or if documents required for entry have not been provided. Goods
may be seized when the import specialist has evidence that the law has
been broken; this requires a higher level of evidence than exclusion.
Port Staff Review "National Criteria" Shipments but Have Less Time for
Local Monitoring:
In the post-September 11, 2001, environment, the ports have become more
likely to rely on national criteria. At all of the ports we visited,
CBP officials said that, in response to national criteria in ACS for
textile shipments, they will detain all such shipments and request
production documents. However, only a few large ports that handle a
high level of textile imports, such as Los Angeles/Long Beach and New
York/Newark, have been able to do much proactive local targeting. At
most of the other ports, officials said that they do as much local
criteria or targeting as they can but rarely get the spare time to do
very much. CBP data support these statements. While national criteria
accounted for about 75 percent of inspections in 2002, local criteria
and self-initiated reviews accounted for 25 percent. Further, local
criteria and self-initiated reviews had declined by half, from 2000 to
2002; and most of the local criteria in 2002 were generated by the
ports in Los Angeles and New York.
According to a senior CBP official, headquarters directs the input of
national criteria to improve communications to the ports and foster
greater uniformity of response and action by all affected ports.
National criteria are continually tracked, analyzed, and adjusted as
appropriate. One reason is that smaller ports have fewer import
specialists; and in some cases, no import specialists are dedicated to
specific commodities. In some ports, the import specialist is
responsible for the entire range of products that can enter the
country.
TPVTs Are Critical to Enforcement, but Follow-up Reporting Is Not
Always Timely:
TPVTs are a critical enforcement tool, and the conduct and reporting of
TPVT visits have been made more uniform and rigorous in recent years.
However, while the TPVT reports are an important part of the targeting
process, they are not always provided in a timely manner to CBP ports,
CITA, and the foreign governments.
TPVT Process Triggers Port Textile Reviews:
TPVTs are critical to enforcement because the ports increasingly depend
on the national criteria that headquarters supplies to trigger
enforcement. These national criteria primarily result from STC
targeting and the findings of the TPVTs conducted in high-risk
countries. Additionally, CBP may receive enforcement information
provided by a foreign government or other sources.
The TPVT process has two main objectives: (1) to verify that the
production capacity of the factory matches the level and kind of
shipments that have been sent to the United States and (2) to verify
production of the specific shipments for which they have brought copies
of the entry documents submitted to CBP. If a factory is closed,
refuses entry, or the team finds evidence of transshipment, the team
immediately notifies headquarters so that national criteria can be
entered into ACS. Any further shipments from the closed factories will
be excluded. Shipments from factories refusing entry or found to be
transshipping will be detained, and importers will be asked for
production verification documents. If a factory is deemed to be at high
risk for transshipment, but no clear evidence has been found, CBP has
generally waited until the TPVT report is approved before entering the
criteria.[Footnote 27] Figure 5 shows a TPVT team verifying production
in El Salvador textile factories.
Figure 5: TPVT Officials Verifying Production in El Salvador Textile
Factories, in July 2003:
[See PDF for image]
[End of figure]
TPVT report drafting and approval involves several steps. First, the
import specialists on the team write the initial draft of their TPVT
results report while in country. When the team members return to their
home ports, the team leader completes the report and forwards it to
headquarters, where it is reviewed, revised, and finally approved by
CBP management. Once the TPVT report is approved, the remaining
national criteria for the high-risk factories are entered into ACS.
TPVT Follow-Up Is Not Always Timely:
CBP's standard operating procedures for TPVTs, dated September 21,
2001, state that the TPVT team leader should finalize the reports
within 21 calendar days after completing the trip and get headquarters
approval within 2 weeks afterwards, or 5 weeks total. However, when we
examined the approval timeline for TPVT reports during the past 4
years, we found that, in practice, report approvals have averaged 2.3
months, or almost twice as long as the procedural requirement. For
example, the El Salvador TPVT we observed was conducted from July 21
through August 1, 2003, but headquarters did not approve the TPVT
report until October 20, 2003.
More importantly, during such interim periods, although national
criteria have been identified for high-risk factories, they are
generally not entered into ACS until the report is approved within
CBP.[Footnote 28] The result is that questionable shipments for which
criteria are intended can continue to enter commerce for another 2.3
months on average. From 2000 to 2003, an average of 37 percent of TPVT-
generated criteria were for high-risk factories. This means that import
specialists at the ports may not see more than a third of the criteria
for about 2.3 months after the TPVT visits. At that time, if
examination of these high-risk factories' production documents show
transshipment of textiles during the interim period, the import
specialists will not be able to exclude these shipments, because they
will have already entered commerce. Instead, import specialists will
have to ask for redelivery by the importer to the port. At that point,
most garments will likely have been sold. Although, according to CBP,
it can charge the importer liquidated damages[Footnote 29] for failure
to redeliver, additional transshipped garments will have entered
commerce nevertheless.
CITA Uses TPVTs to Generate Information Exchange with Foreign
Governments:
The TPVT reports are also sent to CITA and trigger another set of
actions in the textile enforcement process. If the TPVT cannot verify
the correct country of origin in all shipments being investigated, then
CITA will ask the foreign government to investigate, which also
provides it with an opportunity to respond before CITA takes an
enforcement action. CITA's goal is to get foreign governments to
monitor and control their own plants--essentially to self police.
According to a CITA official, if the government does not provide a
satisfactory response, CITA is then obligated to direct CBP to exclude
the illegal textiles.[Footnote 30]
When CBP provides CITA with information that the TPVT (1) was refused
entry to the factory, (2) found evidence of textile transshipment, or
(3) found the factory was unable to produce records to verify
production, CITA will send a letter to the foreign government
requesting that it investigate whether transshipment has occurred and
report back to CITA.[Footnote 31] The foreign government has 30 days to
respond; if there is no response, CITA can also direct CBP to block
entry of that factory's goods, generally for 2 years. In such cases,
CBP ports do not even have to review production documents first; the
goods will be denied entry. Notice of this prohibition is published in
the Federal Register to inform U.S. importers.
When CITA sends a letter to the foreign government, CITA officials said
that most governments respond with an investigation of the
manufacturer. Sometimes governments penalize the factory with a
suspended export license, or they report back that the factory has
closed. As long as they are taking steps to prevent further
transshipment, CITA is satisfied, according to CITA officials.
CITA officials stated that TPVT reports are essential to CITA's efforts
to address illegal transshipment and that CBP has made progress in
providing CITA, through the TPVT reports, with useful information to
identify suspect factories and to determine the nature and extent of
illegal transshipment. However, CITA officials continue to seek
improvement in these reports, in particular for the reports to contain
factual, verifiable information with definitive conclusions regarding
whether a visited factory is involved in illegal transshipment and for
this information to be provided clearly and concisely. While CITA
officials acknowledged that it may be extremely difficult to CBP to
find a "smoking gun" necessary to make this type of conclusion, CITA
officials believe that increased clarity and more definitive
conclusions are possible. Also, delay in receiving the reports hamper
prompt action by CITA, and CBP in many instances does not advise CITA
of follow-up action it has taken against factories that the CBP found
to be unable to verify production or otherwise suspect.
A CITA official estimated that about one-half to three-quarters of
TPVTs result in CITA letters. He estimated that CITA sent about six to
seven letters between October 2002 and October 2003.[Footnote 32]
Overall, CBP's TPVTs and TPVT reports are more geared toward providing
CBP with national criteria, as recognized by a CBP official. However,
CITA officials said that they need more detailed evidence to better
support CITA enforcement actions.
Information from Attaché Offices, Cooperation of Foreign Governments
Crucial:
CBP faces further challenges to which it must adapt with the expiration
of the Agreement on Textiles and Clothing--the global textile quota
regime--on January 1, 2005. The end of the quota regime will mean that
the United States will also lose its authority under that agreement to
conduct TPVTs in former quota countries, unless customs cooperation
provisions with the foreign governments are renewed. CBP has other
means by which it can supplement the enforcement information it
receives from targeting and TPVTs, including placing import specialists
in overseas Customs Attaché offices in high-risk countries and
obtaining greater foreign government cooperation.
End of Global Quota Regime Could Affect CBP's Cooperation with Foreign
Governments:
Finding means of supplementing the enforcement information provided to
CBP ports will be critical once the global textile quota regime,
embodied in the WTO Agreement on Textiles and Clothing, expires on
January 1, 2005. The numerous U.S. bilateral quota agreements with WTO-
member textile exporting countries were all subsumed in the global
regime. The textile enforcement provisions in these agreements provided
the authority for CBP to conduct TPVTs. All of these provisions will
expire together with the global textile quota regime. CBP will have
continued authority to conduct TPVTs in countries with free trade
agreements and preference agreements (such as the Caribbean Basin Trade
Preference Act), as well as in non-WTO countries whose bilateral quota
agreements will not expire (such as Vietnam).
However, certain incentives for transshipment will continue to exist.
For example, special provisions that apply to imports of Chinese
textiles have recently been invoked under the safeguard provision of
China's Accession Agreement to the WTO to limit growth of imports of
certain textile categories.[Footnote 33] The safeguard provision allows
individual categories of textiles to remain under quota for up to an
additional 12 months, if the domestic industry petitions CITA for
relief and CITA affirms the petition. The petition must establish that
imports of Chinese origin textiles and apparel products are threatening
to impede the orderly development of trade in these products, due to
market disruption.[Footnote 34]
The U.S. government currently maintains a Memorandum of Understanding
with Hong Kong under which customs cooperation has been conducted.
Given the possibility of additional safeguard quotas being imposed on
Chinese textiles after the global quota regime expires, it will be
critical that U.S.-Hong Kong customs cooperation continues. However,
the United States does not have such memorandums of understanding with
other high-risk countries in the region, such as Taiwan, Macau, and
Bangladesh. CBP will no longer have the authority to conduct TPVTs in
these high-risk countries unless customs cooperation agreements are
renewed.
CBP Has Other Possible Means to Supplement Its Enforcement Information:
CBP has sought to supplement the enforcement information it receives by
placing some import specialists in overseas Customs Attaché offices in
high-risk countries and by obtaining greater foreign government
cooperation. CBP started sending import specialists to its overseas
Customs Attaché offices in 2000. The reason for this effort was that
most staff in the Customs Attaché offices were special agents who were
criminal investigators and had no trade background. Import specialists
were to provide this missing trade experience. CBP identified the
countries that would most benefit from having an import specialist in
the Attaché office, and by November 2003, six import specialists were
assigned to Canada, Hong Kong, Japan, Mexico, Singapore, and South
Africa.
A CBP official said that the import specialists are assisting with
providing information. They have been able to help in following up on
TPVT findings. They also have been useful in uncovering counterfeit
visa cases in which fake company names and addresses are given in
import documents. If more import specialists were in Customs Attaché
offices in high-risk countries to assist with textile monitoring and
enforcement, additional benefits would result, according to the CBP
official. In between TPVT visits, they would be able to assist the
targeting effort with activities such as checking to see whether a
particular factory really exists or has the level of capacity claimed.
They could also verify factory addresses and licensing. Finally, they
would be able to facilitate cooperation and coordination with the
foreign government on textile transshipment issues, including
conducting training on transshipment prevention.
Another means by which CBP can also supplement the enforcement
information it receives is by encouraging foreign government
cooperation and self-policing. A good example of such an arrangement is
CBP's present relationship with Hong Kong customs authorities. The Hong
Kong Trade and Industry Department has established an extensive system
for regulating Hong Kong's textile industry, which it enforces together
with the Customs and Excise Department. Hong Kong officials work
closely with the U.S. Customs Attaché Office in Hong Kong and CBP's
Textile Enforcement and Operations Division at headquarters. Hong Kong
also provides self-policing assistance to CBP. Hong Kong officials
conduct follow-up investigations on findings by the TPVTs, called Joint
Factory Observation Visits in Hong Kong, which have resulted in
numerous cancelled or suspended export licenses. Hong Kong officials
have also actively prosecuted and convicted individuals violating Hong
Kong's textile transshipment laws.[Footnote 35] As it is a matter of
public record, CBP gets the names of those companies that have been
convicted of violations. Macau and Taiwan also provide CBP with such
information. CBP creates national criteria for these manufacturers, and
the ports would detain any future shipments for production verification
documentation. Figure 6 shows the high volume of commercial traffic
coming into Hong Kong from Shenzhen, China, at the Lok Ma Chau Control
Point.
