With the constant barrage of updates about Section 301 tariffs, it can be difficult to know what new development will actually affect your business. How can you protect your business from potentially expensive consequences caused by these ongoing trade disputes?
A great place to start is your Customs continuous bonds (CBs).
Keep reading to learn about how customs bonds are affected by Trump's tariffs, and how you can protect your bottom line.
Importers need to take a hard look at their Customs continuous bonds to ensure that they are adequately covered when Trump's tariffs go into effect.
U.S. importers, especially those importing goods from China, are at risk of having their Customs continuous bonds rendered insufficient due to the increasing costs of tariffs.
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U.S. Customs bonds, also sometimes called "surety bonds", act as a contract between three parties:
The surety financially guarantees to an obligee that the principal will act in accordance with the terms established by the bond.
If, for some reason, an importer were unable to fulfill their financial obligations to CBP (let's say they went out of business), the government needs a way to recoup their costs. The bond therefore pays this obligation on the importer's behalf.
If you are importing merchandise valued at more than $2,500 into the U.S. for commercial purposes, you must post a customs bond to ensure that all duties, taxes, and fees due to the federal government are paid.
A Customs continuous bond is 10% of duties, taxes and fees paid for the 12 month period
A continuous bond is valid for an entire year after its date of purchase, and only needs be purchased once per year per shipper (so long as the bonded amount is sufficient to cover your importing activities).
Bonds are issued in $10K increments up to $100K, with the minimum bond being $50K.
It is common for many importers to jump straight from $50K to $100K.
Once the $100K threshold is exceeded, bonds are issued in increments of $100K upward.
The bond amount will always be based on the importers need, and should be set to cover at least 10% of the duties, taxes, and fees that the importer expects will need to be paid within that 12 month period of time.
For example, if an importer predicts that they will pay $1 million in duties and fees for a year, they would need a continuous bond for 10% of that, or $100,000.
The continuous bond amount that an importer can expect to carry will vary based on the volume of cargo they are importing, and any changes in duties or taxes applicable to that volume.
To determine the continuous bond amount you need, take your Total Annual Duties, Taxes, & Fees X 10% and round up to the nearest $10,000.
(Current bond formulas can be found on www.CBP.gov)
A continuous bond that is less than 10% of an importer's annual duties, taxes and fees will be considered "insufficient".
Not maintaining a sufficient bond can significantly impede an importers’ ability to get their cargo released at US ports.
If CBP determines that a bond is insufficient, they may send a warning notice to the importer about the insufficiency and require an increase (however, this warning notice is not mandatory). Insufficient bonds must go through a 15-day termination process. If the deficiency is particularly egregious, the bond can be deemed insufficient immediately, causing delays, penalties and additional fees, or CBP may even void the importer record altogether.
When a bond is deemed insufficient, it can no longer be used for entries. CBP can direct shipments to be held at port until a new bond is filed, which can cause the importer to incur costly demurrage charges. CBP can also inactivate a continuous bond, requiring an importer to obtain exorbitantly expensive single transaction bonds for each shipment instead,
This is where Section 301 tariffs come into play and can really throw a wrench into an importer's operations.
In fact, there’s evidence that suggests since the new tariffs were assessed, CBP has increased its watchfulness of importers not meeting their bond requirements.
From June to July, CBP tripled the number of notices it sent to importers with insufficient bonds, from ~50 to 183. The number of notices rose again in August to 269, and continues to trend upwards.
Additionally, companies that normally trade with countries under free trade agreements, like Mexico and Canada, likely only carry the minimum $50K bond level because their imports are labeled as duty, tax, and fee free. With the Trump Administration adding tariffs to some goods from Canada and Mexico, these importers are at risk of needing to increase their bond level and incurring more expenses.
If your products are impacted by this list, it is incredibly important to review your import activity and make sure the CBs you have in place are sufficient to cover 10% of your duties and taxes for the remainder of their life cycle.
With the new tariffs in place, in order to stay compliant with CBP, we have seen some importers have to increase their bond level by 20-100 times their current amounts.
Stacking liability can prove to be costly to an importer if their bond limit is exceeded.
Let's look at a simplified example:
*These costs have been simplified and are not actual premiums.
Actual bond premium rate increases are not necessarily linear with the increase in bond requirements and depend on the surety's assessment of an importer's ability to pay the increased bond.
In the above example, the importer has now paid premiums in the amount of $3000 over a 7 month period of time.
If the importer would have planned accordingly, and chose the $200K bond initially, they could have saved their organization $1500.
The more accurately you can predict your importing activities, the less likely you are to waste money on buying the wrong bonds.
Beyond rising premiums, the underwriting and collateral requirements are typically higher for larger continuous bonds.
The collateral needed for a continuous bond is controlled by the bond company and is based on their risk assessment of the importer. The higher the risk, the more collateral will be needed to back the bond. To mitigate risk, sureties use collateral as funds on hand to settle any claims made against the bond.
Small- to medium-sized importers may need to acquire a larger letter of credit as collateral to stake against their continuous bond. This larger letter of credit has the potential to hinder an importer's finances, as it cuts into their available line of credit, which can slow their growth.
These reasons go to show how important it is for importers to be thinking about their CBs.
When determining your needed bond amount, it’s incredibly important to accurately anticipate your future duty.
We also encourage importers to build in a cushion to cover any unanticipated increases.
Exceeding your continuous bond can have real consequences, so it is important to monitor your duty activity to ensure that your CB meets your current needs.
If you don't already know what your continuous bond amount is or when it renews, go forth and find out!
Then, really analyze your importing activity data. Look at your past activity, current activity, and do your best to accurately predict your future needs.
With more than 200 laws in place for the United States alone, navigating customs can be a complex and confusing process.
Our team of customs compliance specialists are ready to help you review your bond amounts and determine what bond limit will meet your current needs.