Connected Show - Interview with Foreign Trade Expert Nestor Scherbey

    In today's Connected Show, Peter Edlund speaks with foreign trade expert Nestor Scherbey on how to navigate foreign trade in these uncertain times with advice for those U.S. based importers considering redirecting sourcing from China to other countries and the impact that may have when working with U.S. Customs. 

    Enjoy the video and transcription below.

    Report: The State of Drop Ship Compliance

    Interview Transcription

    Peter Edlund: Welcome to The Connected Show. I'm your host, Peter Edlund. On today's show, we have a wonderful subject. We're talking about navigating global trade in uncertain times. We have a wonderful guest speaker. His name is Nestor Scherbey, president of CTRMS, Customs Trade and Risk Management Services. I’m speaking to Nestor live on Skype from Vietnam. Now Nestor is originally from Michigan, but he now resides in Ho Chi Minh City, Vietnam. And today though, I believe, if I'm correct, you're in the south near the South China Sea on vacation, is that correct?

    Nestor Scherbey: Yes, it's the holiday season and I'm the guest of Vietnamese friends here at their place about two and a half hours away from Ho Chi Minh City, and about 25 minutes from the South China Sea.

    Peter Edlund: Oh, that's wonderful. Well, that brings me to some questions that I'm sure you're more than happy to answer, and some of these questions have to do with just, you know, current times. You can't open up the newspaper, you can't read something or get away from reading something around international trade, and you hear about Brexit, you hear about the China tariffs, and the trade war that's going on, but you have some unique insight given the fact that you've been navigating these waters for so long, so to speak. Can you give me a sense of what is going on right now and kind of give the audience a little bit of sense of some of the real nitty gritty that's going on with respect to some of the laws and the implications of those laws that US importers are going to have to navigate and concerns around the tariffs?

    Nestor Scherbey: Sure. I'll try it.

    Peter Edlund: It's a lot. I'm sure to ask.

    Nestor Scherbey: It's a fast changing situation. As you said, virtually every day there's some new statement in the newspaper or new development, and we have a kind of much more complex, mobile environment developing. You know, on the one hand we have new US China tit for tat tariffs, you know, with negotiations that, it was just announced the other day must be completed on March the first, so we won't really know, you know, for another few weeks. But it to me looks like a long-term situation that, regardless of whatever agreement is reached, the trade tensions follow from. Those are not going to go away anytime soon.

    Peter Edlund: Do you find, as we're kind of going day to day right now, how are you and, I guess at the end of the day, our importers to navigate this? Are they having to sort of, you know, day by day appreciate sort of the change that's going on? Or are they dealing with consultants and firms like yourself to kind of help them navigate that?

    Nestor Scherbey: Yes. Thank you. I mean, there are various sizes and capabilities of companies, and they have in-house management that is concerned with this. They also have external advisers. Consultants like myself are very concerned about it.  I think in a very short time, I had three firms who are currently engaged with imports from China, contact me about shifting their operations to Vietnam in terms of sourcing and other possible countries. And the ASEAN area which they haven't really focused on as much before, but are now very much focusing on it. Of those, Vietnam is kind of a clear leader, but followed by Thailand, Malaysia and others in the region as alternatives to the current situation in China. They're already immediately facing additional tariffs, either at the 25 percent level or ten percent level that have already been levied and instituted.

    Nestor Scherbey: And a threat exists as president trump stated that there's a remaining balance of imports that may be targeted for additional tariffs. And so, when you say “additional” what does that mean exactly? Let's say you import something today from any favored nation in the world. I'll leave aside the special preferential treaties and programs, but let's say you import something and it was a dutiable at say 10 percent. Okay. Well, if the origin is China, that could be an additional 25 percent on top of the 10 percent, so it becomes 35 percent or depending on the classification an additional 10 percent until March one. So that's enough to cause major sourcing supply chain changes, and a serious look at alternatives because certainly at the upper level it would render imports, and sales of such products, not tenable at just too high a cost. Have you increased the duties and taxes on something by 35 percent? You can imagine what that means, at say the local Walmart or somewhere else.

