Bonds Are Not Boring: Tariffs, Risk & Sureties

Machine Operated Script:

Andy  00:00

We’re going to get into a little bit of a technical side of things, but it’s something that you really need to know about. And it’s going to be talking about bonds and sureties and different things like that, with all the changes in the tariffs. It’s, you know, everybody’s been riding a roller coaster Lalo, and it’s been, you know, things are kind of settling down a little bit, and now it’s like, Okay, what’s the repercussion of it? It’s kind of like throwing a rock into a calm little pond. There you see the ripples that go out there. Well, one of the ripples is going to be talking about bonds and surety and risk and all that kind of stuff. So, you know, as far as getting into this, anything you want to try to add before we introduce our guest,

Lalo  00:42

yeah, so before everybody tunes out and says, already heard this episode? You haven’t, yeah, that’s we already had a bond show earlier, and it was we were asked, what about this? What about that? So a bunch of different points of views and angles and deeper dive. So this is more like the 201, version of that episode. In other words, we’re gonna get into a lot more detail. It picks up where we left off, per se, and also digs in to other areas that that were not even discussed previously. So there’s a lot more to the bond. And like I said in my previous episode where that we record it, I’m nowhere even near qualified to even comment or talk about this, because that’s really never been my area. And I know that the stuff that I’ve done, you know, requires bonds and and you know, all the all my clients, of course, you know that are importing, require it. But again, I don’t know much about it, and I’m glad that we do have experts. So we went and went to, well, we’ve been to several conferences, and we always run into these folks from Roanoke, bunch of different folks from there. It’s a big, big company. So anyway, so we’ve had that luxury of being able to get someone from Roanoke to to come on our show for that well,

Andy  02:03

it’s called Colleen Clark is our guest today. Colleen is a good friend. She’s been in the industry. She’s smart, as all get out is most people will know her. She’s been around for quite a while and heavily involved in trying to affect change positively. I guess, in the industry, one way or the other, there’s also just because of the nature of the surety company, sometimes you have to be in a defensive posture to make sure that some of the regulations or new legislation that comes through doesn’t put, you know, surety companies too much at risk, or other companies, I guess, Right. Welcome, welcome aboard, first off, Colleen. It’s good seeing you and good talking with you. It’s been a

Speaker 1  02:44

while. Good to see you as well. Andy and Lalo. Thanks for the invite. I appreciate it. No. Bonds are my passion. I’ve always said bonds are not boring. Well, I’ll tell you right now, they’re really not boring now,

02:56

Yeah, no

Andy  02:57

kidding. Well, it’s, it’s one of those things where so much with the talk of tariffs and different things, as far as us, imports go and tariffs obviously going up, it also then translates into you your your bond amount needs to be increased, and that’s going to cost you more. But the other side of the bond, if you’ve got a continuous bond. It enables you to streamline your clearance process so you don’t, at least technically, have to have a single entry bond for every single entry as it would go. But with that, bonds are one of those things where, and I guess it’s a necessary evil. I hate to say it that way, and forgive my connotation here, but it’s just one of those things where it’s insurance for the government, I guess, for a lack of better terms, isn’t

Speaker 1  03:47

it? Yeah, you know, it’s so as far as the history of the Customs bond, it’s been around for hundreds of years, 1789, when Congress passed the Tariff Act, they started to require bonds and bonds, you know, we’re going to talk more about import bonds today, but they the Customs Bond handles virtually every type of customs transaction. There is you have ISF, you have automated manifest filing requirements and 24 hour rule import bonds, of course, in bond transactions, which are for carriers, drawback, warehouse, Foreign Trade Zone, so so they really cover the gamut of any international transaction. But again, like you said, we’re going to concentrate on the issue with tariffs and the import bond. I always like to bring up something that’s been said for many years. My mentor coined this phrase that the US Customs Bond system is held out to the world as really the gold standard, allowing the release of imported goods with worrying about the collection of duty and reviewing admissibility issues until later. That’s the liquidation cycle, right? So the surety really is a collector for the government.

Andy  04:58

Well, one of the things too, is. It enables you to protect your cash flow of your company. Because one of the other things without a bond would normally, I said normally, are in the In days gone by, you’d almost just go ahead and post $1 amount and take however much money that is needed, that the government set thought that you would need, and, you know, supply that to the government in a non interest bearing account type of scenario, or pay the the expected duties and then adjust it after the fact. Well, this is a bond. Is a way for for layman terms, for those of you that it may not go in. Oh, I don’t know if I want to listen to this. You need to listen to this a little bit more. Is this understanding that is a bond is a way for you to validate that you are financially and corporately, a good citizen. And you, you know you’re bringing in something and you’re submitting it under whatever the transaction may be, and you don’t have to post that money because you’ve got this bond behind you, backing you up. Is that a good way of I guess? Yeah.