Figure 6: Main Hong Kong-China Commercial Control Point at Lok Ma Chau,
August 2003:
[See PDF for image]
[End of figure]
However, it is not clear whether many other high-risk countries have
the capacity to self-police. In some countries, customs authorities may
be constrained by domestic laws that either limit their authority or do
not extend sufficient authority to adequately enforce textile
transshipment provisions in their bilateral agreements with the United
States. For example, government officials in El Salvador said that they
do not have the same authority that U.S. CBP has in requesting
production documentation from Salvadoran factories, because such
authority is not provided in their customs laws. Such lack of authority
was also an issue that USTR addressed when it negotiated the U.S.-
Singapore Free Trade Agreement (FTA), finalized in 2003. CBP, which is
a technical advisor to such negotiations, encouraged the addition of a
provision to require the government of Singapore to enact domestic
legislation that provided the authority needed to fully enforce the
agreement's textile transshipment provisions.
The United States is currently negotiating numerous new FTAs. As with
the Singapore FTA negotiations, USTR may be able to include such
provisions in new FTAs, providing an opportunity for the United States
to buttress textile transshipment enforcement provisions and enhance
the ability of foreign governments to conduct more effective self-
policing. Such provisions have generally been included in the FTAs
negotiated since NAFTA, according to a senior CBP official.
Weak Internal Controls Hinder Effectiveness of CBP's In-bond System:
CBP uses its in-bond system to monitor cargo, including foreign
textiles, transiting the U.S. commerce or being exported to a foreign
country. However, weak internal controls in this system enable cargo to
be illegally diverted from the supposed destination, thus circumventing
U.S. quota restrictions and duties. At most of the ports we visited,
CBP inspectors we spoke with cited in-bond cargo as a high-risk
category of shipment because it is the least inspected and in-bond
shipments have been growing. They also noted that CBP's current in-bond
procedures allow too much reliance on importer self-compliance and that
little actual monitoring of cargo using this system takes place. Lack
of automation for tracking in-bond cargo, inconsistencies in targeting
and examining cargo, in-bond practices that allow shipments'
destinations to be changed without notifying CBP and extensive time
intervals to reach their final destination, and inadequate verification
of exports to Mexico hinder the tracking of these shipments. Although
CBP has undertaken initiatives to tighten monitoring, limitations
continue to exist. These limitations pose a threat not only to textile
transshipments but also to other areas related to national security.
Without attention to this problem, enforcement of national security,
compliance with international agreements, and proper revenue collection
cannot be ensured.
In-bond System Designed to Expedite Flow of Commerce:
To expedite the flow of commerce into the United States, Congress
established in-bond movements to allow cargo to be transported from the
port of arrival to another U.S. port for entry into U.S. commerce or
for export to a foreign country.[Footnote 36] Cargo can be transported
in several ways using the in-bond system. When a vessel arrives with
containers, an importer may elect to use the in-bond system to postpone
payment of taxes and duties while moving the goods from the original
port of arrival to another port. By doing this, the importer delays
paying duties until the goods are closer to their ultimate destination-
-for example, goods arriving by ship in Los Angeles may transit the
country and ultimately be inspected and have duties levied in Chicago.
Or goods may pass through the United States on their way to another
destination, such as goods that are transported from Los Angeles to
Mexico or from Canada to Mexico.
There are three types of in-bond movements:
* Immediate transportation (I.T.). This is merchandise that is moved
from one U.S. port to another for entry into U.S. commerce.
* Transportation and exportation (T&E). This is merchandise "in
transit" through the United States. Export to another country is
intended at the U.S. destination port.
* Immediate exportation (I.E.). This is merchandise exported from the
port at which it arrives in.
Once the shipment leaves the port of arrival, the bonded
carrier[Footnote 37] has 30 days to move the merchandise to the U.S.
destination port. Upon arrival at the destination port, the carrier has
48 hours to report arrival of merchandise. The merchandise must then be
declared for entry or exported within 15 days of arrival (see fig. 4).
Use of the In-Bond System Growing Rapidly:
Based on responses from our survey of 11 of 13 major area ports, the
use of the in-bond system as a method of transporting goods across the
country nearly doubled from January 2002 through May 2003. For our
study, we surveyed the 13 ports across the country that process the
largest amount of textiles and apparel and asked them about in-bond
operations at their port. Figure 7 shows the increase in in-bond
shipments processed in the past 17 months at 11 of these
ports.[Footnote 38] From January 2002 through May 2003, in-bond entries
increased 69 percent. A recent study on crime and security at U.S.
seaports estimated that approximately 50 percent of all goods entering
the United States use the in-bond system and projects that this figure
will increase.[Footnote 39]
Figure 7: Total In-bond Entries for 11 Major U.S. Ports, January 2002-
May 2003:
[See PDF for image]
Note: This graph represents growth for 11 major U.S. ports and may not
be representative of overall in-bond growth across all CBP ports.
[End of figure]
Based on our survey, the top three U.S. ports that were the most
frequent reported destinations for in-bond shipments from October 2002
to May 2003 were Miami, New York, and Los Angeles. In-bond entries
comprised a significant portion of the total entries for these ports,
with 58.2 percent of total entries in Miami, 60 percent in New York,
and 45.9 percent in Los Angeles. For goods arriving at the Los Angeles-
Long Beach seaport, the top three intended in-bond destination ports
for fiscal year 2002 were Chicago, New York, and Dallas-Fort Worth,
Texas.
In-bond System May Facilitate Textile Transshipment:
Many officials at the ports we surveyed expressed concern in their
responses over the growth of in-bond shipments and their lack of
additional resources to examine and track these shipments. In addition,
some port officials we spoke with also expressed concern that the in-
bond system is increasingly being used for diverting goods that are
quota restricted (such as textiles) or that have high duty rates.
One example of how illegal in-bond diversion occurs is when textile
shipments arrive by vessel at Los Angeles and are transported by truck
to a port such as Laredo, Texas, where the carrier (trucking company)
may declare immediate exportation to Mexico (see fig. 5). However,
instead of exporting the goods to Mexico, they are shipped to another
U.S. location for sale. This can occur because CBP relies heavily on
importer compliance, and it requires only that carriers drop off
paperwork showing exportation, without actually requiring physical
inspection of the cargo.[Footnote 40]
Figure 8: Example of In-bond Diversion of Goods Supposedly Going to
Mexico:
[See PDF for image]
[End of figure]
CBP and BICE presently have ongoing investigations to address the
problem of illegal diversion of in-bond merchandise. For example, a
2003 in-bond diversion investigation found that 5,000 containers of
apparel were illegally imported, thus avoiding quota restrictions and
payment of $63 million in duties. Between May 2003 and October 7, 2003,
the ports of Long Beach and El Paso made 120 seizures with cases
involving a textile in-bond diversion smuggling scheme. The total
domestic value for these goods was more than $33 million. Table 2 shows
the number of in-bond cases and the penalty amounts assessed by CBP for
the past 3 fiscal years. Total penalty amounts assessed were more than
$350 million.
Table 2: Total number of In-bond Cases and Assessed Amount for
Liquidated Damages, 2001-2003:
Fiscal year: 2001; Total number of in-bond cases: 3,466; Total assessed
amounts for liquidated damages: $93,696,618.
Fiscal year: 2002; Total number of in-bond cases: 2,677; Total assessed
amounts for liquidated damages: 151,292,457.
Fiscal year: 2003; Total number of in-bond cases: 3,717; Total assessed
amounts for liquidated damages: 64,226,161.
Source: U.S. Customs and Border Protection.
Note: An insured party must pay "liquidated damages"--or a monetary
fine-to CBP if the insured party has breached the terms of the bond.
[End of table]
In-bond System Lacks Automation and Critical Information to Properly
Monitor Cargo Movement:
At present, CBP lacks a fully automated system that can track the
movement of in-bond transfers from one port to another. Much shipment
information must be entered manually--a time-consuming task when
thousands of in-bond shipments must be processed every day--and as a
result, recorded information about in-bond shipments is minimal and
records are often not up to date. In addition, in-bond arrival and
departure information recording is not always timely; and according to
our survey results, insufficient cargo information, along with a lack
of communication between U.S. ports about in-bond shipments, makes it
difficult for ports of destination to monitor cargo and know the number
of in-bond shipments to expect. CBP has begun to automate its in-bond
system but concerns remain.
Under Current CBP Procedures, In-bond Shipments Transit with Minimal
Information Provided to CBP:
By definition, an in-bond movement is entry for transportation without
appraisement. CBP collects significantly less information on in-bond
shipments than regular entries that are appraised. While CBP has the
ability to collect additional information for textile products, our
survey results show that very little information is collected by CBP
for in-bond shipments in general.
To process an in-bond shipment, all in-bond paper transactions require
a Customs Form 7512, Transportation and Entry form. This form is filled
out by brokers and submitted to the port of arrival. According to many
in-bond personnel responding to our survey, the information that is
provided on this form to allow the shipment to travel in-bond is often
minimal, capturing some, but not all, shipment manifest information,
shipment data, and carrier data. They also responded that the
information on the Customs Form 7512 is often vague, with not enough
descriptions of the commodities shipped. The form also lacks any
invoice or visa information--information that is critical for shipment
targeting. This lack of information causes difficulty in tracking.
Without this information, CBP is unable to effectively track in-bond
shipments.[Footnote 41]
In-bond shipments of textiles or textile products have specific
description requirements. CBP regulations require that these shipments
be described in such detail as to allow the port director to estimate
any duties or taxes due. In addition, the port director may require
evidence of the approximate correctness of value and quantity or other
pertinent information.[Footnote 42] However, our survey results show
that such additional information has not been obtained in practice.
CBP's Recording of Arrival and Departure In-bond Information Is Not
Always Timely:
In-bond data are not entered in a timely, accurate manner, according to
some port in-bond personnel we spoke with, as well as some survey
respondents. Currently, CBP accounts for goods that initially arrive at
one CBP port (port of arrival) but are shipped immediately to the port
of entry (port of destination) through an in-bond module in CBP's
ACS.[Footnote 43] For automated entry forms submitted on electronic
manifests, departure data can be entered in ACS automatically showing
that an in-bond transfer is planned from the port of arrival. For
nonautomated entries (paper), CBP officials are supposed to input
departure data manually at the port of arrival to establish
accountability for the merchandise. When the goods arrive at the port
of destination, personnel are to input data indicating that the goods
have arrived, at which time accountability is transferred from the port
of arrival to the port of destination.
However, at three of the seven ports we visited, officials stated that
the departure and arrival information was not consistently maintained,
because personnel did not input data promptly. As the volume of
shipments transiting via in-bond has increased, the workload for ports
across the country to enter this information has created a backlog,
often resulting in entries that are never entered into the system. More
than half of the 29 ports we surveyed reported that between 50 and 100
percent of their in-bond entries were paper entries. At two of the
largest ports processing the highest volume of in-bond entries,
officials reported that more than 75 percent of the entries received
were paper entries requiring that staff manually enter information. CBP
personnel at two major ports told us that in-bond data are often not
entered into the system at the port of arrival, because CBP lacks the
personnel to enter in-bond information for every shipment.
Communication between Ports Regarding In-bond Arrival/Departure Data Is
Minimal:
Results from our survey showed that 80 percent of the ports did not
track in-bond shipments once they left the port of arrival. A CBP
official at the Port of Laredo, Texas, a major port of destination,
said that they have no way of knowing the number of shipments intended
to arrive at their port. Without proper communication between them,
ports are unable to determine the location of a shipment traveling in-
bond until it reaches its destination. As a result, personnel at the
port of destination were unable to anticipate a shipment's arrival and
thereby identify and report any delayed arrivals, because a record of
departure had never been set up. However, some ports such as Laredo,
Texas are beginning to communicate with other ports more frequently to
anticipate and track in-bond shipments.
