U.S. Customs and Border Protection Textiles

1. Department of Homeland Security  Customs and Border Protection U.S. Customs and Border ProtectionTextiles Qualifying Industrial Zones QIZ Cairo, Egypt November 2010

2. U.S. Customs and Border Protection (CBP) QIZ Seminar • Topic Outline • Who Are We? • U.S. Textile Industry Statistics • Preference Trade Programs • Enforcement Focus/Concerns • CBP Authorities • Conducting the Textile Production Verification Team Visit • QIZ Requirements

3. CBP • Part of the Department of Homeland Security • Formerly U.S. Customs Service • Part of the Department of the Treasury • Protection of the Borders • Anti-Terrorism at the Ports of Entry and between the Ports of Entry • Controls the Movement of all People and Products Into and Out of the United States

4. CBP • 42,000 Front Line Employees Strong • Patrolling 7,000 Miles of Our Country’s Land Border • Processing $1.7 Trillion in Commercial Imports Annually • Processing 361 Million Travelers Annually • Located at 327 Ports of Entry

5. CBP’s Dual Mission Security Trade Enforcement and Facilitation • Stop Terrorism • Prevent Illegal Entry • Block Drug & Human Smuggling • Prevent Agricultural Disease • Assist with Disaster Relief • Collect Customs Revenue • Process Incoming Travelers and Cargo • Inspect Imports • Stop Counterfeits • Regulate Trade • Enforce Trade Laws

6. CBP QIZ Seminar • Janet Labuda, Director, Textile/Apparel Policy and Programs Division • Manage Three Branches • Textile Operations Branch • Textile Policy Branch • Quota Enforcement and Administration Branch

7. Department of Homeland Security  Customs and Border Protection U.S. Textile Import Industry 2

8. U.S. Textile/Apparel Supplier Countries

9. Apparel Supplier Countries by Value

10. Trade Preference Programs • Unilateral/Bilateral/Multilateral Preference Programs • African Growth and Opportunity Act • Qualifying Industrial Zones; Jordan/Israel/Egypt • Caribbean Basin Trade Partnership Act • Haiti HOPE 1 and 2 and Haiti HELP • Andean Trade Promotion and Drug Eradication Act • Free Trade Agreements (Israel, NAFTA, Jordan, Chile, Singapore, Australia, Morocco, CAFTA, Bahrain, Oman, Peru) • Unique Qualifying Rules for Each

11. Textile Trade Preferences • Free Trade Agreements • South Korea, Colombia and Panama Negotiations Completed • Trans-Pacific Partnership Under Negotiation • (Peru, Australia, New Zealand, Chile, Singapore, Brunei, Vietnam, and Malaysia)

12. Textile Trade Preferences • Qualifying Industrial Zones (QIZ) • Special Provision of Trade within the U.S. Israel Free Trade Agreement • Allows QIZs in Egypt and Jordan • 35% Value Added/Additional Agreement between Egypt and Israel 10.5% Israeli Value Added • Rules of Origin Must Be Met • Direct Ship Rules

14. Textile Trade Preferences • Each Agreement is Different • Different Requirements Must Be Met to Obtain Preferential Access to the U.S. Market • U.S. Customs and Border Protection, By Law, Must Enforce the Requirements of Each Agreement/Program

15. Textile Enforcement Focus • Textiles and Wearing Apparel Designated As a Priority Trade Issue for FY 11 • Enforcement Focus • Origin Fraud; Illegal Transshipment; Quota Circumvention; Inadmissibility of Merchandise • Enforcement of Various Legislative Trade Initiatives and Free Trade Agreement Preference Claims • Protection of the Revenue • 5 Year Enforcement Strategy Submitted to Congress

16. Textile Enforcement Focus • Risks • FTA and other Trade Legislation e.g. QIZ Claims of Preference • $17.5 Billion in Trade Preference Claims out of a Universe of $95 Billion in Textile Imports • China Trade Issues • Illegal Transshipment • Misdescription of Merchandise • Smuggling; Unmanifested Goods; Falsifying Documents • Undervaluation • General Misdescription to Avoid Duties • 47% of Duties Collected Involve Textile Goods

17. Enforcement Authorities/Tools • Use of Textile Production Verification Teams to Visit Foreign Factory Locations • Duty Preference Claims May Be Denied • Penalties Issued to Importers if a Pattern of Non-Compliance Is Detected or Intent to Circumvent the Law or Defraud the Government Is Discovered

18. Enforcement • Why Is Enforcement Important? • Protects the Economic Interest of the Bilateral Trading Partners • Ensures that Benefits Are Received by the Countries that Agree to the Requirements and No Other Country • Supports the Good Faith Negotiation of the Bilateral Agreement • Ensures Access to the U.S. Market if the Goods Are in Compliance with the Agreements Requirements

