Can customs handle the import boom

The U.S. Customs Service wants to modernize to keep pace with soaring import volumes. Sticky policy and funding issues may undermine the agency's efforts.

By Toby B Gooley -- Logistics Management, 11/1/1998

As anyone who has been in a retail store lately knows, the U.S. economy has become very dependent on imported consumer goods. Economists expect that situation will intensify--some have predicted imports to this country will double in less than 10 years.

Even now, thanks to economic conditions in North America and Asia, import volumes have reached record levels, ships are filled to capacity, and ports are scrambling to handle the flood of inbound containers. And though most of the attention has been focused on transportation bottlenecks, another problem--one that has equally serious implications for U.S. importers--has been developing in the background.

After imported goods arrive by vessel and are unloaded at a port, they are cleared through customs. But the U.S. Customs Service, like ocean carriers and ports, is hard-pressed to keep pace with surging import volumes. This is of critical economic importance: If U.S. Customs is unable to keep goods moving quickly, it will compromise importers' ability to get consumer goods onto retail shelves. That would have a negative effect on the entire U.S. economy--a point the agency has been trying to make on Capitol Hill for some time.

In order to handle growing trade volumes, the Customs Service urgently needs to update its technology, increase personnel and equipment resources, and boost the efficiency of existing operations. But a number of roadblocks stand in the agency's way. Chief among them are the competition for resources between the agency's different missions, and the inability of the agency's computer system to handle the current volume of transactions.

Competing for Resources

The U.S. Customs Service has three primary responsibilities: to collect duties assessed on imported goods; to protect the country from illegal importation of narcotics and contraband; and to enforce laws designed to prevent the export of high-technology goods.

Because of this dual focus on trade and enforcement, a sort of tug-of-war has developed between customs' drug-interdiction efforts and trade-related activities. These two vitally important responsibilities are competing for personnel, funding, and other resources. The balance seems to be tipping in favor of drug enforcement: Since the North American Free Trade Agreement (NAFTA) took effect five years ago, Congress has put increasing pressure on the agency to devote more of its attention to drug enforcement. It's widely believed, in fact, that former Commissioner George Weise was forced out of office earlier this year because influential legislators believed he spent too much time on automation and trade facilitation and not enough time on drug interdiction.

The appointment in August of Weise's successor, Raymond W. Kelly, lends credence to that belief. Kelly has spent most of his career in law enforcement. For the past two years, he served as undersecretary of enforcement of the Treasury Department, with oversight of the Customs Service; the Secret Service; the Bureau of Alcohol, Tobacco and Firearms; and several related law-enforcement offices.

More than one member of the importing community has expressed reservations about Kelly's appointment, fearing that his focus on law enforcement will shift attention toward drug interdiction at the expense of trade issues. Indeed, the agency has been very busy on the law-enforcement front: Drug seizures in the first seven months of this year were up an average of 34 percent compared to last year. In September alone, customs officials announced 11 seizures of drugs worth more than $15 million along the U.S. border with Mexico.

Although it appears that Kelly was brought in to beef up enforcement efforts, drug-interdiction programs are nothing new. The agency's Carrier Initiative Program, which helps more than 3,800 land, air, and ocean carriers detect and prevent drug smuggling aboard their conveyances, was established in 1984. The Business Anti-Smuggling Coalition, which has 160 shippers participating in its strict, cradle-to-grave monitoring of manufacturing and distribution activities, has been in effect for two years now. During Weise's tenure, moreover, customs made dealing with drug smuggling via commercial cargo conveyances a top priority.

Kelly himself, in testimony before the Senate Finance Committee in September, sought to alleviate fears that the agency would emphasize enforcement at the expense of trade. Referring to the importance of both drug interdiction and global trade, he said, "The Customs Service must live in both realities. And I intend that we tackle the problems and opportunities they both pose with equal vigor."

Can importers take Kelly at his word? Former District Director of Customs Gerald McManus, now vice president for regulatory affairs with international logistics firm BDP International, says he's seen the pendulum swing between enforcement and facilitation at least a dozen times since he joined the agency in 1960. No matter how great the political pressure, the Customs Service today can't afford to shortchange trade facilitation, he believes.

Nevertheless, cautions international trade attorney and Logistics columnist Matthew T. McGrath, importers should have realistic expectations about the Customs Service's priorities. "[Importers] keep trying to act as if [customs] is a service. But it's not--they're cops, and what they do is slow down trade," he warned attendees at the annual convention of the American Association of Exporters and Importers (AAEI).

Automation: Situation Critical

On Sept. 14, the U.S. Customs Service's main computer system, which processes millions of import transactions each year, crashed. Importers and customs brokers were forced to resort to faxes and hand-carried paper copies until the system was restored.

Less than two weeks later, it happened again. Why? According to customs officials, a surge in transaction volumes overwhelmed the system.

The agency's leaders have long recognized that the current ACS (Automated Commercial System) information system is incapable of keeping up with current and future demand. As Commissioner Kelly pointed out in his Senate testimony just 11 days before the system crashed, ACS was designed nearly 15 years ago to accommodate trade levels that were reached a decade ago.