Finally, although CBP has computer-generated reports available to
identify in-bond shipments that were not reported and closed within the
required 30 days, 70 percent of ports we surveyed report that they have
never used these reports. They said they do not do so because (1) they
either did not consider the report to be reliable or (2) they had never
heard of these reports. Tracking overdue shipments is a critical
internal control, because it alerts CBP to shipments that never made it
to their stated destinations. Without consistent examination of overdue
shipments, CBP cannot account for in-bond shipments that failed to meet
the time requirements for delivery.
We reported these limitations in 1994 and 1997, and we made several
recommendations to CBP on improving the monitoring of in-bond
shipments.[Footnote 44] In 1998, CBP initiated the TINMAN Compliance
Measurement Program to address some of the weaknesses noted in our 1997
report, including the ability to generate reports to follow-up on
overdue shipments. In 2001, the Treasury Department's Inspector General
conducted a financial management audit and found that although TINMAN
resolved some of the weaknesses found in prior audits, CBP was still
unable to ensure that goods moving in-bond were not diverted into U.S.
commerce, thereby evading quotas and proper payment of duties. Results
from our survey show that this compliance program is not consistently
implemented across ports.
CBP Is Making Progress in Automating Its In-bond System; However,
Concerns Remain:
In March 2003, CBP launched an initiative to automate the in-bond
system with a pilot program called the Customs Automated Form Entry
System (CAF—'s), currently being tested at six U.S. ports.[Footnote 45]
CAF—'s is an interim step toward full automation. It is intended to
allow more detailed shipment data to be entered into the system
electronically, thus reducing the amount of time personnel must spend
entering shipment data. The CAF—'s program is currently voluntary, and,
so far, about 8 to 10 percent of the brokers at the pilot ports are
participating. However, according to a 2003 CBP Action Plan, all land
border truck ports will be required to use the automated in-bond system
by midyear 2004. Nevertheless, no time frame yet exists for deploying
CAF—'s at other locations.
Although CAF—'s will improve automation of the in-bond system, it will
not resolve the tracking of in-bonds until full automation occurs. When
we spoke to CBP headquarters officials about this continuing weakness,
they stated that they had not made additional improvements to the in-
bond program, because those improvements will be made when their new
Automated Commercial Environment (ACE) computer system is rolled out.
CBP stated that it does not have a time frame for deploying the system
to fully automate in-bonds because development is still under way but
it estimated this might be accomplished within 3 years. Without a
definite time frame, it is not clear if the automation of in-bonds will
actually be implemented.
In-bond Shipments Are Not Consistently Targeted and Examined Before
Leaving the Arrival Port:
Although all incoming cargo is targeted for national security purposes,
once the paperwork is filled out for a shipment to travel in-bond, CBP
does not generally perform any additional targeting for these
shipments. CBP instead focuses on targeting shipments making an
official entry into U.S. commerce. The New York STC also does not
analyze information from in-bond shipments in order to perform
additional targeting. Conducting additional targeting for in-bond is
also critical because in-bond shipments that are not identified as
high-risk shipments by Container Security Initiative may go through CBP
undetected and without inspection. Recognizing the need for targeting
in-bond shipments, some ports we surveyed responded that they have
begun to target in-bond shipments. However, targeting is not
consistently performed because ports do not have the staff to conduct
targeting or exams. Port management officials we spoke with at two
major ports stated that since the September 11 attacks, resources have
shifted to other antiterrorism areas. In addition, because brokers for
in-bond shipments at the port of arrival provide very little
information regarding shipments, targeting of in-bond shipments is
difficult to conduct (See fig. 9 for illustration of in-bond shipment
process and points of concern).
Figure 9: Weaknesses in the In-bond Process:
[See PDF for image]
[End of figure]
CBP officials at most of the ports we visited cited resource
constraints as a top reason for not inspecting in-bond shipments. For
example, CBP officials at the Los Angeles/Long Beach, California, port-
-one of the busiest, with the highest volume of in-bond entries--told
us that the current understaffing does not allow examination for many
in-bond shipments. Moreover, results from our survey showed that more
than 80 percent of the 13 area ports we surveyed do not have full-time
staff dedicated to inspecting in-bond shipments. Some ports responded
that if they had more staff dedicated to in-bond shipments, they would
have a greater ability to inspect in-bond shipments. In addition, seven
of the eight largest ports that responded to our survey stated that
inspectors dedicate less than 10 percent of their time to in-bond
inspections. For example, CBP officials at the port of New York/Newark
said that they estimated that less than 2 percent of in-bond entries
are actually inspected.
Nature of In-bond Regulations May Make It Difficult to Monitor In-bond
Shipments:
According to several CBP in-bond personnel we spoke with at two ports,
certain provisions in the in-bond regulations make it more difficult to
track in-bond shipments. These regulations pertain to (1) whether
importers can change a shipment's final destination without notifying
CBP and (2) the time allowed for in-bond shipments to reach their final
destination.
Under the regulations, an in-bond shipment can be diverted to any
Customs port without prior notification to CBP, except where diversions
are specifically prohibited or restricted. For example, an importer
with a shipment arriving in Los Angeles may declare that it will travel
in-bond to Cleveland, Ohio. However, after filing the paperwork, the
importer may then elect to change the final destination to New York,
without filing new paperwork or informing CBP. The information provided
to CBP at the port of arrival will still state Cleveland as a final
destination. CBP has no way of knowing where the shipment is going
until and if it shows up at another port.
For in-bond shipments of textiles or textile products, a change in
destination requires approval of CBP's director at the port of
origin.[Footnote 46] However, officials at three ports that handle high
volumes of textile in-bond shipments said that they were either unaware
of the regulation or that it was too difficult to enforce due to the
high volume of shipments they processed.
Another problem CBP in-bond personnel mentioned in monitoring in-bond
movements is the extensive time allowed to carriers to transport
merchandise across the country. The Tariff Act of 1930 established the
in-bond system and CBP regulations set time limits at 30 days for the
delivery of merchandise at the port of destination for entry or for
exportation.[Footnote 47] Port officials stated that this time limit is
excessive and may contribute to the diversion of cargo by giving
carriers too much time to move merchandise to different locations.
Tracking would be easier if a carrier had a more restricted time period
during which brokers or carriers would have to close out the in-bond,
such as 10 to 20 days, depending on the distance between the port of
arrival and the final port of destination, according to these CBP
officials.
Mexico's in-bond system works differently than the U.S. system. In
fact, when we spoke with Mexican Customs officials at the port of Nuevo
Laredo in Mexico regarding illegal textile transshipment, they said
that their in-bond system could track the movement of goods more easily
because (1) importers were not allowed to change the final destination
and (2) carriers are given a certain time limit to deliver merchandise,
depending on the distance between the port of arrival and the port of
destination.
Shipments Declaring Exportation to Mexico Lack Sufficient Monitoring to
Ensure Actual Exportation:
Several BICE investigations have uncovered in-bond fraud concerning
textile shipments that were allegedly exported to Mexico but instead
entered into U.S. commerce to circumvent quota and duty payment. To
cope with this problem, BICE officials in Laredo, Texas, initiated an
effort to improve the verification of exports to Mexico by requiring
that for shipments processed for immediate exportation, brokers had to
submit a Mexican document known as a "pedimento," as proof that
shipments were exported to Mexico. However, these documents are easily
falsified and can be sold to willing buyers for submission to CBP,
according to Laredo CBP officials. When we spoke with Mexican Customs
officials at the Nuevo Laredo, Mexico, port, they acknowledged that
reproducing false government pedimentos is easy to do and that it is
not a reliable method for verifying exportations. The broker community
in Laredo, Texas, also expressed serious concerns with fraudulent
activity by some Mexican government officials. They suspected that
pedimentos were being sold by some Mexican Customs officials to
facilitate the diversion of goods into the United States. In fact, in
August 2003, the port director of Nuevo Laredo, Mexico, was indicted
for selling false Mexican government documents for $12,000 each.
Moreover, many ports along the U.S.-Mexican border do not have export
lots where trucks with shipments bound for Mexico can be physically
examined to ensure that the shipments are actually exported to Mexico
instead of entering the U.S. commerce.[Footnote 48] Although export
lots were opened at one time, they have been closed at many ports as a
result of resource constraints. When export lots were open, inspectors
were able to verify exportation because carriers were required to
physically present the truck with the shipments for inspection.
Since our review began, CBP has opened an export lot in Laredo, Texas,
and has required that all shipments declared for export to Mexico be
presented and inspected at the export lot. However, not all ports along
the border have export lots, and Laredo in-bond personnel have noticed
that as a result many trucks were now choosing to clear their goods
through those ports without export lots. CBP officials we interviewed
in Laredo, along with the members of the Laredo broker community, have
raised this concern and have noted the need to reopen export lots as a
way to minimize fraud.
As of October 20, 2003, a CBP directive mandated that all merchandise
to be exported should be presented for export certification.
Certification is not to take place until the merchandise is physically
located where export is reasonably assured. According to a senior CBP
official, as a result of this directive, ports with export facilities
have reopened them or provided a reasonable alternative such as
reporting to the import facility. He also stated that CBP has developed
plans to verify that at least a representative sample of reported
exports are actually reported. However, officials we spoke with at two
ports are not sure whether they will have the resources to verify every
in-bond export. A senior CBP official confirmed this problem, saying
that verification of exports might not occur during periods of staffing
constraints.
CBP Has Experienced Serious Challenges in Enforcing Textile
Transshipment:
CBP has broad enforcement authority regarding illegal textile
transshipment, but it has experienced challenges in implementing
enforcement actions. These challenges include a complex and lengthy
investigative process, as well as competing priorities. As a result of
these challenges, CBP generally has relied on excluding transshipped
textiles from entry into the United States, rather than seizing
merchandise or assessing penalties. In addition, addressing in-bond
violations presents special challenges due to weaknesses in CBP's
internal controls and in the nature of the penalty structure. CBP also
employs other means to deter illegal transshipment, such as informing
the importer community of violations of textile transshipment laws and
by making available lists of foreign violators.
CBP Has Extensive Authority to Address Textile Transshipment
Violations:
CBP has broad authority to act when violations of textile transshipment
occur. Depending on the circumstances, CBP may pursue the following
enforcement actions:
* Exclusion of the textile shipment. CBP can exclude textiles from
entry if the importer has not been able to prove country of origin.
Before admitting goods into the United States, CBP may ask for
production records, review them, and then make a determination on
origin. The importer must be able to prove the textiles' country of
origin. If CBP cannot clear the goods within 30 days, the textiles are
automatically excluded. CBP may also deny entry of textiles if
production documents reveal that the textiles were produced at a
factory identified in the Federal Register by the Committee for the
Implementation of Textile Agreements, as discussed below.
* Seizure of the textile shipment. CBP can seize the textiles, if it
has evidence that violations of a law have occurred. By law,[Footnote
49] seizure is mandatory if textiles are stolen, smuggled, or
clandestinely imported. In other instances, CBP can exercise discretion
in deciding whether seizure is the most appropriate enforcement action.
When seizure is invoked, CBP takes physical possession of the
merchandise. In order for textiles to be seized, there must be specific
statutory authority that allows for the seizure.
* Imposition of penalties. CBP has several administrative penalties
available, based on the nature of the violation. CBP may levy
administrative penalties locally at the port level without conducting
an investigation. Alternatively, CBP may refer a suspected violation
for an investigation by BICE. The outcome of the BICE investigation may
be a referral to (1) CBP for an administrative penalty or (2) a
referral to the U.S. Attorney for possible criminal prosecution of the
importer and its principal officers and the imposition of criminal
monetary penalties. Thus, some monetary penalties result from
investigations performed by BICE, while others simply result from
activity within a port. In addition to civil administrative penalties,
CBP may also assess liquidated damages claims against bonded cartmen
(carriers) implicated in violations involving cargo transported in-
bond. CBP's Office of Fines, Penalties and Forfeitures is responsible
for assessing certain penalty actions for transshipment violations and
is responsible for adjudicating penalties, liquidated damages claims
and seizures occurring at the ports, up to a set jurisdictional amount.
