International Trade: Observations on U.S. Government Efforts to Address Textile Transshipment
Published: 2009-06-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: This testimony provides GAO's perspective on the issues associated with textile transshipment. It is particularly important in the current economic environment that the United States does everything it can to ensure that U.S. laws regarding the entry of illegal goods are fully enforced at the U.S. borders. Effective monitoring of textile and apparel imports are also important because duties on textile and apparel products account for a significant share of U.S. duty collections. However, this enforcement takes place in the challenging and busy environment of U.S. ports of entry - - in fiscal year 2008, there were nearly 29 million trade entries processed at more than 300 ports of entry throughout the United States. This testimony will summarize key findings from our prior reports on (1) U.S. government efforts to enforce laws related to imports of textiles and other goods, including transshipment, and (2) the revenue implications of these efforts, as well as discuss the recommendations we made to improve those efforts. GAO's last report on the subject of textile transshipment was published in 2004 and there have been many changes in world trade and in customs enforcement since that time. However, we have consulted with Customs and Border Protection (CBP) since that report was issued on the status of their response to the GAO recommendations to improve that system. In addition, we have completed additional studies on customs enforcement issues, which provide important insights into the challenges CBP faces as it addresses textile transshipment. One of those reports covered the in-bond system, which was a key subject in the 2004 report on textiles, and a second is on CBP's ability to maintain an emphasis on revenue such as duties collected from textile and apparel imports. In addition, we have also completed numerous studies on intellectual property enforcement by CBP and other U.S. agencies, and there is considerable overlap between those efforts and textile enforcement efforts.
section_title: What GAO Found
paragraphs: Our prior reports identified three key challenges to effectively addressing textile transshipment. First, in 2004 we found that CBP's Textile Production Verification Team reports were not always finalized and provided to CBP ports, other agencies, or foreign governments for follow-up in a timely manner. CBP adopted our recommendation to improve the timeliness of this follow-up. We also found that information from overseas Customs Attache' offices and cooperative efforts by foreign governments can provide important information for port inspections. Since the time of our report, CBP has increased the number of attaches in foreign ports to 20 in 2009. In addition, ICE has also increased its overseas personnel to over 50 in 2009. The in-bond program creates the risk that importers can circumvent trade rules, including those applying to textile imports. To facilitate trade, the U.S. customs system allows imported cargo intended for either U.S. or foreign markets to move from one U.S. port to another without being assessed duties or quotas and without officially entering U.S. commerce. This cargo--referred to as an in-bond shipment, requires a responsible party to be covered by a CBP-approved bond and to agree to comply with applicable regulations. Some CBP port officials have estimated that in-bond shipments represent from 30 percent to 60 percent of goods received at their ports. In our original report on textile transshipment and in a later review, we found that CBP's ability to assess and manage the risks of the in-bond cargo system was impaired by both (1) the limited information it collected on in-bond cargo and (2) the limited analysis it performed on available information. CBP was not able to tell us, for example, the extent of the system's use, what products are shipped in-bond, or what shipments are expected for entry (and thus expected revenue collection from applicable trade duties) at inland ports. In reviewing the in-bond system, we also found that CBP had failed to perform basic analyses of available information. CBP was not able to tell us, for example, the extent of the system's use, what products are shipped in-bond, or what shipments are expected for entry (and thus expected revenue collection from applicable trade duties) at inland ports. Despite prior audit recommendations, important management weaknesses persisted in CBP's tracking of in-bond cargo, with the result that CBP still does not know whether in-bond cargo shipments of greatest security or revenue interest are in fact entered into U.S. commerce or exported as required. In particular, CBP continued to have high numbers of open in-bond transactions with uncertain disposition. In addition to needed improvements on specific programs, we also found that CBP had to find a way to better balance security and important trade functions such as revenue collection. Although CBP's priority mission relates to homeland security, it collected more than $34 billion in fiscal year 2008, making it the second largest revenue generator for the federal government. Because of the high concentration of duties collected on textiles and apparel--four percent of U.S. imports generate approximately 40 percent of U.S. duties collected--any efforts to focus on revenue functions would likely generate improved oversight of textile and apparel imports. Our previous findings suggest that Congress' concerns about the potential effects of moving customs revenue functions into DHS, whose priority mission is homeland security, were warranted. We found that this shift in mission contributed to reduced focus and resources devoted to customs revenue functions. Specifically, the number of staff in most customs revenue positions declined since the creation of DHS, despite a legislative mandate that they should not. In addition, the number of Auditors in the Office of Inspector General dedicated to customs issues has declined as the office's resources were focused in other areas.