Speaker 1  06:10

I mean, many other countries, they don’t have bonds, so they have to pay the duties up front and and wait for release of their goods, because there is nothing backing that import, right? When there’s other government agency requirements, the admissibility factors right as well, and customs really does retain 90% of that duty risk. Customs base is the bond, the continuous bond on 12 months of rolling, 12 months of total duties, taxes and fees, and the bond is only 10% of that. So if you think about it, customs is retaining 90% of that risk if an importer fails to pay the duty over a certain

Andy  06:48

time. All right, so let’s talk a little bit with all of the you know, trade negotiations that have been going on, the reciprocal tariff type things that the Trump administration is building, and the negotiations of different things, the last minute changes of, you know, from zero duty to 50% duty to, you know, it’s going up and down like a, you know, a roller coaster. As far as the things that you’re looking at there, what has been the overall impact, as far as the industry here?

Speaker 1  07:18

Well, when there’s higher duty payments. That means higher bond amounts, right? Based on the calculation 10% of those two total duties, taxes and fees. So customs does run an insufficiency review of every continuous bond on file with customs the first week of every month. So we’re through nine months here, and they look at they go backwards. They don’t have a crystal ball to know what an importer is going to bring in or pay in the next 12 months, so their insufficiency is really based on old data they’re looking at. And by the way, it’s by entry summary date, not entry date, and it’s paid or payable because of monthly statement. They’re not just looking at the paid duty, they’re looking at what what could be due. Year to date, there have been 58 mandated increases issued by customs. Last year. For nine months, it was 4727

Andy  08:16

All right, so for for what that means is, is that there’s been almost 17,000 importers, I guess, or bond holders, that that customs or CBP has requested them to increase the bond amount, correct, right? That’s a 350%

08:34

increase over last year at this time.

Andy  08:37

So what that means for all of those from an executive level, folks, and especially the CFO. You’ve got to make adjustments into your budget to accommodate the increase in premiums for the bonds, but you also need to look at that bond amount and make sure you’re covered. But then here’s the other thing, with the increase of tariffs, there’s there’s also the increase of risk. Is there not absolutely

Speaker 1  09:04

because of the risk for the surety and for the importer, obviously, they they’re outlaying more cash internally a company. If they’re cash strapped, this could cause major issues with the company itself and financial concerns when the sureties underwriting that bond. The sureties are in the business to write bonds. There is that financial risk. It’s a financial guarantee. So the bond can be saturated almost within like 45 to 60 days, just based on only 10% of the total duties, taxes and fees. So that’s why sureties underwrite you know, they need to protect their interest as well

Andy  09:44

as you’re going through there. I mean, one of the things that comes to mind is, you know, people trying to transact business and in on stimulating international trade and all, one of the things I will also say that comes into play as a tool, and we’ll maybe come back to this in a little bit. But. Maybe the use of an ATA CarNet, which also has bonds to it, it helps to you know if you’re going to send machinery or samples or something that goes out to other countries and then comes back in, rather than paying duties and taxes on it, coming back in on returns or duties and taxes anywhere else in the world. Again, that bond comes into play, but those amounts are going to be going up as well. So you got to look at things, I guess holistically, we’re talking predominantly right now, imports, but I mean, you also you have to look at it on export, if you’re doing business in other countries, if you’re looking at non resident importers, or whatever else that comes into play. So there’s a lot of things. If somebody’s looking at this and trying to assess their current bond amounts, should they reach out to you, or reach out to your customs broker, or what?

Speaker 1  10:52

So you know, as far as the tips, we always say that they really should, of course, look forward rather than backwards, because that’s what customs does. Having a sufficient bond is an informed compliance requirement. If they don’t properly project, they’ll end up with another insufficiency, and we’ve seen that, you know, an importer may have gotten one in July and another one this month because they’re not properly forecasting. I think the rule of thumb is obviously projecting and do their own math. They really need to estimate the duties, tax and fees are going to pay in the next year account for special tariffs like anti dumping and countervailing duty. The customs broker is really their best source of information, because they do the entries right. They handle those entry transactions for their importer clients. So so that is like the number one go to is the customs broker? Absolutely, they really, importers. Really need to look at their bond amount regularly, in particular, at renewal. No bonds renew, you know, once a year. So prior to that renewal, they should be looking at it so that it’s terminated at renewal rather than midterm. Because we talked before the show a little bit about aggregate liability, where if an importer has a $50,000 bond, customs could require 200 and they just go with the 200 and the surety wants collateral. Well, that’s a $200,000 letter of credit or cash that they have to put up, and then a few months later they could get another insufficiency. Say it’s 400 well, they would have been better off going with the 400 immediately, because maybe the surety would require another 400,000 in collateral that’s holding up 600,000 and collateral rather than 400 so the old saying, it’s better to be penny wise than pound foolish.

