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Chilton's Distribution, March 1987 v86 p10(5)

The maritime minefield; the seas separating exporters from foreign markets are full of obstacles, and the biggest booby trap is pre-shipment inspections. E.J. Muller.

Full Text: COPYRIGHT Chilton Co. 1987

MARITIME MINEFIELD

Wendy Moore, customer service specialist for CD Medical Inc. in Portland, Ore., learned recently she'd be pulling double duty due to a company reorganization. She now has to handle the exporting of dialysis machines, the most crucial part of the firm's modest overseas business.

It was when Moore attended a class to brush up on export documentation that she first learned about "pre-inspection" of shipments. The instructor, she recalls, said simply, "You'd better add $500 to your quote and five weeks more lead time if you're shipping to a country that employs a pre-inspection service."

If that mindset has filtered down to basic export classes, the battle currently raging against pre-inspection of export shipments may already be lost. And that would be devastating news to thousands of U.S. exporters, who presently see pre-inspection of goods as the biggest floating mine in an ocean of obstacles.

Pre-inspection of exported goods, performed at the site of origin, is nothing new. In fact, the organization that has become synonymous with it, the Swiss-based Societe Generale de Surveillance (SGS), has been operating for more than 100 years, providing "quantity and quality" inspections for international buyers in all corners of the globe.

What's put the fat in the fire, however, is the inclusion of pricing information in current pre-inspection criteria. Critics of pre-inspection assert that unless the agencies performing this service are made answerable to a higher authority, they ultimately will be able to set international pricing standards for a host of commodities.

Says Anthony Barone, director of international traffic for Warner-Lambert, current president of the National Export Traffic League, and one of the most outspoken critics of pre-inspection, "If you've made a deal to sell something at $4 a bottle, SGS can come in and say, 'Sorry, but that price is not acceptable. It must be $3.10 a bottle.'"

If an "acceptable price" cannot be agreed upon, the inspecting agency can prevent shipment. Not surprisingly, free-enterprise, fair-trade proponents see something drastically wrong with this.

Cash Flight

Before drawing the battle lines in this escalating trade war, some background is needed. The original purpose of pre-inspection, as performed by SGS (two other agencies, caleb-Brett/Intertek and Bureau Veritas, also provide the same service) is to determine, in the words of SGS spokesman Willis Bussard, "that what's in the purchase order is what's actually being shipped." If you're buying bulk grain from China, the SGS office there will inspect it to ensure compliance with your order. It's a valuable service.

But back in 1965, the African republic of Zaire, formerly the Belgian Congo, decided to use SGS in another way: cracking down on the "illegal" flight of capital. The government of Zaire felt that some foreign importers, eager to get money out of a country with a treacherous currency exchange, would over-invoice and end up collecting more than the value of what was being sold. Or, to avoid heavy import duties on some commodities, an importer might under-invoice the cost of the goods.

Zaire asked SGS to develop a program that would determine the "reasonable value" of goods being purchased overseas. The idea gradually spread to many developing African nations, and five years ago Surinam became the first country in the Western Hemisphere to employ SGS for the same purpose. It has rapidly spread throughout South America, with the unspoken understanding that, in addition to pricing "protection," SGS allows many of these countries to circumvent widespread Customs corruption on the receiving end. The greatest example of its cleansing effect is Indonesia, Bussard indicates. There, he says, SGS has become the Customs Service and has vastly improved a situation that at one time was so sordid, "every kid in Indonesia wanted to grow up to be a Customs inspector."

Building An Empire

What scares exporters about SGS is that the agency has found itself in a position -- either by design or fortuitous accident -- where it is answerable to no one. Groups such as the Ad Hoc Coalition Against Pre-Inspection Agencies are scrambling to prove that the whole concept of pre-inspection must violate some international trade treaties. In the meantime, pre-inspection agents continue to say, "We're just doing our job," deflecting criticism toward the countries which employ them. And shippers continue to complain -- loudly.

"SGS is building an empire," declares Sergio Maddalena, manager, international traffic for Witco Corp., the New York-based oil company which does business in four countries utilizing SGS' services -- Venezuela, Ecuador, Jamaica and Indonesia. (For a complete list of client countries, see the box at left).

