International Trade: U.S. Customs and Border Protection Faces	 
Challenges in Addressing Illegal Textile Transshipment		 
(23-JAN-04, GAO-04-345).					 
                                                                 
U.S. policymakers and industry groups are concerned that some	 
foreign textile and apparel imports are entering the United	 
States fraudulently and displacing U.S. textile and apparel	 
industry workers. Congress mandated GAO to assess U.S. Customs	 
and Border Protection's (CBP) system for monitoring and enforcing
textile transshipment and make recommendations for improvements, 
as needed. Therefore, GAO reviewed (1) how CBP identifies	 
potential illegal textile transshipment, (2) how well CBP's	 
textile review process works to prevent illegal textile 	 
transshipment, and (3) how effectively CBP uses its in-bond	 
system to monitor foreign textiles transiting the United States. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-345 					        
    ACCNO:   A09161						        
  TITLE:     International Trade: U.S. Customs and Border Protection  
Faces Challenges in Addressing Illegal Textile Transshipment	 
     DATE:   01/23/2004 
  SUBJECT:   Import regulation					 
	     Import restriction 				 
	     Importing						 
	     Inspection 					 
	     Internal controls					 
	     Strategic planning 				 
	     Textile industry					 

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GAO-04-345

United States General Accounting Office

GAO

                       Report to Congressional Committees

January 2004

INTERNATIONAL TRADE

U.S. Customs and Border Protection Faces Challenges in Addressing Illegal
                             Textile Transshipment

                                       a

GAO-04-345

Highlights of GAO-04-345, a report to the Chairmen and Ranking Minority
Members, Committee on Finance, U.S. Senate, and Committee on Ways and
Means, House of Representatives

U.S. policymakers and industry groups are concerned that some foreign
textile and apparel imports are entering the United States fraudulently
and displacing U.S. textile and apparel industry workers. Congress
mandated GAO to assess U.S. Customs and Border Protection's (CBP) system
for monitoring and enforcing textile transshipment and make
recommendations for improvements, as needed. Therefore, GAO reviewed (1)
how CBP identifies potential illegal textile transshipment, (2) how well
CBP's textile review process works to prevent illegal textile
transshipment, and (3) how effectively CBP uses its in-bond system to
monitor foreign textiles transiting the United States.

GAO is making several recommendations to the Commissioner of CBP to
improve the information available for textile transshipment reviews, to
encourage continued cooperation by foreign governments, to improve CBP's
monitoring of in-bond cargo, and to strengthen the deterrence value of
in-bond enforcement provisions.

The Department of Homeland Security agreed with GAO's findings and
recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-345.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Loren Yager at (202)
512-4347 or [email protected].

January 2004

INTERNATIONAL TRADE

U.S. Customs and Border Protection Faces Challenges in Addressing Illegal
Textile Transshipment

To identify potential illegal textile transshipments, CBP uses a targeting
process that relies on analyzing available trade data to focus limited
inspection and enforcement resources on the most high-risk activity. In
2002, CBP targeted about 2,500 textile shipments out of more than 3
million processed, or less than 0.01 percent.

Given resource constraints at CBP ports, CBP's textile review process for
preventing illegal textile transshipment increasingly depends on
information from foreign factory visits that CBP conducts, based on the
targeting results. However, CBP's foreign factory visit reports are not
always finalized and provided to ports, other agencies, or the foreign
governments for timely follow-up. Further, after the global textile quotas
end in 2005, CBP will lose its authority to conduct foreign factory visits
in former quota countries. U.S. overseas Attache offices and cooperative
efforts by foreign governments can supplement information provided to the
ports.

Under CBP's in-bond system, foreign textiles and apparel can travel
through the United States before formally entering U.S. commerce or being
exported to a foreign country. However, weak internal controls in this
system enable cargo to be illegally diverted from its supposed
destination, thus circumventing quota restrictions and payment of duties.
Moreover, CBP's penalties do not deter in-bond diversion. Bond amounts can
be set considerably lower than the value of the cargo, and violators may
not view the low payments as a deterrent against diverting their cargo.

CBP's Process for Processing and Inspecting Goods

Entry Targeting Review Final actions

Contents

  Letter

Results in Brief
Background
CBP Uses a Targeting Process to Identify Potential Textile

Transshipment CBP Has Adapted Textile Review Activities to Changing
Environment but Faces Further Challenges Weak Internal Controls Hinder
Effectiveness of CBP's In-bond System CBP Has Experienced Serious
Challenges in Enforcing Textile

Transshipment Conclusions Recommendations for Executive Action Agency
Comments

1 3 5

8

18

32

45 53 55 56

Appendixes

Appendix I: Appendix II:

Appendix III: Appendix IV:

Objectives, Scope, and Methodology

U.S. Textile and Apparel Trade, Production, and
Employment

Imports of Textile and Apparel
Top U.S. Ports
Textile and Apparel Products Affected by Quotas
Future Barriers to Trade in Textile and Apparel

Comments from the Department of Homeland Security
GAO Contacts and Staff Acknowledgments

GAO Contacts
Staff Acknowledgments

57

61 61 65 67 67

72

76 76 76

Tables    Table 1: U.S. Trade Partners Visited by Textile Production    
                            Verification Teams, 2000-2003                  12 
            Table 2: Total number of In-bond Cases and Assessed Amount for 
                            Liquidated Damages, 2001-2003                  37 
            Table 3: CBP Port-Level Exclusions, Penalties, and Seizures of 
                      Textiles, 2000-2002 (Dollars in millions)            48 
Figures     Figure 1: U.S. Textile and Apparel Domestic Production,        
                     Employment, Imports, and Exports, 1993-2002            7
             Figure 2: CBP's Process for Targeting Textile Transshipment   10 

Contents

Figure 3: CBP's Monitoring of U.S.-Vietnam Trade Indicates Role
and Limitations of Targeting 14
Figure 4: An Overview of CBP's Textile Monitoring and
Enforcement Process, with Results for 2002 21
Figure 5: TPVT Officials Verifying Production in El Salvador Textile
Factories, in July 2003 25
Figure 6: Main Hong Kong-China Commercial Control Point at Lok
Ma Chau, August 2003 31
Figure 7: Total In-bond Entries for 11 Major U.S. Ports, January
2002-May 2003 34
Figure 8: Example of In-bond Diversion of Goods Supposedly

Going to Mexico 36
Figure 9: Weaknesses in the In-bond Process 42
Figure 10: Major Components of Textile and Apparel Imports,

1993-2002 62
Figure 11: Share of U.S. Textile and Apparel Imports by Trade
Partner, 2002 64
Figure 12: Share of U.S. Textile and Apparel Imports by Service Port,
2002 66
Figure 13: Employment in Major Sectors of the Textile and Apparel
Industry, 1993-2002 70
Figure 14: U.S. Production (Shipments) in Textile and Apparel
Sectors, 1997-2001 71

Contents

Abbreviations

ACE Automated Commercial Environment
ACS Automated Commercial System
AGOA African Growth and Opportunity Act
ATC Agreement on Textiles and Clothing
ATPDEA Andean Trade Promotion and Drug Eradication Act
BICE Bureau of Immigration and Customs Enforcement, Department

of Homeland Security CAFE'S Customs Automated Form Entry System CBP U.S.
Customs and Border Protection CBTPA Caribbean Basin Trade Partnership Act
CITA Committee for the Implementation of Textile Agreements FTA Free Trade
Agreements FTAA Free Trade Area of the Americas I.E. Immediate Exportation
I.T. Immediate Transportation NAFTA North American Free Trade Agreement
STC Strategic Trade Center T&E Transportation and Exportation TPVT Textile
Production Verification Team USTR Office of the U.S. Trade Representative
WTO World Trade Organization

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States General Accounting Office Washington, D.C. 20548

January 23, 2004

The Honorable Charles E. Grassley
Chairman
The Honorable Max S. Baucus
Ranking Minority Member
Committee on Finance
United States Senate

The Honorable William M. Thomas
Chairman
The Honorable Charles B. Rangel
Ranking Minority Member
Committee on Ways and Means
House of Representatives

With overall U.S. imports of textile and apparel products running about
$81
billion in 2002, or about 7 percent of all U.S. imports, U.S. policymakers
and
industry groups have been concerned that some foreign textile and apparel
imports are entering the United States fraudulently and displacing U.S.
textile and apparel industry workers. Illegal textile transshipment is one
form of such illegal import activity and occurs when false
country-of-origin
information is provided for imported goods in order to evade U.S. textile
quotas and customs duties.1 U.S. Customs and Border Protection (CBP)2
does not have a reliable estimate of the overall amount of illegal textile

1As defined in the Trade Act of 2002, illegal textile transshipment occurs
when preferential treatment under any provision of law has been claimed
for a textile or apparel article on the basis of material false
information concerning the country of origin, manufacture, processing, or
assembly of the article or any of its components. False information is
material if disclosure of the true information would mean or would have
meant that the article is or was ineligible for preferential treatment
under the provision of law in question. "Country of origin" for customs
purposes generally refers to the country, territory, or insular possession
where a textile or apparel product is grown, produced, or manufactured.
Exceptions to this general principle exist and are briefly discussed in
later sections of this report. Quotas are quantitative restrictions on the
amount of a good that can be entered into commerce. A tariff is a duty or
tax levied at the border on goods going from one country to another.

2On March 1, 2003, the U.S. Customs Service was transferred to the new
Department of Homeland Security. The border inspection functions of the
Customs Service, along with other U.S. government agencies having border
protection responsibilities, were reorganized into the U.S. Customs and
Border Protection (CBP). The U.S. Customs Service's Office of
Investigations was transferred into the Department's new Bureau of
Immigration and Customs Enforcement (BICE).

transshipment that occurs annually, but restrictive U.S. quotas and
relatively high tariffs on certain textile and apparel products create
incentives to foreign suppliers and importers to avoid these trade
restrictions.3

Congress included a mandate in the Trade Act of 2002 (P.L. 107-210, Aug.
6, 2002) directing that we assess CBP's system for monitoring and
enforcing textile transshipment4 and make recommendations for
improvements, as needed. As discussed with representatives of the Senate
Committee on Finance and the House Committee on Ways and Means, we have
focused on answering the following questions:

o  How does CBP identify potential textile transshipment?

o 	How well does CBP's textile review process work to prevent illegal
textile transshipment?

o 	How effectively does CBP monitor foreign textiles transiting the United
States in its in-bond system before entering U.S. commerce or being
exported? and

o 	What challenges, if any, has CBP experienced in using penalties and
other means to deter illegal textile transshipment?

To answer these questions, we conducted fieldwork at seven ports of entry
(New York/Newark, New York; Los Angeles/Long Beach, California; Laredo,
Texas; Columbus and Cleveland, Ohio; and Seattle and Blaine, Washington)
to review how CBP reviews textile shipments at the major land, sea, and
inland ports. Together, these ports represent CBP service ports that
processed 55 percent of textiles and apparel imported into the United
States in 2002. We also reviewed CBP's data analysis at its Strategic
Trade Center in New York, observed a Textile Production Verification Team
conduct foreign factory visits in El Salvador, and discussed CBP's efforts
to coordinate textile enforcement activities with the customs authorities
in El Salvador, Hong Kong, Macau, Mexico, and Canada. We conducted a
survey

3Textile transshipment is difficult to detect, and CBP has not attempted
to systematically determine the size of illegal transshipment occurring.

4For purposes of this report, the term "transshipment" refers to illegal
textile and apparel transshipment; and "textiles" refers to textiles and
apparel, unless otherwise specified.

of 29 CBP ports, including the 11 largest ports that process textiles and
apparel imports. (See app. I for details about our scope and methodology.)

Results in Brief	To identify potential illegal textile transshipments to
the United States, CBP targets countries, manufacturers, shipments, and
importers that it determines to be at a higher risk for textile
transshipment. CBP uses a targeting process that relies heavily on
analyzing available trade data and other information to focus limited
review and enforcement resources on the most suspect activity. First, CBP
identifies the countries in which trade flows and other information
indicate a large potential for transshipment. Second, CBP focuses on
selected manufacturers in those high-risk countries for overseas factory
visits, known as Textile Production Verification Teams. The teams attempt
to verify that factories are able to produce the shipments they have
claimed or to discover evidence of transshipment, such as counterfeit
documents. If evidence of transshipment is found, CBP uses this
information to target shipments to the United States for review and
potential exclusions, seizures, or penalties. In 2002, CBP targeted and
selected for review about 2,500 textile and apparel shipments out of more
than 3 million such shipments it processed that year. CBP also targets
importers based on high-risk activity, and conducts internal control
audits that include verifying whether the importers have controls against
transshipment. However, resource constraints limit the number of foreign
factories and shipments that CBP can target and review annually to a small
share of textile and apparel trade.

CBP's textile review process for preventing illegal textile transshipment
has adapted to the changing security environment, but CBP faces challenges
in its monitoring and enforcement activities. The textile review process
includes analysis of entry documents, inspection of shipments, and
verification of foreign production. CBP ports increasingly depend on
information received from targeting the most high-risk shipments, the
results of CBP's Textile Production Verification Team foreign factory
visits, and other intelligence to do so, given the decreasing level of
resources available at the ports for illegal textile transshipment
enforcement. However, CBP's Textile Production Verification Team reports
are not always finalized and provided to CBP ports, other agencies, or the
foreign governments for follow-up in a timely manner. With the expiration
of the World Trade Organization's textile quota regime in 2005, CBP will
lose its authority to conduct foreign factory visits in former quota
countries. Additionally, supplementing the enforcement information
provided to the ports will be important because textile transshipment will
remain a

concern due to tariff differentials resulting from free trade agreements
and trade preference programs. Information from overseas Customs Attache
offices, now used on a limited basis, and cooperative efforts by foreign
governments can provide important information for port inspections.

