As analysts and journalists still try to make sense of Target Corporation’s ill-fated attempt to expand to Canada, a common theme is that the company misread the Canadian market and failed to take into account both consumer demand and the complexity of building a Canadian supply chain.
“We’re sort of like Chile sideways… a long, thin country in many ways,” Dr. Barry Prentice, a professor of supply chain management at the University of Manitoba in Winnipeg, said in a podcast discussing the Target failure. “If they could’ve just extended U.S. distribution to [Canadian] stores, it would have been easy, because most of the cities are within 150 kilometers of the border. But they couldn’t do that. They had to have distribution in Canada, and that, I think, was a complicating factor.”
Canadian news magazine Maclean’s noted speculation that Target’s Minneapolis headquarters was to blame “for trying to force its processes and procedures on the Canadian operation despite evidence they weren’t working.” While speculation will likely continue about Target’s abrupt and complete 2015 withdrawal from Canada, there are clear lessons to be learned from this example, namely, the need to prioritize a Canada-specific logistics strategy. A company can have a phenomenal inventory of products, but without a solid strategy for moving shipments through the U.S./Canadian customs process and into a Canadian distribution network, there is a high probability of failure.
Did you know, for example, that incomplete or missing paperwork along with improper tariff classifications are top reasons for shipment delays at the border? Or that most U.S. transportation carriers do not have the capacity to seamlessly deliver throughout Canada? Or that shipments to Canada must be labeled in both English and French, since that country is officially bilingual?
These are just a few examples of common mistakes made by U.S. businesses – mistakes that can usually be easily avoided. Many businesses take a “how hard can it be” approach to shipping to Canada, assuming that the closeness of the two countries – both geographically and culturally – extends to crossborder shipments. In fact, shipping to Canada is a “uniquely Canadian” experience that warrants an understanding of the border clearance process and of the nuances of that market.
Following is a list of five important tips that can help a business reach the Canadian market more efficiently. These tips can help minimize the risk of having a shipment delayed at the border, thereby ensuring faster access to the Canadian market and seamless deliveries to end customers.
Successfully moving goods into Canada – which also means successfully exporting goods out of the United States – is a multistep process that requires detailed knowledge of the process. Failure to successfully navigate any of these steps can result in shipment delays and fines. This is why most businesses choose to entrust the compliance process to an experienced customs broker or logistics provider. According to U.S. Customs and Border Protection (CBP), 90 percent of all import transactions are filed through a broker.
But even with an experienced broker managing the clearance process, a business still has an important role to play. Keep in mind that the shipper is ultimately responsible for all information supplied to customs. As such, CBP and/or Canada Border Services Agency (CBSA) will hold the shipper – and not the customs broker or transportation carrier – responsible for any mistake.
CBP estimates 20 percent of shipments are delayed at the border due to incomplete or missing documentation. Common sense says that a customs form should be completed in full. So the question then is why would anyone submit a form with missing information? In some instances, information is omitted simply because of an oversight. Other times, the individual completing the form may not have the required information or understand what is being requested.
While specific documentation and forms required will vary based on a shipment’s contents, all shipments heading to Canada will require specific information that includes:
For each of these required data points, supplying the correct information can be easier said than done. Following is a brief overview of each category and suggestions for ensuring correct information is listed on all customs forms:
Every product entering either Canada or the United States must be assigned a value that is used for a number of purposes, including assessing duties, collecting accurate statistics, and determining applicability of additional legal requirements. However, determining the correct valuation can be complicated since many factors may need to be addressed.
In general, the value listed on a commercial invoice should be the price a buyer has paid for a product (and not the amount the goods will be sold for). This is called the product’s transaction value and should also reflect money paid for commissions, assists, royalties, production costs, and packaging, and these items should be included on the commercial invoice. Important to note though, transaction value should not include transportation or insurance costs, or any taxes paid on the item.
Failure to include the above factors, according to CBP, “is undervaluing the goods and may result in penalties.” The agency also advises that all prices in foreign currency must be converted to U.S. dollars on invoices and other entry documents.
