Transshipping’s Disadvantages

Whenever the word “transshipping” comes up, I’m instantly reminded of the old football maxim regarding the forward pass that states “three things can happen ... and two of them are bad.” This is because transshipping, although generally considered a legal term, also carries a negative connotation because of its known use as a means of purposely evading certain trade laws or regulations.

The Dictionary of International Trade (World Trade Press) defines a transshipment as: “The transfer of merchandise from the country-of-origin to an intermediary country prior to shipment to the destination country for purposes of 1., achieving a lower transport cost; 2., legally or illegally achieving new country-of-origin status for the merchandise; or 3., circumventing the foreign trade policies of the country-of-origin or the country of destination.”

But even when the intentions are purely legitimate, transshipping can still be fraught with costs, time and risk that need to be fully recognized, weighed and accepted before proceeding with this option. For example, one area that I continue to witness a high degree of “dysfunctional” logistics planning associated with transshipping is with foreign-sourced material shipments destined to production plants in Mexico that are routed through the United States.

I say dysfunctional because while this type of routing is very popular with traffic managers due to the abundant capacity, options and low freight rates that can be found to U.S. ports, I typically find those transportation departments have failed to invite trade and customs personnel into the planning process.

The result? A shipment still hundreds of miles from its destination in Mexico, but now with an additional international border to contend with that can add significant time, cost and regulatory exposure.

Once the transshipment arrives in the U.S., it has just two options with regard to navigating U.S. Customs. The first is to move the goods under Customs bond as either an Immediate Exportation (“IE”) from the original port of arrival, or as a Transportation & Exportation (“T&E”) movement to a second place of export or foreign trade zone. An IE transfer to another flight would be preferred because this reduces the freight’s handling (risk for damage/loss) and transit time, whereas a T&E simply moves the shipment to another U.S. location.

A forwarder’s service fee for filing the transportation entry alone often can equal or exceed the price difference for an available direct flight. When the second leg is via overland delivery, the entire process easily can add days to the door-to-door transit time with little option to expedite should a plant suddenly find itself in a line-down situation. 

The second option is to enter the shipment through U.S. Customs as domestically cleared merchandise, but, this, in my opinion, should never even be a consideration unless there is a very compelling reason to do so. For starters, this now obligates the company to be legally accountable/responsible to the U.S. government for filing an accurate U.S. Customs declaration, together with potential penalties for non-compliance.

These shipments now become vulnerable to a multitude of potential delays related to chasing down missing or incorrect invoice data elements, or documentation in support of other government agency admissibility requirements.

You now also run the risk of a Customs examination and the further potential costs and delays should any discrepancies be identified. Then there’s import duty/tax. In one case, a company had no idea that over a three-year period, the duty bill for its transshipping program had grown to seven figures. While this certainly makes it the perfect candidate for a duty drawback recovery operation, this comes with its own set of costs and risks, starting with a statutory 1 percent reduction of the funds eligible for recovery, a recovery-based commission paid to a duty drawback broker, as well as the cost of the money itself for having been tied up over this period.

And, as with any duty avoidance/recovery program, it will be subjected to a higher level of government scrutiny and regulatory audit, thus requiring additional internal oversight and governance.       

In summary, when conducting side-by-side comparisons between direct-ship and transship options and capturing and comparing both options’ respective touch points, time, costs and risks associated with each, one will consistently find transshipping to ultimately be more expensive, take longer to deliver, and hold greater risk for additional costs and delays. And with most companies today running just-in-time inventories, few can afford to gamble on not having any trouble with transshipments.  

Jerry Peck is a licensed customs broker and Global Trade Management expert with more than 30 years experience in regulatory compliance and GTM optimization solutions. Contact him at 469-235-5229, or at wmjerrypeck@gmail.com.

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