CBP has not effectively monitored movements of textiles in its in-bond
system, due to weak internal controls that enable cargo to be illegally
diverted from the supposed destination. The in-bond system allows cargo,
including foreign textiles, to be transported from the original U.S. port
of arrival (such as Los Angeles) to another U.S. port (such as Cleveland)
for formal entry into U.S. commerce or for export to a foreign country.
The effect of illegal diversion is that quota restrictions have been
circumvented and payment of duties avoided. For example, a 2003 CBP
investigation of in-bond diversion of foreign textiles found that the U.S.
importer was filing false CBP documents reflecting export into Mexico
when, in fact, the textile shipments were turned around before reaching
the border and diverted into the U.S. market. Internal control weaknesses
include

o  lack of an automated system to track in-bond shipments,

o 	inconsistencies across ports in targeting and inspecting in-bond
shipments,

o 	in-bond regulations that allow importers to change in-bond shipments'
final destinations without notifying CBP and allow extensive time
intervals for in-bond shipments to reach their final destination, and

o 	inadequate verification that in-bond shipments destined for Mexico are
actually exported.

Although we reported on the in-bond system in 1994 and 1997 and made
recommendations to CBP, not all have been implemented. Since we began our
recent review, CBP has implemented some new measures and has made some
improvements to the in-bond system. However, internal control problems
remain.

CBP has experienced serious challenges in deterring illegal textile
transshipment due to a lengthy and complex investigative process and
competing priorities. CBP has extensive authority to enforce textile
transshipment violations-from seizing the textiles, to penalizing or
prosecuting the violator, to totally excluding the textiles from entering
U.S. commerce. However, CBP relies on exclusions because, among other

reasons, they require less evidence than seizures and eliminate the need
to penalize or prosecute the violator. Furthermore, enforcing violations
under the in-bond system presents challenges due to CBP's weak internal
controls and mitigation guidelines that can allow reduction of liquidated
damages to a fraction of the total amount. CBP also employs other means to
deter illegal transshipment by informing the U.S. importer community of
violations. Additionally, CBP and the interagency Committee for the
Implementation of Textile Agreements5 maintain various lists of foreign
violators, in part to help deter transshipment by the importer community.
CBP also regularly meets with the textile trade community to keep it
informed of the latest enforcement information.

In this report, we are making recommendations to improve information
available for textile reviews at the ports, to encourage continued
cooperation by foreign governments, and to strengthen CBP's monitoring of
in-bond goods.

We received written comments on a draft of our report from the Department
of Homeland Security, which agreed with our recommendations. (See app.
III.)

Background	The United States, like the European Union and Canada,
maintains annual quotas on textile and apparel imports from various
supplier countries. When a country's quota fills up on a certain category
of merchandise, that country's exporters may try to find ways to transship
its merchandise through another country whose quota is not yet filled or
that does not have a quota. Transshipment may also occur because obtaining
quota can be very expensive and the exporters want to avoid this expense.
The actual illegal act of transshipment takes place when false information
is provided regarding the country-of-origin to make it appear that the
merchandise was made in the transited country. The effects of the illegal
act of transshipment are felt in both the transited country (potentially
displacing its manufactured exports) and the United States, increasing
competition for the U.S. textile and apparel industry.

5The Committee for the Implementation of Textile Agreements is an
interagency group composed of members from the Office of the U.S. Trade
Representative and the departments of Commerce, Labor, State, and the
Treasury.

These U.S. quotas, embodied in approximately 45 bilateral textile
agreements, are scheduled for elimination on January 1, 2005, in
accordance with the 1995 World Trade Organization (WTO) Agreement on
Textiles and Clothing. However, U.S. quotas will remain for approximately
five countries that are not members of the WTO and for specific product
categories when trade complaint actions, resulting in reinstated quotas,
are approved. Incentives to engage in transshipment will also continue due
to the differing tariff levels resulting from the various bilateral or
multilateral free trade agreements and preference programs that the United
States has signed with some countries.6 U.S. tariffs on certain types of
sensitive textile and apparel products range up to 33 percent,7 but such
tariffs can fall to zero for imports from trade agreement countries. As
with quotas, manufacturers from countries facing higher U.S. tariffs may
find ways to transship their merchandise to countries benefiting from
lower or no U.S. tariffs, illegally indicate the merchandise's
country-of-origin, and enter the merchandise into the U.S. market.

Imports Nearly Double over Over the past decade, U.S. imports of textile
and apparel products have Past Decade, While grown significantly, while
domestic production and employment have Production and declined. For
example, textile and apparel imports in 2002 were about $81

billion, nearly double their value in 1993.8 The largest suppliers to the
U.S.Employment Decline market in 2002 were China (15 percent), Mexico (12
percent), and Central America and the Caribbean (as a group, 12 percent).
See appendix II for

6The United States has negotiated free trade agreements or enacted trade
preference programs with numerous countries or regions. The Trade and
Development Act of 2000 includes the African Growth and Opportunity Act
(AGOA) and the Caribbean Basin Trade Partnership Act (CBTPA) and gives
nations of both regions quota-free and duty-free access to the U.S. market
for products meeting rules of origin requirements. In addition, the Trade
Act of 2002 provides for expanded access to U.S. markets from AGOA
countries and also provides duty-free and quota-free treatment for
merchandise from Colombia, Peru, Ecuador, and Bolivia. In addition, the
United States, Mexico, and Canada participate in the North American Free
Trade Agreement (NAFTA), and in 2003 the United States entered into free
trade agreements with Chile and Singapore. The rule-of-origin provisions
differ in these various trade agreements.

7This compares to an overall average U.S. tariff rate of less than 5
percent.

8Textile and apparel imports, as we define them in this report, include
all textile and apparel products, whether or not quotas or other
restrictions cover them. See appendix II for more information on textile
and apparel trade and appendix I for more information on our methodology.

more information on textile and apparel trade, production, and employment.

While imports have grown over the decade, domestic production and
employment have declined. Figure 1 shows U.S. domestic production,
imports, exports, and employment in the U.S. textile and apparel sector.
From 1993 through 2001 (latest year available), textile and apparel
production (as measured by shipments to the U.S. market or for export)
declined by 11 percent, and employment fell by 38 percent. However, the
United States still maintains significant production (over $130 billion)
and employment (about 850,000 jobs) in the textile and apparel sector.

Figure 1: U.S. Textile and Apparel Domestic Production, Employment,
Imports, and Exports, 1993-2002

Note: Data on production (shipments) was not available for 2002.
Production, import and export values are in current dollars, not adjusted
for inflation. Producer price changes in the domestic textile products and
apparel sector were low over this period.

U.S. Government Roles in Monitoring Textile Transshipment

CBP has responsibility for ensuring that all goods entering the United
States do so legally. It is responsible for enforcing quotas and tariff
preferences under trade agreements, laws, and the directives of the
interagency Committee for the Implementation of Textile Agreements (CITA)
involving the import of textiles and wearing apparel. CBP has established
a Textile Working Group under its high-level Trade Strategy Board that
prepares an annual strategy for textiles and apparel. This annual strategy
establishes national priorities and an action plan to carry out its goals.
Within the framework of this overall strategy, CBP administers quotas for
textiles, processes textile and apparel imports at U.S. ports, conducts
Textile Production Verification Team (TPVT) visits to foreign countries,
provides technical input for trade agreement negotiations, and monitors
existing trade agreements. In addition to staff at CBP's headquarters,
officials at 20 Field Operations Offices9 and more than 300 CBP ports of
entry oversee the entry of all goods entering the United States. CBP has a
specific unit, the Strategic Trade Center (STC) in New York City, assigned
to analyze textile trade data and other information sources for the
targeting process.

In addition to CBP, the departments of Commerce, Justice, State, and
Treasury, and the Office of the U.S. Trade Representative (USTR) also play
a role in transshipment issues. Further, as an interagency committee, CITA
determines when market-disrupting factors exist, supervises the
implementation of textile trade agreements, coordinates U.S.
administration efforts to combat illegal textile and apparel
transshipment, and administers the phase-out of textile and apparel quotas
on WTO countries required under the 1995 Agreement on Textiles and
Clothing.

CBP Uses a Targeting Process to Identify Potential Textile Transshipment

CBP's process for identifying potential illegal textile transshipments
depends on targeting suspicious activity by analyzing available data and
intelligence. Due to increased trade volumes and shifted priorities, CBP
seeks to focus its limited enforcement resources on the most suspect
activity. CBP targets countries, manufacturers, shipments, and importers
that it determines to be at a higher risk for textile transshipment.
First, CBP identifies the countries in which trade flows and other
information indicate a high potential for transshipment. CBP then targets
selected

9Field Operations Offices provide centralized management oversight and
technical assistance for port operations within their regions.

manufacturers in those high-risk countries for overseas factory visits.
Information from the factory visits is then used to target shipments to
the United States for review and potential exclusions or penalties.
Finally, CBP also targets importers based on high-risk activity and
conducts internal control audits that include verifying that controls
against transshipment exist. However, CBP selects only a small share of
foreign factories and shipments for review due to limited resources.

Targeting Is Essential, Due to High Trade Volumes and Shifting Priorities
for Resources

In response to a rapidly growing volume of trade at the border and limited
resources for enforcement, CBP relies on a targeting process to identify
shipments that have a high risk of being transshipped. According to CBP
officials, trade growth and expanding law enforcement efforts have nearly
overwhelmed its staff and resources. In addition, CBP's modernization of
its processes and technology, as called for in the Customs Modernization
and Informed Compliance Act of 1993, recognizes that the nearly 25 million
entries (shipments) CBP processes annually cannot all be inspected.10
Furthermore, since the terrorist attacks of September 11, 2001, CBP has
shifted resources to security concerns as its priority mission. Inspection
and some other port-level staff have been diverted from detecting
commercial violations to ensuring security. In addition, during higher
alert levels (such as code orange and above), additional staff is also
refocused to assist in port and national security.

CBP Targets Risky Countries, Manufacturers, Shipments, and Importers

CBP's process of targeting high-risk activity begins by identifying the
countries that supply textile imports that pose the greatest risk of
illegal textile transshipment.11 Applying a risk-management approach, CBP
targets shipments for review based on trade data, such as sudden surges of
products restricted by quotas from nonquota countries, production data,

10Public Law 103-182, title VI of the North American Free Trade Agreement
Implementation Act, subtitles A, B. The Customs Modernization and Informed
Compliance Act 1993 (also known as the "Mod Act") places part of the
responsibility for compliance on importers while requiring CBP, then known
as Customs, to modernize its processes and technology to enforce trade
laws.

11By identifying a country as high risk for textile transshipment, CBP is
not making a determination that the country's government is involved in
transshipment. Rather, the significance of the trade and the intelligence
data concerning certain of that country's manufacturers identify the
country as a potentially important transit point for transshipped goods.

results of past factory and port inspections, suspicious patterns of
behavior, and tips from the private sector. CBP then reviews the targeted
shipments for evidence of transshipment, while expediting the processing
of nontargeted shipments. From its country-level review, CBP targets 16
countries per year on average, and actually visits 11 of them on average.
For the countries CBP selects, it targets on average about 45 high-risk
manufacturing plants to visit. These visits seek to find evidence of
transshipment or to verify that the factories are in compliance with U.S.
trade laws and regulations regarding the origin of the goods exported to
the United States. If problems are found, CBP uses that information to
target shipments (entries) entering the United States for possible
detention and exclusion. CBP targeted 2,482 shipments in 2002. CBP has
begun to target high-risk importers' shipments for review while also
conducting internal audits of selected importers. Figure 2 shows the
general process CBP uses to target suspicious activity.

Figure 2: CBP's Process for Targeting Textile Transshipment

Source: GAO analysis of CBP information.

CBP Targets about 16 Countries Before the beginning of each fiscal year,
CBP analyzes trade and

Annually	production data, as well as other available intelligence, to
assess the relative risk of each major U.S. trade partner for engaging in
illegal textile transshipment. CBP generally identifies 16 countries a
year on average as being at high risk for transshipment or other trade
agreement violations and updates its assessment at least once during the
fiscal year. The risk level (high, moderate, or low) is based largely on
the volume of trade in

sensitive textile categories, such as certain types of knit apparel and
fabric, and the likelihood of transshipment through that country. For
example, as of November 1, 2003, quotas on men and women's knit shirts and
blouses were approximately 80 percent or more filled for China, India, and
Indonesia. This situation creates an incentive for producers in those
countries concerned that the quotas will close before the end of the year
to transship their goods. CBP may increase its monitoring of trade in
these products through neighboring countries. The likelihood of
transshipment is a qualitative judgment that CBP makes based on available
intelligence.

Countries with high production capabilities and subject to restrictive
quotas and tariffs, such as China, India, and Pakistan, are considered
potential source countries. These countries could produce and export to
the United States far more textile and apparel products than U.S. quotas
allow. Countries that have relatively open access to the U.S. market,
either through relatively generous quotas (Hong Kong and Macau) or trade
preferences programs (Central America and the Caribbean, and sub-Saharan
Africa) are considered potential transit points for textile
transshipment.12 CBP focuses its efforts on targeting and reviewing goods
from these transit countries rather than source countries because any
evidence that goods were actually produced elsewhere, such as closed
factories or factories without the necessary machinery to produce such
shipments, would be found in the transit country.

After selecting the high-risk countries, CBP then selects a subset of
these countries to visit during the year to conduct TPVT factory visits.
During the past 4 years, CBP conducted 42 TPVT visits to 22 countries.
Cambodia, Hong Kong, Macau, and Taiwan in Asia, and El Salvador in Latin
America received three or more visits between 2000 and 2003. Table 1 shows
the U.S. trade partners that CBP visited on a TPVT trip in those years,
along with their share of U.S. imports of textile and apparel products in
2002.13 For some U.S. trade partners, their share of overall textile and
apparel trade may be relatively low, but for certain products they are
significant

12Although a good may be physically transshipped through a country with
available quota or tariff preferences, it is also possible that the good
would never enter the transit country. Rather, the product's documentation
can be falsified to claim a certain country of origin without it ever
entering that country.