section_title: Letter
paragraphs: Thank you for the opportunity to appear today to provide our perspective  on the issues associated with textile transshipment. I have had the  opportunity to testify on a number of occasions before the Committee on  Small Business, and learned more in each of those hearings about the  importance of trade to the small business community. It is particularly  important in the current economic environment that the United States  does everything it can to ensure that U.S. laws regarding the entry of  illegal goods are fully enforced at the U.S. borders. Effective monitoring of  textile and apparel imports are also important because duties on textile  and apparel products account for a significant share of U.S. duty  collections. However, this enforcement takes place in the challenging and  busy environment of U.S. ports of entry - - in fiscal year 2008, there were  nearly 29 million trade entries processed at more than 300 ports of entry  throughout the United States.
In my statement today, after providing some background on the role of  Customs and Border Protection (CBP) with regard to textile imports and  other goods, I will summarize key findings from our prior reports on (1)  U.S. government efforts to enforce laws related to imports of textiles and  other goods, including transshipment, and (2) the revenue implications of  these efforts, as well as discuss the recommendations we made to improve  those efforts.
GAO’s last report on the subject of textile transshipment was published in  2004 and there have been many changes in world trade and in customs  enforcement since that time. However, we have consulted with CBP since  that report was issued on the status of their response to the GAO  recommendations to improve that system. In addition, we have completed  additional studies on customs enforcement issues, which provide  important insights into the challenges CBP faces as it addresses textile  transshipment. One of those reports covered the in-bond system, which  was a key subject in the 2004 report on textiles, and a second is on CBP’s  ability to maintain an emphasis on revenue such as duties collected from  textile and apparel imports. In addition, we have also completed numerous  studies on intellectual property enforcement by CBP and other U.S.  agencies, and there is considerable overlap between those efforts and  textile enforcement efforts. We conducted our work in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: Background
paragraphs: CBP is the agency primarily responsible for border enforcement, given its  authority to detain and examine shipments and seize goods that violate  U.S. law. These illegal goods could include textiles and apparel that are  illegally entering the U.S., but could also include goods that violate U.S.  laws related to intellectual property, illegal drugs, or product safety. CBP’s  priority mission is keeping terrorists and their weapons out of the U.S.  CBP is also responsible for enforcing immigration and other border  related laws and regulations. Two CBP offices are central to carrying out  policies and procedures related to enforcement efforts at the U.S. border:    Office of Field Operations – This office houses CBP’s border operations  and is comprised of 20 field offices under which are CBP’s more than 300  ports of entry. With more than 20,000 CBP officers, the office is  responsible for carrying out CBP’s cargo and passenger-processing  activities related to security, trade, immigration, and agricultural  inspection. Daily management of port operations is highly decentralized,  with field offices overseeing but not directly managing port operations.  CBP’s port operations oversee an array of cargo- and passenger-processing  environments, and port management structures are not uniform. For  example, some ports’ management oversees a single port of entry while  others oversee multiple ports of entry (e.g., a seaport and nearby airport).
Office of International Trade – Established in October 2006, this office  consolidates the trade policy, program development, and compliance  measurement functions of CBP into one office. It is responsible for  providing uniformity and clarity for the development of CBP’s national  strategy to facilitate legitimate trade and managing the design and  implementation of strategic initiatives related to trade compliance and  enforcement. CBP has identified seven customs issues considered to be its  priority trade issues, one of which is textiles.
Although all goods imported into the United States are subject to  examination, CBP examines only a small portion of them. The total  number of exams conducted each year increased dramatically after  September 2001, but most exams conducted between 2001 and 2005 were  for security rather than trade reasons; the percent of exams conducted for  trade purposes decreased during that time period. When CBP detects  imported goods that violate U.S. law, additional law enforcement agencies  such as the Department of Homeland Security’s (DHS) Immigration and  Customs Enforcement (ICE) and the Department of Justice may become  involved to further investigate and/or prosecute violators.
section_title: CBP Attempts to Address Textile Transshipment, but Significant Challenges Remain
paragraphs: GAO’s prior work has shown that CBP targets potential textile  transshipment on several levels. However, we have found that CBP’s  efforts continue to face challenges which inhibit its ability to fully address  the risk of textile transshipment.
To identify potential illegal textile transshipments to the United States,  CBP targets countries, manufacturers, shipments, and importers that it  determines to be at a higher risk for textile transshipment. CBP uses a  targeting process that relies heavily on analyzing available trade data and  other information to focus limited review and enforcement resources on  the most suspect activity.