* Pursuit of judicial criminal or civil prosecutions. CBP may refer
unpaid civil administrative penalty or liquidated damages cases to the
Department of Justice for the institution of collection proceedings
either in federal district court or in the Court of International
Trade. Additionally BICE investigates potential violations to establish
the evidence needed for criminal prosecution of the violations. When
BICE deems sufficient evidence can be established, cases may be
referred to the appropriate U.S. Attorney's Office for criminal
prosecution.
CBP Relies Primarily on Exclusions Due to Lengthy and Complex
Investigative Processes:
CBP has increasingly relied on exclusions rather than seizures or
penalties for textile transshipment enforcement for two primary
reasons. First, it is easier to exclude transshipped goods than to
seize them because exclusions require less evidence. Second, although
excluded textile shipments may incur penalties, often CBP does not
assess penalties against importers of excluded merchandise because it
is impossible to attach specific culpability to the importer. According
to CBP officials, absent the evidence to conclude the importer failed
to exercise reasonable care, it would be difficult to sustain a penalty
against an importer of excluded merchandise. CBP also avoids the
lengthy and complex process associated with criminal and civil
prosecutions and penalties by excluding the shipments.
CBP Relies on Exclusions for Enforcement:
In enforcing textile transshipment violations, CBP has relied more on
exclusions than on seizures or penalties. Textiles may be excluded if
the importer is unable to prove country of origin, whereas seizures may
occur when false country of origin documents are presented to evade
quota or visa restrictions--a situation requiring a higher standard of
evidence. Exclusions usually have an immediate effect, although if the
importer chooses to protest the decision to exclude, the importer can
appeal CBP's decision to the Court of International Trade. Import
specialists in Long Beach/Los Angeles said that when an exclusion
determination is made, they are ready to go to court if needed. The
importer can ship to another country, abandon, or destroy the excluded
textiles.
CBP may elect not to levy penalties on excluded goods where culpability
of the importer cannot be established, and generally issues penalties
against the importer only if the importer is implicated or the
transshipped textiles entered the commerce of the United States.
However, a senior CBP official said that the exclusion of textiles is
considered a better deterrent than penalties because the importer
cannot receive the goods and, therefore, cannot get them into U.S.
stores that are waiting for them--often for seasonal shopping. Also,
the complexity and length of investigations and litigation are no
longer of concern, since the goods are simply excluded from entering
the United States. Table 3 presents port-level data on selected
enforcement actions in 2000 to 2002.
Table 3: CBP Port-Level Exclusions, Penalties, and Seizures of
Textiles, 2000-2002 (Dollars in millions):
Seizures;
2000: Number: 43;
2000: Value: $2.10;
2001: Number: 14;
2001: Value: $0.31;
2002: Number: 24;
2002: Value: $0.79.
Penalties;
2000: Number: 54;
2000: Value: 4.4;
2001: Number: 19;
2001: Value: 0.13;
2002: Number: 45;
2002: Value: 0.37.
Exclusions;
2000: Number: 402;
2000: Value: 20.2;
2001: Number: 308;
2001: Value: 22.2;
2002: Number: 455;
2002: Value: 20.0.
Source: CBP's Strategic Trade Center.
Note: CBP was not able to provide data on prosecutions.
[End of table]
Investigative Processes for Seizures and Penalties Are Complex and
Lengthy:
The investigative phase for textile transshipment cases can be a
complex and lengthy effort, resulting in few criminal penalties.
Investigators often must follow convoluted paper trails for the
movement of goods and money, obtain accounting records--sometimes
having to get Internal Revenue Service records (which can be a 6 to 9
month process). They also may have to subpoena banks, interview brokers
and shippers, get foreign government cooperation, and pursue new leads
as they arise. A BICE official noted that it is often difficult to
pursue textile transshipment criminal cases because, unlike with some
crimes, there is no "smoking gun" at the port. For example, when drugs
are found, the drugs themselves are evidence of the violation. With
textile transshipment, an illegal T-shirt will look no different than a
legal one. The basis for the violation is established by proving that a
false country of origin was knowingly claimed and that the importer
intended to commit fraud, committed negligence, or gross negligence.
Although CBP does not keep records on the length of time for
disposition of cases, import specialists and inspectors voiced concern
that investigations can be lengthy. For example, a senior CBP official
noted that in 1989, there were 83 illegal entries. Although some civil
cases went to the Court of International Trade in 1990, the first
decisions were made in 1993, and the last were not decided until 1995,
1997, and 1999. Two of the larger civil cases against multinational
corporations took 7 and 10 years to pursue at the Court of
International Trade. Accordingly, CBP has a process in place to
determine whether to accept offers to settle civil cases out of court,
which includes evaluating the litigation risk and the resources CBP
would have to devote to a trial.
One factor relating to the length of the case is that, if BICE
initiates a criminal investigation, any action relating to that case is
held in abeyance pending possible criminal prosecution of the case. If
sufficient evidence exists to justify a criminal prosecution, the case
then goes to the U.S. Attorney's Office. This move delays related civil
proceedings. BICE officials in Los Angeles/Long Beach noted that U.S.
attorneys are short on resources, since they are also working on drug-
smuggling and money-laundering investigations; and in the past 10 years
in that district, fewer than 10 cases have been sent to the U.S.
Attorney's Office and prosecuted. They noted, though, that the U.S.
attorneys had not rejected any textile transshipment cases that BICE
had brought to them. Neither CBP nor the Justice Department could
provide exact figures on the numbers of prosecutions of illegal textile
transshipments, but CBP officials noted that the figures were low.
In addition, investigating a case may entail allowing the suspect
textile transshipments to continue for a while, to obtain sufficient
evidence. However, investigators can be pulled off a particular textile
investigation for a higher priority; and then the textile case sits,
with CBP sometimes never getting back to it, according to a senior CBP
official.
When CBP pursues a case, the monetary amounts of the penalties may get
reduced, according to CBP staff, in line with CBP's mitigation
guidelines. CBP data are not available to summarize the penalty amounts
assessed and the final mitigated penalty amounts. But in one example,
CBP discovered that a company transshipped $600,000 worth of blue jeans
to evade quota and visa restrictions. Company officials pled guilty
and, in the end, paid CBP civil penalties totaling only $53,000. CBP
officials in the field expressed concern that substantial penalty
reductions may be a disincentive to pursuing penalties or
investigations.
CBP's Enforcement of In-bond Violations Presents Challenges:
CBP has experienced two basic challenges in deterring in-bond
diversions through enforcement actions. First, the previously discussed
weaknesses in the system make it difficult for CBP to track in-bond
movements and catch the violators. Second, when CBP discovers a breach
of a bond by a bonded cartman (carrier), the total liability associated
with the bond breach is limited to the value of the bond, rather than
the value of the merchandise. Additionally, it is difficult for CBP to
enforce payment of unpaid penalties and liquidated damages because the
Department of Justice does not have sufficient resources available to
prosecute all the referrals for collections actions.
Because in-bond shipments are not tracked, CBP cannot account for all
the in-bond shipments that fail to fulfill the requirements of timely
cargo delivery. According to a senior BICE official involved in in-bond
investigations, when an investigation is initiated, BICE must
physically track the cargo to prove a violation has occurred. This is
difficult because the cargo is often not at the port but at a
warehouse, and CBP's surveillance must be constant in order to
establish that the cargo was not exported.
When CBP does find in-bond diversion occurring, it typically seeks
liquidated damages[Footnote 50] for breach of the bond. When CBP
demands payment of liquidated damages, the claim cannot exceed the
amount of the bond. Several CBP and BICE officials stated that the bond
amounts set by CBP regulations are low, compared with the value of the
merchandise.[Footnote 51] The original bond amount for textile entries
relates to the total value of shipments. However, according to BICE
officials, convention has allowed bonds for bonded cartmen (carrier) to
be generally set at $25,000-$50,000 a year--a minimal amount that, as
one BICE investigator put it, is the "cost of doing business."[Footnote
52] For example, if a textile shipment with a domestic value of $1
million is illegally diverted, liquidated damages can be set at three
times the value of the merchandise. However, if the bond is set at
$50,000, the demand for payment of liquidated damages cannot go above
this bond amount. Furthermore, violators may request mitigation of the
$50,000 fine so that the resulting mitigation may only be as little as
$500.[Footnote 53] Bond amounts are usually set every calendar year
and, if the liquidated damages claims in one year exceed that year's
bond amount, the next year's bond cannot be used to pay the liquidated
damages incurred the previous year.[Footnote 54]
In 1989, CBP recognized the problem in which the amount of delinquent
liquidated damages claims against a bonded carrier exceeded the amount
of the bond. CBP then issued a directive that required district
directors to periodically review bond sufficiency.[Footnote 55] CBP
again issued directives in 1991 and 1993 to provide guidelines for the
determination of bond sufficiency.[Footnote 56] However, CBP and BICE
officials we spoke with stated that inadequate bond amounts continue to
make liquidated damages for in-bond diversion a weak deterrent.
CBP Also Uses Informed Compliance and Outreach to the Community as
Deterrence Methods:
CBP also employs methods to deter illegal transshipment by informing
the importer community of violators of illegal textile transshipment.
CBP officials view the publication of violators as a means to deter
transshipment. CBP and CITA maintain various lists of foreign
violators, in part, for this purpose. In addition, under the Customs
Modernization Act,[Footnote 57] CBP is obligated to use informed
compliance and outreach with the trade community. CBP regularly meets
with the trade community to keep it informed of the latest enforcement
information and to help encourage reasonable care on its part. CBP is
looking increasingly at patterns of company conduct to establish lack
of reasonable care. It currently is investigating or monitoring 40 U.S.
importers it suspects may have violated the reasonable care standard.
CBP Maintains Lists to Serve as Deterrence:
CBP maintains three lists associated with illegal transshipment
violations: the "592A list," the "592B list," and the "administrative
list.":
* The 592A list is published every 6 months in the Federal Register and
includes foreign manufacturers who have been issued a penalty claim
under section 592A of the Tariff Act of 1930.
* The 592B list enumerates foreign companies to which attempts were
made to issue prepenalty notices, but were returned "undeliverable" and
therefore could not be included on the 592A list.
* The administrative list identifies companies that have been convicted
or assessed penalties in foreign countries, primarily Hong Kong, Macau,
and Taiwan. CBP decided that because these companies had due process in
their countries and were determined by that country's law to have
illegally transshipped textiles (false country of origin), CBP could
legally make this information public, according to a senior CBP
official. This list is updated as necessary. Between 1997 and October
2003, the names of 488 companies from Hong Kong, 7 from Taiwan, and 34
from Macau have been published in the administrative list.
CITA Maintains an Exclusion List and May Issue Chargebacks:
CITA has a policy in place whereby a letter is sent to the government
of an offending country requiring it to address what is being done to
enforce anti-transshipment policies. If the government does not
respond, the company is placed on an "exclusion" list; and goods from
that company may not be shipped to the United States. This exclusion
could run anywhere from 6 months to 5 years, but the standard period is
2 years. In 1996, CITA issued a new policy stating that all goods could
be banned if a TPVT visit was not allowed in that factory. After the
policy was issued, Hong Kong began allowing the United States to
observe enforcement efforts in factories, although it does not allow
CBP access to companies' books and records. Extensive enforcement
efforts led to 500 convictions in Hong Kong courts for origin fraud
from 1997 to October 2003.
When CITA has evidence of textile transshipment from CBP's TPVTs or
other sources, it may also apply chargebacks if it has evidence of the
actual country of origin and the goods have entered the commerce of the
United States. Chargebacks occur when goods were not charged against
quotas as they should have been. CITA then will go ahead and "charge
those goods back" against the appropriate levels for an appropriate
country. For example, if textiles have been transshipped through
Vietnam, but their actual country of origin was found to be China,
China's quota will be reduced by the appropriate amount. CITA also has
the authority to "triple charge" goods. Although CITA has the authority
to issue chargebacks, over the last decade it has only issued
chargebacks against China and Pakistan. The last chargebacks were
issued in 2001 for a sum of $35 million. From 1994 to 2001, chargebacks
totaled $139 million. Chargebacks require a higher burden of proof
because they require that the actual country of origin be established.