13See appendix II for a list of top U.S. trade partners that supply
textile and apparel products to the U.S. market.

suppliers. For example, although Thailand is the tenth largest supplier
overall, it is the fifth largest supplier of cotton bed sheets.14

Table 1: U.S. Trade Partners Visited by Textile Production Verification
Teams, 20002003

Rank in U.S.

                                            textile and U.S. imports       
                            Number of                apparel 2002 Share of 
                         TPVT visits,       imports, (million U.S. imports 
        Partner             2000-2003                       2002 US$) 2002 

                     All Countries    42                $80,864          100% 
                         Hong Kong    6            3     4,099     
                             Macau    4        20        1,149     
                            Taiwan    3            8     2,483     
                       El Salvador    3        16        1,713     
              Cambodia (Kampuchea)    3        21        1,062     
                          Honduras    2            7     2,513     
                          Thailand    2        10        2,322     
                         Guatemala    2        18        1,676     
                           Vietnam    2        22         960      
                         Nicaragua    2        31         434      
                           Lesotho    2        38         321               a 
                             Korea    1            6     3,275     
                Dominican Republic    1        12        2,252     
                       Philippines    1        13        2,066     
                        Bangladesh    1        15        2,017     

Sri Lanka (Ceylon) 1 19 1,553

a

Mauritius 1 44 255

a

Republic of South Africa 1 46 220

14Due to an increase in imports of these products from Thailand, CBP
selected Thailand for a TPVT visit. The visit uncovered that three of the
top five exporters were illegally transshipping bed linens to the U.S.
market. According to CBP, the Government of Thailand cooperated fully with
U.S. authorities and revoked the companies' export rights.

(Continued From Previous Page)

Rank in U.S.

                                            textile and U.S. imports       
                            Number of                apparel 2002 Share of 
                         TPVT visits,       imports, (million U.S. imports 
        Partner             2000-2003                       2002 US$) 2002 

                       Kenya           1      54          126               a 
                  Madagascar           1      62           90               a 
                   Swaziland           1      63           89               a 
                    Botswana           1     108           6                a 

Sources: U.S. Department of Commerce official trade statistics and CBP.

aIndicates less than 1 percent of total U.S. imports of textile and
apparel products. Imports are general imports measured at the entered
Customs value.

The number of countries CBP visits each year has varied, but from 1996
through 2003 CBP visited 11 countries per year on average. Although the
overall size of trade is an important factor in targeting countries, CBP
also looks at a range of information in making its determination. For
example, several relatively small suppliers, such as Nicaragua, Swaziland,
and Botswana, were visited because they receive special preferences as
developing countries. Also, Vietnam, which only accounted for about 1
percent of U.S. imports in 2002, was selected partly due to trade
anomalies occurring during a period when Vietnam's quota-free access to
the U.S. market made it a potential transit country.15 Figure 3 describes
the case of Vietnam as an example of the role and limitations of the
targeting process. However, Canada and Mexico are both top U.S. trade
partners and designated as high-risk countries, but CBP has not made any
TPVT visits. Under the NAFTA, producers in these countries are subject to
visits to verify NAFTA eligibility. However, these visits do not focus on
transshipment specifically and although CBP has sought to send a TPVT
visit to Canada, it has not yet been successful in persuading the Canadian
government.

15Between December 10, 2001, when Vietnam received lower tariff rates
under normal trade relations, and July 17, 2003, when bilateral quotas
were effective, there were no quotas on imports of Vietnamese textile and
apparel products into the United States. Until December 10, 2001, Vietnam
was subject to higher tariffs reserved for countries with which the United
States does not maintain normal trade relations.

Figure 3: CBP's Monitoring of U.S.-Vietnam Trade Indicates Role and
Limitations of Targeting

When Vietnam achieved normal trade relations (or nondiscriminatory tariff
treatment) with the United States in December 2001, it also became more
attractive as a location to manufacture textiles and apparel for export to
the U.S. market, especially since quotas did not restrict these exports.
As the graph below shows, Vietnam's exports of textile and apparel
products to the United States began to increase rapidly in January 2002.
Monthly imports from Vietnam rose from an average of about $4 million per
month between January 2000 and December 2001 to a peak of about $349
million in July 2003.

The STC monitored Vietnamese textile exports to the U.S. market and
identified Vietnam as a high-risk country for textile transshipment in
2002. In September 2002, CBP conducted its first TPVT visit after Vietnam
received normal trade relations treatment and generally found the same
kinds of issues there as CBP finds in most high-risk countries, especially
poor record-keeping. CBP continued to monitor Vietnam's trade patterns,
because Vietnam's exports were growing very quickly.

In February 2003, USTR began bilateral textile negotiations with Vietnam.
About this time, CBP started having increased concerns about transshipment
based on more concrete evidence. By the time USTR was finalizing an
agreement in April 2003, CBP had serious concerns, according to a senior
CBP official. When these concerns became public, a controversy ensued over
whether the quota levels that had been negotiated based on Vietnam's
existing import levels may have been inflated with non-Vietnamese
transshipped imports. The result was a provision in the bilateral
agreement that the United States could reduce the quota by the amount of
any transshipped imports it might identify. To this end, CBP responded
with a major initiative to review and verify Vietnamese textile imports,
including a TPVT with three teams for 3 weeks in August 2003. Of the 102
factories they visited, 6 were closed or refused entry, 13 had their names
used in counterfeit documents, and 18 were deemed high risk. CBP ports
issued redelivery notices to 22 importers to return their merchandise to
the ports for review. CBP also consulted the Vietnamese government about
hundreds of questionable certificates of origin.

This example indicates the strength of targeting in identifying
transshipment, as well as the limitations in doing so only
retrospectively, especially in highly fluid situations. CBP was able to
find evidence of transshipment, but only after many months had passed. In
addition, intelligence information also played an important role in
discovering the transshipment, underscoring that having other information
sources is important in supplementing the information gained from
targeting and conducting TPVTs.

U.S. Monthly Imports of Textile and Apparel Products from Vietnam, January 2000
                                 to August 2003

CBP Visits About 45 Manufacturers Per Country

CBP targets about 45 factories on average per country visit, although this
number varies depending on the characteristics of each country. For
example, the proximity of factories to one another and the length of trip
(1 to 2 weeks) will affect the number of factories that can be visited.
The importance of the trade partner in U.S. textile and apparel trade will
affect the length of the trip and number of factories targeted. On the
November 2003 Hong Kong TPVT trip, for example, CBP visited over 200
factories. Before undertaking a TPVT visit in a foreign country, CBP
conducts a special targeting session to identify the manufacturers in that
country that it suspects may be involved in textile transshipment. Similar
to its targeting of countries, CBP import and trade specialists consider
the recent trade flows, available intelligence, experience from past
factory visits, and reviews of merchandise at U.S. ports in order to
narrow down from the total list of factories in the country to a list of
the highest-risk factories that they will target for a visit.16 The
process involves collaboration between the STC trade specialists, the
port-level import specialists that will travel to the factories, and
headquarters staff.

During the past 4 years, CBP found that about half the manufacturers that
it targeted as high risk were actually found by TPVT visits to have
serious problems. These problems included actual evidence of
transshipment, evidence that indicated a high risk of potential
transshipment, permanently closed factories, and factories that refused
admission to CBP officials. Each of these problems is considered a
sufficient reason to review and detain shipments from these factories as
they reach U.S. ports. In addition, some factories were found to warrant
additional monitoring by the STC. They were listed as low risk and their
shipments were not targeted for review when they reached U.S. ports.

Although the share of targeted factories found to have problems is
relatively high, the factories that CBP targeted were those that generally
had some indication of risk, based on intelligence or trade data analysis.
Also, the targeted manufacturers that were visited (about 1,700) during
the 4-year period generally make up a small share of the total number of
manufacturers in each country. However, for smaller trade partners, such
as those that receive trade preferences under the Caribbean Basin Trade

16Import specialists generally are the port-level experts that are
responsible for processing textile and apparel shipments and potentially
detaining and examining the products and documentation before entry.
Headquarters staff are also generally import specialists. International
trade specialists conduct the trade data analysis and targeting at the
STC.

Partnership Act (CBTPA) or African Growth and Opportunity Act (AGOA), CBP
can visit a sizable share of the factories within the country because
their overall number of factories is smaller. For El Salvador and
Nicaragua, CBP has visited about 10 percent of the factories, and for
Swaziland and Botswana, CBP has visited about 22 and 28 percent of the
factories, respectively.

Due to the small share of factories that CBP can actually visit, the STC
says it is developing evaluation tools to improve CBP's process of
targeting foreign manufacturers for TPVT visits. Currently, the STC tracks
the number and results of the TPVT visits in order to assess whether the
targeted factories were actually found to have problems by the TPVT
visits. CBP says it is developing a database to keep track of the specific
criteria it used to target manufacturers for TPVT visits. It plans to use
the results of the TPVT visits to identify which criteria were most useful
in its targeting process.

CBP Identified More Than 2,400 In 2002, CBP identified 2,482 high-risk
shipments (entries) for greater

Shipments in 2002	scrutiny or review-less than one-tenth of 1 percent of
the more than 3 million textile and apparel entries that year. CBP
actually reviewed 77 percent of the shipments that were identified.17 Of
the shipments reviewed, about 24 percent resulted in exclusions from U.S.
commerce, 2 percent in penalties, and 1 percent in seizures. To choose
shipments for review, CBP headquarters uses information collected from
TPVT factory visits as well as other intelligence information to create
criteria for its targeting system. When shipments match these criteria,
they are flagged at the ports for a review.18 For instance, when a TPVT
visit finds that a foreign factory has been permanently closed, CBP will
place this information in its automated system to be used as criteria for
targeting any shipments destined for entry into the United States that
claimed to have been produced in that factory. In addition, other
information such as prior shipment reviews or intelligence information
concerning possible illegal activity by manufacturers, importers, or other
parties can be entered as criteria to stop shipments. Criteria can be
entered nationally for all ports, or individual ports can add criteria
locally that only affect shipments to their own port.

17Not all shipments (entries) identified for review were actually
inspected, since some were low-valued shipments that were exempted or
entered during a security alert period in which nonsecurity inspections
were limited.

18"Review" refers to the entire process of analyzing entry documents,
inspecting shipments, and verifying foreign production documents.

CBP Identifies High-Risk Importers for Review and Audit

CBP has recently begun to increase targeting of U.S. importers of textile
and apparel products who demonstrate patterns of suspicious behavior. For
example, CBP identified more than 40 importers in the past year who have a
pattern of sourcing from foreign manufacturers involved in transshipment.
According to CBP officials, they can pursue penalties against these
companies, because this pattern of behavior may violate reasonable care
provisions19 of U.S. trade laws. CBP also uses this information and other
intelligence it collects to target for review shipments that these
importers receive. In addition to this targeting, CBP's Regulatory Audit
division has traditionally conducted internal control audits of importers,
and it uses a separate targeting process to identify the importers that it
will audit. One component of its audits focuses on whether the importer
has and applies internal controls for transshipment. The STC has also
provided information about the companies it targets to Regulatory Audit
for its own investigations or audits.

Number of Targets Identified Is Limited by CBP Resource Constraints

Although CBP's textile transshipment strategy relies on targeting,
resource constraints limit both the number of targets that CBP generates
and the type of targeting analysis that CBP can conduct. First, the number
of foreign factories and shipments targeted is limited by the ability of
CBP to conduct the reviews.20 As previously discussed, CBP is able to
visit only a small share of the foreign factories exporting textile and
apparel products to the United States. The results of these visits then
provide key information for targeting shipments for review as they arrive
at U.S. ports. Similarly, CBP targets only a small share of textile and
apparel shipments to U.S. ports for review. CBP officials with whom we met
said CBP limits the number of shipments it targets for port reviews
because port staff are unable to effectively examine a significantly
larger number of shipments.21

19Reasonable care provisions require importers entering textile or apparel
products into the commerce of the United States to ensure that the
documentation covering the imported merchandise is accurate as to the
country of origin. These provisions require that the importer not solely
rely on information provided by the foreign supplier of the merchandise.

20Since no reliable estimates exist of the amount of imports that are
illegally transshipped, CBP is unable to assess whether the number of
inspections is a sufficient tool to detect and deter textile
transshipment.

21In addition, CBP does not want to adversely affect importers by
detaining shipments without some evidence of transshipment besides trade
data anomalies. However, even if a shipment is not targeted, CBP port
staff can still select the shipment for inspection.

In addition to resource constraints due to security (previously
discussed), reviewing shipments for textile transshipment is labor
intensive and involves more than a simple visual inspection of the
merchandise. Unlike cases involving narcotics in which physical
inspections alone can lead to discovery of the drugs, physical inspections
of textile or apparel products rarely provide sufficient evidence of
transshipment. Port staff generally needs to scrutinize detailed
production documentation, which is time consuming, to determine a
product's origin and assess the likelihood of transshipment.22

Second, staff constraints restrict the extent to which CBP can utilize and
develop its targeting process. As of December 2, 2003, the STC had 25
percent of its staff positions unfilled (3 out of 12 positions), while its
responsibilities are growing as trade agreements are increasing. For each
new trade agreement, STC staff monitor trade and investment patterns to
detect whether anomalies are developing that should be targeted.
Consequently, CBP officials said that resource constraints have meant that
several types of analysis that the STC planned on conducting have either
been delayed or not conducted at all. These included analyses of high-risk
countries, improvements to existing targeting processes, and studies of
alternative targeting techniques. Despite these resource limitations, CBP
and the STC, in particular, have made regular improvements to the
targeting process. For example, CBP's targeting of countries and
manufacturers for TPVT visits has become more systematic, relying on trade
data and other intelligence to select factories for visits.