Andy  12:40

So people are not, you know, I know there was this big push about, you know, China. And what’s interesting is, over this past year, there’s not been as much discussion on forced labor, or use of forced labor. It’s still there in the forced labor prevention acts and all of that that’s going in. But people have been, companies have been moving away from China, initially, not so much, taking the existing stuff. But, you know, any new products they’re looking for other sources. Of course, Mexico has really benefited from that, but going to other countries and all that well. Now things have are changing so rapidly all over that, the compliance folks need to be looking at, probably doing a quarterly review on their bonds, because just to look to see what’s happening and trying to get a handle on it. But then, secondarily to that, how do you communicate that to the executive management, or especially to the finance area, the CFO and all to say, here’s what the impact is of these kinds of things. Would you agree with that? And what would you recommend

Speaker 1  13:44

Absolutely, the routine review of their bond amount for sure. And, you know, I keep saying that people should project and and I understand it’s very hard because you don’t know what changes will come about. Nobody has that crystal ball, right? But just forecast properly, are you going to change your your supply chain, you know, to like, like you had mentioned, from China to to Colombia, Brazil, wherever, Mexico, um, just keep in mind that, you know, things could change in a week or a day, right? So even though I keep saying project, project, I understand it’s very hard for importers to do that, but to talk with their their consultants. If they have a consultant or a customs attorney, I know many small importers do not. So the best source is their customs broker. They they’re the closest to everything going on. The ncbfa has great information on their website. We have a tariff page on our website as well. There’s all kinds of information out there, but it’s very unpredictable, and the timeliness of everything is crazy, right?

Andy  14:49

Well, it is. But here’s the other thing that I’m hoping people are getting past the they’re almost just worn out. There’s been so much change in. Things that are going on in the static and all that. If anything, the compliance folks need to be that steady rock. It’s like, okay, yes, there’s all this static. What are we doing? And everybody’s calling so, well, what does this mean? It’s like, you know, as of this point in time, here’s what we know. And take that approach, right, and go through and say, All right, we’ve calculated this now. This was a month ago that this came out, and we it’s taken this much time to look at this. Here’s what the impact is, and you’ve got to develop those relationships again, with your pricing group, with your sales group, your marketing, with your with your finance folks in all of that, and look at the overall this is what we know as of this point in time. Put that stake in the ground. There’s been, well, we’ve had other, well, yeah, finish out your research, and then you can look at it, because there may be a lot of stuff that comes out and it’s not relevant. It’s more positioning and saber rattling, as I would call between governments in the end. I mean, the one thing that I also will say is that, you know, talking about different trade agreements, things change on a positive end.

Speaker 1  16:08

Well, that, and we had talked before, we recorded here that, what are some tips on separating the risk too, right? If you have separate divisions, if an importer has separate divisions, maybe got a bond for each division, because maybe one’s importing from a higher tariff country than another, so that could minimize the risk on one bond versus the other. Or if there’s anti dumping, if they import a variety of products, but some are subject to anti dumping and countervailing duty, maybe get a separate bond for that, because that’s really high risk.

Andy  16:38

Well, and you that is a great point. There’s some companies. You mentioned that there’s a billion dollar bond out there and a one and a half billion dollar bond. That’s another company and and to me that, I mean, there must be some high, high dollar stuff, maybe trying to put one umbrella over everything. And in theory, that sounds simplistic, and maybe easier. On the flip side of that, you could have a deal where you don’t want your company’s import privileges suspended or tied up because of one little case or situation, case in point of an anti dumping or countervailing duty case that snags the rest of it. So that’s breaking up that, that surety risk, I guess, sounds like a smart move.

Speaker 1  17:27

Yeah, I think so. And too, you know, if an importer puts some things in Foreign Trade Zone, okay, for you know, those entry types use a different bond than their regular consumption entries. But to talk a little bit about surety capacity for these very large bonds, there is capacity out there. Surety companies are have a treasury limit approved by the US Treasury to underwrite federal obligations. That information is publicly available and published in the Department Circular 570, the company can write individual bonds up to their treasury limit. It’s not all of their bonds, but per bond their treasury limit, which is 10% of their capital in surplus. So there are there is capacity out there. Customs allows for CO surety bonds, so multiple sureties can go together on one bond to get to that high amount, if they have to, if they’re limited with their treasury limits.

Andy  18:26

Well, very similar to companies that are doing major capital investments of, you know, like a building of some kind, there’s lots of banks that can come together to finance that project. Same thing here on the surety side to keep things going. And that’s, that’s, well, anything else, as far as communicating, you know, to upper management, and the the impact there is, like, where to get the information, maybe, as you’re talking about, I’m sure, using ace, looking at the history, as well as then projecting, you’ve got to work with your, you know, you’re purchasing folks, you’re marketing your your sales, whatever, so you can kind of get a holistic picture, right?

