21THE MIDDLE MEN
Mr. and Mrs. John Smith of Lima, Ohio, were strolling through the streets in Florence, Italy, enjoying their first European vacation, when Mrs. Smith noticed a beautiful, hand-blown glass bowl in the window of a small shop.
“John!” she exclaimed. “There is the bowl I’ve been looking for. It would be perfect for our Christmas eggnog parties. Let’s go in and price it.”
They stepped inside the shop and a clerk brought the bowl from the window to a table where Mr. and Mrs. Smith could examine it more closely. It was a lovely piece of glass and obviously the work of a fine Venetian craftsmen. After admiring the delicate etchings on the glass, Mrs. Smith asked, “How much is it?”
The clerk said the bowl was one of the best pieces in the house and that it was priced at $75.
“My goodness,” Mrs. Smith exclaimed. “That bowl would cost double the price at home. It’s a good buy.”
Mr. Smith said, “But how will we ever get it home? We can’t lug it all over Europe with us. We would be certain to break it.”
The clerk interrupted, saying, “Pardon me. You don’t have to worry about getting the bowl to your home. We will take care of everything for you—the packing and the shipping. And we will insure it against breakage. We ship hundreds of purchases every year for American visitors.”
Mr. Smith asked, “How much do you charge for that service?”
The clerk shrugged. “There is no charge for our service, sir,” he said. “There will be a small shipping charge which you can pay on receipt of the package, but as for the trouble of packaging and handling the shipment from here, that is merely a part of the service we give our customers.”
“We won’t be back home for another three weeks,” Mrs. Smithsaid. “What will happen if the bowl arrives before we reach home?”
“You need not worry about that,” the clerk said. “I’ll hold the bowl for several days and then ship it so that it will not arrive until after you have reached home.”
“Well, that seems simple enough,” Mr. Smith said. “As long as you can handle this for us, then we’ll buy it.” He pulled out his wallet and paid for the bowl. Then he carefully wrote out his home address in Lima, Ohio.
“Don’t worry about a thing,” the clerk said, smiling. “The bowl will arrive soon after you get home.”
As the Smiths left the shop, Mrs. Smith said to her husband, “Well, the Italians certainly do make it easy for the Americans to buy something and send it home. I had no idea there would be so little red tape to sending a purchase home.”
A month later Mrs. Smith was at home when the telephone rang. It was a long-distance call from New York. A strange man—someone she had never heard of—asked if she had ordered a glass bowl from a shop in Florence, Italy. He explained that he was a Customs broker, the bowl had been consigned to him, and he was prepared to clear the package and forward the shipment if she authorized him to do so. He explained there would be a nominal fee for his services in getting the package released from Customs and forwarded to the Smiths in Lima.
Mrs. Smith was so flustered she told the caller she would have her husband get in touch with him. What was this strange man doing with her bowl? The clerk in Florence had said he would take care of everything, and now this broker was saying something about having legal title to the shipment and that she would have to pay a fee to get her bowl shipped to her. He had explained that she could come to New York and arrange personally for the Customs clearance if she wished to do so.
Mrs. Smith telephoned her husband at his office and told him about the call from the broker in New York. She gave her husband the man’s name and his telephone number in New York.
And then Mr. Smith exploded with anger. “It’s a gyp deal of some sort,” he said. “I am going to call the nearest Customs office and see what this is all about. We didn’t tell that clerk to send the package to anyone in New York. I don’t know how he got intothis picture. There’s something funny going on and I’m going to find what it’s all about.”
Within a short time, Mr. Smith learned—by checking with a Customs officer—that he was not being gypped. The broker in New York was a legitimate broker, licensed by the Federal government to act as a clearing agent for merchandise arriving in the port of New York. The call that had been made to Mrs. Smith was a routine call, because the package containing the bowl had been consigned to the broker in routine fashion either by the shipper in Florence or by the carrier which brought the package into the port of New York.
Mr. Smith asked why it was that Customs in New York could not forward the bowl directly to him without going through a broker. That seemed the easy way to handle the shipment without all this red tape and the payment of a fee to some stranger whose name he had never heard before this day. Mr. Smith declared heatedly that he didn’t have time to go running off to New York for a $75 glass bowl. As a matter of fact the bowl wasn’t worth all that trouble and expense. He and his wife wanted the bowl and they wanted it as quickly as possible.