    Peter Edlund: You mentioned something to me when we were talking earlier. Before the show we were talking about how it's not easy to just pick up and source somewhere else and there is some risk associated with being in compliance. If you're an importer and making that choice to just resource or have somebody in China decided to move those goods to Vietnam and then ship it from Vietnam. Can you explain some of the risk that, and people need to pay attention to? What is the due diligence that people are going to have to pay attention to?

    Nestor Scherbey: It varies. Paying attention to where the products that they are going to import or currently import from China. After the changes, will they be considered by US customs as having a third country, the new country origin, or will they be considered as being China origin, and the risks are high because if you send an item that is fully assembled in a third country like Vietnam or Thailand or somewhere and then a local company or a freight forwarder documented as the origin of that without anything being done to it, that could be treated by US customs as origin fraud. There may well be some such cases developing in the current environment because people are simply not paying attention to these things.

    Peter Edlund: Yeah, they're getting there. They're making fast decisions.

    Nestor Scherbey: Fast decisions, and they don't go into the detail of this with the right experts. This is the simplest example I can think of. If you look at this shirt I'm wearing, let's say it's made in China. If you cut the fabric into the various components, then ship it to Vietnam or Thailand or somewhere and have it sewn together, and the buttons put on and packaged and ship it to the United States. If on that invoice it lists the country of origin as Vietnam or Thailand, that's wrong. And because it's the country in which in the case of textiles were there, it was their origin and of course, where the material originated. So you have to do a case by case analysis when you do ship to other countries of what exactly is the country of origin going to be decided by US customs when you imported into the US.

    Peter Edlund: Well, what happens when you start getting into situations like that with labels and all these other things? I'm assuming the critical eye is really on now. I think US customs, if you have not made a mistake, and this is really taking a critical line of this right now, given the fact that we're doing a lot on the trade war with China, what, what is it? What's the implications like, what will happen once the goods are found out to be in a fraudulent state? What's the remedy? What happens?

    Nestor Scherbey: That's a gradation of scale, of things that can happen depending on, did the case involve ignorance? Simple mistakes by the importers or a failure to look into this in detail before they caused the US to come to us by placing an order. Because basically when you placed that order, you'll have to specify what the labeling is, it has to be these made in China or made in Vietnam or Thailand. Labels on apparel or, and they have their equivalence on all kinds of other merchandise. Basically, all goods imported into the United States that are capable of it must be permanently, legibly, conspicuously marked with the country of origin. That's been part of the Customs Act since the 1930's. And they do enforce that. So let's say that we order something, for the sake of argument, from Vietnam, okay. The goods arrive in Los Angeles or Boston or Chicago or Detroit or somewhere, and the importer of record receives an official request for information concerning that, import from that importer.

    Nestor Scherbey: They're given 30 days to respond and you can have one of a couple of situations develop. If they've done their homework, you know, the importation will be finalized as entered, as they were put forward by the importers, customs broker. In a not so good case, customs may determine, well, we don't really care what’s on the foreign exporter’s invoice or packing list or even their foreign origin certificate from some chamber of Commerce, they'll make their own determination based on the facts and may say, unfortunately in your case, the goods are origin China. Now we'll give you 30 days to return them to customs custody at the port of arrival to which you have three choices. One of which is, since they can't be sold in US commerce with the wrong labels on them, you can re-export them from the United States and close out those transactions.