In some situations, it is not possible to assign a transaction value. In those situations, alternate processes for determining value will be applied in this order:
Once a valuation is determined, that information is provided to CBP or, for shipments entering Canada, to CBSA. Customs agents will review; if a valuation seems questionable, they will either delay the shipment, pending additional information, possibly reject the claim outright, or impose a financial penalty on the importer.
Importers also have an obligation to provide specific information about a product’s country of origin. This information is necessary for several reasons, including:
For shipments in which a product is 100 percent grown or produced in a single country, and proof of that origin is easily accessible, compliance with CBP or CBSA requirements is not difficult. Unfortunately, this is not usually the case.
Since many imported goods consist of materials from more than one country, or are manufactured in processes performed in multiple countries, complex rules have been established to determine the country of origin. In these instances, a “substantial transformation” standard is most often applied, whereby country of origin is determined based on the country in which the product last underwent a process resulting in the article having a new name, character, or use distinct from that of the article or articles from which it was transformed.
Every product entering Canada must be assigned a 10-digit Customs Tariff code that is used to assess tariff and duty obligations, and to assist in determining eligibility for free trade agreement benefits. Canada’s tariff coding system, like virtually every other developed country’s, is rooted in the Harmonized Commodity Description and Coding System (HS), developed and maintained by the Brussels-based World Customs Organization.
In many instances, there are only slight variations between codes. But, assigning an improper code can have a substantial impact on the amount of tariff that is assessed. For example, Chapter 57 of the tariff schedule includes codes for “Carpets and other Textile Floor Coverings.” Within that chapter, classification code 5701.10.10.00 covers carpets and other textile floor coverings “of wool or fine animal hair – machine knotted” and carries a tariff rate of 13 percent. But tariff classification 5701.10.90.00 includes carpets and textile products “of wool or fine animal hair – other” and carries a 6.5 percent tariff rate. Sounds like a slight product variation, but the difference in tariff rates is significant.
Thus it is very important for a product to be assigned the tariff code that best meets its precise characteristics. Unfortunately though, determining the exact code can be a time-consuming and exacting process, and unless the individual making the classification assignment truly understands the process, it is easy for errors to occur.
And while every business understands the need to pay duties and tariffs, there is no reason to pay more than is legally owed. Not only does a misclassified shipment run the risk of missing out on trade benefits, or of overpaying duties, but it also faces potential fines and legal repercussions.
Shipping to Canada can be further exacerbated when the parties involved in the transaction fail to agree on established terms of service. This can be a confusing exercise, but it is critically important.
International shipping operates under a uniform set of standards – known as Incoterms – that establish clear expectations and responsibilities between buyers and sellers. “Incoterms” is shorthand for “International Commerce Terms,” and they are developed and maintained by the International Chamber of Commerce (ICC) located in Paris, France.
Because of Incoterms, buyers and sellers have a clear understanding of what constitutes “delivery,” for example, and which party is responsible for unloading a vehicle, who is liable for certain payments, and who has responsibility for customs compliance. This avoids costly mistakes and misunderstandings.
The current list includes 11 specific Incoterms, which are divided into two categories based on mode of transport. For purposes of ground shipments traveling between the United States and Canada, Incoterms choices are generally limited to the three terms commonly referred to as “Arrival Group D.” Within this category are the Delivered at Terminal (DAT), Delivered at Place (DAP), and Delivered Duty Paid (DDP) options.
The primary difference between these three terms of service is that a DDP transaction places responsibility for payment of customs, taxes, and brokerage fees on the seller. DAT and DAP shipments place these responsibilities on the buyer.
The choice then really comes down to “duty paid or duty unpaid.” Does it make more sense for a U.S. business to prepay its customers’ customs fees and transaction costs at time of purchase, or is it preferable to have the customer pay those costs at time of delivery? Also, under what circumstances is it preferable for a Canadian customer to oversee the importation process as opposed to having the U.S. business bear responsibility?
