Come mid-December, the much anticipated new rules governing the importation of food will go into effect. Shippers and transporters have been awaiting the role of the new regs from the Food and Drug Administration with anxious concern since the Bioterrorism Act was passed by Congress in June 2002. Although substantial changes, and compromises, have been made since the rules were initially proposed, many in the trade community believe there are still plenty of details to be ironed out.

World Trade talked to sources on all sides of the issue--shippers, customs brokers, carriers, and legal analysts--to identify looming potential snags, and whether the early line on the rollout is betting it will be "sweet" or "sour."

Benjamin England, an attorney in the Washington, D.C. legal power house Hogan & Hartson, recently left the FDA where he was the Regulatory Counsel to the Associate Commissioner for Regulatory Affairs, focusing on import risk management and FDA's bioterrorism regulations. While shippers, in his opinion, are generally pleased with the revised rules published in October, concessions are "not really as gracious" as they appear (see sidebar).

For starters, "under the (initial) proposed rule, only someone in the United States was permitted to submit the prior notice (the notice that's required to be submitted to the FDA in advance of import food shipments and animal feed). Now, they're saying that any person who has knowledge can submit prior notice," he says, referring to the revision that allows any individual with knowledge of the required information to submit the prior notice including, but not limited to, brokers, importers, and U.S. agents.

However, "one of the data pieces that's in the prior notice is the entry number, and only the customs broker has that number-it's their number-which means there's going to have to be communication with the customs broker in order to obtain that number." The reliance on the broker doesn't end there, England says. "In addition, the proposed system for submitting that information is U.S. Customs' computer system, which ordinarily only brokers use." Specifically, the FDA is requiring the prior notice to be submitted electronically via U.S. Customs' Automated Broker Interface (ABI) or the FDA Prior Notice System Interface (FDA PN System Interface).

Not only do the new rules make it hard for shippers to comply with the requirements without using a broker, England calculates that there are hundreds of shipments that will require special handling, further adding to the likelihood of delay. "FDA's estimating that 90 percent of shipments could come through Customs' system." But, it's those that are moving in-bond or under Customs' BRASS system, for instance, that pose problems, he says. "If only 10 percent come in under a separate system (other than ABI) and have to be matched up later-that's 10 percent of 6.5 million commercial lines of entry, or 650,000 commercial lines of entry-that have to be matched up together between the two systems. Any confusion in those areas is just going to clog up the borders."

In the meantime, "there are quite a number of truck entries that come in now that do not use electronic systems, they're using non-AMS (Automated Manifest System) systems. At least when it comes to manifests, there is still going to have to be a match up. When a truck arrives, they use the manifest to 'arrive the truck.' But if those systems are not linked up, you're still stuck with matching up the FDA prior notice with the actual truck when it arrives. Customs has already said they will not be requiring trucks to use the AMS, they can use fax or paperwork, and that's going to be difficult to match up no matter how FDA receives its prior notice. There are still a number of operational and logistical issues that could result in significant confusion at the border level."

Time = money

Extra work typically translates into extra costs, and this may be the case when the new rules are implemented. According to Jim Wiser, executive vice president, brokerage operations, PBB Global Logistics, "I don't think it's a big cost impact to our shippers. To the brokerage community-yes, it's significant. We're going to have to have more people involved in the release process. We're going to have to handle these things at a peak time, we're going to have to handle them almost instantaneously upon arrival because there's quite a bit of work we need to do with them to get them in."

While there will be more costs to bear, Wiser is hopeful they won't be burdensome. "The FDA has estimated that a 3-line entry might cost an extra $75. If that number's accurate, and it's probably a little bit high, if you add $75 to a $30,000 or $40,000 shipment, it's not really a significant cost to the total transportation, logistics chain of getting that product to market. The brokerage for most food importers is probably going to double, because what we're going to end up doing is making a whole separate entry for FDA and one for Customs. But again, we're talking about doubling a relatively small fee and a very small part of the overall costs of production and getting something to market-maybe tenths of a percent."