CBP Conducts Outreach with the Textile Trade Community:
When the Customs Modernization Act became effective on December 8,
1993, CBP, then known as Customs, was given the responsibility of
providing the public with improved information concerning the trade
community's rights and responsibilities. In order to do so, Customs
created initiatives aimed at achieving informed compliance, that is, to
help ensure that the importers are meeting their responsibilities under
the law and to help deter illegal transshipment. Accordingly, Customs
issued a series of publications and videos on new or revised Customs
requirements, regulations, or procedures. CBP also has the
responsibility to inform importers of their duty to act in accordance
with its reasonable care standard. To that end, CBP provides guidance
to help importers avoid doing business with a company that may be
violating CBP laws. For example, CBP suggests the U.S. importer ask its
supplier questions regarding the origin of the textiles, the labeling,
and the production documentation, among others. CBP is currently
investigating 40 importers for potential violations of the reasonable
care standard. In a continuing effort to deter transshipment and meet
its own responsibilities, CBP officials regularly meet with members of
the trade industry to share information about the latest developments
regarding textile transshipment.
Conclusions:
Despite increasing trade volumes and heightened national security
priorities, CBP has maintained a focus on textile transshipment by
consolidating its various textile enforcement activities and by using
its expertise to target its review process at the most suspect
shipments. The actual number of textile and apparel shipments CBP
reviews at the ports is low (less than 0.01 percent), and in 2002 about
24 percent of these reviews resulted in exclusions, 2 percent in
penalties, and 1 percent in seizures. CBP's overall efforts at
deterrence are aimed more at excluding problem shipments from U.S.
commerce and emphasizing importer compliance responsibilities rather
than at pursuing enforcement actions in the courts, due to the
complexity and length of the investigative process and past experiences
with ultimate imposition of minimal penalties. The low likelihood of
review and minimal penalties limit the system's deterrent effect and
make high-quality intelligence and targeting essential to focusing
limited resources on the highest risk overseas factories and shipments.
Although textile import quotas on WTO members will be eliminated on
January 1, 2005, with the expiration of the Agreement on Textiles and
Clothing, the roles of the STC and the port import specialists will
continue to be important, because incentives will continue to exist to
illegally transship merchandise through countries benefiting from trade
preferences and free trade agreements. In addition, quotas will remain
on Vietnam until its WTO accession, and quotas may be placed into
effect on certain imports from China under the safeguard provision of
China's WTO Accession Agreement.
Because transshipment will remain a concern beyond this coming year,
CBP will still face challenges in implementing its monitoring system.
First, CBP has been slow to follow up on some of the findings from the
TPVT factory visits, which are one of the key sources of information
used in decisions on what textile shipments to review. CBP has not
fully made the results of these trips known and acted quickly by
entering all national criteria at an earlier stage rather than waiting
until CBP approves the TPVT report. CBP has the authority to review any
shipments presented for import. The result of waiting for TPVT report
approval may mean that some suspect shipments are not reviewed or
inspected at the ports. Second, CBP faces challenges in ensuring that
additional import specialists are placed in Customs Attaché Offices
overseas to assist with textile monitoring and enforcement activities.
CBP would be able to further facilitate cooperation on textile issues,
follow up on TPVT findings, and supplement the enforcement information
it needs to trigger port textile reviews if it placed more import
specialists in Customs Attaché Offices in high-risk countries.
In addition, we found weaknesses in CBP's current monitoring of in-bond
cargo transiting the United States, and CBP has only in the last year
begun to intensively address the issue of in-bond textile and apparel
shipments being diverted into U.S. commerce. CBP's current in-bond
procedures may facilitate textile transshipment by allowing loosely
controlled interstate movement of imported cargo upon which no quota or
duty has been assessed. Internal control weaknesses have meant that CBP
places an unacceptably high level of reliance on the integrity of
bonded carriers and importers. Without an automated system and detailed
and up-to-date information on in-bond shipments, CBP cannot properly
track the movement of in-bond cargo. In addition, limited port
targeting and inspections of in-bond shipments constitute a major
vulnerability in monitoring possible textile transshipments and other
areas of national security. CBP's regulations regarding delivery time
and shipment destination also hinder proper monitoring. Unless these
concerns are addressed, proper revenue collection, compliance with
trade agreements, and enforcement of national security measures cannot
be ensured. While CBP has taken some preliminary steps, much remains to
be done before the in-bond system has an acceptable level of internal
controls.
Moreover, CBP's system for assessing liquidated damages does not
provide a strong deterrent against in-bond diversion. With bond amounts
set considerably lower than the value of the merchandise and mitigation
of liquidated damages down to a fraction of the shipment value,
violators may see paying the bond as a cost of doing business and may
not perceive it as a deterrent against the diversion of goods. CBP has
the authority to review bond sufficiency and can change the bond
amounts to provide an effective deterrent against the illegal diversion
of goods.
Recommendations for Executive Action:
To improve information available for textile transshipment reviews at
CBP ports and to encourage continued cooperation by foreign
governments, we recommend that the Commissioner of U.S. Customs and
Border Protection take the following two actions:
* Improve TPVT follow-up by immediately entering all criteria resulting
from overseas factory visits into ACS to trigger port reviews.
* Assign import specialists to Customs Attaché Offices in high-risk
textile transshipment countries to assist with textile monitoring and
enforcement activities, including conducting follow-up to TPVTs.
To improve its monitoring of in-bond cargo and ensure compliance with
U.S. laws and enforcement of national security, we also recommend that
the Commissioner of U.S. Customs and Border Protection take the
following four steps:
* Place priority on timely implementation of a fully automated system,
including more information to properly track the movement of in-bond
cargo from the U.S. port of arrival to its final port of destination.
* Increase port targeting and inspection of in-bond shipments.
* Routinely investigate overdue shipments and, pending implementation
of an improved automated system, require personnel at ports of entry to
maintain accurate and up-to-date data on in-bond shipments.
* Assess and revise as appropriate CBP regulations governing (1) the
time intervals allowed for in-bond shipments to reach their final
destinations, taking into consideration the distance between the port
of arrival and the final port of destination and (2) whether importers
or carriers can change the destination port without notifying CBP.
Finally, to strengthen the deterrence value of in-bond enforcement
provisions, we recommend that the Commissioner of U.S. Customs and
Border Protection review the sufficiency of the amount of the bond for
deterring illegal diversion of goods.
Agency Comments:
The Department of Homeland Security provided written comments on a
draft of this report, which is reproduced in appendix III. The
Department agreed with our recommendations and stated that it would
take the appropriate steps needed to implement the recommendations. In
its letter, the department listed its key planned corrective actions
for each of our recommendations. In addition, we received technical
comments from the Departments of Homeland Security, Commerce, and the
Office of the U.S. Trade Representative, which we incorporated in this
report as appropriate.
We are sending copies of this report to appropriate congressional
Committees and the Secretaries of Homeland Security, Commerce, and
State and the Office of the U.S. Trade Representative. We will also
make copies available to others upon request. In addition, this report
will be available at no charge on the GAO Web site at [Hyperlink,
http: //www.gao.gov] http: //www.gao.gov.
If you or your staff have any questions about this report, please
contact me on (202) 512-4128. Additional contacts and staff
acknowledgments are listed in appendix IV.
Signed by:
Loren Yager:
Director, International Affairs and Trade:
[End of section]
Appendixes:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
In a legislative mandate in the Trade Act of 2002 (P.L. 107-210, Aug.
6, 2002), Congress directed GAO to review U.S. Customs and Border
Protection's (CBP)[Footnote 58] system for monitoring and enforcing
textile transshipment and make recommendations for improvements, as
needed, to the Chairman and the Ranking Minority Member of the Senate
Committee on Finance and the Chairman and the Ranking Minority Member
of the House Committee on Ways and Means. As discussed with Committee
representatives, we have focused on answering the following questions:
(1) how CBP identifies potential textile transshipment, (2) how well
CBP's textile review process works to prevent illegal textile
transshipment, (3) how effectively CBP monitors foreign textiles
transiting the United States in its in-bond system before entering U.S.
commerce or being exported, and (4) what challenges CBP experienced in
using penalties and other means to deter illegal textile transshipment.
To examine how CBP identifies potential textile transshipment, we
reviewed and analyzed internal planning documents and trade studies
from the Office of Strategic Trade's Strategic Trade Center (STC) in
New York City, which conducts analysis and targeting of textile
transshipment. We also analyzed CBP foreign factory and cargo shipment
reports and summaries from the STC; the Office of Field Operations'
Textile Enforcement and Operations Division at CBP's headquarters; and
some ports of entry, from 2000 to 2003. We collected and analyzed data
from 2000 to 2003 on the targeting process from CBP's internal database
and documents and reviewed how CBP collected the data. We examined the
data for their reliability and appropriateness for our purposes. We
found the data to be sufficiently reliable to represent CBP's targeting
activity. In addition, we also collected official U.S. international
trade statistics from the Census Bureau for 1993 to 2002, textile and
apparel production statistics from the Census Bureau (Annual Survey of
Manufacturers) for 1993 to 2001, and employment statistics from the
Bureau of Labor Statistics (Current Employment Survey) for 1993 to
2002. We defined "textile and apparel goods for international trade,"
based on the definition in the World Trade Organization's (WTO)
Agreement on Textiles and Clothing (Annex), as well as additional
textile and apparel goods not covered by the agreement but identified
as textile and apparel goods by the Department of Commerce's Office of
Textiles and Apparel on the Department of Commerce's Web site. We
reviewed these statistics for their reliability and appropriateness for
our purposes and found them sufficiently reliable to represent the
trends and magnitude of trade, production, and employment in the
textile and apparel sector. We also observed a targeting session at the
STC in preparation for a foreign factory visit to El Salvador. In
addition, we interviewed CBP officials in the Office of Strategic
Trade's STC and Regulatory Audit Division, the Office of Field
Operations, and in seven ports of entry (New York/Newark, New York; Los
Angeles/Long Beach, California; Laredo, Texas; Columbus and Cleveland,
Ohio; and Seattle and Blaine, Washington) about their targeting
activities and roles. Together, these ports represent CBP service ports
that processed 55 percent of textiles and apparel imported into the
United States in 2002. However, we recognize that activities among
individual ports of entry within CBP service port areas may vary from
ports that we visited. To gain additional perspectives on CBP's
targeting operations, we interviewed officials of the Department of
Commerce and the Office of the U.S. Trade Representative (USTR), as
well as former Customs officials and private sector business
associations.
To examine CBP's textile review process to prevent illegal textile
transshipment, we reviewed internal planning documents, directives, and
reports of the Office of Field Operations' Textile Enforcement and
Operations Division, the Office of International Affairs, and the
Office of Strategic Trade's STC and Regulatory Audit Division covering
the years 1999 to 2003. We visited seven ports of entry and observed
operations. To review CBP's foreign factory visits, we observed a
Textile Production Verification Team (TPVT) visit in El Salvador. To
report on CBP's overall textile review activity, we collected data on
TPVT visits and port-level textile review activity from 1996 to 2003
from CBP's internal database and documents. We reviewed how CBP
collected the data and examined the data for their reliability and
appropriateness for our purposes. We found the data to be sufficiently
reliable to represent CBP's foreign factory inspections and port-level
activity. We interviewed CBP officials in the Office of Field
Operations, the Office of International Affairs, the Office of
Strategic Trade, and the seven ports of entry we visited. We also
interviewed officials of the Department of Commerce, including the
Committee for the Implementation of Textile Agreements (CITA) and the
Office of Textiles and Apparel; USTR; and the Department of State; as
well as former Customs officials and private sector business
associations. In addition, we interviewed customs and trade officials
in Hong Kong and Macao, as well as a Mexican embassy trade official in
Washington, D.C., and Mexican port officials in Nuevo Laredo, Mexico.