    Nestor Scherbey: Or you may add a facility under approved facility under US customs supervision, proceed to tear out the old label and sew in new ones or remake them if they have marketing plates or similar things. An expensive, time consuming procedure and they have to give you the time and ability to do it, because it's very time consuming. I can't even imagine the costs associated with that. Well, it gets worse in the case of some goods, things like automotive engine blocks, camera bodies and lenses and so forth. The country of origin marking is actually engraved or cast or molded into the product, and you can't remake that, you know. So then the third option is, you may engage in supervised destruction, having the imported goods destroyed by customs and you suffer a total loss. Now I experienced some of that when I worked in the auto business when we had non-conforming vehicles that didn't comply with a safety requirement, equipment requirements or pollution control devices and so forth. And it turned out that in those cases, after using them in R&D for a few months, the best solution was in fact destruction, because everything else would cost more, but you know, we knew that could be one of the outcomes and prepared for it.

    Peter Edlund: I think that, you know, those stories you just mentioned, these are the uses of major risks associated with, I had read an article that you'd written and, and there you were talking about all of this and it was interesting to see sort of this notion that there has to be substantial if somebody is moving manufacturing from China to Vietnam as now becoming the, the origin, there has to be a substantial amount of… I don't remember the word you used, but I'm assuming rework to that product, the value add, if you will, in Vietnam in order for it to constitute as a Vietnam product of origin. Is that correct?

    Nestor Scherbey: Yes. Let me just clarify it a little bit. Believe it or not, there are a million customs rulings online in their database available to companies to research this for the goods that they are going to import. And in that collection, there are some rulings that deal with what's called substantial transformation and substantial transformation is when you have a product made in country a and then you send it to country B and they're further manufacturing or there’s complicated assembly or something occurs to come to a finished product and then you ship it to the United States. What they're really interested is in knowing what was made and exactly how much time, labor capital, effort goes into it. The old test that’s still valid is that a new and different article has to emerge from the process and manufacturing in the second country in order to change the origin.

    Nestor Scherbey: So if a company doesn't pay attention to this, I advocate getting advanced ruling before you do this. I say the US customs will give you an advanced ruling. People like me will write it up, etc. Submitted to them, explaining what they plan to do a and ask them for things like the correct customers classification or HS code, what duty rates will apply and what the marking of your country of origin of the goods must be, so origin becomes now all important again. It only determines what and duty rates apply whether you get hit with the additional tariffs, uh, characters or not.

    Peter Edlund: I see. How much time does it take someone to let's say that, you know, today I decided that I wanted to shift my origin to Vietnam and I needed to start the processes engaging somebody like you or you know, trying to figure it out and do the due diligence. How long can it take for somebody to get all this accomplished?

    Nestor Scherbey: You know, that varies a lot because, there's so many different kinds of goods and it depends on how ready the company is. How knowledgeable they are, if they designed the product, and have control over all aspects of the specifications and so forth, right? It'll be faster if they don't. And you'll have to find all this out from the foreign manufacturer that takes longer and varies. It's a much more difficult situation. But you know, because there are competitiveness issues that arise and fears and so forth. But once you actually apply, and let’s say when I filed an application with US which, I used to file hundreds of rulings in my career and, they would issue one as to the classification or engine marketing of goods within 30 days and you could rely on that. Now, they've actually added a new online capability to do it, to submit these things online.

    Nestor Scherbey: So I'm interested to test the new procedure to see if it's any faster. But there are so called national commodity specialists in the US customs that are headquartered in New York. And one applies to them with the facts of what it is you're planning for, how it's made, where it's made, and what's in it. And what's in it is, you know, very few things are 100 percent the origin of one sentence. That's like agricultural goods, you know, coffee or a rice or something, right. But any kind of manufactured or assembled product is a bit more complex and you have to know the origins of what goes in it and they'll make a determination, you know, based on their rules, case law in studies to whether the good is substantially transformed in second country or not, and which origin it will be. That hasn't been paid attention to for a long time, simply because the duty rates used to be the same if it came from China or it came from Thailand or it came from Vietnam.