The other side of the equation to cost is time. The new regs require that prior notice must be received and confirmed electronically by FDA no more than 5 days before arrival and, as specified by the mode of transportation, no fewer than: 2 hours before arrival by land or road; 4 hours before arrival by air, land or rail; and 8 hours before arrival by water. Wiser sees the potential for a time crunch. "If you tell the trade community you need it 2 hours in advance of the truck arriving-they're going to send it to you 2 hours in advance of the truck arriving (and not likely sooner)." This doesn't leave much time for the broker to get the data to FDA, have the FDA review the data, then transmit back a release. "We'll have some difficulties along those lines," he says.

Another component of the new rules requires domestic and foreign facilities that manufacture/process, pack, or hold food for human or animal consumption in the U.S. to register with the FDA by December 12. When we spoke with Wiser on October 16, registration had just opened up. "Over the next week, or two, or three, we should know how many companies can be registered every day, and how long it's going to take to register over 400,000 importers and exporters. It's probably going to be a lot longer than 57 days."

Despite the challenges, Wiser is upbeat about the trade's ability to comply with the rules. "If you look at the big picture, I don't think this is going to have a big impact on the import and export activity in the United States. What they started out with would have been horrendous. But, I'm optimistic because we went from something that was completely unworkable to something that will just take a lot of work."

Kristin Krause, spokesperson for FedEx Corp., believes added costs are likely to show up in several areas-changes that must be made to IT systems and extra paperwork. Furthermore, while she says it's too soon to know the financial impact on shippers, Krause thinks consumers may ultimately experience increases in prices. Her main concern, though, is the effect on the supply chain. "We understand the need for safety and security measures, but these changes can't come at the expense of global commerce," she says.

England also sees the potential for rising costs and lower supply chain efficiency. "The extra pieces of data that the FDA is now requiring combined with the fact that it has to be given in advance means you're going to run into higher expenses. Under the new rules, information has to be solidified earlier in the transaction. Therefore, the industry has a lot less flexibility in how they manage their supply chains. Once a shipper decides what they want to do in advance, they have to lock it down and follow through, otherwise, they have to cancel the prior notice, resubmit it, then wait another two, four, or 8 hours. While this doesn't sound like a lot, when you're in a just-in-time environment the consequence can be huge. I think it's the exponential impact of this that FDA isn't really thinking about...the practical implications that are going to have a tremendous financial burden for the industry."

The devil's in the details

Clif Burns, an attorney in the International Business Transactions practice group at Powell,Goldstein, Frazer & Murphy LLP in Washington, D.C., shared his observations about the new rules, particularly in regards to determining the proper country of origin for FDA and Customs purposes.

"An hour going through the FDA proposed rule on advance notice shows some interesting things not addressed in the summaries of the rule on the FDA site.

"First, the definition of food is not quite what you might think. Live cows are food, even though we generally find it easier to eat them after they're dead. Food packaging materials are not food, even though the FDA otherwise regulates food packaging materials. Dog chow is food, while agricultural pesticides aren't food and aren't regulated, even though tainted pesticides would be a spectacular way for terrorists to render large quantities of food unsafe.

"Second, food that is brought in for either transshipment or for processing and export is considered imported for purposes of these rules. Yet, it's hard to see how this furthers the purpose of the (Bioterrorism) Act, but the FDA huffs and puffs and declares that it does.

"Third, if food is in its natural state then the grower must be listed in the notice; if not, then the manufacturer must be listed instead. Whether food is in its natural state is not always obvious, though. Peeled apples are not in their natural state; waxed apples are. An eviscerated chicken is not in its natural state, but an eviscerated, decapitated fish is-you go figure.