We communicated with Canadian officials through an exchange of written
questions and answers.
To review how CBP uses its in-bond system to monitor foreign textiles
transiting the United States before entering U.S. commerce or being
exported, we observed in-bond operations at six of the ports of entry
we visited: Newark, New Jersey/New York, New York; Long Beach/Los
Angeles, California; Cleveland and Columbus, Ohio; Laredo, Texas; and
Blaine, Washington. We reviewed documents on CBP's in-bond operations
from the Office of Field Operations' Cargo Verification Division, as
well as documents on in-bond penalties from the Office of Field
Operations' Fines, Penalties, and Forfeitures Branch. We conducted
interviews on the in-bond system with CBP officials in the Cargo
Verification Division; the Fines, Penalties, and Forfeitures Branch;
and the Textile Enforcement and Operations Division at headquarters;
and at the ports of entry and Bureau of Immigration and Customs
Enforcement (BICE) headquarters and Field Offices.
In addition, we conducted a survey of in-bond activities at 11 major
U.S. area ports that process the highest levels of textile and apparel
imports and 2 smaller area ports that also process textile and apparel
imports. For each area port, we also requested that the survey be
distributed to two additional subports that also processed textile and
apparel imports. We asked ports to respond to the survey, based on in-
bond activities from October 2001 to May 2003. We received responses
from all 13 area ports and 29 subports we surveyed. We selected ports
for our survey, based on four criteria: (1) ports with the highest
value of textile and apparel imports; (2) geographic distribution that
included coastal, in-land, northern, and southern border ports; (3)
ports with the highest value of textile and apparel imports by trade
preference program (such as the African Growth and Opportunity Act and
the Caribbean Basin Trade Partnership Act); and (4) ports of various
sizes, allowing us to include smaller ports that also process textile
and apparel imports. We found the data to be sufficiently reliable to
review how the in-bond system monitors foreign textiles transiting the
United States. Not all ports were able to provide data for the entire
time period requested; therefore, we were not able to use some of the
data for the missing time period. In addition, although we received a
100-percent response rate, the in-bond data we received from the 13
area ports and 29 subports are not representative of in-bond operations
at all Customs ports. Copies of the survey are available from GAO.
To examine the challenges CBP experienced in using penalties and other
means to deter illegal textile transshipment, we reviewed internal
planning documents, memorandums, and reports, dating from 1999 to 2003,
from former Office of Investigations officials now in the BICE, as well
as from CBP's Offices of Chief Counsel; Field Operations (including the
Textile Enforcement and Operations Division and the Fines, Penalties,
and Forfeitures Division); Strategic Trade, (including the STC and
Regulatory Audit Division); and Regulations and Rulings. We also
reviewed CBP's enforcement authorities in the relevant statutes and
federal regulations, as well as reviewing informed compliance
publications and other information on CBP's and BICE's Web sites. We
collected data on CBP's enforcement and penalty actions for the years
2000 to 2002, from CBP's internal databases and documents. We reviewed
how CBP collected the data and examined the data for their reliability
and appropriateness for our purposes. We found the data to be
sufficiently reliable to represent CBP's enforcement and penalty
actions. We interviewed officials in BICE and in CBP's Offices of Chief
Counsel; Field Operations (including the Textile Enforcement and
Operations Division and the Fines, Penalties, and Forfeitures
Division); Strategic Trade (including the STC and Regulatory Audit
Division); and Regulations and Rulings, as well as at the seven ports
of entry we visited, and associated BICE Field Offices. We also
interviewed officials of the Department of Commerce, including CITA and
OTEXA; as well as former Customs officials and private sector business
associations.
We performed our work from September 2002 through December 2003 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: U.S. Textile and Apparel Trade, Production, and
Employment:
U.S. textile and apparel imports have grown considerably over the past
decade and have been comprised largely of apparel products. In 2002,
China surpassed Mexico as the largest foreign supplier of textile and
apparel to the U.S. market, followed by Caribbean Basin countries that
benefit from preferential access.[Footnote 59] New York and Los Angeles
are the service ports that receive the largest share (by value) of
textile and apparel imports, with Miami, Florida, and Laredo, Texas,
important service ports districts for imports from Latin America. The
United States is in the process of gradually phasing out textile and
apparel quotas under a 1995 World Trade Organization (WTO) agreement,
but a significant number of quotas are still to be eliminated at the
end of the agreement's phase-out period on January 1, 2005. Elimination
of these quotas is likely to affect trade patterns as more efficient
producers acquire greater market share. Tariffs and other potential
barriers, however, such as antidumping and safeguard measures, still
exist and could still affect trade patterns and create an incentive for
illegal textile transshipment. Also, as quotas are removed, a more
competitive market may place increasing pressure on the U.S. textile
and apparel industry. Industry production and employment in the United
States has generally been declining in recent years, with employment in
the apparel sector contracting the most.[Footnote 60]
Imports of Textile and Apparel:
U.S. imports of textile and apparel products have nearly doubled during
the past decade (1993 to 2002), rising from about $43 billion to nearly
$81 billion.[Footnote 61] Because overall imports have also nearly
doubled during the decade, textile and apparel products have maintained
about a 7 percent share of total U.S. imports throughout this period.
As figure 10 shows, the majority of U.S. textile and apparel imports
are apparel products (about 73 percent in 2002). The remaining imports
consist of yarn (10 percent), uncategorized textile and apparel
products (9 percent), made-up and miscellaneous textile products (7
percent), and fabric (2 percent).[Footnote 62]
Figure 10: Major Components of Textile and Apparel Imports, 1993-2002:
[See PDF for image]
Note: Uncategorized imports of textile and apparel are those products
not listed under the U.S. quota category system. These products may
still fall into one of the four other categories, such as yarn or
fabric.
[End of figure]
The major foreign suppliers of textile and apparel to the U.S. market
are China, Mexico, and the Caribbean Basin countries. However, as
figure 11 shows, no major supplier had more than a 15 percent share of
overall textile and apparel imports in 2002. Also, after the top 10
suppliers, remaining suppliers still provided more than a third of
imports. These smaller suppliers include Africa Growth and Opportunity
Act (AGOA) countries, which supplied $1.1 billion (about 1.4 percent)
of imports, and Andean Trade Promotion and Drug Eradication Act
(ATPDEA) countries, which supplied $790 million (about 1 percent) of
imports.[Footnote 63]
Figure 11: Share of U.S. Textile and Apparel Imports by Trade Partner,
2002:
[See PDF for image]
Note: Caribbean Basin Trade Partnership Act (CBTPA) beneficiary
countries include Antigua and Barbuda, Aruba, Bahamas, Barbados,
Belize, British Virgin Islands, Costa Rica, Dominica, Dominican
Republic, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras,
Jamaica, Montserrat, Netherlands Antilles, Nicaragua, Panama, St. Kitts
and Nevis, Saint Lucia, Saint Vincent and the Grenadines, and Trinidad
and Tobago. However, not all beneficiary countries are eligible for
textile and apparel benefits. According to CBP, Barbados, Belize, Costa
Rica, Dominican Republic, El Salvador, Guatemala, Guyana, Haiti,
Honduras, Jamaica, Nicaragua, Panama, Saint Lucia, and Trinidad and
Tobago are currently eligible for these benefits.
[End of figure]
Countries with free trade agreements (FTA) with the United States
accounted for 18.8 percent of total textile and apparel imports in
2002. This includes the North American Free Trade Agreement (NAFTA)
countries, Mexico and Canada, which supplied 17.1 percent. Other FTA
partners--Chile, Israel, Jordan, and Singapore--supplied the remaining
1.7 percent.[Footnote 64] In addition, the United States is negotiating
FTAs with several other countries, which combined accounted for 15
percent of U.S. imports.[Footnote 65] The most important (in terms of
imports) of these potential FTA partners are the countries in the
Central American FTA negotiations (Costa Rica, El Salvador, Guatemala,
Honduras, and Nicaragua) and the Dominican Republic, all of which are
also part of the overall Free Trade Area of the Americas (FTAA)
negotiations.
Top U.S. Ports:
The service ports of New York and Los Angeles were the top two
recipients of textile and apparel imports into the United States in
2002. Together they accounted for more than 40 percent of imports.
Furthermore, the top 10 U.S. service ports accounted for about 77
percent of textile and apparel imports in 2002 (see fig. 12). Overall,
Customs has 42 service ports, encompassing more than 300 individual
ports of entry. For example, the New York service port encompasses the
individual ports of JFK Airport; Newark, New Jersey; and New York City.
Figure 12: Share of U.S. Textile and Apparel Imports by Service Port,
2002:
[See PDF for image]
[End of figure]
On the West Coast, Los Angeles receives a large portion of its imports
from Asian suppliers such as China and Hong Kong; while in the South,
Miami and Laredo receive a large portion of their imports from
Caribbean countries. In-land ports, such as Columbus, Ohio, receive
imports shipped across country by truck or rail from other ports or
flown directly into the airports in its district.
Textile and Apparel Products Affected by Quotas:
Under the WTO's 1995 Agreement on Textiles and Clothing (ATC), the
United States and other WTO members agreed to gradually eliminate quota
barriers to textile and apparel trade during a 10-year transition
period, ending by January 1, 2005.[Footnote 66] By 1995, the United
States, the European Union, Canada, and Norway were the only WTO
members to maintain quotas on textile and apparel. Each agreed,
however, to remove a share of their quotas by January 1 in 1995, 1998,
2002, and 2005. Based on 2002 Department of Commerce import statistics
and our analysis, the United States still maintains quotas on products
that account for about 61 percent of its textile and apparel imports by
value. Not all of these imports, however, are subject to quotas because
not all U.S. trade partners are subject to quotas on these products.
For instance, U.S. textile and apparel categories 338 and 339 (men and
women's cotton knit shirts and blouses) account for over 12 percent of
U.S. imports of textile and apparel products, and categories 347 and
348 (men and women's cotton trousers and shorts) account for about
another 13 percent. Although several countries face U.S. quotas in each
of these categories, not all countries are restricted. Therefore,
quotas only limit a portion of the 25 percent of imports accounted for
by products in these categories. Customs, though, is concerned with the
trade flows relating to all the products under quotas, despite which
country they originate in because the country of origin may be
misrepresented.
Future Barriers to Trade in Textile and Apparel:
Under the ATC, the United States agreed to remove by 2005 textile and
apparel quotas maintained against other WTO members. These quotas have
created significant barriers to imports of certain types of textile and
apparel products from quota-restricted countries. For example, in 2002,
the U.S. International Trade Commission estimated that quota barriers
amounted to an approximately 21.4 percent tax on apparel imports and a
3.3 percent tax on textile imports.[Footnote 67] However, these
estimates were calculated across all textile and apparel products and
countries. Therefore, actual barriers may be significantly higher for
certain highly restricted products. Upon removal of these quotas, trade
patterns are likely to change, with more efficient foreign suppliers
that were formerly restricted under the quotas capturing a larger share
of the U.S. market.
FTAs, though, will still provide preferential access to products that
meet rules of origin requirements from FTA partners. FTAs generally
provide tariff-free access, while 2002 tariff rates on more restricted
textile and apparel products ranged from 15 to 33 percent. Also, the
United States provides similar preferential access unilaterally to
countries from the Caribbean Basin, sub-Saharan Africa, and the Andean
region under the CBTPA, AGOA, and ATPDEA preferential
programs.[Footnote 68] Officials and experts that we spoke with said
they believed these tariff differentials to be a significant incentive
for continued illegal textile transshipment because they act as a tax
on textile and apparel products from non-FTA partners. Also, under WTO
rules, the United States may impose antidumping or countervailing
duties on imports from certain countries if it can be shown that these
products have either been "dumped" in the U.S. market or were
subsidized.[Footnote 69] Furthermore, under China's accession
agreement with the WTO, members may impose a special safeguard
mechanism on imports from China if they are shown to cause market
disruption.[Footnote 70] In fact, in December 2003 the United States
imposed this mechanism against imports from China of certain types of
knit fabrics, dressing gowns and robes, and brassieres.
