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Customs compliance obligations have to be met when importing and exporting goods to ensure that the documentation related to the accompanying goods is generated in adherence with the legislation of the importing and exporting countries. 

The World Trade Organisation and 164 member nations, and the World Customs Organisation with 184 member nations have established multilateral treaties, such as The General Agreement for Tariffs and Trade, and the Revised Kyoto Convention, governing areas including customs valuation, customs classification, and rules of origin.

This ensures that customs obligations for merchants are for the most part harmonised.

Customs classification 

The harmonised schedule (HS) determines the first 6 digits of a commodity code, this is known as to sub-heading level. Depending on the importing territory, digits following the HS code may vary on a regional basis. 

The European Union and the United Kingdom classify goods to a national 10-digit nomenclature for imports, and on the basis of: 

  • classification, 
  • the country of economic origin of the goods, 
  • and exporting country, 
  • compliance measures related to prohibitions and restrictions, 
  • licensing and certification, 
  • sanctions, and the application of customs duty, 
  • and in certain cases, excise duty, anti-dumping duty, safeguarding duty, countervailing duty, and quotas will be mandated. 

Traders who are importing or exporting goods from the United Kingdom can review their obligations using HMRC’s Check How to Import and Export Goods tool. The United Kingdom’s (CDS) removal of the 999L waiver code for imports since 31 January 2024 has obligated increased scrutiny of the composition of imported goods.

Rules of origin 

Rules of origin govern trade agreements, enabling access to preferential tariffs. The criteria will be assessed on whether the goods are wholly sourced, sufficiently processed or cumulated to a permitted percentage, as determined by the accompanying free trade agreement’s product-specific rules. 

In order to benefit from the enhanced market access, exporters may have to apply the appropriately worded text of the statement of origin on an accompanying document such as the commercial invoice and may also have to apply to their national authorities for approved/registered exporter (REX) status if the value of the goods is above £5,500. Alternatively, they may choose to present a certificate of origin, EUR-1 or EUR-Med Certificate, where permitted. 

In addition to FTAs, there are 65 countries in the developing countries trading scheme (DCTS) that can benefit from preferential tariffs for exports. In circumstances where the goods traded do not meet the rules of origin criteria or are exported from a country which does not have a trade deal in place with the importing nation, goods will be traded under a “most favoured nation” (MFN) basis, ensuring equivalent duty rates. 

Customs valuation 

In circumstances where a sale for export is occurring, customs valuation method 1 should be used, based upon the value of the commercial invoice. 

In circumstances where a sale of goods is not occurring, for example, a branch transfer of goods, the appropriate valuation methodology between 2 – 6 must be adopted, with consideration of the principles of each method evaluated on a consecutive basis (other than method 4 (sale price on the importer’s market) and method 5 (computed value), which are interchangeable). 

Depending on the Incoterms, the cost of freight may be included within the customs valuation. 

Shipping and the passage of risk

The geopolitical tensions and the crisis in the Red Sea led to heightened risk management and increased shipping costs impacting goods traded from the Far East, the Middle East, and from India to Europe, and vice-versa.

The Red Sea route to Europe, accounting for 12% of global trade, and a reported 30% of global container movements, traverses the Bab-El-Mandep ‘Gate of Tears’ twenty-mile straits adjacent to Yemen, and through the Suez Canal, where it connects to the Mediterranean Sea. 

UNCTAD has reported a 42% decrease in movements via the Suez Canal in January 2024, and major shipping lines are increasingly deciding to transport goods via the Cape of Good Hope, which is reported to add around 3,500 nautical miles to the journey. The first Houthi rebel attack occurred on 19 October 2023. At the time of writing, the majority of shipments which were in progress prior to the crisis will have taken place. 

Traders who send goods via the Indian ocean to Europe must now face decisions concerning their exposure to escalating costs of shipping, with container shipping costs estimated to have risen by a premium of 150%-200% (Drewry’s WCI spot rate), currently at a rate increased by around $2,000 USD per 40ft container. The delayed arrival of goods has particularly affected ‘just-in-time’ manufacturers, who may be assessing their position in relation to a claim for damages, on the basis of orders lost or cancelled due to late delivery. 

Pacta sunt servanda 

The British International Freight Association (BIFA) have published updated guidelines, highlighting to carriers that the Red Sea crisis cannot be considered a force majeure incident, which can only be declared when a contractual provision is impossible to perform, and not on the basis of increased costs or an extended timeframe of delivery, as determined in the case law concerning Tsakiroglou & Co Ltd v Noblee Thorl GmbH. 

Merchants may wish to review their obligations under the terms of a FOB or CIF contract and assess whether any sub-sale agreements rely on specified goods and a predetermined timeframe, and confirm the route with their carrier. 

On an additional basis, the terms of insurance should also be subject to scrutiny. For example, a within a sale conducted under CIF Incoterms, the Institute Cargo Clause (C) minimum insurance coverage, at 4.5 does not cover “loss damage or expense caused by delay, even though the delay be caused by a risk insured against” and at 6.1 does not cover “war civil war revolution rebellion insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power.” 

Whether the underlying sale agreement is governed by English law, and the Sale of Goods Act 1979, the United Nations Convention for the International Sale of Goods (CISG) or the Uniform Commercial Code (UCC) may also have any impact on the assessment of damages caused by the late arrival of goods, if at all, and any obligations to mitigate the circumstances.