"They're in a position to compare our prices with Texaco's and determine what's 'fair and reasonable,'" adds Maddalena, "and apparently there's nothing we can do. If you don't comply, you won't be able to ship to that nation."

Beaten to a Pulp

While the pricing issue obviously is the most critical in the overall international trade picture, other aspects of the pre-inspection controversy have had serious repercussions on the daily lives of T&D departments.

Vivianne Silverman, corporate traffic manager for Fritzsche, Dodge and Olcott, a unit of BASF which makes flavorings for a wide variety of spices, beverages and dry food mixes, claims that this "big political game" has forced restructuring of her department. "We are buried by clerical work," she says, "and not doing as much business as a result."

The extra paperwork involved in complying with SGS is what boils the blood of most exporters. As Henrietta Earle, manager of transportation, import/export, for Kraft Inc. indicates, "We waste six weeks in paperwork before we're even ready to have SGS send out an inspector - and this is for a shipment to our own people at Kraft Venezuela."

The following Kraft inter-office memo from transportation analyst Jim Fallucco to Earle delineates what Earle considers the "normal process under SGS":

Weeks 1-2: Supplier requests SGS Control Form. This is completed and returned with supplier' invoice showing C & F costs.

Week 3: SGS needs copy of import license from SGS/Venezuela.

Week 4-5: SGS contacts its local agent to arrange for inspection.

Week 6: Supplier waits for clean certificate in order to ship.

It Ain't Cheap, Either

A cost breakdown of SGS compliance was sent to DISTRIBUTION by John W. Borman, export distribution and traffic manager for the McCord Gasket Corp., Wauseon, Ohio. Borman states that "on the average it takes us half and hour to fill out the SGS request for inspection forms, make copies and mail them. The average time spent with an inspector for each shipment is another half an hour. If the time was costed out you could say our additional expense is $25 to $30 per shipment.

"I am sure this causes about the same extra expense for our freight forwarders," adds Borman. "Most of the expense is borne by our customers; they end up paying SGS in one way or another. Inspectors travel at least 100 miles, one way, to inspect our shipments. Some of the time they have other stops enroute. When you figure mileage, pay for the inspectors and administrative costs for SGS, and add their mark-up, the bill must be in the vicinity of $500 for a minimum order of $5,000."

Paul Chin, director of export and import services for Eveready Battery Co. in Purchase, N.Y., estimates that in 1986 his company was subject to between 600 and 700 SGS inspections. "Fiasco" and "atrocious" are two of the milder words Chin uses to describe the pre-inspection process.

"Every time a shipment is delayed, production is delayed," Chin maintains. He also complains that SGS subcontracts to part-timers who have insufficient expertise to perform the checks, and that there is little consistency in what the agency requires on the pro forma invoice the exporter must present, along with a price list, for each shipment.

"They want a breakdown of all charges, sometimes on an FOB basis, other times CIF," says Chin. "We don't want to reveal that. We ask, 'Where's the mandate for this?' but can't find out."

An SGS spokesman told DISTRIBUTION that the pricing investigation varies according to the client government. "It's not going to always be the FOB price, or the CIF price," the spokesman says. "We need to know what are the additional 'acceptable' charges that receiving countries will accept. We look at the basic price, the freight cost and any other charges--if it has to be paid in foreign currency, then we have to determine if it is 'reasonable.' We have found that there are instances of overcharges on freight."

Vivianne Silverman relates that coping with SGS has required drastic measures: rewriting four job descriptions; adding two staff members; reevaluating projected sales to market areas requiring SGS inspection; determining what percentage of time is dedicated to SGS compliance; creating a formal proposal to reorganize her department; and, finally, shifting one person--at a $5,000 per-year salary hike--to full-time SGS paperwork duty.

"We've spent a long time trying to develop a traffic module and computerize everything--and now we have to contend with this," she sighs. "I'd advise any companies that have a serious involvement in countries using SGS to consider reorganizing their international departments to ensure proper handling of the burden--and to take a good look at whether or not it's worth it."