U.S. Textile and Apparel Production and Employment:
U.S. textile and apparel employment has declined over the past decade
(1993 through 2002), while production has declined from 1995 through
2001 (latest year statistics were available for production data).
Production of apparel (and textiles to a lesser extent) in the United
States tends to be relatively intensive in its use of labor.
Consequently, the U.S. industry has faced strong competition from
developing countries, such as China and India, where labor rates are
significantly lower than in the United States. Employment in the U.S.
apparel sector is higher than in the textile sector, overall; however,
employment declines in the U.S. textile and apparel industry have
primarily been due to declines in the apparel sector. As figure 13
shows, employment in the overall textile and apparel industry fell from
about 1,570,000 jobs in 1993 to about 850,000 jobs in 2002. The
majority of this decline was due to the fall in apparel employment from
more than 880,000 workers in 1993 to about 360,000 workers in
2002.[Footnote 71] However, employment in the other sectors of the
industry--textile mills (yarns, threads, and fabrics) and textile
product mills (carpets, curtains, bedspreads, and other textile
products besides apparel)--also declined.
Figure 13: Employment in Major Sectors of the Textile and Apparel
Industry, 1993-2002:
[See PDF for image]
[End of figure]
Regarding U.S. production (as measured by shipments) in the textile and
apparel sectors, figure 14 shows overall textile and apparel production
declined between 1997 and 2001.[Footnote 72] During that period, the
value of U.S. shipments of textile and apparel products (either to the
U.S. market or overseas) fell from nearly $158 billion to about $132
billion. This decline was due to contraction in the apparel and textile
mills sectors. However, the textile product mills sector remained
relatively stable during the same time period.
Figure 14: U.S. Production (Shipments) in Textile and Apparel Sectors,
1997-2001:
[See PDF for image]
Note: Data from the Annual Survey of Manufacturers only available
through 2001.
[End of figure]
[End of section]
Appendix III: Comments from the Department of Homeland Security:
U.S. Department of Homeland Security
Washington, DC 20528:
Homeland Security:
January 14, 2004:
Loren Yager:
Director, International Affairs and Trade
U.S. General Accounting Office:
441 G St., NW Washington, DC 20548:
Dear Mr. Yager:
Thank you for providing us with a copy of your draft report entitled
"INTERNATIONAL TRADE: U.S. Customs and Border Protection Faces
Challenges in Addressing Illegal Textile Transshipment" and the
opportunity to discuss the issues in this report.
We agree with the General Accounting Office's (GAO) observations that
the U.S. Customs and Border Protection (CBP) needs to take additional
steps to improve the information available for textile transshipment
reviews, to improve monitoring of in-bond cargo and to strengthen the
deterrence value of in-bond enforcement provisions. We have taken, and
will continue to take, prudent steps to address these factors. Attached
are comments specific to the recommendations, as well as technical
corrections.
If you have any questions concerning this response, please contact me
at (202) 772-9580.
Sincerely,
Anna Dixon:
Director, Bankcard Programs And GAO/OIG Liaison:
Signed by Brenda B. Smith for Anna Dixon:
www.dhs.gov:
Department of Homeland Security Comments on GAO Draft Report:
INTERNATIONAL TRADE: U.S. Customs and Border Protection Faces
Challenges in Addressing Illegal Textile Transshipment:
Response to Recommendations and Planned Corrective Actions:
GAO has made several recommendations to the Commissioner of Customs and
Border Protection to improve the information available for textile
transshipment review, to encourage continued cooperation by foreign
governments, to improve CBP's monitoring of in-bond cargo and to
strengthen the deterrence value of in-bond enforcement provisions.
CBP agrees with the recommendations and will take the appropriate steps
needed to implement the recommendations. Key actions are listed below:
Recommendation #1:
Improve Textile Production Verification Team (TPVT) follow-up by
immediately entering all criteria resulting from overseas factory
visits into ACS to trigger port reviews.
Corrective Action:
U.S. Customs and Border Protection plans to complete an update of its
September 21, 2001 Standard Operating Procedure (SOP) for TPVT's in
Spring, 2004. The update will incorporate the immediate input of high-
risk factories into the Automated Commercial System (ACS), diminishing
the five-week time period for input and headquarters approval.
Recommendation #2:
Assign import specialists to Customs Attache Offices in high-risk
textile transshipment countries to assist with textile monitoring and
enforcement activities, including conducting follow-up to TPVTs.
Corrective Action:
DHS will evaluate the assignment of import specialists to Customs
Attache Offices in high-risk textile transshipment countries to assist
with textile monitoring and enforcement activities, including
conducting follow-up to TPVTs, given available resources and an
assessment of associated threat.
Recommendation #3:
Place priority on timely implementation of a fully automated system,
including more information, to properly track the movement of in-bond
cargo from the U.S. port of arrival to its final port of destination.
Corrective Action:
The Trade Act of 2002 requires the implementation of a fully automated
system to track in-bond shipments. CBP will complete implementation of
this increase in automation in FY 2004 and 2005. This newly implemented
automated system, along with the Automated Commercial Environment (ACE)
system, will allow for the automated tracking of most in-bond
shipments.
Recommendation #4:
Increase port targeting and inspection of in-bond shipments.
Corrective Action:
U.S. Customs and Border Protection is developing an in-bond action plan
to increase enforcement actions. This action plan, combined with CBP
Directive 3240-036A (dated August 7, 2003) which improves data quality
and ensures electronic tracking of in-bond merchandise, will refine the
inspection and targeting of in-bond shipments. An Automated Targeting
System is being implemented for in-bond shipments as well. In FY 2004,
six to eight enforcement operations led by headquarters level program
staff will also be undertaken.
Recommendation #5:
Routinely investigate overdue shipments and, pending implementation of
an automated system, require personnel at ports of entry to maintain
accurate and up-to-date data on in-bond shipments.
Corrective Action:
CBP Directive 3240-036A, issued in August 2003, provides direction for
CBP Officers on data collection and maintenance until full automation
is complete.
Recommendation #6:
Revise CBP regulations governing (1) the time intervals allowed for in-
bond shipments to reach their final destinations depending on the
distance between the port of arrival and the final port of destination
and (2) the ability of importers or carriers to make changes in the
intended destination port without notifying CBP.
Corrective Action:
U.S. Customs and Border Protection will consider appropriate revisions
in these two areas. CBP believes that any regulatory changes should be
made with appropriate automation and is therefore assessing the
creation of flexible automation that supports these regulatory changes.
Time frames for implementation of a new process are dependent upon the
completion of the automation systems.
Recommendation #7:
Review the sufficiency of the amount of the bond for deterring illegal
diversion of goods.
Corrective Action:
New guidelines for determining bond sufficiency are currently being
developed which will use a more risk-based approach based on type of
commodity, history of carrier and potential loss of revenue. CBP will
evaluate methods for determining bond sufficiency, including setting a
more reasonable minimum bond amount.
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Virginia Hughes (202) 512-5481 Leyla Kazaz (202) 512-9638:
Staff Acknowledgments:
In addition to those individuals named above, Margaret McDavid,
Michelle Sager, Josie Sigl, Tim Wedding, Stan Kostyla, Ernie Jackson,
and Rona Mendelsohn made key contributions to this report.
(320152):
FOOTNOTES
[1] As defined in the Trade Act of 2002, illegal textile transshipment
occurs when preferential treatment under any provision of law has been
claimed for a textile or apparel article on the basis of material false
information concerning the country of origin, manufacture, processing,
or assembly of the article or any of its components. False information
is material if disclosure of the true information would mean or would
have meant that the article is or was ineligible for preferential
treatment under the provision of law in question. "Country of origin"
for customs purposes generally refers to the country, territory, or
insular possession where a textile or apparel product is grown,
produced, or manufactured. Exceptions to this general principle exist
and are briefly discussed in later sections of this report. Quotas are
quantitative restrictions on the amount of a good that can be entered
into commerce. A tariff is a duty or tax levied at the border on goods
going from one country to another.
[2] On March 1, 2003, the U.S. Customs Service was transferred to the
new Department of Homeland Security. The border inspection functions of
the Customs Service, along with other U.S. government agencies having
border protection responsibilities, were reorganized into the U.S.
Customs and Border Protection (CBP). The U.S. Customs Service's Office
of Investigations was transferred into the Department's new Bureau of
Immigration and Customs Enforcement (BICE).
[3] Textile transshipment is difficult to detect, and CBP has not
attempted to systematically determine the size of illegal transshipment
occurring.
[4] For purposes of this report, the term "transshipment" refers to
illegal textile and apparel transshipment; and "textiles" refers to
textiles and apparel, unless otherwise specified.
[5] The Committee for the Implementation of Textile Agreements is an
interagency group composed of members from the Office of the U.S. Trade
Representative and the departments of Commerce, Labor, State, and the
Treasury.
[6] The United States has negotiated free trade agreements or enacted
trade preference programs with numerous countries or regions. The Trade
and Development Act of 2000 includes the African Growth and Opportunity
Act (AGOA) and the Caribbean Basin Trade Partnership Act (CBTPA) and
gives nations of both regions quota-free and duty-free access to the
U.S. market for products meeting rules of origin requirements. In
addition, the Trade Act of 2002 provides for expanded access to U.S.
markets from AGOA countries and also provides duty-free and quota-free
treatment for merchandise from Colombia, Peru, Ecuador, and Bolivia. In
addition, the United States, Mexico, and Canada participate in the
North American Free Trade Agreement (NAFTA), and in 2003 the United
States entered into free trade agreements with Chile and Singapore. The
rule-of-origin provisions differ in these various trade agreements.
[7] This compares to an overall average U.S. tariff rate of less than 5
percent.
[8] Textile and apparel imports, as we define them in this report,
include all textile and apparel products, whether or not quotas or
other restrictions cover them. See appendix II for more information on
textile and apparel trade and appendix I for more information on our
methodology.
[9] Field Operations Offices provide centralized management oversight
and technical assistance for port operations within their regions.
[10] Public Law 103-182, title VI of the North American Free Trade
Agreement Implementation Act, subtitles A, B. The Customs Modernization
and Informed Compliance Act 1993 (also known as the "Mod Act") places
part of the responsibility for compliance on importers while requiring
CBP, then known as Customs, to modernize its processes and technology
to enforce trade laws.
[11] By identifying a country as high risk for textile transshipment,
CBP is not making a determination that the country's government is
involved in transshipment. Rather, the significance of the trade and
the intelligence data concerning certain of that country's
manufacturers identify the country as a potentially important transit
point for transshipped goods.
[12] Although a good may be physically transshipped through a country
with available quota or tariff preferences, it is also possible that
the good would never enter the transit country. Rather, the product's
documentation can be falsified to claim a certain country of origin
without it ever entering that country.
[13] See appendix II for a list of top U.S. trade partners that supply
textile and apparel products to the U.S. market.
[14] Due to an increase in imports of these products from Thailand, CBP
selected Thailand for a TPVT visit. The visit uncovered that three of
the top five exporters were illegally transshipping bed linens to the
U.S. market. According to CBP, the Government of Thailand cooperated
fully with U.S. authorities and revoked the companies' export rights.
[15] Between December 10, 2001, when Vietnam received lower tariff
rates under normal trade relations, and July 17, 2003, when bilateral
quotas were effective, there were no quotas on imports of Vietnamese
textile and apparel products into the United States. Until December 10,
2001, Vietnam was subject to higher tariffs reserved for countries with
which the United States does not maintain normal trade relations.
[16] Import specialists generally are the port-level experts that are
responsible for processing textile and apparel shipments and
potentially detaining and examining the products and documentation
before entry. Headquarters staff are also generally import specialists.
International trade specialists conduct the trade data analysis and
targeting at the STC.
[17] Not all shipments (entries) identified for review were actually
inspected, since some were low-valued shipments that were exempted or
entered during a security alert period in which nonsecurity inspections
were limited.
[18] "Review" refers to the entire process of analyzing entry
documents, inspecting shipments, and verifying foreign production
documents.