19. Enforcement Authorities/Tools • Textile Production Verification Team (TPVT) Visits • Visit on Average 12-13 Countries Per Year • Conduct In-Factory Reviews • Determine Production Capacity • Determine If Goods that Entered the U.S. Were Made in the Country as Declared • Determine Whether the Requirements to Claim a Preference Are Met

20. Textile Production Verification Teams (TPVT)U.S. Customs and Border Protection

21. Purpose of TPVT Visits • Ensure Goods Are Not Circumventing the Laws Governing the Importation of Textile Products • Illegal Transshipment to Take Advantage of Trade Preference Programs and Obtain Duty-free Benefits • False Declaration of Eligibility for Duty-Free Benefits, i.e. Goods Assembled in the Country, but Do not Meet the Rules/Requirements Under the Claimed Program

22. TPVT Composition • Import Specialist • Knowledgeable about the Commodity • Classification, Value, Country of Origin; the Way the Goods Are Manufactured; the Importers, Manufacturers, etc. • Criminal Investigator • Knowledgeable about the Collection of Information, Evidence, the Pursuit of Prosecution in U.S. Courts of Law • Other disciplines • Data Analysts • Auditors

23. Department of Homeland Security Customs and Border Protection What Should You Do? Establish Self-Policing Mechanisms • Know Your Industry • What Commodities Are Manufactured • How Are Goods Manufactured? • What Types of Processes Occur? • What Types of Machines Are Used? • What Types of Skills Are Needed? • What Types of Raw Materials Are Needed? • Where Are Raw Materials Obtained • How Much Does It Cost to Produce? • Look at Trade Trends from Year to Year • Old Players/New Players (exporters/importers)

24. Department of Homeland Security Customs and Border Protection What Should You Do? Develop Manufacturer Profiles: • Owners/Managers • Location • Machinery/Equipment • Date Established • Product Line & Capability • Subcontractors • Renew Yearly • Employees • Joint Venture Relationships

25. Department of Homeland Security Customs and Border Protection What Should You Do? • Conducting a Textile Production Verification Visit to the Manufacturing Operation 1. Conduct an Interview with Knowledgeable Staff/Management 2. Conduct a Tour of the Factory Facility Establish Production Capacity 3. Select an Order that Has Been Exported and Trace the Production Process through the Factory’s Books and Records

26. Department of Homeland Security Customs and Border Protection Establishing a Base Line • What Does This Factory Claim to Do? • Cutting? • Sewing/Assembly? • Dyeing/Printing? • Fabric Production? • Woven? Knit? • Garment Manufacture? • Does the Factory Machinery/Skill Sets/Number of People Support the Process?

27. Department of Homeland Security Customs and Border Protection What Should You Verify? Containers • Does the Factory Have Containers on the Premises Waiting to Be Unloaded? • If So, Check What Is in Them. • Fabric? • Cut Components? • Finished Goods?

28. Department of Homeland Security Customs and Border Protection What Should You Verify? • Conduct Regular Inspections of Textile Factory Plant Facilities • Number of Workers • Types of Workers (skill sets) and Machines • Inventory Stock • Overall Factory Organization

29. Department of Homeland Security Customs and Border Protection What Should You Verify?Factory Inspections Production • Employees • How Many Employees Are There? • How Skilled Are the Employees? • How Fast Do They Work? • Do the Employees Specialize? If So, This Generally Improves Their Efficiency.

30. Department of Homeland Security Customs and Border Protection What Should You Verify?Factory Inspections • Raw Materials • Fabric, Thread, Labels • Does the Factory Stock the Materials or Is the Material Brought in by Order? • Who Does the Factory Use As Suppliers? • What Are the Countries of Origin?

31. Department of Homeland Security Customs and Border Protection What Should You Verify?Factory Inspections Raw Materials • Fabric, Thread, Labels • Do They Have the Appropriate Type and Quantity of Fabric/components to Match the Type and Quantity of Merchandise They Produce? • Are the Raw Materials in New and in Good Condition?

32. Department of Homeland Security Customs and Border Protection What Should You Verify?Factory Inspections Machinery • Cutting Tables/Spreaders • Cut Components - Does the Factory Cut Its Own Fabric? If So, Does It Have Patterns and Markers to Make the Components? • Is There Waste/Scraps Resulting From Cutting? (Either in Bags or Floor Depending on Time of Visit)

33. Department of Homeland Security Customs and Border Protection What Should You Verify?Factory Inspections - Machinery • Number • Sufficient for the Production Claimed? • Condition • Are Most Machines in Working Condition? • Appropriateness • Are the Type of Machines Appropriate for the Type of Merchandise Being Produced

34. Department of Homeland Security Customs and Border Protection What Should You Verify? Factory Inspections Machinery • Sewing Machines • Do They Have Enough for Their Claimed Production? • How Many Are in Use? • How Many Are Idle? • Any Specialty Sewing Machines?

