Shippers Get Caught in Customs' Net

New security rules are costing plenty--and could slow trade

Officials at the U.S. Customs Service officials are casting a virtual safety net around the country. And they're ensnaring people they never meant to inconvenience. Freight forwarder Jose Aguirre, for one, has been forced to upgrade the software his Miami-based shipping company uses to track merchandise. The new program must be able to notify U.S. Customs officials 24 hours before goods arrive from overseas via cargo ship. The upgrade cost his company $25,000, which he can ill afford when margins are shrinking. "We just had to eat it," says Aguirre, senior vice-president of Miami International Forwarders. "Our customers won't let us pass this cost onto them."

Aguirre isn't suffering alone. Everyone from air-express giant United Parcel Service Inc. (UPS ) to mom-and-pop trucking outfits has been notified that they may soon face the same regimen. Customs, which is part of the Dept. of Homeland Security, believes that by taking a long, hard look at data accompanying every shipment into the U.S., it'll be able to spot inconsistencies, which can be red flags for smuggled bombs or biological weapons. "In effect, we're creating a much-needed virtual border," says Charles W. Winwood, senior vice-president of industry consultant Sandler & Travis Trade Advisory Services and a former deputy Customs commissioner.

The first steps toward creating this net have disrupted legitimate business. In just one month of operation, Customs issued at least 167 no-load orders, delaying U.S.-bound shiploads on docks worldwide. To meet the new reporting requirements, some of the biggest ocean carriers have privately stated they've spent $600,000 and more to upgrade computerized tracking systems. The program could eventually hit air shippers even harder. Customs is considering requirements that might make the international overnight air delivery of cargo all but impossible. "It would put air-express carriers out of business," says Norman Schenk, a vice-president at UPS Supply Chain Solutions.

Nobody is confused about the intentions of the new shipping requirements. They were implemented as part of the Trade Act of 2002, when shock waves from the September 11 World Trade Center and Pentagon attacks were rippling through every branch of government and industry. The Act mandated advance notice for all cargo entering the U.S. The idea was to push the country's line of defense back to the point of origin for all incoming goods. Such vigilance "should prove a deterrent to terrorists trying to use the maritime system," says Brian C. Goebel, a border protection adviser in the Homeland Security Dept.

In February, Customs began requiring every ocean carrier to electronically file a detailed list of its cargo 24 hours before departing for U.S. ports. Armed with sophisticated software, Customs officials analyze those manifests for telltale signs, such as a clothing retailer suddenly shipping electronic parts. They can order any load held over. And the agency has inspectors in the world's 20 largest ports, equipped with machines that can scrutinize even 40-foot metal containers using X-rays.

Although this program hasn't yet netted any terror suspects, Customs is confident that the 24-hour notice will make a difference. In the past, merchants rushed to load goods up to the last hour before departure. On the U.S. side, the total that was unloaded came to 915 million short tons in 2001, the latest figure available. For this flood of goods, merchants provided only the vaguest accounting -- such as "clothing" or "general cargo" -- and the shipment information often arrived after the goods had already been unloaded.

The new regs will rectify that situation. And so far, they have hardly derailed trade. Indeed, not one big shipment has been stranded at sea. And all 167 no-load orders have been resolved to Customs' satisfaction and shipped on. "Customs has tried very hard not to disrupt trade," says Christopher L. Coch, president and CEO of the World Shipping Council, a trade group representing ocean carriers.

Still, industry execs say the measures have turned their process upside down, forcing exporters and their shippers to catalogue shipped merchandise first rather than last. "It has thrown a real monkey wrench in exporters' plans," says Miami International's Aguirre. And more intrusive changes are coming. By October, truck, rail, and air carriers will have to provide advance electronic notice of their cargo, too. In January, Customs proposed eight-hour advance notice of air freight. FedEx Corp. (FDX ) and UPS said such a requirement was unworkable, since freight continues to be loaded up to the final hour before takeoff. Instead, air-express carriers have proposed filing an electronic manifest in-flight, reaching Customs at least an hour before arrival, with some exceptions. UPS' Schenk is confident that the carriers can strike a reasonable deal with Customs.

All sides agree that, no matter what the final regulations are, transportation here and overseas is on the brink of a massive, irreversible change. "The U.S. is the model for the rest of the world, and everyone will adopt [the safety measures] in the name of maintaining world trade," predicts Paul Bingham, a principal at industry consultant Global Insights Inc. The whole world, in short, will have to learn to function in the confines of electronic security fences.

By Charles Haddad in Atlanta

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