CBP Has Adapted CBP has consolidated textile functions at headquarters and
has adapted

textile review activities at the ports to changing resource levels.
InTextile Review response to national security priorities, CBP inspectors
at the ports areActivities to Changing being shifted to higher-priority
duties, leaving import specialists at the Environment but Faces ports to
play the critical role in making decisions on excluding or seizing

illegal textile shipments. CBP now relies on TPVT visits as an essential
partFurther Challenges of its targeting process, but CBP has not always
finalized these TPVT

22In addition, preference and free trade agreements have particular "rules
of origin" requirements that must be met in order to obtain reduced or
zero tariffs. These requirements are part of the complexity port staff
face in determining whether transshipment has occurred. Rules of origin
are the conditions that specify how a product must be produced or what
materials must be used for the product to claim a particular country as
its origin and qualify for trade preferences.

results and provided them to CBP ports, CITA, and the foreign governments
for follow-up in a timely manner. With the expiration of the WTO global
textile quota regime in 2005, CBP will lose its authority to conduct TPVTs
in the former quota countries, and supplementing the enforcement
information provided to the ports will be important. Information from
overseas Customs Attache offices and cooperative efforts with foreign
governments can provide additional important information for port
inspections.

CBP Has Consolidated Its Textile Activities Amid National Security
Priorities

CBP Has Centralized Textile Transshipment Activities, but Ports Still Key

CBP has moved most textile functions into a single headquarters division
to foster a coordinated agency approach to monitoring textile imports and
enforcing textile import laws, but it must still depend on its port staff
to identify and catch illegal textile transshipments. As CBP inspectors
are shifted to higher-priority functions, such as antiterrorism and drug
interdiction efforts, import specialists at the ports are playing an
increasingly central role in scrutinizing the growing volume of textile
imports. They review the entry paperwork for all textile imports covered
by quotas or needing visas23 in order to exclude shipments that are
inadmissible or to seize those that are illegal, according to port
officials. However, resource constraints at the ports have forced them to
depend increasingly on STC targeting, results of TPVTs, and information
from headquarters to identify suspect shipments and enforce textile laws.

In 2001, CBP consolidated oversight of most of its textile operations into
one headquarters division in the Office of Field Operations, creating the
Textile Enforcement and Operations Division. One important exception to
that consolidation was the Textile Clearinghouse in the New York STC,
which remained in the Office of Strategic Trade. The Textile Enforcement
and Operations Division is responsible for monitoring and administering
textile quotas; providing technical input to textile negotiations;
overseeing implementation of textile import policies at the ports; and for
planning, reporting, and following up on TPVT visits. It uses the results
of targeting by the STC, the findings of the TPVTs, and input from the
ports to oversee

23A textile visa is an endorsement in the form of a stamp on an invoice or
export control license that is provided by an authorized official of a
foreign government. It is used to control the exportation of textiles and
textile products to the United States and to prevent their unauthorized
entry into U.S. customs territory. A visa may cover either quota or
nonquota merchandise; and conversely, quota merchandise may or may not
require a visa, depending upon the terms of negotiated bilateral textile
agreements with the particular country of origin.

the daily implementation of textile policy at the ports. It also works
with CITA, the domestic textile industry, the importing community, and the
Bureau of Immigration and Customs Enforcement (BICE).

Notwithstanding this, the critical point in identifying and preventing
illegally transshipped textiles from entering the United States is at the
ports. There are more than 300 CBP ports across the country-including
seaports, such as Los Angeles/Long Beach, California; land border
crossings for truck and rail cargo such as Laredo, Texas; and airports
handling air cargo such as JFK Airport in New York, New York. The top 10
of 42 CBP service ports that processed textile imports accounted for about
75 percent by value of all shipments in 2002, according to the official
trade statistics of the Commerce Department. The key staff resources for
textile enforcement at the ports are the inspectors and the import
specialists.

Figure 4 provides an overview of CBP's textile monitoring and enforcement
process, including targeting, port inspections, and penalty
investigations. The figure also provides data for the results obtained at
each stage of the process in 2002. CBP processed about 3 million entries
in that year, with 2,482 entries triggering targeting criteria, of which
981 entries were detained, 455 excluded, and 24 seized.

Figure 4: An Overview of CBP's Textile Monitoring and Enforcement Process, with
                                Results for 2002

aData was not available on the number of criminal investigations and cases
specifically involving textile transshipment.

As national security and counternarcotics concerns have become CBP's top
priorities, CBP inspectors' roles have shifted away from textile and other
commercial inspection. The result is that, even at the larger ports, fewer
CBP inspectors are knowledgeable about a specific commodity, such as
textiles. These inspectors now have less time and expertise to inspect
textile shipments. For example, at all but one of the ports we visited,
inspectors were mainly pulling sample garments from shipments for import

                  Sources: GAO, Nova Development, and Corbis.

specialists to examine rather than acting as an additional, knowledgeable
source on textiles who could do a first level of review.

As a result, the import specialists have become more critical in
preventing textile transshipment. About 900 import specialists work at the
ports, of which approximately 255 are assigned to work on textiles,
according to a senior CBP official.24 These specialists have always been
central to determining whether illegal textile transshipment has occurred,
because visual inspection is usually not sufficient. While physical clues
such as cut or resewn labels can provide an indicator that a garment
should be further examined, in many cases nothing about the garment itself
indicates that a problem exists. To establish textile transshipment,
import specialists must request production documents from the importer
(who, in turn, requests them from the manufacturer) and review them to see
if they support the claimed country of origin. This is a highly complex,
technical, and laborintensive process.25

Import specialists (or at some ports, entry specialists or inspectors)
review the basic entry paperwork for all textile shipments arriving at the
ports that are covered by quotas or need visas.26 They will place a hold
on a textile shipment:

1. if there are "national criteria," that is, if headquarters has entered
an alert in the Automated Commercial System (ACS), CBP's computer system
for imports, based on targeting, TPVT findings, and other risk factors, to
detain all shipments from that manufacturer or to that importer and
request production documents;

24As of September 30, 2003, there were 892 import specialists. While
approximately 255 import specialists were assigned to textile teams, CBP
estimates that only 214 handled textiles and wearing apparel exclusively.
This is because many of the teams handle other commodities as well.

25The rule of origin determines the country of origin that can be claimed
for goods that include components manufactured in more than one country.
For apparel products, the country of origin is generally determined to be
the country where the "most important" assembly process occurred. The
import specialist reviews the production documents to be sure that they
substantiate the requirements for claiming origin. In addition, free trade
or preference programs may have additional requirements, such as using
domestic or U.S. fabric, yarn, or thread. The rules of origin for any
particular product differ under various free trade agreements and
preference programs.

26They would also be reviewing any nonquota or nonvisa textiles that were
presented for entry.

2.

3.

4.

5.

if there are "local criteria," that is, the port has entered an ACS alert
based on concerns particular to that port;

if the port has conducted its own targeting on shipments arriving at the
port and found questionable entries;

if there are abnormalities in the paperwork that warrant further review;
or

if there is other information that may be provided by domestic industry,
the Office of Textiles and Apparel at the Commerce Department, CITA,
foreign governments, or informants.

In most cases, shipments with national criteria will automatically be
detained, a sample pulled from the shipment, and production verification
documents requested. For shipments held due to local criteria, port
targeting, abnormalities, or other information, the import specialist may
request that the CBP inspectors pull a sample from the shipment, which
must be done within 5 days. The import specialist examines the sample
garments and determines whether shipments being held can be released or
require further review. If further review is warranted, they detain the
shipment and send the importer a detention letter, in which they ask the
importer to provide the production verification documentation for an
indepth review. CBP must receive and review the documents within 30 days,
or the shipment is automatically excluded.

Based on the in-depth review of the documentation, the import specialist
decides whether to release the goods into commerce, exclude them if found
to be inadmissible, or seize them if found to be illegal. Goods are
inadmissible and are denied entry when the importer has not provided
sufficient information to substantiate the claimed country of origin or if
documents required for entry have not been provided. Goods may be seized
when the import specialist has evidence that the law has been broken; this
requires a higher level of evidence than exclusion.

Port Staff Review "National In the post-September 11, 2001, environment,
the ports have become more

Criteria" Shipments but Have likely to rely on national criteria. At all
of the ports we visited, CBP

Less Time for Local Monitoring	officials said that, in response to
national criteria in ACS for textile shipments, they will detain all such
shipments and request production documents. However, only a few large
ports that handle a high level of textile imports, such as Los
Angeles/Long Beach and New York/Newark, have been able to do much
proactive local targeting. At most of the other

ports, officials said that they do as much local criteria or targeting as
they can but rarely get the spare time to do very much. CBP data support
these statements. While national criteria accounted for about 75 percent
of inspections in 2002, local criteria and self-initiated reviews
accounted for 25 percent. Further, local criteria and self-initiated
reviews had declined by half, from 2000 to 2002; and most of the local
criteria in 2002 were generated by the ports in Los Angeles and New York.

According to a senior CBP official, headquarters directs the input of
national criteria to improve communications to the ports and foster
greater uniformity of response and action by all affected ports. National
criteria are continually tracked, analyzed, and adjusted as appropriate.
One reason is that smaller ports have fewer import specialists; and in
some cases, no import specialists are dedicated to specific commodities.
In some ports, the import specialist is responsible for the entire range
of products that can enter the country.

TPVTs Are Critical to Enforcement, but Follow-up Reporting Is Not Always
Timely

TPVT Process Triggers Port Textile Reviews

TPVTs are a critical enforcement tool, and the conduct and reporting of
TPVT visits have been made more uniform and rigorous in recent years.
However, while the TPVT reports are an important part of the targeting
process, they are not always provided in a timely manner to CBP ports,
CITA, and the foreign governments.

TPVTs are critical to enforcement because the ports increasingly depend on
the national criteria that headquarters supplies to trigger enforcement.
These national criteria primarily result from STC targeting and the
findings of the TPVTs conducted in high-risk countries. Additionally, CBP
may receive enforcement information provided by a foreign government or
other sources.

The TPVT process has two main objectives: (1) to verify that the
production capacity of the factory matches the level and kind of shipments
that have been sent to the United States and (2) to verify production of
the specific shipments for which they have brought copies of the entry
documents submitted to CBP. If a factory is closed, refuses entry, or the
team finds evidence of transshipment, the team immediately notifies
headquarters so that national criteria can be entered into ACS. Any
further shipments from the closed factories will be excluded. Shipments
from factories refusing entry or found to be transshipping will be
detained, and importers will be asked for production verification
documents. If a factory is deemed to be at high risk for transshipment,
but no clear evidence has

been found, CBP has generally waited until the TPVT report is approved
before entering the criteria.27 Figure 5 shows a TPVT team verifying
production in El Salvador textile factories.

Figure 5: TPVT Officials Verifying Production in El Salvador Textile
Factories, in July 2003

A BICE special agent participating in the TPVT examines rolls The team
investigates the contents of a truck supplying a textile of fabric for
country of origin. factory.

Workers sewing apparel in an El Salvador textile factor.

Source: GAO.

27According to a senior CBP official, this provision was implemented in a
flexible manner, so that in some cases, if a high-risk factory were deemed
sufficiently risky, they would immediately enter criteria.

TPVT report drafting and approval involves several steps. First, the
import specialists on the team write the initial draft of their TPVT
results report while in country. When the team members return to their
home ports, the team leader completes the report and forwards it to
headquarters, where it is reviewed, revised, and finally approved by CBP
management. Once the TPVT report is approved, the remaining national
criteria for the high-risk factories are entered into ACS.

TPVT Follow-Up Is Not Always CBP's standard operating procedures for
TPVTs, dated September 21, 2001,

Timely	state that the TPVT team leader should finalize the reports within
21 calendar days after completing the trip and get headquarters approval
within 2 weeks afterwards, or 5 weeks total. However, when we examined the
approval timeline for TPVT reports during the past 4 years, we found that,
in practice, report approvals have averaged 2.3 months, or almost twice as
long as the procedural requirement. For example, the El Salvador TPVT we
observed was conducted from July 21 through August 1, 2003, but
headquarters did not approve the TPVT report until October 20, 2003.

More importantly, during such interim periods, although national criteria
have been identified for high-risk factories, they are generally not
entered into ACS until the report is approved within CBP.28 The result is
that questionable shipments for which criteria are intended can continue
to enter commerce for another 2.3 months on average. From 2000 to 2003, an
average of 37 percent of TPVT-generated criteria were for high-risk
factories. This means that import specialists at the ports may not see
more than a third of the criteria for about 2.3 months after the TPVT
visits. At that time, if examination of these high-risk factories'
production documents show transshipment of textiles during the interim
period, the import specialists will not be able to exclude these
shipments, because they will have already entered commerce. Instead,
import specialists will have to ask for redelivery by the importer to the
port. At that point, most garments will likely have been sold. Although,
according to CBP, it can charge the importer liquidated damages29 for
failure to redeliver, additional transshipped garments will have entered
commerce nevertheless.

28In some instances, import specialists have immediately entered criteria
for high-risk factories of particular concern, according to a senior CBP
official.

29"Liquidated damages" are a charge against the bond for a breach of a
bond condition.

CITA Uses TPVTs to Generate Information Exchange with Foreign Governments

The TPVT reports are also sent to CITA and trigger another set of actions
in the textile enforcement process. If the TPVT cannot verify the correct
country of origin in all shipments being investigated, then CITA will ask
the foreign government to investigate, which also provides it with an
opportunity to respond before CITA takes an enforcement action. CITA's
goal is to get foreign governments to monitor and control their own
plants-essentially to self police. According to a CITA official, if the
government does not provide a satisfactory response, CITA is then
obligated to direct CBP to exclude the illegal textiles.30

When CBP provides CITA with information that the TPVT (1) was refused
entry to the factory, (2) found evidence of textile transshipment, or (3)
found the factory was unable to produce records to verify production, CITA
will send a letter to the foreign government requesting that it
investigate whether transshipment has occurred and report back to CITA.31
The foreign government has 30 days to respond; if there is no response,
CITA can also direct CBP to block entry of that factory's goods, generally
for 2 years. In such cases, CBP ports do not even have to review
production documents first; the goods will be denied entry. Notice of this
prohibition is published in the Federal Register to inform U.S. importers.