35. Department of Homeland Security Customs and Border Protection What Should You Verify? Factory Inspections Machinery • Specialty Machines • Does the Factory Have the Necessary Specialty Machines for the Merchandise They Produce? (e.g. Waistband, Buttonhole) • If Not, Why? • Is There a Subcontractor Who Does This Step? • Otherwise, How Is Production Accomplished?

36. Department of Homeland Security Customs and Border Protection What Should You Verify?Factory Inspections Production • Assembly Area/Line Groups • Is the Production Area Organized in a Logical, Efficient Manner? How Many Production Lines? • Time in Motion Study - Time the Most Complicated Steps in Order to Estimate Daily Production.

37. Department of Homeland Security Customs and Border Protection What Should You Verify?Factory Inspections Finishing Operations • Washing & Drying • Does the Factory Do Their Own Pressing, Washing, And/or Packing? • If Not, Who Does This Operation for Them? • Is There Excess Inventory?

38. Department of Homeland Security Customs and Border Protection What Should You Verify?Factory Inspections Production • Does the Factory Maintain a Record Keeping System to Track What Is Produced on the Factory Floor?

39. Document Review and Verification • Select a Shipment that Has Been Exported and Verify the Steps Using the Factory’s Books and Records

40. Department of Homeland Security Customs and Border Protection Documents and Records • Sufficient Production Records Must Be Provided to Establish Country of Origin • Records Should Be Understandable • The Steps of Production Should Be Clear • A List of Production Machinery Used in the Factory Is Needed

41. Documents and Records • Where to Begin • Establish a Systematic Approach to the Review • The Purchase Order—Review What the Customer Has Ordered from the Factory/Manufacturer • Quantities • Types of Goods • Styles • Value of the Order • Delivery Dates • Special Instructions from the Buyer

42. Department of Homeland Security Customs and Border Protection What Should You Verify?Document Review • Factory Files • Review All Files Relating to the Production of the Merchandise: • Purchase Orders • Confirmation of Orders • Correspondence - Letters, Faxes, Etc. • Production Records • Shipping Arrangements and Payment • Factory Inspection Reports by Customer or Agent • Export Invoices and Packing Lists • Payment Records

43. Department of Homeland Security Customs and Border Protection Documents and Records • Type of Work Performed Should Be Traceable Through the Records • Must Reflect the Ordered Style and Quantity of the Shipment • Timeframes Should Make Sense • Work Performed Outside of the Factory by Subcontractors Should Be Documented

44. Department of Homeland Security Customs and Border Protection Documents and Records • Types of Records • Payments for Raw Material Purchases • Export Documentation/Shipping Records • Contracts/Subcontracts • Payroll Records • Cutting Records • Assembly Records • Letters of Credit • Subcontracting Records • Customs Clearance Documents

45. Department of Homeland Security Customs and Border Protection What Should You Verify?Document Review Raw Materials • Invoices/Bill of Lading for Raw Materials, Transportation Document • Entry Documents for Raw Materials (Receiving Records) • Verify Type of Raw Materials (Fabric, Cut Components, Partially Assembled Merchandise, Etc.) • Verify Where Raw Materials Are From (Imported, Domestic, Both)

46. Department of Homeland Security Customs and Border Protection What Should You Verify?Document Review Raw Materials • Verify the Shipping Documents • Verify When Imported or Received in Relation to Production of Order • Verify Fabric Shown Was Actually Used in Production • Does the Factory Store the Fabric in Bulk or Just Import/Store by Order? • Who Pays for the Fabric? (Factory, Customer)

47. Department of Homeland Security Customs and Border Protection What Should You Verify?Document Review Production • Contracts/Subcontracts • How Busy Is the Factory When You Visit? • What Are They Currently Working on? • When Do They Expect to Finish Current Production? • What Orders Are Waiting to Be Produced? • Compare Previous Few Months Total Production Against Claimed Production (Higher? Lower? At Capacity?) • Are Subcontractors Used? If So, Verify Production of Subcontractors.

48. Department of Homeland Security Customs and Border Protection What Should You Verify?Document Review Production • Production Time Line • Check Whether the Production Time Line Is Reasonable Based on the Factory’s Production Capacity: • When Was the Order Received? • When Did Production Start/finish? • Can the Factory Produce in That Time Frame? • Were Other Orders Being Worked at the Same Time? • What Was Total Daily Production (All Orders) in That Time Frame?

49. Department of Homeland Security Customs and Border Protection What Should You Verify?Document Review Production • Cutting Tickets/Cutting Records • Sewing Tickets/Sewing Records • Verify Daily Cutting and Daily Sewing Records • Compare Daily Records Against Summary Records

50. Department of Homeland Security Customs and Border Protection What Should You Verify?Document Review Production • Cutting Records • Sewing Tickets/Sewing Records • If Workers Are Paid by the Piece, Verify Amount Paid to Worker Against Payroll Records. • If Paid by Hourly Rate, Verify Hours Paid Against Time Cards.