SGS's View

Willis Bussard, hired by SGS Control Services to act as a "point man" for the agency during this escalating controversy, claims that pre-inspection serves a few simple functions: saving foreign exchange for its client nation; preventing the importation of restricted items; ensuring that goods are not second-hand or of inferior quality; and "giving an opinion of the normal price of goods to determine dutiable value of imports."

He asserts that SGS is no really accountable for what shippers see as an unfair burden. "It's now a government requirement of these countries, either by presidential decree or central bank authorization," he notes.

"Some American exporters felt it was aimed at them. Actually, these requirements apply to any country," Bussard says. "There is no bias against the U.S. But if they feel the burden is too restrictive, then they have a business decision to make."

Bussard says that he understands the consternation shippers feel when their pricing is revealed to an outside agency, but he claims that "SGS's integrity and confidentiality have been established over 108 years. The pricing information goes only to the importer and stays within SGS files...shopping is not the purpose that we are hired for."

Don't tell that to Warner-Lambert's Tony Barone. To him, SGS "has sold these developing nations a bill of goods. They've gone in there and said, 'We're going to save you all some money by knocking down exporters' prices.' Their reasoning--that it controls capital flight--is not valid. If these countries wanted to controls 'fraudulent' imports, they could employ a legitimate professional customs service of non-nationals." Barone tersely adds that "Nobody says United States Customs is a trade barrier."

Bussard holds the line, however: "The reasoning behind pre-inspection is something exporters can't really argue against. The process is being objected to because it has been laid down over the existing system." He claims that "most of the companies I've talked with have learned how to live with it."

No Middle Ground

There are plenty, however, that Bussard has yet to canvas, if the growing membership of the Ad Hoc Coalition Against Pre-Inspection Agencies is any indication. The responses that continue to come into the U.S. Trade Representative's office from a survey it is conducting on the subject also indicate that "living with it" is easier said than done.

According to Florizelle Liser, director of customs valuation and import licensing policy at the USTR's office, "SGS can't dictate price after an agreement is struck between buyer and seller. We don't believe that any company has the right to set world prices," says Liser. "And SGS hasn't given us a good answer yet on why it should be able to do it."

But in the meantime SGS continues to do it, because it exists in a sort of diplomatic vacuum between the U.S. and its trading partners. The USTR's survey was intended to gauge industry response to pre-inspection, but there has been much grousing about its credibility. Tony Barone describes it as a "put-up job" because SGS worked with the USTR in formulating the questionnaire. Also, the original survey was a hefty 35 pages; that didn't help ensure a healthy response.

Liser, however, is refreshingly frank in her views of the SGS dilemma. "Why do they have to check every shipment?" she wants to know. "Isn't sampling a more logical way to go? If a company is shipping regularly, why does every shipment have to be checked? That's the way se do it--we don't go onto the docks in other countries to inspect their shipments."

Take Our Problems--Please

The root of the controversy, Liser maintains, is that many of the countries employing a pre-inspection agency "have got a problem, and they've decided to export it to the U.S." Some of those countries, like the Haitian government of General Namphy, have indicated--but not yet confirmed--that they will cease pre-inspection regulations. Korea had employed pre-inspection, but dropped it when it became a member of the customs valuation committee of the General Agreement on Trade and Tariffs (GATT). Others, such as Venezuela (which employs three different inspection agencies), "don't want to talk about it," according to Liser. "Some countries know they're in a precarious situation," she adds. "Others remain very belligerent."

Liser is hopeful that a GATT meeting in May will produce some international guidelines on pre-inspection. That may not satisfy an exporter such as Barone. "The goal isn't to make pre-inspection more palatable, it's to eliminate the practice altogether," he says. But according to Liser, "We're past the point of being able to ban it."

She notes that the International Trade Commission is looking for detailed information from the export community, and that a new, shorter version of the USTR survey is going out to a "computer-selected" list of exporters. "Send whatever you can," she advises concerned shippers. "It's better to have 5,000 half-filled out surveys than 50 complete ones."

In the end, it probably will take some laborious legislative work, or diplomatic leverage, to resolve the issue. As an ironic footnote--sure to draw a laugh from U.S. exporters--Liser mentions that Switzerland, home base of the Societe Generale de Surveillance, expressly forbids pre-inspection of its exports.