The Customs officer explained that unless Mr. Smith or his wife went to the port of entry to clear the shipment with Customs—or unless they authorized the broker to act as their agent—the bowl would be held by Customs for five days. Then if it were not claimed, it would be sent to a warehouse. It would remain in the warehouse for one year, and if it had not been claimed within that period, then it would be sold at auction along with other unclaimed packages. The officer explained further that Customs was not authorized by law to act as the forwarding agent for anyone—except in cases where a shipment valued at less than $250 was received by mail from an overseas point.
“Now, if you had shipped the bowl by mail,” the Customs officer said, “it would have been delivered to your post office and you could have obtained its release with no difficulty at all.”
Smith retorted, “This is a fine time to tell me I should have shipped by mail. All I can say is it’s a hell of a way to run a railroad.” He slammed down the phone, cursing Customs and all of the government’s red tape. Then, reluctantly and angrily, he called the strange broker in New York and authorized him to clear theglass bowl. Thus the day was ruined for Mr. and Mrs. John Smith of Lima, Ohio.
The story of Mr. and Mrs. Smith is not unusual. Similar cases occur daily throughout the United States as returning travellers discover that they could have saved themselves worry, time, and money by familiarizing themselves with the Customs procedures governing the importation of foreign purchases into the United States. Had Mr. and Mrs. Smith taken the time to read a few relatively simple instructions—available to travellers in pamphlet form—they would not have gotten into the difficulty they did.
In the first place, they would not have accepted the glib assurance of the Florence clerk that he would take care of everything. Instead, they would have instructed the clerk to mail the glass bowl by parcel post, marked as a “tourist purchase.” When the package arrived in New York, the post office would have turned it over to Customs in routine fashion for examination. An examiner would have verified the contents and its value and then returned the package to the post office to be forwarded directly to the Smiths in their home town. If any duty were due, it could have been paid to the postmaster after filling out a simple entry form. No broker. No delay. No red tape.
But this is what happened to the Smith’s glass bowl after it was purchased in Florence: the clerk turned the package over to a forwarding agent with no special instructions. The agent routinely consigned the shipment to a broker in New York with whom he had been doing business for years. The bill of lading was made out to the New York broker, which meant that when the package arrived in New York, the broker had legal title to the glass bowl because it was consigned to him.
What few travellers realize is that there is no automatic movement of merchandise arriving by ship from overseas. Someone has to be on hand to clear each shipment with Customs and pay any duties that might be due. Someone must see to it that the merchandise is moved from the piers to its destination. And this is usually the job of the broker, a point which many people do not understand and which causes considerable difficulty.
The broker is the expediter of the multi-billion-dollar flow of merchandise through the ports of entry in the United States. He is the legal representative of his client in dealing with Customs problems.
The Customs Service is not interested in merchandise until it arrives within the limits of a port of entry to be unloaded. At this point the merchandise legally becomes an import. And the merchandise passes through Customs under two types of general entries. One is called the “consumption entry” and the other is known as a “warehouse entry.”
Most imports arrive and are passed through Customs under the consumption entry, which permits the importer to pay the duties, obtain a release, and get immediate possession of all of his merchandise.
When merchandise is brought into the country under a warehouse entry, the major part of the merchandise is sent to a Customs bonded warehouse for storage. No duties are deposited when the papers are filed except for that portion of the merchandise which is to be taken immediately by the importer. In other words, the importer is permitted to place his goods in storage without payment of duties and then is permitted the privilege of making partial withdrawals from the warehouse, paying duties on whatever he draws for consumption.
There is a continual movement of merchandise from one bonded warehouse to another. This is particularly true in movements of liquor from one part of the country to another. Liquors may move across the country and may be in six or a dozen different bonded warehouses before they are withdrawn for consumption and taxes are paid. This system permits merchants to move their merchandise freely to meet shifting consumer demands.
The normal period for bonded storage is three years, but this period may be extended. If no extension is granted and the goods still remain in a bonded warehouse beyond the three-year period, they are considered unclaimed and abandoned to the government. The government then puts the merchandise up for public auction.
* * * * *
A point of constant friction in the field of imports is the law which requires that imports shall be marked “legibly and conspicuously” with the name of the country of origin. It has been the Customs Bureau’s position that if the marking can be reasonably expected to remain on the article until it reaches the ultimate purchaser, then that is all that the laws requires. But there are many exporters and importers who disagree with the Customs interpretation of the law.