When CITA sends a letter to the foreign government, CITA officials said
that most governments respond with an investigation of the manufacturer.
Sometimes governments penalize the factory with a suspended export
license, or they report back that the factory has closed. As long as they
are taking steps to prevent further transshipment, CITA is satisfied,
according to CITA officials.

CITA officials stated that TPVT reports are essential to CITA's efforts to
address illegal transshipment and that CBP has made progress in providing
CITA, through the TPVT reports, with useful information to identify
suspect factories and to determine the nature and extent of illegal
transshipment. However, CITA officials continue to seek improvement in
these reports, in particular for the reports to contain factual,
verifiable information with definitive conclusions regarding whether a
visited factory is involved in illegal transshipment and for this
information to be provided clearly and

30Under 19 C.F.R. 12.130, CBP, then known as Customs, is required to make
a country-oforigin determination before allowing entry of textiles and
textile products.

31When TPVTs find the factory was closed, it results in automatic criteria
and exclusion. CITA does not have to be consulted first, and it would not
be included in the CITA letter.

concisely. While CITA officials acknowledged that it may be extremely
difficult to CBP to find a "smoking gun" necessary to make this type of
conclusion, CITA officials believe that increased clarity and more
definitive conclusions are possible. Also, delay in receiving the reports
hamper prompt action by CITA, and CBP in many instances does not advise
CITA of follow-up action it has taken against factories that the CBP found
to be unable to verify production or otherwise suspect.

A CITA official estimated that about one-half to three-quarters of TPVTs
result in CITA letters. He estimated that CITA sent about six to seven
letters between October 2002 and October 2003.32 Overall, CBP's TPVTs and
TPVT reports are more geared toward providing CBP with national criteria,
as recognized by a CBP official. However, CITA officials said that they
need more detailed evidence to better support CITA enforcement actions.

Information from Attache Offices, Cooperation of Foreign Governments
Crucial

End of Global Quota Regime Could Affect CBP's Cooperation with Foreign
Governments

CBP faces further challenges to which it must adapt with the expiration of
the Agreement on Textiles and Clothing-the global textile quota regime- on
January 1, 2005. The end of the quota regime will mean that the United
States will also lose its authority under that agreement to conduct TPVTs
in former quota countries, unless customs cooperation provisions with the
foreign governments are renewed. CBP has other means by which it can
supplement the enforcement information it receives from targeting and
TPVTs, including placing import specialists in overseas Customs Attache
offices in high-risk countries and obtaining greater foreign government
cooperation.

Finding means of supplementing the enforcement information provided to CBP
ports will be critical once the global textile quota regime, embodied in
the WTO Agreement on Textiles and Clothing, expires on January 1, 2005.
The numerous U.S. bilateral quota agreements with WTO-member textile
exporting countries were all subsumed in the global regime. The textile
enforcement provisions in these agreements provided the authority for CBP
to conduct TPVTs. All of these provisions will expire together with the
global textile quota regime. CBP will have continued authority to conduct
TPVTs in countries with free trade agreements and preference

32A CITA letter to a foreign government may include requests to
investigate more than one factory.

agreements (such as the Caribbean Basin Trade Preference Act), as well as
in non-WTO countries whose bilateral quota agreements will not expire
(such as Vietnam).

However, certain incentives for transshipment will continue to exist. For
example, special provisions that apply to imports of Chinese textiles have
recently been invoked under the safeguard provision of China's Accession
Agreement to the WTO to limit growth of imports of certain textile
categories.33 The safeguard provision allows individual categories of
textiles to remain under quota for up to an additional 12 months, if the
domestic industry petitions CITA for relief and CITA affirms the petition.
The petition must establish that imports of Chinese origin textiles and
apparel products are threatening to impede the orderly development of
trade in these products, due to market disruption.34

The U.S. government currently maintains a Memorandum of Understanding with
Hong Kong under which customs cooperation has been conducted. Given the
possibility of additional safeguard quotas being imposed on Chinese
textiles after the global quota regime expires, it will be critical that
U.S.-Hong Kong customs cooperation continues. However, the United States
does not have such memorandums of understanding with other highrisk
countries in the region, such as Taiwan, Macau, and Bangladesh. CBP will
no longer have the authority to conduct TPVTs in these high-risk countries
unless customs cooperation agreements are renewed.

33The Accession Agreement textile and apparel safeguard allows U.S. and
other WTO member countries that believe imports of Chinese origin textile
and apparel products are, due to market disruption, threatening to impede
the orderly development of trade in these products to request
consultations with China to ease or avoid such market disruption. Upon
receipt of the request, China has agreed to hold its shipments to a level
no greater than 7.5 percent (6 percent for wool categories) above the
amount entered during the first 12 months of the most recent 14 months
preceding the request for consultations. The limit is effective beginning
on the date of the request for consultation and may not remain in effect
for more than 1 year, without reapplication, unless otherwise agreed
between the United States and China. The domestic industry has the right
to petition for safeguard relief until Dec. 31, 2008, including reapplying
for additional years of protection for categories that have quota imposed.

34As of November 1, 2003, the domestic textile industry had already
applied for safeguards for four categories of textiles that had been
removed from quotas in 2002. CITA reviewed three petitions received on
July 24, 2003, related to knit fabric, dressing gowns, and brassieres, and
declined to review a fourth petition for cotton gloves. On November 17,
2003, CITA approved the three petitions it had reviewed.

CBP Has Other Possible Means to Supplement Its Enforcement Information

CBP has sought to supplement the enforcement information it receives by
placing some import specialists in overseas Customs Attache offices in
high-risk countries and by obtaining greater foreign government
cooperation. CBP started sending import specialists to its overseas
Customs Attache offices in 2000. The reason for this effort was that most
staff in the Customs Attache offices were special agents who were criminal
investigators and had no trade background. Import specialists were to
provide this missing trade experience. CBP identified the countries that
would most benefit from having an import specialist in the Attache office,
and by November 2003, six import specialists were assigned to Canada, Hong
Kong, Japan, Mexico, Singapore, and South Africa.

A CBP official said that the import specialists are assisting with
providing information. They have been able to help in following up on TPVT
findings. They also have been useful in uncovering counterfeit visa cases
in which fake company names and addresses are given in import documents.
If more import specialists were in Customs Attache offices in high-risk
countries to assist with textile monitoring and enforcement, additional
benefits would result, according to the CBP official. In between TPVT
visits, they would be able to assist the targeting effort with activities
such as checking to see whether a particular factory really exists or has
the level of capacity claimed. They could also verify factory addresses
and licensing. Finally, they would be able to facilitate cooperation and
coordination with the foreign government on textile transshipment issues,
including conducting training on transshipment prevention.

Another means by which CBP can also supplement the enforcement information
it receives is by encouraging foreign government cooperation and
self-policing. A good example of such an arrangement is CBP's present
relationship with Hong Kong customs authorities. The Hong Kong Trade and
Industry Department has established an extensive system for regulating
Hong Kong's textile industry, which it enforces together with the Customs
and Excise Department. Hong Kong officials work closely with the U.S.
Customs Attache Office in Hong Kong and CBP's Textile Enforcement and
Operations Division at headquarters. Hong Kong also provides self-policing
assistance to CBP. Hong Kong officials conduct follow-up investigations on
findings by the TPVTs, called Joint Factory Observation Visits in Hong
Kong, which have resulted in numerous cancelled or suspended export
licenses. Hong Kong officials have also actively prosecuted and convicted
individuals violating Hong Kong's textile

transshipment laws.35 As it is a matter of public record, CBP gets the
names of those companies that have been convicted of violations. Macau and
Taiwan also provide CBP with such information. CBP creates national
criteria for these manufacturers, and the ports would detain any future
shipments for production verification documentation. Figure 6 shows the
high volume of commercial traffic coming into Hong Kong from Shenzhen,
China, at the Lok Ma Chau Control Point.

Figure 6: Main Hong Kong-China Commercial Control Point at Lok Ma Chau,
August 2003

Source: GAO.

The view from the roof of the Hong Kong control point on the border with
Shenzhen, China, showing the high volume of commercial truck traffic
coming into Hong Kong from China. Shenzhen is seen in the background.

However, it is not clear whether many other high-risk countries have the
capacity to self-police. In some countries, customs authorities may be
constrained by domestic laws that either limit their authority or do not

35It is a violation of Hong Kong law to falsely claim Hong Kong as a
country of origin for textiles, according to Hong Kong officials. See
later discussion of penalties and Customs' administrative list for further
details.

extend sufficient authority to adequately enforce textile transshipment
provisions in their bilateral agreements with the United States. For
example, government officials in El Salvador said that they do not have
the same authority that U.S. CBP has in requesting production
documentation from Salvadoran factories, because such authority is not
provided in their customs laws. Such lack of authority was also an issue
that USTR addressed when it negotiated the U.S.-Singapore Free Trade
Agreement (FTA), finalized in 2003. CBP, which is a technical advisor to
such negotiations, encouraged the addition of a provision to require the
government of Singapore to enact domestic legislation that provided the
authority needed to fully enforce the agreement's textile transshipment
provisions.

The United States is currently negotiating numerous new FTAs. As with the
Singapore FTA negotiations, USTR may be able to include such provisions in
new FTAs, providing an opportunity for the United States to buttress
textile transshipment enforcement provisions and enhance the ability of
foreign governments to conduct more effective self-policing. Such
provisions have generally been included in the FTAs negotiated since
NAFTA, according to a senior CBP official.

Weak Internal Controls Hinder Effectiveness of CBP's In-bond System

CBP uses its in-bond system to monitor cargo, including foreign textiles,
transiting the U.S. commerce or being exported to a foreign country.
However, weak internal controls in this system enable cargo to be
illegally diverted from the supposed destination, thus circumventing U.S.
quota restrictions and duties. At most of the ports we visited, CBP
inspectors we spoke with cited in-bond cargo as a high-risk category of
shipment because it is the least inspected and in-bond shipments have been
growing. They also noted that CBP's current in-bond procedures allow too
much reliance on importer self-compliance and that little actual
monitoring of cargo using this system takes place. Lack of automation for
tracking in-bond cargo, inconsistencies in targeting and examining cargo,
in-bond practices that allow shipments' destinations to be changed without
notifying CBP and extensive time intervals to reach their final
destination, and inadequate verification of exports to Mexico hinder the
tracking of these shipments. Although CBP has undertaken initiatives to
tighten monitoring, limitations continue to exist. These limitations pose
a threat not only to textile transshipments but also to other areas
related to national security. Without attention to this problem,
enforcement of national security, compliance with international
agreements, and proper revenue collection cannot be ensured.

In-bond System Designed to Expedite Flow of Commerce

To expedite the flow of commerce into the United States, Congress
established in-bond movements to allow cargo to be transported from the
port of arrival to another U.S. port for entry into U.S. commerce or for
export to a foreign country.36 Cargo can be transported in several ways
using the in-bond system. When a vessel arrives with containers, an
importer may elect to use the in-bond system to postpone payment of taxes
and duties while moving the goods from the original port of arrival to
another port. By doing this, the importer delays paying duties until the
goods are closer to their ultimate destination-for example, goods arriving
by ship in Los Angeles may transit the country and ultimately be inspected
and have duties levied in Chicago. Or goods may pass through the United
States on their way to another destination, such as goods that are
transported from Los Angeles to Mexico or from Canada to Mexico.

There are three types of in-bond movements:

o 	Immediate transportation (I.T.). This is merchandise that is moved from
one U.S. port to another for entry into U.S. commerce.

o 	Transportation and exportation (T&E). This is merchandise "in transit"
through the United States. Export to another country is intended at the
U.S. destination port.

o 	Immediate exportation (I.E.). This is merchandise exported from the
port at which it arrives in.

Once the shipment leaves the port of arrival, the bonded carrier37 has 30
days to move the merchandise to the U.S. destination port. Upon arrival at
the destination port, the carrier has 48 hours to report arrival of
merchandise. The merchandise must then be declared for entry or exported
within 15 days of arrival (see fig. 4).

36See 19 U.S.C. 1552 and 1553.

37A bonded carrier is a carrier company that is allowed to move goods that
have not been entered into commerce from one place to another under a
Customs bond. A Customs bond is a contract between all parties that import
merchandise and CBP; it is given to insure the performance of an
obligation or obligations imposed by law or regulation, backed by a
monetary guarantee.

Use of the In-Bond System Growing Rapidly

Based on responses from our survey of 11 of 13 major area ports, the use
of the in-bond system as a method of transporting goods across the country
nearly doubled from January 2002 through May 2003. For our study, we
surveyed the 13 ports across the country that process the largest amount
of textiles and apparel and asked them about in-bond operations at their
port. Figure 7 shows the increase in in-bond shipments processed in the
past 17 months at 11 of these ports.38 From January 2002 through May 2003,
inbond entries increased 69 percent. A recent study on crime and security
at U.S. seaports estimated that approximately 50 percent of all goods
entering the United States use the in-bond system and projects that this
figure will increase.39

Figure 7: Total In-bond Entries for 11 Major U.S. Ports, January 2002-May
2003

38Data for Miami, Florida and Charlotte, North Carolina were excluded
because they did not have complete data for this period.

39Report of the Interagency Commission on Crime and Security in U.S.
Seaports, Fall 2000.

Note: This graph represents growth for 11 major U.S. ports and may not be
representative of overall in-bond growth across all CBP ports.

Based on our survey, the top three U.S. ports that were the most frequent
reported destinations for in-bond shipments from October 2002 to May 2003
were Miami, New York, and Los Angeles. In-bond entries comprised a
significant portion of the total entries for these ports, with 58.2
percent of total entries in Miami, 60 percent in New York, and 45.9
percent in Los Angeles. For goods arriving at the Los Angeles-Long Beach
seaport, the top three intended in-bond destination ports for fiscal year
2002 were Chicago, New York, and Dallas-Fort Worth, Texas.

