The China-US Textile Agreement And Verifications

It is the purpose of this Act and the amendments made by this Act to increase and broaden the scope
of certain penalties relating to illegal imports and cargo theft so as to enable the Bureau of
Customs and Border Protection of the Department of Homeland Security to effectively deter
commercial fraud in the United States, particularly concerning textile and apparel products.
Section 659 of title 18, United States Code, is amended in the fifth undesignated paragraph, by
striking one year and inserting three years.

China’s Circumvention Problem

Now that an agreement has been reached, Chinese textile manufacturers face some very
interesting issues. The proposed increase in fines and prison terms is just another issue with
which to be concerned. There are others. First, in paragraph five of the Memorandum of
Understanding (MOU) between the Governments of the United States of America and the People’s
Republic of China concerning Trade in Textile and Apparel Products, there is a clearly stated
obligation to demonstrate non-circumvention of the Agreement. The United States and China will
cooperate in enforcing the agreed levels and in preventing circumvention of the agreed levels by
transshipment, rerouting, false declaration concerning country or place of origin, falsification of
official documents, or any other means. If the United States has evidence that circumvention has
occurred, it may charge the actual quantities of goods that entered the United States in
circumvention against levels of those goods. Second, paragraph six requires electronic data
transmissions which are further defined in Annex III. The movement to mandated electronic
transmission is also indicative of concern over controls and circumvention.

To assist in the administration of this Memorandum, the United States and China will
establish an electronic visa system. Annex III of the MOU defines the purpose and content of the
electronic visa (ELVIS) transmission as a direct electronic communication with the U.S. Customs and
Border Protection (CBP) that describes the shipment. China is obligated, as of January 2006, to
issue an ELVIS transmission for each shipment of products manufactured in China, shipped to the
United States, and that fall within agreed- upon categories regardless of the products value.

The ELVIS transmission shall certify the product’s country of origin and shall authorize the
United States to charge the shipment against any agreed levels within the Memorandum. The United
States recognizes that China shall be free to issue additional documents, such as paper visas or
certificates of origin. Each transmission shall originate from China and include the Visa number,
date of issuance, correct categories or part-categories, quantities, units, date of issuance, or a
Manufacturer Identification Code (MID). The United States cannot permit an entry if the ELVIS
transmission is not consistent with the information supplied by the importer. Finally the last page
of Annex III reveals that if hard documents are also used, CBP can hold the shipment until such
time as the paper documents can be confirmed to be authentic. The MID has been further clarified by
CBP. The Mid is required for all entries in which a CBP Form 3461 and CBP Form 7501 must be
submitted to CBP to make entry. This would apply to both formal and informal entries. For textile
merchandise identified in 19 CFR 102.21 (b) (5) this MID must be calculated from the manufacturer
that performs the origin conferring process. If an importer cannot provide the name of the
manufacturer that performed the origin conferring process, the goods can be excluded when there are
admissibility concerns, i.e. if the importer cannot provide the name of the manufacturer who
produced the goods when these goods are subject to quota/visa admissibility issues. The United
States has, in effect, established what means it could to prevent transmission, rerouting, false
declaration of country of origin, and falsification of documents, all in an attempt to prevent
circumvention of the agreement. There will likely be claims of transshipment and rerouting anyway.
Additionally, there will be an onerous burden on China to prove non-circumvention, and there will
likely be discrepancies in paperwork or electronic transmissions. However, there is a way for China
to avoid all or most of these potential problems. China can and should use a class of smart
boxes/smart containers to defend themselves against circumvention claims.

The Use of Smart Containers

While there is little agreement on defining a smart container because of a lack of
international standards, there is agreement on what a smart box can do. The container security
market is now better defined with the entry of the giants like Maersk/IBM; GE/NKY; and SAVI. What
this can do for China’s textile industry is quite clear. In our view and in the view of others, a
smart container must perform at least seven clearly defined operations.

1. A smart container must be a part of a system approach necessary to coordinate all facets
of the supply chain process to insure visibility and security. That begins at origin. Therefore,
the container must be able to record the identity of the person responsible for monitoring the
stuffing and securing of the container at the foreign point of origin, a responsibility set forth
in the World Customs Organization (WCO) standards adopted by 165 nations (99% of the trading world)
and the United States.

2. There should be an electronic capturing of certain trade data that will link to other
documentation. Examples would be the container number, or booking number. One could even include
portions of the Inward Cargo Declaration, Customs Form 1302.

3. Consistent with C-TPAT requirements to conduct a seven-point inspection of the container,
a smart box should be able to detect a breach anywhere into its body, not just through the doors.

4. The container should be able to report a breach in real time or close to real time with
the date, time, and geographic location of the breach.

5. The smart container is one that can give its geographic position throughout the supply
chain when queried, or automatically give its position if it is off its designated course of travel
in controlled environments.

6. The container must recognize and record the identity of the authorized person opening the
container at destination.

7.Finally, the container should be adaptable to different sensors and be able to communicate
with or be adapted to divergent logistic software packages used by shippers and carriers within the
supply chain.

China’s Smart-Container Defense

Specifically in the case of the MOU, there will be likely be accusations and claims by
China’s U.S. textile competitors and perhaps even by CBP of transshipment, re-routings, and other
forms of circumvention of the Agreement. However, these accusations may be precluded or certainly
defended by China’s use of smart containers. Six defenses or benefits become obvious. First, China
could demonstrate the integrity of the stuffing process (container loading) at origin by
electronically capturing the identity of the person supervising the stuffing. Second, the ELVIS
transmission could take place at origin through the container itself and go directly to CBP and to
the U.S. importer simultaneously. Third, since a smart container can detect a breach anywhere into
its body, China could demonstrate that the container was not surreptitiously breach or opened after
if left its Chinese origin all the way to its U.S. destination. Fourth, since smart boxes are
easily tracked (at least by one smart-system manufacturer) the Chinese shipper could demonstrate
the actual movement of the container from origin in China to destination in the United States.
Other than sea carriage, the tracking could even indicate if the container moves too far off of its
intended route. Fifth, there would be transparency with respect to who opened the container in the
United States by electronically capturing the identity of the authorized person at destination.
Sixth, depending on the smart-system manufacturer, a third-party worldwide monitoring facility
would serve as a neutral party in verifying the itinerary of the containers international voyage.
Finally, the smart container would be usable or adaptable to different logistics packages of
exporters, importers, and government.In other words, the use of smart-box technology will offer a
defense for China and even gain them preferential treatment provided by green lanes or facilitated
clearance and movement through CBP at U.S. seaports. In fact, China would gain not only the
circumvention defense, but also gain a business advantage in the process. Additionally, China
International Maritime Containers (CIMC), one of the largest, if not the largest container
manufacturers in the world, is in China. Therefore, the costs of producing a new class of smart
containers or retrofitting currently-used containers would be less costly for the Chinese textile
manufacturers. In summary, the MOU brings with it the need for China to defend itself against the
expected claims of transshipment so often voiced by entities within the U.S. textile industry and
to comply with the new electronic demands stipulated in the Agreement.

Both may be accomplished with the use of smart-box technology while at the same time its use
can provide a competitive edge in moving through the international supply chain increasing the
profit margin of the firm.

Editor’s Note: Dr. James Giermanski is director, Centre for Global Commerce, Belmont Abbey
College, Belmont,N.C.; and chairman, Powers International Inc., Belmont.

October 17, 2006