"Fourth, shipments from Puerto Rico aren't covered, but shipments from every other American territory or possession are subject to advance notice." Burns concludes, "Finally, the country of origin to be provided in the notice yields some interesting conundrums. What is the country of origin of a fish caught in international waters? Bonus points will be awarded for the correct answer. Hint: it doesn't have anything to do with the nationality of the crew, which is probably the only thing that would have made sense in this context!"

Carriers agree that documentation and country of origin predicaments are probable, and worry about the outcome. "There's $8 to $10 billion worth of FDA-regulated shipments that cross the Canadian border annually. What if the FDA started turning back every shipment at the border that didn't have proper documentation? The magnitude would be daunting," said one express consignment company.

The finer points of the new rules have unique ramifications for foreign firms, such as Rainbow Farms Ltd. in Nova Scotia, Canada. The company ships frozen blueberries via truck throughout North America and via container around the world. Similar to most shippers World Trade spoke with, Rainbow Farms is anticipating a learning curve at first, yet "once a new routine is developed, things should run smoothly," comments the company's Barbara Hagell. Nonetheless, "One of the major challenges is in regards to prior notice," she says. "Often, our finished product leaves our facility on weekends, after the office has been closed. This would make prior notice difficult if there is a sudden purchase order." Hagell explains that Rainbow Farms generally has all their product sold early in the season, although they ship to customers on an "as needed" basis. Sometimes, the company receives purchase orders on Fridays for delivery into the U.S. on Monday or Tuesday.

As for the improved safety and security brought about by the new rules, that too is a matter of opinion. Hagell says, "I am unsure if the new rules really improve the security of the food supply, but at least the new rules make someone accountable. If everyone along the food supply chain maintains the proper documents, the system should work. If someone along the food supply chain does not maintain proper documents, the system fails." The bottom line? "Due diligence," she says.

Still and all, England questions whether the new rules will dramatically improve security. "I don't know that there's that much additional intelligence that they're getting out of the data just by getting it 2 hours or more in advance, that's going to enable them to really screen it for risk purposes," he says. "Unless, they start building a real risk-based paradigm and get away from this transactional model and start getting to a system that looks at the people who are involved in the supply chain and how they're securing the supply chain. In other words, just use the transaction to audit the account rather than trying to get all of your information out of the transaction. It's just too much data coming into them too rapidly to really screen it and get much value out of it."

Transactional vs. account-based compliance

FDA's strategy for monitoring shipments and shippers without impeding the supply chain is a concern, which is why the agency should adopt an account-based approach rather than a transactional approach, contends England. Yet, while Customs has been operating in an account-based environment for some time, the FDA is still behind the times.

"There really are two camps when it comes to FDA, specifically when it comes to imports. Imports for the FDA was sort of the 'bastard stepchild' for quite a number of years, and largely that's because under the old paradigm, FDA was primarily interacting with bulk products-ingredients that were going to be produced as a finished product later in the United States. So, FDA could always rely on the domestic inspection to ensure that the industry was using proper receipt and handling and quarantining and testing of incoming goods. But from the late 1980s to the mid-90s the industry changed-the vast majority of products coming in now is no longer ingredients, it's finished products. However, the FDA didn't shift with it. And, the result is that they're using and old system that really doesn't focus enough resources when it comes to inspections, or IT solutions."

Not only have the nature of FDA's imports changed, so has the volume, says England, which makes the transactional method inefficient. "Today, they've got a very high volume and they're trying to jam a transactional system in order to manage risk into the program, and I think it's just going to muck up the works. Now, the new camp thinks that you really need to focus on the product as it comes through the supply chain-it's not just the name of the grower or the manufacturer-it's also the product as it comes through the entire life cycle all the way down to the consumer in order to ensure the product is safe and secure. You have both traditional food safety and the new food security pieces to it. You can't manage that on a transactional level. Often times, the people who are being required to submit the information don't have it first hand. So, now you're increasing the likelihood of errors in the transmissions."