[19] Reasonable care provisions require importers entering textile or
apparel products into the commerce of the United States to ensure that
the documentation covering the imported merchandise is accurate as to
the country of origin. These provisions require that the importer not
solely rely on information provided by the foreign supplier of the
merchandise.
[20] Since no reliable estimates exist of the amount of imports that
are illegally transshipped, CBP is unable to assess whether the number
of inspections is a sufficient tool to detect and deter textile
transshipment.
[21] In addition, CBP does not want to adversely affect importers by
detaining shipments without some evidence of transshipment besides
trade data anomalies. However, even if a shipment is not targeted, CBP
port staff can still select the shipment for inspection.
[22] In addition, preference and free trade agreements have particular
"rules of origin" requirements that must be met in order to obtain
reduced or zero tariffs. These requirements are part of the complexity
port staff face in determining whether transshipment has occurred.
Rules of origin are the conditions that specify how a product must be
produced or what materials must be used for the product to claim a
particular country as its origin and qualify for trade preferences.
[23] A textile visa is an endorsement in the form of a stamp on an
invoice or export control license that is provided by an authorized
official of a foreign government. It is used to control the exportation
of textiles and textile products to the United States and to prevent
their unauthorized entry into U.S. customs territory. A visa may cover
either quota or nonquota merchandise; and conversely, quota merchandise
may or may not require a visa, depending upon the terms of negotiated
bilateral textile agreements with the particular country of origin.
[24] As of September 30, 2003, there were 892 import specialists. While
approximately 255 import specialists were assigned to textile teams,
CBP estimates that only 214 handled textiles and wearing apparel
exclusively. This is because many of the teams handle other commodities
as well.
[25] The rule of origin determines the country of origin that can be
claimed for goods that include components manufactured in more than one
country. For apparel products, the country of origin is generally
determined to be the country where the "most important" assembly
process occurred. The import specialist reviews the production
documents to be sure that they substantiate the requirements for
claiming origin. In addition, free trade or preference programs may
have additional requirements, such as using domestic or U.S. fabric,
yarn, or thread. The rules of origin for any particular product differ
under various free trade agreements and preference programs.
[26] They would also be reviewing any nonquota or nonvisa textiles that
were presented for entry.
[27] According to a senior CBP official, this provision was implemented
in a flexible manner, so that in some cases, if a high-risk factory
were deemed sufficiently risky, they would immediately enter criteria.
[28] In some instances, import specialists have immediately entered
criteria for high-risk factories of particular concern, according to a
senior CBP official.
[29] "Liquidated damages" are a charge against the bond for a breach of
a bond condition.
[30] Under 19 C.F.R. 12.130, CBP, then known as Customs, is required to
make a country-of-origin determination before allowing entry of
textiles and textile products.
[31] When TPVTs find the factory was closed, it results in automatic
criteria and exclusion. CITA does not have to be consulted first, and
it would not be included in the CITA letter.
[32] A CITA letter to a foreign government may include requests to
investigate more than one factory.
[33] The Accession Agreement textile and apparel safeguard allows U.S.
and other WTO member countries that believe imports of Chinese origin
textile and apparel products are, due to market disruption, threatening
to impede the orderly development of trade in these products to request
consultations with China to ease or avoid such market disruption. Upon
receipt of the request, China has agreed to hold its shipments to a
level no greater than 7.5 percent (6 percent for wool categories) above
the amount entered during the first 12 months of the most recent 14
months preceding the request for consultations. The limit is effective
beginning on the date of the request for consultation and may not
remain in effect for more than 1 year, without reapplication, unless
otherwise agreed between the United States and China. The domestic
industry has the right to petition for safeguard relief until Dec. 31,
2008, including reapplying for additional years of protection for
categories that have quota imposed.
[34] As of November 1, 2003, the domestic textile industry had already
applied for safeguards for four categories of textiles that had been
removed from quotas in 2002. CITA reviewed three petitions received on
July 24, 2003, related to knit fabric, dressing gowns, and brassieres,
and declined to review a fourth petition for cotton gloves. On November
17, 2003, CITA approved the three petitions it had reviewed.
[35] It is a violation of Hong Kong law to falsely claim Hong Kong as a
country of origin for textiles, according to Hong Kong officials. See
later discussion of penalties and Customs' administrative list for
further details.
[36] See 19 U.S.C. 1552 and 1553.
[37] A bonded carrier is a carrier company that is allowed to move
goods that have not been entered into commerce from one place to
another under a Customs bond. A Customs bond is a contract between all
parties that import merchandise and CBP; it is given to insure the
performance of an obligation or obligations imposed by law or
regulation, backed by a monetary guarantee.
[38] Data for Miami, Florida and Charlotte, North Carolina were
excluded because they did not have complete data for this period.
[39] Report of the Interagency Commission on Crime and Security in U.S.
Seaports, Fall 2000.
[40] Since our investigation began, CBP has issued Directive 3240-036A
requiring that merchandise declared for exportation (T&E and I.E.
shipments) be physically inspected before the merchandise can be
exported to Mexico. As of October 20, 2003, all merchandise must be
presented to CBP before export certification.
[41] CBP issued a directive in August 2003 requiring all CBP officers
reviewing Form 7512 documents to ensure that all required information
is furnished and correct at time of presentation.
[42] 19 C.F.R. 18.2 (b), 18.11 (e).
[43] ACS is CBP's current automated import system. Originally designed
in 1984, ACS will be replaced in order for CBP to be able to meet the
increasingly complex, long-term requirements resulting from the growth
in trade, enforcement responsibilities, and legislation. Consequently,
the first modernization project will focus on the trade system,
replacing ACS with the Automated Commercial Environment (ACE).
[44] See U.S. General Accounting Office, Examination of Customs' Fiscal
Year 1993 Financial Statements, GAO/AIMD-94-119 (Washington, D.C., June
15, 1994); U.S. General Accounting Office, Financial Management:
Control Weaknesses Limited Custom's Ability to Ensure That Duties Were
Properly Assessed GAO/AIMD-94-38 (Washington, D.C. March 7, 1994); and
U.S. General Accounting Office, High-Risk Program: Information on
Selected High-Risk Areas HR-97-30 (Washington, D.C., May 16, 1997).
[45] Pilot testing is being conducted in three seaports and three land
ports: Los Angeles, California; New York, New York; Miami, Florida;
Port Huron, Michigan; Buffalo, New York; and Laredo, Texas.
[46] 19 C.F.R. 18.5(a), (f).
[47] 19 C.F.R. 18.2.
[48] There are 24 ports of entry along the U.S.-Mexico border of which
only 5 have export lots: Otay Mesa, Calexico, Nogales, Laredo, and El
Paso.
[49] 19 U.S.C. §1595a (c)(1)(A).
[50] See 19 C.F.R. 18.8.
[51] 19 C.F.R. 113 sets forth the general requirements applicable to
bonds.
[52] Bond amounts are not set by regulation but by the port director's
exercise of sound discretion.
[53] Amount of penalty may vary between $100 to $500, depending on the
presence of aggravating or mitigating factors.
[54] Multiple claims can be made against the same bond.
[55] U.S. Customs Directive No. 4410-012, dated December 1, 1989.
[56] U.S. Customs Directive No. 099 3510-004 dated July 23, 1991; and
Customs Directive No. 099 3510-005 dated May 17, 1993.
[57] Public Law 103-182, Title VI. The Customs Modernization and
Informed Compliance Act 1993 (also known as the "Mod Act").
[58] On March 1, 2003, the U.S. Customs Service was transferred to the
new Department of Homeland Security. The border inspection functions of
the Customs Service, including specifically the Office of Field
Operations, along with other U.S. government agencies having border
protection responsibilities, were reorganized into the U.S. Customs and
Border Protection (CBP). The Office of Investigations was moved into
the new Bureau of Immigration and Customs Enforcement (BICE).
[59] The Caribbean Basin Trade Partnership Act (CBTPA) provides
Caribbean Basin countries (see note to fig. 11 for list of countries)
reduced or eliminated tariff rates for qualifying textile and apparel
products.
[60] The textile and apparel industry we refer to in this report is the
manufacture of textile and apparel products, but not the distribution
and retail of textile and apparel products.
[61] Textile and apparel imports, as we define them in this report,
include all textile and apparel products, whether or not quotas or
other restrictions affect them. See appendix I for more information on
our methodology.
[62] Made-up and miscellaneous textile products include such products
as bedspreads, blankets, pillow cases and sheets; towels; floor
coverings; handbags; and luggage. Uncategorized imports of textile and
apparel are those products not listed under the U.S. quota category
system. These products may still fall into one of the four other
categories, such as yarn or fabric.
[63] AGOA beneficiary countries are Benin, Botswana, Cameroon, Cape
Verde, Central African Republic, Chad, Republic of the Congo, Cote
d'Ivoire, Democratic Republic of the Congo, Djibouti, Eritrea,
Ethiopia, Gabon, the Gambia, Ghana, Guinea, Guinea-Bissau, Kenya,
Lesotho, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique,
Namibia, Niger, Nigeria, Rwanda, So Tome and Principe, Senegal,
Seychelles, Sierra Leone, South Africa, Swaziland, Tanzania, Uganda,
and Zambia. However, not all beneficiary countries are eligible for
textile and apparel benefits. According to CBP, Botswana, Cameroon,
Cape Verde, Cote d'Ivoire, Ethiopia, Ghana, Kenya, Lesotho, Madagascar,
Malawi, Mali, Mauritius, Mozambique, Namibia, Niger, Rwanda, Senegal,
South Africa, Swaziland, Tanzania, Uganda, and Zambia are eligible for
these benefits. Countries eligible for ATPDEA benefits are Bolivia,
Colombia, Ecuador and Peru.
[64] However, imports in 2002 from Chile and Singapore did not yet
qualify for free trade status. In addition, some textile and apparel
imports from FTA countries may not have qualified for free trade status
if they did not meet rules of origin requirements.
[65] Countries with which the United States had publicly announced its
intent to negotiate free trade agreements as of November 25, 2003,
include Australia, Bahrain, and Morocco; the countries of the Southern
African Customs Union (Botswana, Lesotho, Namibia, South Africa, and
Swaziland); and the 34 countries of the Free Trade Agreement of the
Americas (FTAA). In addition to the FTAA, the United States is intent
on negotiating separate free trade agreements with Central American
countries (Costa Rica, El Salvador, Guatemala, Honduras, and
Nicaragua), Andean countries (Bolivia, Colombia, Ecuador, and Peru),
and the Dominican Republic.
[66] Of the $81 billion in U.S. imports of textile and apparel products
in 2002, the ATC covered about 95 percent.
[67] See U.S. International Trade Commission, The Effects of
Significant U.S. Import Restraints (Washington, D.C.: International
Trade Commission, 2002).
[68] Some of these programs may be eliminated, as the countries become
members of FTAs with the United States.
[69] Antidumping or countervailing measures take the form of increased
duties on imports. Dumping is generally considered to be the sale of a
commodity in a foreign market at a lower price than its normal value.
WTO rules allow for the imposition of antidumping duties, or fees, to
offset dumping. Countervailing duties are special customs duties
imposed to offset subsidies provided on the manufacture, production, or
export of a particular good. Subsidies essentially lower a producer's
costs or increase its revenues.
[70] A safeguard is a temporary import control or other trade
restriction that a WTO member imposes to prevent serious injury to
domestic industry caused by increased imports. Upon joining the WTO,
China agreed to a unique safeguard provision that allows WTO members to
impose restrictions if imports from China disrupt their markets, as
well as a special textile safeguard that also allows restrictions on
textile and apparel products specifically. The China-specific safeguard
provision expires in 2013, and the textile-specific safeguard expires
in 2008.
[71] The industry sectors described here (apparel, textile product
mills, and textile mills) are based on the North American Industry
Classification System (NAICS).
[72] Prior to 1997, production data was classified by the Standard
Industry Classification (SIC) system into two industry sectors, rather
than three. Therefore, we do not show the individual sectors of the
industry prior to 1997 for production data, as we do with employment
data.
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