Speaker 1  19:07

Absolutely, and I would think that, you know, with all the talk of tariffs over the course of this year, the finance people and everybody within any company is going to understand that, yes, this does have an impact on them, right? Again, the ACE, like you said, the ACE reports as well as surety. Sureties get the information as well, but it’s not real granular, it’s real header information. So we can give a summary, a level information, but your ACE reports your customs brokers, that’s another thing. As far as underwriting is concerned, that sureties are in the business to write bonds, right? Even though it’s a financial guarantee, we’re going to request financial statements in some cases. But you look at the importer history too. We’ve been writing bonds since for 90 years. Many of those bonds we’ve written for decades. So we have that information available on what have they imported in the past? Have there been. Claims. Are there PGA entries? You know, the participating government agencies, they look at credit ratings. It’s really a subjective review based on, you know, that importer history and the financial wherewithal.

Andy  20:13

Let me come in. I just, I guess part of it’s my background or whatever. But I want to mention that also the ATA CarNet is if you are looking at a scenario where you’re trying to stimulate trade. Now, the one thing that’s happening, you know, again, whether you you like the administration, or not, or whatever, there are trade deals now, finally, being, I guess, signed and all that. That means that there are definitely opportunities for us goods around the world with that. That means that you will have sales people, and you’re going to go out to these conferences or to, you know, companies or whatever, and you’re trying to meet with people to stimulate trade, get orders, right? The use of an ATA CarNet is a great tool in international trade that will help you, I guess, make the deal, but also help protect your cash flow, because it’ll be a way to prevent or avoid having to pay duties and taxes. But you got to have a bond with that and and I will say Roanoke operation there is really good. There’s other carne operations as well. I just will say that that the use of an ATA CarNet is definitely a good one to help you stimulate trade and protect your cash flow. So with that, any last words here to as we wrap up here? Colleen, well,

Speaker 1  21:32

I started out saying bonds are not boring, so I’ll say that again. And you know, the future take takes time. We don’t know what’s going to happen going forward. I understand that it’s hard to predict bond amounts, but you know, between between us, between customs brokers, that the ACE data, we’re all in it together, and we work together to help the importers as much as we can well.

Andy  21:55

And one thing too is that companies should definitely be involved in trade associations that are, you know, affecting change. They’re keeping their hand on the pulse of UL on, you know, different changes or things that are going on. It’s, it’s a strong way of being able to see what’s happening, and, from a company perspective, try and add some influence to, you know, Congress and the administration and the agencies to, you know, I guess, influence it positively rather than negatively. But I would highly recommend that that’s another way of and the brokers Association, the NCB FAA, this is a national customs brokers and freight forwarders Association, as you mentioned. It’s probably a good resource for people. You don’t have to be a broker to hit their website, and it may be a good source for some support. What do you think of it? As far as that kind of thing, you know, involvement in trade associations is that, do you recommend that? Or what? Absolutely.

Speaker 1  22:55

You know, there’s the aaei as well, American Association of exporters and importers. We have a surety Association, the International Trade surety Association. There’s only four members, but we’re we’re small but mighty. We always say we write a good portion of the bonds on file between the four members. You know, we work. All of us work very closely with the NCB FAA. They have great information and and the leadership of the ncpfa really goes to bat for all of their members and understands the issues right well.

Andy  23:26

Colleen, thank you so much for being on our show. Folks like us, share us, make your comments and and when I will have more information about Roanoke on our show notes here and all but Colleen, thank you so much for being on you’re always such a pleasure to I’m sorry I haven’t seen you personally in for quite some time, but you’ve

Speaker 1  23:48

been missing in action a little bit. I know it. I need to get back

Andy  23:51

in into the middle of trade and some things, but

Speaker 1  23:56

website to it, Roanoke group calm for that tariff page and our bond calculator, so that should help importers as well.

Andy  24:02

Outstanding, all right, say that again, it’s, it’s the bond calculator. Especially, I love that tool.

Speaker 1  24:08

Yeah, it’s in our resources, within our website, Roanoke insurance, or, I’m sorry, Roanoke group.com so there’s that’s available, and there’s also a tariff and bond page in there. Excellent.

Lalo  24:19

Yeah, we always add those on the show notes as well. So in case you all missed it, just you know you’re driving or running or walking your dog or whatever, when you’re listening to this, don’t worry. Just check the show notes and you’ll you’ll find links to to the resources that were discussed here, including colleen’s contact information to her LinkedIn and, of course, the website as well. So just just to make sure that y’all didn’t miss anything so well,

Andy  24:47

we got some nuggets of knowledge and some potential actions that we can take out of this show. So thank you again. Colleen and everybody. Have a great day.

24:55

Thank you. Thank you all.