Sidebar: Government "Double-Speak" in Imported Food Security

Nobody is more conscientious about imported food security than the people who make, move, and clear it. If the unthinkable occurred in the food, drug, or cosmetics industries entire sectors could be severely impacted economically. Consumer confidence in an industry's safety and security controls would become a hot commodity. Fortunately for the United States, and foreign businesses and economies producing the foods, drugs, and cosmetics consumed here, manufacturers, transporters, importers and Customs brokers are familiar with managing risk and are answering the call for security-manufacturing, logistical, and informational. But, the government seems to be out of its realm.

Customs and Border Protection and the Food and Drug Administration have been battling the trade community-and apparently each other-over the final framework for managing safety and security risks in imported foods. But, both agencies are schizophrenic on counter-terrorism. Notwithstanding differences in their recent regulatory efforts, philosophically they cannot seem to align themselves. Should risk be managed transactionally or on an account and supply chain basis? For instance, FDA's proposed prior notice rule requires electronic transmission of detailed notice to FDA before each imported food arrives. In contrast, FDA Commissioner Dr. Mark B. McClellan's report to Health and Human Services Secretary Tommy G. Thompson regarding FDA's progress on food security, and his Strategic Plan, espouse shifting FDA's import regime to a "life-cycle" approach involving partnerships with industry. Similarly, the Customs-Trade Partnership Against Terrorism (C-TPAT) uses an account-based supply chain paradigm for managing risk, yet participation in C-TPAT will not mean a reduction in the amount of information industry must submit for importation, much less frequencies of the submissions.

So, which is it? Should the government try to manage counter-terrorism risks or should the government work with industry to reduce such risks and then reciprocate with reductions in regulatory burdens? And, why are we hearing these conflicting messages? Regarding the last question, it is partly a statutory problem. Both agencies are required to begin receiving advanced import and manifest information. Yet, both programs assume the agencies have correctly identified data elements that will actually assist in detecting terrorism risks. Are they correct?

Meanwhile, the industry, being well aware of loss prevention and risk management (for supply chain security) and food, drug, and cosmetic safety principles (such as Good Manufacturing Practices and Hazard Analysis and Critical Control Points), continue to reduce risk in exchange for very little governmental value. And, the trade impact of the mismatch between transactional ("tell me lots of information with each importation") and account-based ("show me how you identify, manage, and mitigate risk so I can look elsewhere for it") risk management is looming. Customs' final advance manifest rule will be effective in early October, and FDA's prior notice will become effective on December 12, 2003.

The trade impact of these transactional rules has been severely under estimated. The agencies predict a majority of advance manifest data on imported food will be transmitted through a single system, but rumors abound as to the extent they can succeed. Even in Customs' announcement of their advanced manifest rule, certain imported truck cargo manifests may be presented to Customs via fax. That will be difficult to reconcile with FDA's prior notice, no matter how FDA receives it. Furthermore, assuming prior notice for 80 percent of food imports is received simultaneously with the Customs notice, that leaves 1.3 million commercial lines of food imports to be reconciled across agencies or against paper manifests. Add international mail, difficulties with in-bond entries, reconciling different levels of required detail (manifest data versus FDA's line-by-line data) and consolidated freight-and December 13th will be unlucky for another reason.

What is the answer? FDA and Customs must begin to give meaningful value to industry and supply chains (what I call "life-cycle accounts") that manage risks that the government would otherwise have to manage transactionally, while using minimized transactions to challenge an account's veracity, integrity, and robustness through audits. Industry should demand this, demonstrating how the agencies can hardly justify stopping their shipments at the border. Besides, what is FDA looking for at the border anyway? Inspectors cannot "see" the risks that concern them. Only processing and supply chain risk management can adequately control FDA risks. Without this major philosophical shift, both agencies will continue to writhe under congressional oversight trying to explain how they can ensure food safety and security by examining two percent of the cargo-on a good day. --Benjamin L. England

England is an attorney with Washington, D.C.-based Hogan & Hartson.