The Canadian government does not allow U.S. businesses to collect Canadian sales tax or act as an importer of record in clearing goods into Canada. This means a business may face the highly inconvenient and unwelcome dilemma of having to collect taxes from Canadian customers at time of delivery. Further, it is possible the Canadian customer will have to become personally involved in the customs process by retrieving the shipment from a local customs office. Neither or these situations are helpful to a U.S. business trying to build its brand in the Canadian market.
Fortunately, the Canadian government addresses this problem through its Non-Resident Importer (NRI) program, available through the Canada Border Services Agency (CBSA). As a nonresident importer, a U.S. business is allowed to act as an “importer of record,” which offers many benefits that include:
According to Livingston International customs brokers: “A nonresident importer is a business located outside of Canada that ships goods to customers in Canada and assumes responsibility for customs clearance and other import-related requirements.” This distinction allows a U.S. business to operate in Canada, much the same as a Canadian business, and levels the playing field to compete in the Canadian market. NRIs are able to charge their Canadian customers an all-included landed price at time of purchase. NRIs can also provide a streamlined customs clearance process and better manage paperwork and compliance.
In addition, U.S. businesses can operate in Canada without having to maintain physical assets, including warehouses, distribution centers, or brick-and-mortar stores. Thus the benefits of NRI status can help a business manage supply chain costs in addition to the more obvious competitive and customer service benefits.
Every year, the Small Business Administration conducts a nationwide survey of small businesses to gauge export activity and to better understand barriers that prevent more businesses from pursuing export opportunities. Each year, respondents seem to list the same issues:
In reality though, many government resources are available to address each of these concerns and to essentially offer a helping hand to businesses determined to enter the world of international commerce.
Each state offers assistance to businesses interested in expanding sales or operations beyond the United States. Specific resources vary, but in general, a business can look to its state government for services ranging from official trade mission visits to market research to funding opportunities.
A first stop though is to download a copy of A Basic Guide to Exporting. Published by the U.S. Commercial Service, this publication provides comprehensive information about the export process and is considered a “must read” for any business interested in pursuing export opportunities.
Once a business has a basic understanding of the export process, it can then look to other government resources for additional information and assistance.
The Customs and Border Protection (CBP) agency maintains a network of industry-specific “Centers of Excellence and Expertise” that oversees trade policy and serves as a resource for the trade community. Each center is a “one-stop” solution provider for the industry it serves. Centers are staffed by trade specialists who are experts in that industry and who are empowered to make decisions and give direction on related import and export issues. Following is the current list of Centers for Excellence and Expertise offices:
District Export Councils (DEC): Organizations are comprised of business leaders from local communities who are appointed by the U.S. Secretary of Commerce to provide professional advice for local firms. Currently, 59 DECs operate throughout the U.S., comprised of approximately 1,500 members who volunteer their time and share their expertise to assist local businesses interested in pursuing export opportunities.
Export.gov: Gateway to the trade promotion and export finance programs of the federal government. Administered by the International Trade Administration, export.gov is a collaborative effort with the 19 federal agencies that offer export assistance programs and service. Export.gov is the go-to source for information on key topics, including:
Export Assistance Centers: Integral to federal efforts is the network of offices located across the United States and in more than 80 countries worldwide. Each Export Assistance Center is staffed by professionals from one or more of the following: Small Business Administration, Department of Commerce, Export-Import Bank, and other public and private organizations. Businesses can also take advantage of the agency’s “Global Markets (GM)” service through which trade professionals work directly with a business owner to resolve issues preventing a business from successfully exporting to a specific market.
Export-Import Bank: The official export credit agency of the United States. The Ex-Im Bank assists U.S. exporters by extending credit to foreign buyers, presumably boosting sales from U.S. companies.
Foreign Agricultural Service (FAS): A division of the U.S. Department of Agriculture (USDA), FAS works to facilitate export opportunities for U.S. agriculture in the global marketplace. Businesses can access one of four State Regional Trade Groups (SRTG) that help U.S. businesses identify international markets for their agricultural products.