As one Customs veteran explained: “The domestic people, of course, would like to have great big red letters 40 feet high on a 20-foot article spelling out the name of the country of origin. Of course, it frequently happens that the importer would like to have this name about as small as the Lord’s Prayer on the point of a pin.
“The markings from some countries increase the value of the article. Chinaware from England, for example. The English are very happy to put their marking under the glaze, where it will remain. There are other countries that are just as happy to put this identification on by paper sticker, which may come off in the rain. So we always are in the middle in the argument over markings on imports.”
The purpose of the law, of course, is to inform the ultimate buyer of the country from which the merchandise came. Normally the ultimate purchaser is considered to be the man who buys it across the counter—the last person to receive the article in the condition in which it was imported.
A great deal of merchandise is permitted into the country under what is known as the “informal entry procedure.” The informal entry is used where the value of a shipment does not exceed $250. The entry was devised for the benefit particularly of persons passing across the borders of the United States from Canada and Mexico.
In such border crossings, there is no formal appraisement. The Customs officers on duty write up the entries, take a look at the merchandise and decide themselves whether the value is correct. Then the duty is paid on the spot and the merchandise is released.
This informal entry procedure is also used at the airfields to expedite shipments of merchandise by air. It is used in the clearing of baggage through Customs when travellers arrive from overseas, and in the clearance of non-commercial shipments which include personal and household effects.
* * * * *
In the vast majority of importations, the broker plays an important part. The broker may be an individual, a partnership, corporation, or association. In any case, those acting as brokers must be licensed by the Customs Bureau, meet certain standards, and submit to Federal regulation of their operations.
Applicants for individual broker’s licenses must undergo an examination at the headquarters port in the Customs district inwhich the broker intends to operate. The purpose of this examination is to determine the applicants knowledge of Customs laws and procedure and his fitness to render a service to importers and exporters. This knowledge must necessarily be quite broad in scope, and a grade of 75 per cent is required for passing.
However, those applying for a broker’s license as a corporation, partnership, or association do not take an examination. Their applications are forwarded by the Collector to the Supervising Customs Agent, who conducts an investigation and then makes a report and recommendation. The agents verify the correctness of the statements made in the applications and the qualifications of the person or persons who will actually handle the customs business. The government requires that each broker keep current records reflecting his financial transactions as a broker, and these records must be available for government inspection at any time.
The Customs Service has no part in fixing the fees charged by customs brokers for their services. However, if a complaint is made against an individual broker or a brokerage house, then the complaint is investigated by Customs Service agents and if the fees charged by the broker are found to be excessive or “unconscionable,” then action is taken by the Service to correct the situation. In cases where investigation discloses irregularities, the Secretary of the Treasury has the authority to suspend or revoke the license of a broker. Such action is taken, however, only after a quasi-judicial hearing in which the accused broker has the right of cross-examining witnesses. If the decision goes against him, then the broker may, if he wishes, appeal his case to a U.S. Circuit Court of Appeals.
The broker plays a prominent role as the middle man in the import-export business, but this does not mean that an importer must necessarily seek the services of a broker in bringing merchandise into the country. Under the law, any citizen may act as his own agent in clearing his own imports through Customs and no license is required.
* * * * *
One of the ancient devices to aid the importer is known as the “drawback” privilege. “Drawback” is a word which is found in customs language through the centuries, and it is another word for “refund.”
In brief, the drawback works in this fashion: an importer bringsmerchandise into the United States to be used in the manufacture of certain articles. At the time of importation, he pays the normal duty. After the articles are manufactured, they are exported to another country. It is then that the manufacturer is entitled to a refund on that part of the imports which he shipped back out of the country.
The drawback plays an important part in the manufacturing operations of all nations. It enables manufacturers to meet competition in the export market. For example, an automobile manufacturer in the United States imports a large amount of steel to be used in the manufacturing of his automobiles. Ten per cent of this steel is used in cars which are shipped overseas. Thus the manufacturer is entitled to a drawback or refund of 10 per cent of the duties he paid on the imported steel.
Congress has liberalized the drawback provisions so that a manufacturer does not necessarily have to use the imported materials in his exports in order to qualify for a refund of duties. An automobile manufacturer may export automobiles made entirely of domestic steel. But if the steel he used in the exports is of “the same kind and quality” as the imported steel, then he is allowed to obtain a refund on that quantity of steel used in the exported automobiles.
