Transshipments: An International Trade Challenge. Are punitive damages the right approach to addressing transshipments? be sure to explain why (support your answer).
Case 3-1 Transshipments: An International Trade Challenge James Crane, a customs broker at Ship-Modal Transportation in the Port of Norfolk, was about to call a customs officer. Something about a household shipment from Germany was odd: it contained just toys, too many toys. Box after box revealed Thomas the Tank Engine, Barbie dolls, and Ninja Turtles. No beds, sofas, and other items listed in the bill of lading. They were shipped in new, large boxes, with prominent "Made in China" labels. The port agent called in a customs officer to look over the paperwork. Together, they looked over the bill of lading from a managing agent in Hamburg, Germany. The shipper was a rep- utable firm with offices worldwide and headquartered in the Czech Republic. The shipment was consigned to the order of a private individual living in the Norfolk, Virginia, area. The ocean carrier was Eastern Arabia, and the port of loading, Bremerhaven, Germany (the port of receipt, Hamburg, CFS). The goods were in one crate, and the description of goods stat- ed: "Used Household Goods, HS CODE: 99909999." All seemed to be in order, except for the contents: new toys, in original boxes, rather than used household goods.The customs officer contacted the consignee, the private individual who was sup- posed to pick up the shipment. He arrived at the port, filled out the paperwork, and had the shipment picked up for delivery to a warehouse. The Department of Homeland Security fol- lowed the trail of the shipment and identified a distributor who eventually delivered the goods to distributors of counterfeit goods. On debriefing, they found that they were deal- ing with a transshipment from China. The Chinese manufacturer had used this distribution venue to hide the products' origin, to avoid high tariffs and quotas imposed on Chinese products and to suspicion that the goods might be counterfeit. Transshipments-also known as laundering trade-are not unusual. When Cambodia started shipping large quantities of garlic to the European Union, analysts at Europe's Olaf antifraud office questioned it. The garlic was Chinese, shipped through Cambodia to hide its origin and avoid high EU tariffs and strict quotas. Chinese garlic pro- duction has tripled since 1995 to 13 million tons a year, but its EU export quota is only 37,480 tons. Once the quota is used up, the tariff paid climbs to 209.6 percent, up from 9.6 percent. The EU agent dispatched to Cambodia found no increase in local produc- MOLPUShu tion; soon thereafter, Italian and U.K. customs found that a Taiwan trading company had shipped 3,000 tons of garlic from Qingdao, China, to Sihanoukville, Cambodia, and after spending two days in port, the garlic was re-exported to Naples, Italy, and Felixstowe, in the U.K. The scheme cost the EU roughly $5 million in lost tariff fees. U.K. and Italian authorities charged the importers with fraud. Subsequently, EU officials discovered 43 operations transshipping garlic from China, with countries used as conduits including Jordan, Russia, Serbia, Turkey, the Dominican Re- public, and the Philippines. The EU estimates transshipment of garlic alone has cost $80 mil- lion in lost tariff fees in the past five years. At stake are also jobs in domestic industries- from shoes to food-under threat from low-cost competition from Asia. In another example, the United States enacted a stiff tariff on Chinese honey after U.S. producers complained that the Chinese were dumping honey (selling it below cost) on the U.S. market. Remarkably, honey imports from other countries not known for their bee populations spiked after these tariffs were imposed. For example, Malaysian beekeepers have the capacity to make 45,000 pounds of honey a year, but they exported 37 million pounds a year to the United States. Laboratories established that, without a doubt, this honey originated in China. Chinese products are particularly scrutinized by the United States and the EU, which have imposed increasing numbers of quotas and punitive tariffs to combat Chinese dumping (i.e., pricing of goods below cost to secure market share). Another reason the goods are scrutinized is safety: China manufactured every one of the 24 types of toys recalled for safe- ty reasons in the United States. Examples of safety violations of products made in China abound: A fake eyeball toy was recalled after it was found to be filled with kerosene; toy drums and a toy bear were recalled because of lead paint, and an infant rattle was recalled(i.e., pricing of goods below cost to secure market share). Another reason the goods are scrutinized is safety: China manufactured every one of the 24 types of toys recalled for safe- by reasons in the United States. Examples of safety violations of products made in China abound: A fake eyeball toy was recalled after it was found to be filled with kerosene; toy drums and a toy bear were recalled because of lead paint, and an infant rattle was recalled because it was a safety hazard. International Marketing Ge -111- Part 2 Chapter 3 -112 International Trade: Institutional Barriers and Facilitators China has a network of brokers that bypass Western tariffs by shipping goods through other countries. Their websites boast of sending steel, aluminum, solar panels, and event stainless steel sinks to Europe and the United States while evading tariffs. Their activi- ty is particularly intense now, after the U.S. imposed stiff tariffs on steel and aluminum in 2018. Transshipments are not just a Chinese phenomenon. In the EU, authorities found evidence of transshipment for go percent of the 91 products subject to the bloc's antidump ing tariffs. In fact, customs agents in both the United States and the EU found that trans- shipment rings sell everything from shoes to cigarette lighters, to energy saving light bulbs. The most sensitive of all is food. Last year, the EU reported 84 instances of food trans- shipped from China, including duck, chicken, beef, and milk. The agents are concerned that these transshipped goods could allow unsafe or contaminated foods to leak into food chains. Even though transshipment is illegal, it poses a major challenge for law enforce- ment; as in the case of the Norfolk shipment, the goods tend to carry documentation that looks legitimate. Sources: The case is fictitious; sources used are: Keith Brandsher, "Tariff Dodgers Stand to Profit Off U.5.-China Trade Dispute," The New York Times, April 22, 2018, accessed at https://www.nytimes.com/2018/04/22/ business/china-trade-tariffs-transshipment.html on May 17, 2018. Peter Andrey Smith, "Food Detectives on a Tough Case, The New York Times, January 19, 2015, accessed at http://www.nytimes.com/2015/01/20/science/a-lab. is-trying-to-keep-china-from-dodging-us-tariffs-on-honey.html?_r=o on May 8, 2018; John Miller, "Why Some Chi- na Exports Are Taking Illegal Detours," The Wall Street Journal, May 25, 2007, Section B, p. 1; Eric S. Lipton and David Barboza, "As More Toys Are Recalled, Train Ends in China," The New York Times, June 19, 2007, At. Analysis Suggestions: 1. What are the reasons behind transshipments? Address them from the perspective of U.S. law enforcement officers and from the perspectives of Chinese manufacturers. 2. What types of barriers to trade are transshipments attempting to bypass? 3. Are punitive damages the right approach to addressing transshipments? Explain