    Nestor Scherbey: As I said, I'm omitting special preferential trade reading programs because those are complicated, but they were basically the same orientation rates. Now. They no longer are now, if you're subject to an additional 25 percent or 10 percent to become 25 percent, it matters. And I'm sure and customs will, you know, look at it carefully. That’s especially true for a new importer, doing this for the first time, can expect to receive what's called an official request for information. The word requests they use loosely because a, you have to respond within 30 days and after you supplied them with all this detailed information in the right way, the date issue away form 29 notice of action of how they're going to finalize your import and, you know, failure to respond or get additional time to those things as negative consequences. So no one should do that.

    Nestor Scherbey: They should get help as fast as they can from their customs broker or advisor or someone who was knowledgeable about this, the, a notice of action and can come out and will determine whether your import is accepted as you haven't declared it or as your customs brokerage declared it for you or they may reclassify it. They may find something, depending on what they were requested. And that has to do with customs. The value is declared for the import, and as I'm mentioning, origin will become a question. And in origin cases, you have to really know where it's made, what it's made out of, and be able to report it correctly, you know,

    Peter Edlund: Sounds like a lot of things to take under consideration. And I know there has been some sensational sort of situations going on recently and there's a Chinese communications company executive who was detained in Canada recently and it seems like there's these sensational things that are occurring and maybe highlighting the fact that, you know, the US and China in particular are serious about this trade war that's going on. But if you were to peer into your crystal ball and look into 2019 as we're going into it in the next few days, can you give me, you know, the sort of things that you're thinking that might end up happening that people need to take under consideration when we're going through this.

    Nestor Scherbey: I can try and pretend to be an, you know, a crystal ball gazer right here, that we're seeing today and that are in the news every day. We can foresee a certain things happening. I anticipate, number one, increased scrutiny of imports from third countries that have some type of China connection or origin, simply because they're going to be looking for that. And because the majority of goods manufactured or assembled in the world today don't have a single country of origin. They have components and parts that come from different places. You know, if you're making a, or let's say importing a vacuum cleaner. I mean, it's got an electric motor. It's got bags and has a housing. It has I don't know how many components but quite a few and it's highly unlikely that all of them are from a single country.

    Nestor Scherbey: Right? So when I request a ruling, I have to get into the detail of those things and submit the information to US customs in proper form, which identifies where the motor is made, where the housing is made, how long it takes, what are the relative costs of these things. And they may have follow up questions that you have to respond to. Once they have all of the information that they want, they'll make the determination and there is a bit of an art you know, in doing this simply because you will have had to research all the prior precedential rulings or cases that they have that are already dealing with merchandise similar to what you were going to import.

    Peter Edlund: I see. Now in terms of, you know, we've got here on the trade war so to speak for a period of time, but what’s your view of China and the US coming to terms on something, an agreement that's solid instead of this sort of temporary halt. What do you foresee? And, and the beginning parts of 2019, will we start to see what really is going to happen?

    Nestor Scherbey: I think in another, you know, a couple of months we will see where it is. We may not know until, say March 1 when the deadline for an agreement is reached. As these things seem to go to the last day, the last minute. These days it is a very different period in trade and we've experienced in the past.

    Peter Edlund: Yeah. Well, I can tell your expertise of many years of experience in dealing with this particularly now that you've been settled in Vietnam for a while now, right? You've been in there working that operations for a long time, right? Or five years. Okay. Well, you know, navigating that, that country and navigating the laws and, and understanding what's going on there as people start to figure out how to source throughout Malaysia, Thailand, and Vietnam. I wanted to thank you very much for being on the connected show, Nestor, and I think that it's been really wonderful to have your insight and I welcome the opportunity to actually have some more discussion around this as things evolve globally and I hope that you'll come back and visit with me.

    Nestor Scherbey: Oh, thank you. It's been my pleasure and I certainly will make up for what they call the interesting times ahead.

    Peter Edlund: It sure is. It sure is. Well, on behalf of myself, the host of connected show, I'm Peter Edlund and my guest Nestor, I want to thank you very much for stopping in and listening and watching the connected show. Until next time, stay connected.