Virtually every manufacturer who is in the export business takes advantage of this drawback material, and its value to the manufacturing industry in the United States is realized when it is noted that the refunds paid in recent years have been running about $9 million annually.
Oddly enough, there are some American manufacturers who do not even know that they have the privilege of a duty refund. They have been importing materials for years, paying duties, and then exporting the finished products without making any claim for a refund of duties on the materials shipped back overseas. One midwestern manufacturer in recent years discovered that he had paid the government in excess of $1,500,000 in duties—and he was entitled to a refund of the entire amount.
This situation developed as a result of the Korean War. Because of the tremendous devastation in Korea, the U.S. government entered into a program of rebuilding the Korean economy. The midwestern manufacturer obtained orders from the government tosupply a quantity of heavy machinery and equipment, the contract running into many millions of dollars.
In that period during and after the Korean War, there was a shortage of domestic steel. For that reason the manufacturer imported virtually all the steel used in the machinery manufactured for the Korean government. When he discovered that he was due a refund of duties, he obtained all his records over the past years, and submitted them to the government. These records were verified and the manufacturer was paid more than $1,500,000.
* * * * *
The maze of tariff laws which has grown up over the years has developed some peculiar situations, and one of the oddest of these involves the Virgin Islands, the insular possession which has attracted many manufacturers in recent years.
One reason that the Virgin Islands is proving attractive to new industries is that under the present laws, manufacturers operating in the Virgin Islands pay an import duty of only 6 per cent on merchandise brought into the Islands for use in manufacturing. Their finished products are permitted into the mainland free of any duty—provided the foreign materials used are less than 50 per cent of the total value.
This quirk in the law has created extreme problems for some American industries, such as the watch industry. For example, a manufacturer in the Virgin Islands will import various watch parts from France or Japan and pay only a 6 per cent duty on these imports. The parts will be assembled into a finished watch, and if the watch meets the requirements fixed by law, then it enters the United States free. In other words, the manufacturer in the Virgin Islands pays a 6 per cent duty on watch parts on which the American manufacturer is required to pay a 50 per cent duty. And this variance extends to other fields of manufacturing.
There has been, in recent years, a growing opposition to the duty differential which is permitted manufacturers in the Virgin Islands. Discussing this situation before Congress in September, 1960, Representative Eugene J. McCarthy of Minnesota voiced the views of many when he said: “In recent months there has been a growing tendency for companies to establish themselves in U.S. insular possessions on a basis that results in their escaping the proper payment of duty on products they wish to import into theUnited States. Section 301 of the Tariff Act of 1930, as amended, was intended to promote the development of employment opportunities in our insular possessions.... (Instead, it) has become an avenue for the avoidance of very substantial amounts of duty....”
The McCarthy argument is disputed by the Virgin Island manufacturing interests, but nevertheless the situation underscores the complexity of the laws by which the Customs Bureau is bound.
* * * * *
In the fourteenth and fifteenth centuries, free-trade zones were common throughout the world. There were no customs requirements, and merchandise moved through these ports with no restrictions. Gradually the free-trade ports disappeared as the various countries imposed tariffs on imports and exports for revenue and for protection purposes.
The nearest thing to the old free-trade port that exists in the United States today is the foreign-trade zone. It is a sort of No Man’s Land which has been described as “a neutral stockaded area where a shipper may put down his load, catch his breath, and decide what to do next.”
There are four of these zones in the United States, located at New York, New Orleans, San Francisco and Seattle. They are fenced and guarded areas into which importers may bring merchandise without payment of duties—excepting prohibited merchandise such as narcotics, subversive or immoral literature, or lottery matter. The merchandise may remain in the zone indefinitely, and once it is there it may be manipulated, processed or manufactured without being subject to any Federal or state controls.
The foreign-trade zones are used for many operations such as assembling machinery, dyeing and bleaching materials, bottling, weaving, printing, extracting oils and other components from raw materials, and for cleaning, grading, sorting, and repackaging materials for a specific market.
It is only when the finished product is removed from the zone that it becomes subject to commodity quotas, commodity standards, labelling and marketing requirements, licenses, fees, controls and taxes that normally apply to all imports. However, if it is to his advantage, the importer may ask for an earlier determinationof the duties and taxes due—before the processing changes the classification of the goods involved.
The foreign-trade zones are intriguing areas because although they are physically within the United States, for all practical commercial purposes they remain outside the United States—reminders of an earlier day when trade through many ports of the world was unfettered.