Small Business Administration: Independent agency charged with assisting small businesses to start, grow, and prosper. The SBA’s International Trade division assists potential exporters in several ways:
U.S. Commercial Service (USCS): Trade promotion arm of the International Trade Administration, located within the U.S. Department of Commerce. The Commercial Service maintains 106 domestic offices staffed by trade professionals. Through its Trade Information Center (TIC), businesses can take advantage of multiple resources, including:
U.S. Trade and Development Agency (USTDA): Helps companies create jobs through the export of U.S. goods and services for priority development projects in emerging economies. Links U.S. businesses with export opportunities to support infrastructure and economic growth projects in partner countries.
Beyond these agencies, which offer assistance to a broad scope of businesses, support is available to specific industries:
Office of Energy and Environmental Industries (OEEI): International Trade Administration division that promotes the export of goods and services associated with renewable energy (biofuel, biomass, geothermal, hydro, solar, wind), civil nuclear energy, fossil energy (oil, gas, coal), smart grid, transmission and distribution, pollution prevention, air pollution control, water, and waste.
Office of Health and Information Technology (OHIT): Located within the International Trade Administration, OHIT promotes trade policy and export opportunities for U.S. medical devices and healthcare products. In addition, the office’s Information Technologies Team promotes exports of semiconductor and related equipment, telecommunications equipment, cable TV and broadcasting equipment, and information technology hardware.
Office of Transportation and Machinery Aerospace Team: International Trade Administration division that promotes exports of aerospace products including aircraft parts, general aviation aircraft, rotorcraft, business jets, and large civil aircraft.
Office of Transportation and Machinery Automotive Team: International Trade Administration division that promotes exports of motor vehicles (passenger cars, light trucks and heavy trucks) and automobile parts (original equipment, aftermarket and specialty equipment).
Office of Transportation and Machinery – Machinery Team: International Trade Administration division that promotes exports of agricultural, construction, and mining machinery, and related equipment; diesel engines, food processing machinery; material handling equipment; machine tools; and other manufacturing equipment.
A final “tip” for improving the U.S./Canadian clearance process is to partner with a logistics company that has been there before. There is no substitute for experience when it comes to understanding the clearance process. Among the benefits of using a logistics partner that truly understands the clearance process:
Many U.S. businesses, in developing their Canadian logistics strategies, reflexively turn to their U.S. carriers on the assumption that a logistics plan that works well in the U.S. can simply be replicated in Canada. Unfortunately, these businesses have learned the hard way that there is no substitute for legitimate, verifiable Canadian experience.
When Canada’s Office of the Auditor General released its 2017 audit focused on “customs duties,” a key finding included the fact “that importers misclassified about 20 percent of goods coming into Canada and may have ended up paying a lesser amount of duty as a result.”
While that may be true, it is also true that misclassified goods may be paying more duty or missing out on free trade agreement benefits to which they are legally entitled.
Misclassification of goods is among the top reasons shipments are delayed at the border when traveling between the United States and Canada. But it’s also among the easiest errors to prevent. Shippers can usually ensure the accuracy of their tariff classifications by learning how to properly identify the right code or by enlisting an experienced third party to manage the process on their behalf.
It can be an easy fix but is symbolic of the many “little inefficiencies” that hamper U.S. businesses in their desire for improved access to the Canadian market. Whether an inefficiency results in overpayment of duties, delays caused by missing paperwork, or failure to take advantage of trade facilitation programs, it all adds up. But with experienced logistics providers available to help, there is no reason for any business to miss out on any opportunity to more efficiently reach the Canadian market.
Purolator is the best-kept secret among leading U.S. companies who need reliable, efficient, and cost-effective shipping to Canada. We deliver unsurpassed Canadian expertise because of our Canadian roots, U.S. reach, and exclusive focus on cross-border shipping.
Every day, Purolator delivers more than 1,000,000 packages. With the largest dedicated air fleet and ground network, including hybrid vehicles, and more guaranteed delivery points in Canada than anyone else, we are part of the fifth-largest postal organization in the world.
But size alone doesn’t make Purolator different. We also understand that the needs of no two customers are the same. We can design the right mix of proprietary services that will make your shipments to Canada hassle-free at every point in the supply chain. Contact us today to find the right solution for your unique shipping needs.
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