The US–China Trade War and its increasing impact on trade compliance

The recent announcement from FedEx that the multinational cargo carrier has filed a lawsuit against the US Department of Commerce is the latest salvo in the US-China trade war.

FedEx is alleging that its compliance with the Export Administration Regulations (EAR) is impossible when checking the 15 million packages it distributes per day for items that require BIS (Bureau of Industry & Security) export licenses.

The lawsuit was a response to an apology by FedEx to the Chinese administration in May when it originally blocked the distribution of two Huawei packages. The blocking of the goods came in response to new US legislation that barred the distribution of Huawei products into the US.

The FedEx lawsuit seeks to push back on the checks that the US Dept of Commerce imposes on the company citing in the lawsuit that 'EAR essentially deputises to FedEx the policing of packages and their contents for potential violations… [which] is an impossible task, logistically and economically'.

Whilst FedEx finds itself stuck in the middle between the US and China and their ever-protracted trade war, there are a few interesting themes to note from the lawsuit and the obligations that carriers and others must perform in regard to EAR.

The first theme deals with what FedEx must do in terms of compliance. Screening the shipper and the consignee to ensure they are not embargoed entities is the most obvious. However, FedEx has noted that it cannot screen the goods as stated in the EAR regulation for:

• The export location of the product
• Any inclusion of US technology contained within an item
• The possibility of US origin items

Whilst there is a grain of truth in the fact that FedEx cannot open every single package and physically check it, they are able to screen and monitor the various documents that accompany the shipping of a package.

Document screening remains an important part of the trade compliance operation. For FedEx this is an important business activity, but it has fallen foul of such regulation in April 2018 when BIS imposed a fine for a failure to detect matches in its screening software for entities on an embargo watch-list.

The other theme to uncover within the current situation is the increasing realisation that the world's two biggest economies have potentially conflicting versions of trade compliance. US sanctions are well known but the much-awaited Chinese 'Unreliable Entity List' is still to be unveiled. This list would target organisations that China believes damage Chinese national company interests but to date, it is not known who is on the list or when it will be released. There have been rumours in the press that FedEx could be included.

For multi-national companies who have to navigate increasing compliance obligations, there is now a greater risk in that such compliance, where it clashes and contradicts, has the potential to exclude carriers and other participants from once-profitable markets. For FedEx, the situation is very real in that to remain compliant in the US, it might make it non-compliant in China.

Whilst the current trade talks between the two countries may still be resolved and the differences in implementation of compliance regulations in the US and China might not come to pass, there is still a significant takeaway for companies that was reiterated recently by Wilbur Ross, the US Commerce Secretary.

In recent remarks made in July, Ross highlighted the importance that US enforcement agencies are attaching to export violations. Ross stated that since the beginning of 2017, BIS has:

• Initiated 2,284 export control investigations, increasing 21% in that time
• Added 182 companies to the Entity List, 49 of these are Chinese, which include Huawei
• Completed more than 2,000 end-use checks on technology sales
• Performed 70 criminal prosecutions covering China, Iran, Pakistan and Russia

The remarks by Ross, hint that the current climate will not lessen as the US seeks to act against those who threaten national security.

Therefore, it is imperative that the latest restricted company and commodity watch-lists are adhered to for export purposes. Additions and updates to the Entity List must be adopted by organisations in a timely manner to ensure there is no backdoor weakness in the compliance workflow.

In this climate, any carrier or financial institution operating globally must have, at the very minimum, an effective and robust trade compliance screening program in place. Without it, organisations are exposing themselves to financial penalties and the new threat of possible country-wide market restrictions.

In 2018, the compliance management process was already tough, it appears that 2019 and beyond will get even tougher.

Posted by Byron McKinney, Associate Director Maritime & Trade Product Management, IHS Markit