In-bond System May Facilitate Textile Transshipment

Many officials at the ports we surveyed expressed concern in their
responses over the growth of in-bond shipments and their lack of
additional resources to examine and track these shipments. In addition,
some port officials we spoke with also expressed concern that the in-bond
system is increasingly being used for diverting goods that are quota
restricted (such as textiles) or that have high duty rates.

One example of how illegal in-bond diversion occurs is when textile
shipments arrive by vessel at Los Angeles and are transported by truck to
a port such as Laredo, Texas, where the carrier (trucking company) may
declare immediate exportation to Mexico (see fig. 5). However, instead of
exporting the goods to Mexico, they are shipped to another U.S. location
for sale. This can occur because CBP relies heavily on importer
compliance, and it requires only that carriers drop off paperwork showing
exportation, without actually requiring physical inspection of the
cargo.40

40Since our investigation began, CBP has issued Directive 3240-036A
requiring that merchandise declared for exportation (T&E and I.E.
shipments) be physically inspected before the merchandise can be exported
to Mexico. As of October 20, 2003, all merchandise must be presented to
CBP before export certification.

Table 2: Total number of In-bond Cases and Assessed Amount for Liquidated
Damages, 2001-2003

Fiscal year Total number of in-bond cases

Total assessed amounts for liquidated damages

                             2001 3,466 $93,696,618

                             2002 2,677 151,292,457

                             2003 3,717 64,226,161

Source: U.S. Customs and Border Protection.

Note: An insured party must pay "liquidated damages"-or a monetary fine-
to CBP if the insured party has breached the terms of the bond.

In-bond System Lacks Automation and Critical Information to Properly
Monitor Cargo Movement

Under Current CBP Procedures, In-bond Shipments Transit with Minimal
Information Provided to CBP

At present, CBP lacks a fully automated system that can track the movement
of in-bond transfers from one port to another. Much shipment information
must be entered manually-a time-consuming task when thousands of in-bond
shipments must be processed every day-and as a result, recorded
information about in-bond shipments is minimal and records are often not
up to date. In addition, in-bond arrival and departure information
recording is not always timely; and according to our survey results,
insufficient cargo information, along with a lack of communication between
U.S. ports about in-bond shipments, makes it difficult for ports of
destination to monitor cargo and know the number of in-bond shipments to
expect. CBP has begun to automate its in-bond system but concerns remain.

By definition, an in-bond movement is entry for transportation without
appraisement. CBP collects significantly less information on in-bond
shipments than regular entries that are appraised. While CBP has the
ability to collect additional information for textile products, our survey
results show that very little information is collected by CBP for in-bond
shipments in general.

To process an in-bond shipment, all in-bond paper transactions require a
Customs Form 7512, Transportation and Entry form. This form is filled out
by brokers and submitted to the port of arrival. According to many in-bond
personnel responding to our survey, the information that is provided on
this form to allow the shipment to travel in-bond is often minimal,
capturing some, but not all, shipment manifest information, shipment data,
and carrier data. They also responded that the information on the Customs
Form 7512 is often vague, with not enough descriptions of the commodities

shipped. The form also lacks any invoice or visa information-information
that is critical for shipment targeting. This lack of information causes
difficulty in tracking. Without this information, CBP is unable to
effectively track in-bond shipments.41

In-bond shipments of textiles or textile products have specific
description requirements. CBP regulations require that these shipments be
described in such detail as to allow the port director to estimate any
duties or taxes due. In addition, the port director may require evidence
of the approximate correctness of value and quantity or other pertinent
information.42 However, our survey results show that such additional
information has not been obtained in practice.

CBP's Recording of Arrival and In-bond data are not entered in a timely,
accurate manner, according to

Departure In-bond Information some port in-bond personnel we spoke with,
as well as some survey

Is Not Always Timely 	respondents. Currently, CBP accounts for goods that
initially arrive at one CBP port (port of arrival) but are shipped
immediately to the port of entry (port of destination) through an in-bond
module in CBP's ACS.43 For automated entry forms submitted on electronic
manifests, departure data can be entered in ACS automatically showing that
an in-bond transfer is planned from the port of arrival. For nonautomated
entries (paper), CBP officials are supposed to input departure data
manually at the port of arrival to establish accountability for the
merchandise. When the goods arrive at the port of destination, personnel
are to input data indicating that the goods have arrived, at which time
accountability is transferred from the port of arrival to the port of
destination.

However, at three of the seven ports we visited, officials stated that the
departure and arrival information was not consistently maintained, because
personnel did not input data promptly. As the volume of shipments
transiting via in-bond has increased, the workload for ports

41CBP issued a directive in August 2003 requiring all CBP officers
reviewing Form 7512 documents to ensure that all required information is
furnished and correct at time of presentation.

4219 C.F.R. 18.2 (b), 18.11 (e).

43ACS is CBP's current automated import system. Originally designed in
1984, ACS will be replaced in order for CBP to be able to meet the
increasingly complex, long-term requirements resulting from the growth in
trade, enforcement responsibilities, and legislation. Consequently, the
first modernization project will focus on the trade system, replacing ACS
with the Automated Commercial Environment (ACE).

across the country to enter this information has created a backlog, often
resulting in entries that are never entered into the system. More than
half of the 29 ports we surveyed reported that between 50 and 100 percent
of their in-bond entries were paper entries. At two of the largest ports
processing the highest volume of in-bond entries, officials reported that
more than 75 percent of the entries received were paper entries requiring
that staff manually enter information. CBP personnel at two major ports
told us that in-bond data are often not entered into the system at the
port of arrival, because CBP lacks the personnel to enter in-bond
information for every shipment.

Communication between Ports Results from our survey showed that 80 percent
of the ports did not track

Regarding In-bond Arrival/Departure Data Is Minimal

in-bond shipments once they left the port of arrival. A CBP official at
the Port of Laredo, Texas, a major port of destination, said that they
have no way of knowing the number of shipments intended to arrive at their
port. Without proper communication between them, ports are unable to
determine the location of a shipment traveling in-bond until it reaches
its destination. As a result, personnel at the port of destination were
unable to anticipate a shipment's arrival and thereby identify and report
any delayed arrivals, because a record of departure had never been set up.
However, some ports such as Laredo, Texas are beginning to communicate
with other ports more frequently to anticipate and track in-bond
shipments.

Finally, although CBP has computer-generated reports available to identify
in-bond shipments that were not reported and closed within the required 30
days, 70 percent of ports we surveyed report that they have never used
these reports. They said they do not do so because (1) they either did not
consider the report to be reliable or (2) they had never heard of these
reports. Tracking overdue shipments is a critical internal control,
because it alerts CBP to shipments that never made it to their stated
destinations. Without consistent examination of overdue shipments, CBP
cannot account for in-bond shipments that failed to meet the time
requirements for delivery.

We reported these limitations in 1994 and 1997, and we made several
recommendations to CBP on improving the monitoring of in-bond shipments.44
In 1998, CBP initiated the TINMAN Compliance Measurement Program to
address some of the weaknesses noted in our 1997 report, including the
ability to generate reports to follow-up on overdue shipments. In 2001,
the Treasury Department's Inspector General conducted a financial
management audit and found that although TINMAN resolved some of the
weaknesses found in prior audits, CBP was still unable to ensure that
goods moving in-bond were not diverted into U.S. commerce, thereby evading
quotas and proper payment of duties. Results from our survey show that
this compliance program is not consistently implemented across ports.

CBP Is Making Progress in In March 2003, CBP launched an initiative to
automate the in-bond system

Automating Its In-bond System; with a pilot program called the Customs
Automated Form Entry System

However, Concerns Remain 	(CAFE's), currently being tested at six U.S.
ports.45 CAFE's is an interim step toward full automation. It is intended
to allow more detailed shipment data to be entered into the system
electronically, thus reducing the amount of time personnel must spend
entering shipment data. The CAFE's program is currently voluntary, and, so
far, about 8 to 10 percent of the brokers at the pilot ports are
participating. However, according to a 2003 CBP Action Plan, all land
border truck ports will be required to use the automated in-bond system by
midyear 2004. Nevertheless, no time frame yet exists for deploying CAFE's
at other locations.

Although CAFE's will improve automation of the in-bond system, it will not
resolve the tracking of in-bonds until full automation occurs. When we
spoke to CBP headquarters officials about this continuing weakness, they
stated that they had not made additional improvements to the in-bond
program, because those improvements will be made when their new Automated
Commercial Environment (ACE) computer system is rolled out. CBP stated
that it does not have a time frame for deploying the system to

44See U.S. General Accounting Office, Examination of Customs' Fiscal Year
1993 Financial Statements, GAO/AIMD-94-119 (Washington, D.C., June 15,
1994); U.S. General Accounting Office, Financial Management: Control
Weaknesses Limited Custom's Ability to Ensure That Duties Were Properly
Assessed GAO/AIMD-94-38 (Washington, D.C. March 7, 1994); and U.S. General
Accounting Office, High-Risk Program: Information on Selected High-Risk
Areas HR-97-30 (Washington, D.C., May 16, 1997).

45Pilot testing is being conducted in three seaports and three land ports:
Los Angeles, California; New York, New York; Miami, Florida; Port Huron,
Michigan; Buffalo, New York; and Laredo, Texas.

fully automate in-bonds because development is still under way but it
estimated this might be accomplished within 3 years. Without a definite
time frame, it is not clear if the automation of in-bonds will actually be
implemented.

In-bond Shipments Are Not Consistently Targeted and Examined Before
Leaving the Arrival Port

Although all incoming cargo is targeted for national security purposes,
once the paperwork is filled out for a shipment to travel in-bond, CBP
does not generally perform any additional targeting for these shipments.
CBP instead focuses on targeting shipments making an official entry into
U.S. commerce. The New York STC also does not analyze information from
inbond shipments in order to perform additional targeting. Conducting
additional targeting for in-bond is also critical because in-bond
shipments that are not identified as high-risk shipments by Container
Security Initiative may go through CBP undetected and without inspection.
Recognizing the need for targeting in-bond shipments, some ports we
surveyed responded that they have begun to target in-bond shipments.
However, targeting is not consistently performed because ports do not have
the staff to conduct targeting or exams. Port management officials we
spoke with at two major ports stated that since the September 11 attacks,
resources have shifted to other antiterrorism areas. In addition, because
brokers for in-bond shipments at the port of arrival provide very little
information regarding shipments, targeting of in-bond shipments is
difficult to conduct (See fig. 9 for illustration of in-bond shipment
process and points of concern).

Figure 9: Weaknesses in the In-bond Process

Weak point in process Sources: GAO and Nova Development.

CBP officials at most of the ports we visited cited resource constraints
as a top reason for not inspecting in-bond shipments. For example, CBP
officials at the Los Angeles/Long Beach, California, port-one of the
busiest, with the highest volume of in-bond entries-told us that the
current understaffing does not allow examination for many in-bond
shipments. Moreover, results from our survey showed that more than 80
percent of the 13 area ports we surveyed do not have full-time staff
dedicated to inspecting in-bond shipments. Some ports responded that if
they had more staff dedicated to in-bond shipments, they would have a
greater ability to inspect in-bond shipments. In addition, seven of the
eight largest ports that responded to our survey stated that inspectors
dedicate less than 10 percent of their time to in-bond inspections. For
example, CBP officials at the port of New York/Newark said that they
estimated that less than 2 percent of in-bond entries are actually
inspected.

Nature of In-bond According to several CBP in-bond personnel we spoke with
at two ports, Regulations May Make It certain provisions in the in-bond
regulations make it more difficult to track Difficult to Monitor In-bond
in-bond shipments. These regulations pertain to (1) whether importers can

change a shipment's final destination without notifying CBP and (2)
theShipments time allowed for in-bond shipments to reach their final
destination.

Under the regulations, an in-bond shipment can be diverted to any Customs
port without prior notification to CBP, except where diversions are
specifically prohibited or restricted. For example, an importer with a
shipment arriving in Los Angeles may declare that it will travel in-bond
to Cleveland, Ohio. However, after filing the paperwork, the importer may
then elect to change the final destination to New York, without filing new
paperwork or informing CBP. The information provided to CBP at the port of
arrival will still state Cleveland as a final destination. CBP has no way
of knowing where the shipment is going until and if it shows up at another
port.

For in-bond shipments of textiles or textile products, a change in
destination requires approval of CBP's director at the port of origin.46
However, officials at three ports that handle high volumes of textile
in-bond shipments said that they were either unaware of the regulation or
that it was too difficult to enforce due to the high volume of shipments
they processed.

Another problem CBP in-bond personnel mentioned in monitoring in-bond
movements is the extensive time allowed to carriers to transport
merchandise across the country. The Tariff Act of 1930 established the
inbond system and CBP regulations set time limits at 30 days for the
delivery of merchandise at the port of destination for entry or for
exportation.47 Port officials stated that this time limit is excessive and
may contribute to the diversion of cargo by giving carriers too much time
to move merchandise to different locations. Tracking would be easier if a
carrier had a more restricted time period during which brokers or carriers
would have to close out the in-bond, such as 10 to 20 days, depending on
the distance between the port of arrival and the final port of
destination, according to these CBP officials.

Mexico's in-bond system works differently than the U.S. system. In fact,
when we spoke with Mexican Customs officials at the port of Nuevo Laredo
in Mexico regarding illegal textile transshipment, they said that their
in-bond system could track the movement of goods more easily because (1)
importers were not allowed to change the final destination and

4619 C.F.R. 18.5(a), (f). 4719 C.F.R. 18.2.

(2) carriers are given a certain time limit to deliver merchandise,
depending on the distance between the port of arrival and the port of
destination.