First, CBP identifies the countries in which trade flows and other  information indicate a large potential for transshipment. Second, it focuses  on selected manufacturers in those high-risk countries for overseas  factory visits, by what are known as Textile Production Verification  Teams. The teams attempt to verify that factories are able to produce the  shipments they have claimed or to discover evidence of transshipment,  such as counterfeit documents. If evidence of transshipment is found, CBP  uses this information to target shipments to the United States for review  and potential exclusions, seizures, or penalties. CBP also targets importers  based on high-risk activity, and conducts internal control audits that  include verifying whether the importers have controls against  transshipment. However, resource constraints limit the number of foreign  factories and shipments that CBP can target and review annually to a small  share of textile and apparel trade.
CBP’s textile review process for preventing illegal textile transshipment  has adapted to the changing security environment, but our past work  found that CBP faces challenges in its monitoring and enforcement  activities. The textile review process includes analysis of entry documents,  inspection of shipments, and verification of foreign production. We found  that CBP ports increasingly depend on information received from targeting  the most high-risk shipments, the results of CBP’s Textile Production  Verification Team foreign factory visits, and other intelligence.
Our prior reports identified three key challenges to effectively addressing  textile transshipment. First, in 2004 we found that CBP’s Textile  Production Verification Team reports were not always finalized and  provided to CBP ports, other agencies, or foreign governments for follow- up in a timely manner. CBP adopted our recommendation to improve the  timeliness of this follow-up. We also found that information from overseas  Customs Attaché offices and cooperative efforts by foreign governments  can provide important information for port inspections. Since the time of  our report, CBP has increased the number of attaches in foreign ports to  20 in 2009. In addition, ICE has also increased its overseas personnel to  over 50 in 2009.
Second, the in-bond program creates the risk that importers can  circumvent trade rules, including those applying to textile imports. To  facilitate trade, the U.S. customs system allows imported cargo intended  for either U.S. or foreign markets to move from one U.S. port to another  without being assessed duties or quotas and without officially entering  U.S. commerce. This cargo—referred to as an in-bond shipment, requires a  responsible party to be covered by a CBP-approved bond and to agree to  comply with applicable regulations. Some CBP port officials have  estimated that in-bond shipments represent from 30 percent to 60 percent  of goods received at their ports.
In our original report on textile transshipment and in a later review, we  found that CBP’s ability to assess and manage the risks of the in-bond  cargo system was impaired by both (1) the limited information it collected  on in-bond cargo and (2) the limited analysis it performed on available  information. Evidence indicates that the in-bond system has been used at  times for moving unauthorized goods through the country. For example, in  2007, we reported that about one-third of the value of goods that CBP  seized for intellectual property violations in 2004 and 2006 were moving  through the in-bond system. With the tremendous volume of trade coming  through U.S. ports, CBP needs detailed information and accurate  monitoring systems to set priorities for targeting and tracking cargo  shipments that pose security or revenue risks. However, we found that  CBP did not collect detailed information on the value or type of in-bond  cargo being transported through U.S. ports; the in-bond form asks only for  a general description. As a result, CBP did not have the information  needed to set priorities for targeting and tracking cargo moving within the  in-bond program, so as to concentrate on cargo of highest security, law  enforcement, or revenue impact.
To address these weaknesses, GAO recommended in 2004 and again in  2007 that CBP increase targeting and inspection of in-bond shipments and  collect more detailed information about such shipments. In response, CBP  issued new in-bond inspection and data collection guidance to its ports, as  well as updated guidance on in-bond processing requirements. In 2008,  CBP issued guidance to advise ports on using automated targeting systems  to identify at-risk in-bond shipments. CBP has also been working under  the SAFE Port Act of 2006 to establish new information requirements for  all maritime cargo destined to the United States, through its Secure Freight  Initiative.
Third, in reviewing the in-bond system, we also found that CBP had failed  to perform basic analyses of available information. CBP was not able to  tell us, for example, the extent of the system’s use, what products are  shipped in-bond, or what shipments are expected for entry (and thus  expected revenue collection from applicable trade duties) at inland ports.  Despite prior audit recommendations, important management weaknesses  persisted in CBP’s tracking of in-bond cargo, with the result that CBP still  does not know whether in-bond cargo shipments of greatest security or  revenue interest are in fact entered into U.S. commerce or exported as  required. In particular, CBP continued to have high numbers of open in- bond transactions with uncertain disposition. As a result, GAO made a  series of recommendations to improve the oversight and monitoring of  cargo moving within the in-bond system.