The need for ACS's planned successor, the Automated Commercial Environment (ACE), is clear: In the last four years, Kelly told the Senate Finance Committee, the number of import entries his agency processed annually increased by 44 percent, from 11.3 million in 1994 to more than 16 million this year. During that same period, the dollar value of those entries rose 45 percent, from $658 billion to nearly $1 trillion today. During those same four years, by contrast, the number of full-time-equivalent employees declined by 2.4 percent, he said.

U.S. Customs estimates the task of developing and implementing ACE will take 10 years and about $1.5 billion. The Clinton administration, meanwhile, has earmarked just $8 million for customs automation programs in Fiscal Year 1998. To close that gap, the Customs Service will need a forceful champion in the House and Senate. That's something it doesn't have right now, says attorney M. Barry Levy of Sharrets, Paley, Carter & Blauvelt, who is trade counsel for the Toy Manufacturers of America. "Customs doesn't have anyone in Congress pushing for [it]," he says. "There's a void in that area, so funding always ends up as a political football."

Where will the rest of the money come from? The administration has proposed raising the Merchandise Processing Fee (MPF) assessed against the value of each import shipment to pay for the program. Importers and customs brokers are immovably opposed to raising that fee. In a joint letter to Vice President Al Gore, AAEI Chairman Richard Salamone of BASF Corp. and Peter H. Powell, president of the National Customs Brokers and Forwarders Association of America, argued that importers alone should not have to pay for a government agency's necessities. "Customs' computer costs ... undeniably are among the core costs of the agency's existence, as [are] office space, employee salaries, pens, and paper. These core costs should be borne by the nation as a whole as the price of having that agency," they wrote.

They also blasted the proposal as unfairly penalizing importers and possibly being illegal. "A surcharge on the user fee paid by importers to finance a computer system [also] used by exporters and by customs for non-commercial purposes would be inherently discriminatory and subject to challenge in the World Trade Organization," they said. Another strike against the plan is that, because funding would fluctuate depending on trade volumes and value, revenues from the MPF--and therefore project funding--would be unreliable and unpredictable.

Some observers predict that lawmakers eventually will adequately fund the automation program. "The House Ways and Means Committee is committed to giving customs funding," Walter Raheb, a former committee staffer and now a trade consultant in Washington, said at the AAEI conference. But legislators want more information before they will authorize those funds, he added. The General Accounting Office, therefore, conducted a review of the Customs Service's strategic plan, including the agency's recent reorganization and automation programs like ACE.

According to Raheb, Congress wants to see evidence of a coherent business strategy, progress in achieving the aims of the Customs Modernization Act of 1993, and an achievable plan for implementing needed technology. In particular, questions remain about how customs will develop and implement ACE, he said. "Do they have the skills and technology to make this work? Or should they be focusing on deciding what the needs are and going out and buying it?"

Speaking at the AAEI conference, Samuel Banks, assistant commissioner of customs, insisted that the agency had the technical expertise to manage the project but would contract out activities that an outside vendor could perform more effectively. Regardless of who performs the work, ACE will go forward, Banks said. "We're not going to wait for the funding."

Customs Cliffhanger

As the century comes to a close, the U.S. Customs Service finds itself caught in a real cliffhanger. Unanswered questions abound: Will customs be able to keep up with trade growth? Can the agency successfully live a double life, giving adequate attention and resources to both law enforcement and trade facilitation? Will ACE be in place before it's too late, or will it, too, be outdated by the time it finally is implemented?

It may be a long time before we have the answers, says Levy. "Unfortunately, it's not a high-profile issue," he says, adding that with congressional attention focused on re-election, presidential misdemeanors, and partisan policy battles, customs funding has been pushed even further down the agenda than usual. In the near term, at least, the agency will find itself not just battling for funding, but simply battling for attention. That's why, Banks told AAEI members, it's vital that private-sector businesses that would be harmed by a customs breakdown make their views known. "You have to stand up and tell Congress what you want," he said. "You may stand opposed [to funding plans], but you can't be a bystander."

Funds for Drug Enforcement on Hold

On Oct. 8, the Senate passed its own version of the Drug Free Borders Act of 1998, which would have given the U.S. Customs Service about $100 million to beef up its drug-enforcement activities. A similar bill passed the House in May, but Congress failed to reconcile the two versions before it adjourned in mid-October.

If the bill had been signed into law, it would have authorized customs to purchase, install, and maintain more non-intrusive drug-detection devices, such as drive-through X-ray machines. This equipment would have been deployed on the borders with Canada and Mexico, as well as in Florida and the Gulf Coast states. The bills also would have allowed for hiring and training hundreds of additional inspectors, special agents, canine enforcement officers, and other personnel for anti-smuggling operations.

If Congress has been pushing customs to increase its anti-narcotics efforts, why didn't the bill pass? The House version included a "Title II" designed to cut back on opportunities for customs personnel to earn overtime pay. The Senate version dropped that provision, and House sponsors reportedly refused to sign off on the Senate bill unless Title II was restored.

Congress adjourned before the two chambers could reconcile their versions, but the 106th Congress is expected to look at the legislation early next year. Although the omnibus federal budget authorizes annual operating funds for U.S. Customs and the rest of the Treasury Department, extra funding for drug interdiction is sure to be welcomed by customs officials and importers alike: If the agency gets more money to fight narcotics smuggling, that may help free up resources for trade facilitation.