Shipments Declaring Exportation to Mexico Lack Sufficient Monitoring to
Ensure Actual Exportation

Several BICE investigations have uncovered in-bond fraud concerning
textile shipments that were allegedly exported to Mexico but instead
entered into U.S. commerce to circumvent quota and duty payment. To cope
with this problem, BICE officials in Laredo, Texas, initiated an effort to
improve the verification of exports to Mexico by requiring that for
shipments processed for immediate exportation, brokers had to submit a
Mexican document known as a "pedimento," as proof that shipments were
exported to Mexico. However, these documents are easily falsified and can
be sold to willing buyers for submission to CBP, according to Laredo CBP
officials. When we spoke with Mexican Customs officials at the Nuevo
Laredo, Mexico, port, they acknowledged that reproducing false government
pedimentos is easy to do and that it is not a reliable method for
verifying exportations. The broker community in Laredo, Texas, also
expressed serious concerns with fraudulent activity by some Mexican
government officials. They suspected that pedimentos were being sold by
some Mexican Customs officials to facilitate the diversion of goods into
the United States. In fact, in August 2003, the port director of Nuevo
Laredo, Mexico, was indicted for selling false Mexican government
documents for $12,000 each.

Moreover, many ports along the U.S.-Mexican border do not have export lots
where trucks with shipments bound for Mexico can be physically examined to
ensure that the shipments are actually exported to Mexico instead of
entering the U.S. commerce.48 Although export lots were opened at one
time, they have been closed at many ports as a result of resource
constraints. When export lots were open, inspectors were able to verify
exportation because carriers were required to physically present the truck
with the shipments for inspection.

Since our review began, CBP has opened an export lot in Laredo, Texas, and
has required that all shipments declared for export to Mexico be presented
and inspected at the export lot. However, not all ports along the border
have export lots, and Laredo in-bond personnel have noticed that as a
result many trucks were now choosing to clear their goods through those

48There are 24 ports of entry along the U.S.-Mexico border of which only 5
have export lots: Otay Mesa, Calexico, Nogales, Laredo, and El Paso.

ports without export lots. CBP officials we interviewed in Laredo, along
with the members of the Laredo broker community, have raised this concern
and have noted the need to reopen export lots as a way to minimize fraud.

As of October 20, 2003, a CBP directive mandated that all merchandise to
be exported should be presented for export certification. Certification is
not to take place until the merchandise is physically located where export
is reasonably assured. According to a senior CBP official, as a result of
this directive, ports with export facilities have reopened them or
provided a reasonable alternative such as reporting to the import
facility. He also stated that CBP has developed plans to verify that at
least a representative sample of reported exports are actually reported.
However, officials we spoke with at two ports are not sure whether they
will have the resources to verify every in-bond export. A senior CBP
official confirmed this problem, saying that verification of exports might
not occur during periods of staffing constraints.

CBP Has Experienced Serious Challenges in Enforcing Textile Transshipment

CBP has broad enforcement authority regarding illegal textile
transshipment, but it has experienced challenges in implementing
enforcement actions. These challenges include a complex and lengthy
investigative process, as well as competing priorities. As a result of
these challenges, CBP generally has relied on excluding transshipped
textiles from entry into the United States, rather than seizing
merchandise or assessing penalties. In addition, addressing in-bond
violations presents special challenges due to weaknesses in CBP's internal
controls and in the nature of the penalty structure. CBP also employs
other means to deter illegal transshipment, such as informing the importer
community of violations of textile transshipment laws and by making
available lists of foreign violators.

CBP Has Extensive Authority to Address Textile Transshipment Violations

CBP has broad authority to act when violations of textile transshipment
occur. Depending on the circumstances, CBP may pursue the following
enforcement actions:

o 	Exclusion of the textile shipment. CBP can exclude textiles from entry
if the importer has not been able to prove country of origin. Before
admitting goods into the United States, CBP may ask for production
records, review them, and then make a determination on origin. The

importer must be able to prove the textiles' country of origin. If CBP
cannot clear the goods within 30 days, the textiles are automatically
excluded. CBP may also deny entry of textiles if production documents
reveal that the textiles were produced at a factory identified in the
Federal Register by the Committee for the Implementation of Textile
Agreements, as discussed below.

o 	Seizure of the textile shipment. CBP can seize the textiles, if it has
evidence that violations of a law have occurred. By law,49 seizure is
mandatory if textiles are stolen, smuggled, or clandestinely imported. In
other instances, CBP can exercise discretion in deciding whether seizure
is the most appropriate enforcement action. When seizure is invoked, CBP
takes physical possession of the merchandise. In order for textiles to be
seized, there must be specific statutory authority that allows for the
seizure.

o 	Imposition of penalties. CBP has several administrative penalties
available, based on the nature of the violation. CBP may levy
administrative penalties locally at the port level without conducting an
investigation. Alternatively, CBP may refer a suspected violation for an
investigation by BICE. The outcome of the BICE investigation may be a
referral to (1) CBP for an administrative penalty or (2) a referral to the
U.S. Attorney for possible criminal prosecution of the importer and its
principal officers and the imposition of criminal monetary penalties.
Thus, some monetary penalties result from investigations performed by
BICE, while others simply result from activity within a port. In addition
to civil administrative penalties, CBP may also assess liquidated damages
claims against bonded cartmen (carriers) implicated in violations
involving cargo transported in-bond. CBP's Office of Fines, Penalties and
Forfeitures is responsible for assessing certain penalty actions for
transshipment violations and is responsible for adjudicating penalties,
liquidated damages claims and seizures occurring at the ports, up to a set
jurisdictional amount.

o 	Pursuit of judicial criminal or civil prosecutions. CBP may refer
unpaid civil administrative penalty or liquidated damages cases to the
Department of Justice for the institution of collection proceedings either
in federal district court or in the Court of International Trade.
Additionally BICE investigates potential violations to establish the

4919 U.S.C. S:1595a (c)(1)(A).

evidence needed for criminal prosecution of the violations. When BICE
deems sufficient evidence can be established, cases may be referred to the
appropriate U.S. Attorney's Office for criminal prosecution.

CBP Relies Primarily on Exclusions Due to Lengthy and Complex
Investigative Processes

CBP Relies on Exclusions for Enforcement

CBP has increasingly relied on exclusions rather than seizures or
penalties for textile transshipment enforcement for two primary reasons.
First, it is easier to exclude transshipped goods than to seize them
because exclusions require less evidence. Second, although excluded
textile shipments may incur penalties, often CBP does not assess penalties
against importers of excluded merchandise because it is impossible to
attach specific culpability to the importer. According to CBP officials,
absent the evidence to conclude the importer failed to exercise reasonable
care, it would be difficult to sustain a penalty against an importer of
excluded merchandise. CBP also avoids the lengthy and complex process
associated with criminal and civil prosecutions and penalties by excluding
the shipments.

In enforcing textile transshipment violations, CBP has relied more on
exclusions than on seizures or penalties. Textiles may be excluded if the
importer is unable to prove country of origin, whereas seizures may occur
when false country of origin documents are presented to evade quota or
visa restrictions-a situation requiring a higher standard of evidence.
Exclusions usually have an immediate effect, although if the importer
chooses to protest the decision to exclude, the importer can appeal CBP's
decision to the Court of International Trade. Import specialists in Long
Beach/Los Angeles said that when an exclusion determination is made, they
are ready to go to court if needed. The importer can ship to another
country, abandon, or destroy the excluded textiles.

CBP may elect not to levy penalties on excluded goods where culpability of
the importer cannot be established, and generally issues penalties against
the importer only if the importer is implicated or the transshipped
textiles entered the commerce of the United States. However, a senior CBP
official said that the exclusion of textiles is considered a better
deterrent than penalties because the importer cannot receive the goods
and, therefore, cannot get them into U.S. stores that are waiting for
them-often for seasonal shopping. Also, the complexity and length of
investigations and litigation are no longer of concern, since the goods
are simply excluded from entering the United States. Table 3 presents
port-level data on selected enforcement actions in 2000 to 2002.

Table 3: CBP Port-Level Exclusions, Penalties, and Seizures of Textiles,
2000-2002 (Dollars in millions)

                           2000               2001               2002 
                       Number    Value    Number    Value    Number     Value 
             Seizures        43  $2.10          14  $0.31          24   $0.79 
            Penalties        54   4.4           19   0.13          45    0.37 
           Exclusions       402   20.2         308   22.2         455    20.0 

Investigative Processes for Seizures and Penalties Are Complex and Lengthy

Source: CBP's Strategic Trade Center.

Note: CBP was not able to provide data on prosecutions.

The investigative phase for textile transshipment cases can be a complex
and lengthy effort, resulting in few criminal penalties. Investigators
often must follow convoluted paper trails for the movement of goods and
money, obtain accounting records-sometimes having to get Internal Revenue
Service records (which can be a 6 to 9 month process). They also may have
to subpoena banks, interview brokers and shippers, get foreign government
cooperation, and pursue new leads as they arise. A BICE official noted
that it is often difficult to pursue textile transshipment criminal cases
because, unlike with some crimes, there is no "smoking gun" at the port.
For example, when drugs are found, the drugs themselves are evidence of
the violation. With textile transshipment, an illegal T-shirt will look no
different than a legal one. The basis for the violation is established by
proving that a false country of origin was knowingly claimed and that the
importer intended to commit fraud, committed negligence, or gross
negligence.

Although CBP does not keep records on the length of time for disposition
of cases, import specialists and inspectors voiced concern that
investigations can be lengthy. For example, a senior CBP official noted
that in 1989, there were 83 illegal entries. Although some civil cases
went to the Court of International Trade in 1990, the first decisions were
made in 1993, and the last were not decided until 1995, 1997, and 1999.
Two of the larger civil cases against multinational corporations took 7
and 10 years to pursue at the Court of International Trade. Accordingly,
CBP has a process in place to determine whether to accept offers to settle
civil cases out of court, which includes evaluating the litigation risk
and the resources CBP would have to devote to a trial.

One factor relating to the length of the case is that, if BICE initiates a
criminal investigation, any action relating to that case is held in
abeyance

pending possible criminal prosecution of the case. If sufficient evidence
exists to justify a criminal prosecution, the case then goes to the U.S.
Attorney's Office. This move delays related civil proceedings. BICE
officials in Los Angeles/Long Beach noted that U.S. attorneys are short on
resources, since they are also working on drug-smuggling and
moneylaundering investigations; and in the past 10 years in that district,
fewer than 10 cases have been sent to the U.S. Attorney's Office and
prosecuted. They noted, though, that the U.S. attorneys had not rejected
any textile transshipment cases that BICE had brought to them. Neither CBP
nor the Justice Department could provide exact figures on the numbers of
prosecutions of illegal textile transshipments, but CBP officials noted
that the figures were low.

In addition, investigating a case may entail allowing the suspect textile
transshipments to continue for a while, to obtain sufficient evidence.
However, investigators can be pulled off a particular textile
investigation for a higher priority; and then the textile case sits, with
CBP sometimes never getting back to it, according to a senior CBP
official.

When CBP pursues a case, the monetary amounts of the penalties may get
reduced, according to CBP staff, in line with CBP's mitigation guidelines.
CBP data are not available to summarize the penalty amounts assessed and
the final mitigated penalty amounts. But in one example, CBP discovered
that a company transshipped $600,000 worth of blue jeans to evade quota
and visa restrictions. Company officials pled guilty and, in the end, paid
CBP civil penalties totaling only $53,000. CBP officials in the field
expressed concern that substantial penalty reductions may be a
disincentive to pursuing penalties or investigations.

CBP's Enforcement of Inbond Violations Presents Challenges

CBP has experienced two basic challenges in deterring in-bond diversions
through enforcement actions. First, the previously discussed weaknesses in
the system make it difficult for CBP to track in-bond movements and catch
the violators. Second, when CBP discovers a breach of a bond by a bonded
cartman (carrier), the total liability associated with the bond breach is
limited to the value of the bond, rather than the value of the
merchandise. Additionally, it is difficult for CBP to enforce payment of
unpaid penalties and liquidated damages because the Department of Justice
does not have sufficient resources available to prosecute all the
referrals for collections actions.

Because in-bond shipments are not tracked, CBP cannot account for all the
in-bond shipments that fail to fulfill the requirements of timely cargo
delivery. According to a senior BICE official involved in in-bond
investigations, when an investigation is initiated, BICE must physically
track the cargo to prove a violation has occurred. This is difficult
because the cargo is often not at the port but at a warehouse, and CBP's
surveillance must be constant in order to establish that the cargo was not
exported.

When CBP does find in-bond diversion occurring, it typically seeks
liquidated damages 50 for breach of the bond. When CBP demands payment of
liquidated damages, the claim cannot exceed the amount of the bond.
Several CBP and BICE officials stated that the bond amounts set by CBP
regulations are low, compared with the value of the merchandise.51 The
original bond amount for textile entries relates to the total value of
shipments. However, according to BICE officials, convention has allowed
bonds for bonded cartmen (carrier) to be generally set at $25,000-$50,000
a year-a minimal amount that, as one BICE investigator put it, is the
"cost of doing business."52 For example, if a textile shipment with a
domestic value of $1 million is illegally diverted, liquidated damages can
be set at three times the value of the merchandise. However, if the bond
is set at $50,000, the demand for payment of liquidated damages cannot go
above this bond amount. Furthermore, violators may request mitigation of
the $50,000 fine so that the resulting mitigation may only be as little as
$500.53 Bond amounts are usually set every calendar year and, if the
liquidated damages claims in one year exceed that year's bond amount, the
next year's bond cannot be used to pay the liquidated damages incurred the
previous year.54

In 1989, CBP recognized the problem in which the amount of delinquent
liquidated damages claims against a bonded carrier exceeded the amount of
the bond. CBP then issued a directive that required district directors to

50See 19 C.F.R. 18.8.

5119 C.F.R. 113 sets forth the general requirements applicable to bonds.

52Bond amounts are not set by regulation but by the port director's
exercise of sound discretion.

53Amount of penalty may vary between $100 to $500, depending on the
presence of aggravating or mitigating factors.