In response to those recommendations, CBP has taken steps to improve  monitoring and oversight of in-bond shipments. For example, it increased  data collection requirements on in-bond shipments and updated its  Automated Commercial System (ACS) to better track, link, and report on  such shipments. These steps have reduced the number of open in-bond  transactions. CBP also modified the development plans for its Automated  Commercial Environment System (ACE) to ensure that ACE provides  adequate in-bond tracking and reporting capabilities. CBP also developed  proposed regulatory changes that are expected to address certain  weaknesses with in-bond regulation, by shortening the time period during  which in-bond shipments can transit the country and requiring importers  to notify CBP if their shipment plans change. As of August 2008, these  proposed changes were being reviewed within CBP. To the extent that  these changes address problems with the in-bond system, they will also  address one of the ways in which textiles and other goods might illegally  enter the United States or enter without paying the appropriate duties.
section_title: CBP Needs to Renew Its Focus on Revenue Functions
paragraphs: In addition to needed improvements on specific programs, we also found  that CBP had to find a way to better balance security and important trade  functions such as revenue collection. Although CBP’s priority mission  relates to homeland security, it collected more than $34 billion in fiscal  year 2008, making it the second largest revenue generator for the federal  government.  Because of the high concentration of duties collected on  textiles and apparel—four percent of U.S. imports generate approximately  40 percent of U.S. duties collected—any efforts to focus on revenue  functions would likely generate improved oversight of textile and apparel  imports. When the Customs Service was created in 1789 under the  Department of the Treasury, its mission was almost entirely focused on  revenue collection. Over time, the agency was presented with new  missions and challenges, including drug interdiction, immigration  enforcement, and airport passenger processing. But customs revenue  functions, such as assessing and collecting duties, excise taxes, and fees  and penalties, were always central to the Customs Service’s mission  because they produced substantial revenue.
To preserve a high level of customs revenue collections, Congress required  in Section 412(b) of the Homeland Security Act that CBP, at a minimum,  maintain certain revenue function positions and the level of staff resources  that were present in the U.S. Customs Service when it became part of DHS  in March 2003. The nine specific revenue function positions Congress  required CBP to maintain were Import Specialists; Entry Specialists;  Drawback Specialists; National Import Specialists; Fines, Penalties, and  Forfeiture Specialists; attorneys of the Office of Regulations and Rulings;  Customs Auditors; International Trade Specialists; and Financial Systems  Specialists. The act also mandated that CBP maintain, at a minimum, the  levels of support staff associated with customs revenue positions.  Associated support staff provide a variety of management, technical, and  administrative support functions. Some staff considered associated  support staff includes Liquidators, Seized Property Custodians, Customs  Technicians, as well as, Assistant Port Directors, Account Managers, and  Economists. In 2007 we reported that CBP had not maintained the  minimum number of staff in each position. In addition, other positions  that were not specified in the act (e.g., CBP Officers) that previously  performed primarily customs enforcement functions, were spending much  of their time performing homeland security functions.
Our previous findings suggest that Congress’ concerns about the potential  effects of moving customs revenue functions into DHS, whose priority  mission is homeland security, were warranted. We found that this shift in  mission contributed to reduced focus and resources devoted to customs  revenue functions. Specifically, the number of staff in most customs  revenue positions declined since the creation of DHS, despite a legislative  mandate that they should not. In addition, the number of Auditors in the  Office of Inspector General dedicated to customs issues has declined as  the office’s resources were focused in other areas. As a result the DHS  Office of Inspector General conducted no performance audits related to  customs revenue functions until 2007.
As a result of these findings, GAO recommended that CBP perform  workforce planning to ensure that they had the necessary expertise to  perform the various functions related to collection of duties and penalties.  In addition, we also recommended that the DHS Office of Inspector  General should identify whether areas of high risk related to customs  revenue functions exist and consider initiating performance audits to  explore and mitigate those risks.
In response the DHS Office of Inspector General initiated a broad survey  of customs revenue functions to determine whether areas of high risk  related to customs revenue functions exist and initiated additional work.  For example, in February 2009, the DHS Office of Inspector General  reported on CBP’s management of revenue analysis functions. In addition,  in preparing its fiscal year 2010 budget request, CBP employed a resource  allocation model to determine the resources necessary to perform trade  functions. As a result, it requested funding for 103 positions related to  import safety and trade enforcement.
section_title: Conclusion
paragraphs: Mr. Chairman, we appreciate the opportunity to summarize our work  related to CBP’s efforts to enforce U.S. laws regarding illegal shipments of  textiles and other products. As I have noted in my statement, we have  performed a number of studies for the U.S. Congress both on textile issues  specifically as well as on a number of closely related issues such as the in- bond program, revenue collection, and intellectual property enforcement  at the U.S. border. Over time, we have found that CBP has made  improvements in its efforts to enforce trade laws, including those related  to textiles, but trade enforcement issues continue to present long-term  challenges with significant revenue implications for the U.S. government.  This concludes my statement, but I welcome the opportunity to answer  any additional questions from you or other members of the Subcommittee.
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