54Multiple claims can be made against the same bond.

periodically review bond sufficiency.55 CBP again issued directives in
1991 and 1993 to provide guidelines for the determination of bond
sufficiency.56 However, CBP and BICE officials we spoke with stated that
inadequate bond amounts continue to make liquidated damages for in-bond
diversion a weak deterrent.

CBP Also Uses Informed Compliance and Outreach to the Community as
Deterrence Methods

CBP Maintains Lists to Serve as Deterrence

CBP also employs methods to deter illegal transshipment by informing the
importer community of violators of illegal textile transshipment. CBP
officials view the publication of violators as a means to deter
transshipment. CBP and CITA maintain various lists of foreign violators,
in part, for this purpose. In addition, under the Customs Modernization
Act,57 CBP is obligated to use informed compliance and outreach with the
trade community. CBP regularly meets with the trade community to keep it
informed of the latest enforcement information and to help encourage
reasonable care on its part. CBP is looking increasingly at patterns of
company conduct to establish lack of reasonable care. It currently is
investigating or monitoring 40 U.S. importers it suspects may have
violated the reasonable care standard.

CBP maintains three lists associated with illegal transshipment
violations: the "592A list," the "592B list," and the "administrative
list."

o 	The 592A list is published every 6 months in the Federal Register and
includes foreign manufacturers who have been issued a penalty claim under
section 592A of the Tariff Act of 1930.

o 	The 592B list enumerates foreign companies to which attempts were made
to issue prepenalty notices, but were returned "undeliverable" and
therefore could not be included on the 592A list.

o 	The administrative list identifies companies that have been convicted
or assessed penalties in foreign countries, primarily Hong Kong, Macau,
and Taiwan. CBP decided that because these companies had due

55U.S. Customs Directive No. 4410-012, dated December 1, 1989.

56U.S. Customs Directive No. 099 3510-004 dated July 23, 1991; and Customs
Directive No. 099 3510-005 dated May 17, 1993.

57Public Law 103-182, Title VI. The Customs Modernization and Informed
Compliance Act 1993 (also known as the "Mod Act").

process in their countries and were determined by that country's law to
have illegally transshipped textiles (false country of origin), CBP could
legally make this information public, according to a senior CBP official.
This list is updated as necessary. Between 1997 and October 2003, the
names of 488 companies from Hong Kong, 7 from Taiwan, and 34 from Macau
have been published in the administrative list.

CITA Maintains an Exclusion List CITA has a policy in place whereby a
letter is sent to the government of an

and May Issue Chargebacks	offending country requiring it to address what
is being done to enforce antitransshipment policies. If the government
does not respond, the company is placed on an "exclusion" list; and goods
from that company may not be shipped to the United States. This exclusion
could run anywhere from 6 months to 5 years, but the standard period is 2
years. In 1996, CITA issued a new policy stating that all goods could be
banned if a TPVT visit was not allowed in that factory. After the policy
was issued, Hong Kong began allowing the United States to observe
enforcement efforts in factories, although it does not allow CBP access to
companies' books and records. Extensive enforcement efforts led to 500
convictions in Hong Kong courts for origin fraud from 1997 to October
2003.

When CITA has evidence of textile transshipment from CBP's TPVTs or other
sources, it may also apply chargebacks if it has evidence of the actual
country of origin and the goods have entered the commerce of the United
States. Chargebacks occur when goods were not charged against quotas as
they should have been. CITA then will go ahead and "charge those goods
back" against the appropriate levels for an appropriate country. For
example, if textiles have been transshipped through Vietnam, but their
actual country of origin was found to be China, China's quota will be
reduced by the appropriate amount. CITA also has the authority to "triple
charge" goods. Although CITA has the authority to issue chargebacks, over
the last decade it has only issued chargebacks against China and Pakistan.
The last chargebacks were issued in 2001 for a sum of $35 million. From
1994 to 2001, chargebacks totaled $139 million. Chargebacks require a
higher burden of proof because they require that the actual country of
origin be established.

CBP Conducts Outreach with the When the Customs Modernization Act became
effective on December 8,

Textile Trade Community	1993, CBP, then known as Customs, was given the
responsibility of providing the public with improved information
concerning the trade community's rights and responsibilities. In order to
do so, Customs created initiatives aimed at achieving informed compliance,
that is, to help ensure that the importers are meeting their
responsibilities under the law

and to help deter illegal transshipment. Accordingly, Customs issued a
series of publications and videos on new or revised Customs requirements,
regulations, or procedures. CBP also has the responsibility to inform
importers of their duty to act in accordance with its reasonable care
standard. To that end, CBP provides guidance to help importers avoid doing
business with a company that may be violating CBP laws. For example, CBP
suggests the U.S. importer ask its supplier questions regarding the origin
of the textiles, the labeling, and the production documentation, among
others. CBP is currently investigating 40 importers for potential
violations of the reasonable care standard. In a continuing effort to
deter transshipment and meet its own responsibilities, CBP officials
regularly meet with members of the trade industry to share information
about the latest developments regarding textile transshipment.

Conclusions	Despite increasing trade volumes and heightened national
security priorities, CBP has maintained a focus on textile transshipment
by consolidating its various textile enforcement activities and by using
its expertise to target its review process at the most suspect shipments.
The actual number of textile and apparel shipments CBP reviews at the
ports is low (less than 0.01 percent), and in 2002 about 24 percent of
these reviews resulted in exclusions, 2 percent in penalties, and 1
percent in seizures. CBP's overall efforts at deterrence are aimed more at
excluding problem shipments from U.S. commerce and emphasizing importer
compliance responsibilities rather than at pursuing enforcement actions in
the courts, due to the complexity and length of the investigative process
and past experiences with ultimate imposition of minimal penalties. The
low likelihood of review and minimal penalties limit the system's
deterrent effect and make high-quality intelligence and targeting
essential to focusing limited resources on the highest risk overseas
factories and shipments. Although textile import quotas on WTO members
will be eliminated on January 1, 2005, with the expiration of the
Agreement on Textiles and Clothing, the roles of the STC and the port
import specialists will continue to be important, because incentives will
continue to exist to illegally transship merchandise through countries
benefiting from trade preferences and free trade agreements. In addition,
quotas will remain on Vietnam until its WTO accession, and quotas may be
placed into effect on certain imports from China under the safeguard
provision of China's WTO Accession Agreement.

Because transshipment will remain a concern beyond this coming year, CBP
will still face challenges in implementing its monitoring system. First,

CBP has been slow to follow up on some of the findings from the TPVT
factory visits, which are one of the key sources of information used in
decisions on what textile shipments to review. CBP has not fully made the
results of these trips known and acted quickly by entering all national
criteria at an earlier stage rather than waiting until CBP approves the
TPVT report. CBP has the authority to review any shipments presented for
import. The result of waiting for TPVT report approval may mean that some
suspect shipments are not reviewed or inspected at the ports. Second, CBP
faces challenges in ensuring that additional import specialists are placed
in Customs Attache Offices overseas to assist with textile monitoring and
enforcement activities. CBP would be able to further facilitate
cooperation on textile issues, follow up on TPVT findings, and supplement
the enforcement information it needs to trigger port textile reviews if it
placed more import specialists in Customs Attache Offices in high-risk
countries.

In addition, we found weaknesses in CBP's current monitoring of in-bond
cargo transiting the United States, and CBP has only in the last year
begun to intensively address the issue of in-bond textile and apparel
shipments being diverted into U.S. commerce. CBP's current in-bond
procedures may facilitate textile transshipment by allowing loosely
controlled interstate movement of imported cargo upon which no quota or
duty has been assessed. Internal control weaknesses have meant that CBP
places an unacceptably high level of reliance on the integrity of bonded
carriers and importers. Without an automated system and detailed and
up-to-date information on in-bond shipments, CBP cannot properly track the
movement of in-bond cargo. In addition, limited port targeting and
inspections of in-bond shipments constitute a major vulnerability in
monitoring possible textile transshipments and other areas of national
security. CBP's regulations regarding delivery time and shipment
destination also hinder proper monitoring. Unless these concerns are
addressed, proper revenue collection, compliance with trade agreements,
and enforcement of national security measures cannot be ensured. While CBP
has taken some preliminary steps, much remains to be done before the
in-bond system has an acceptable level of internal controls.

Moreover, CBP's system for assessing liquidated damages does not provide a
strong deterrent against in-bond diversion. With bond amounts set
considerably lower than the value of the merchandise and mitigation of
liquidated damages down to a fraction of the shipment value, violators may
see paying the bond as a cost of doing business and may not perceive it as
a deterrent against the diversion of goods. CBP has the authority to
review

bond sufficiency and can change the bond amounts to provide an effective
deterrent against the illegal diversion of goods.

Recommendations for Executive Action

To improve information available for textile transshipment reviews at CBP
ports and to encourage continued cooperation by foreign governments, we
recommend that the Commissioner of U.S. Customs and Border Protection take
the following two actions:

o 	Improve TPVT follow-up by immediately entering all criteria resulting
from overseas factory visits into ACS to trigger port reviews.

o 	Assign import specialists to Customs Attache Offices in high-risk
textile transshipment countries to assist with textile monitoring and
enforcement activities, including conducting follow-up to TPVTs.

To improve its monitoring of in-bond cargo and ensure compliance with U.S.
laws and enforcement of national security, we also recommend that the
Commissioner of U.S. Customs and Border Protection take the following four
steps:

o 	Place priority on timely implementation of a fully automated system,
including more information to properly track the movement of in-bond cargo
from the U.S. port of arrival to its final port of destination.

o  Increase port targeting and inspection of in-bond shipments.

o 	Routinely investigate overdue shipments and, pending implementation of
an improved automated system, require personnel at ports of entry to
maintain accurate and up-to-date data on in-bond shipments.

o 	Assess and revise as appropriate CBP regulations governing (1) the time
intervals allowed for in-bond shipments to reach their final destinations,
taking into consideration the distance between the port of arrival and the
final port of destination and (2) whether importers or carriers can change
the destination port without notifying CBP.

Finally, to strengthen the deterrence value of in-bond enforcement
provisions, we recommend that the Commissioner of U.S. Customs and Border
Protection review the sufficiency of the amount of the bond for deterring
illegal diversion of goods.

Agency Comments	The Department of Homeland Security provided written
comments on a draft of this report, which is reproduced in appendix III.
The Department agreed with our recommendations and stated that it would
take the appropriate steps needed to implement the recommendations. In its
letter, the department listed its key planned corrective actions for each
of our recommendations. In addition, we received technical comments from
the Departments of Homeland Security, Commerce, and the Office of the U.S.
Trade Representative, which we incorporated in this report as appropriate.

We are sending copies of this report to appropriate congressional
Committees and the Secretaries of Homeland Security, Commerce, and
State and the Office of the U.S. Trade Representative. We will also make
copies available to others upon request. In addition, this report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me
on (202) 512-4128. Additional contacts and staff acknowledgments are
listed in appendix IV.

Loren Yager
Director, International Affairs and Trade

Appendix I

                       Objectives, Scope, and Methodology

In a legislative mandate in the Trade Act of 2002 (P.L. 107-210, Aug. 6,
2002), Congress directed GAO to review U.S. Customs and Border
Protection's (CBP)1 system for monitoring and enforcing textile
transshipment and make recommendations for improvements, as needed, to the
Chairman and the Ranking Minority Member of the Senate Committee on
Finance and the Chairman and the Ranking Minority Member of the House
Committee on Ways and Means. As discussed with Committee representatives,
we have focused on answering the following questions: (1) how CBP
identifies potential textile transshipment, (2) how well CBP's textile
review process works to prevent illegal textile transshipment, (3) how
effectively CBP monitors foreign textiles transiting the United States in
its in-bond system before entering U.S. commerce or being exported, and
(4) what challenges CBP experienced in using penalties and other means to
deter illegal textile transshipment.

To examine how CBP identifies potential textile transshipment, we reviewed
and analyzed internal planning documents and trade studies from the Office
of Strategic Trade's Strategic Trade Center (STC) in New York City, which
conducts analysis and targeting of textile transshipment. We also analyzed
CBP foreign factory and cargo shipment reports and summaries from the STC;
the Office of Field Operations' Textile Enforcement and Operations
Division at CBP's headquarters; and some ports of entry, from 2000 to
2003. We collected and analyzed data from 2000 to 2003 on the targeting
process from CBP's internal database and documents and reviewed how CBP
collected the data. We examined the data for their reliability and
appropriateness for our purposes. We found the data to be sufficiently
reliable to represent CBP's targeting activity. In addition, we also
collected official U.S. international trade statistics from the Census
Bureau for 1993 to 2002, textile and apparel production statistics from
the Census Bureau (Annual Survey of Manufacturers) for 1993 to 2001, and
employment statistics from the Bureau of Labor Statistics (Current
Employment Survey) for 1993 to 2002. We defined "textile and apparel goods
for international trade," based on the definition in the World Trade
Organization's (WTO) Agreement on Textiles and Clothing (Annex), as well
as additional textile and apparel goods not covered by the

1On March 1, 2003, the U.S. Customs Service was transferred to the new
Department of Homeland Security. The border inspection functions of the
Customs Service, including specifically the Office of Field Operations,
along with other U.S. government agencies having border protection
responsibilities, were reorganized into the U.S. Customs and Border
Protection (CBP). The Office of Investigations was moved into the new
Bureau of Immigration and Customs Enforcement (BICE).

Appendix I
Objectives, Scope, and Methodology

agreement but identified as textile and apparel goods by the Department of
Commerce's Office of Textiles and Apparel on the Department of Commerce's
Web site. We reviewed these statistics for their reliability and
appropriateness for our purposes and found them sufficiently reliable to
represent the trends and magnitude of trade, production, and employment in
the textile and apparel sector. We also observed a targeting session at
the STC in preparation for a foreign factory visit to El Salvador. In
addition, we interviewed CBP officials in the Office of Strategic Trade's
STC and Regulatory Audit Division, the Office of Field Operations, and in
seven ports of entry (New York/Newark, New York; Los Angeles/Long Beach,
California; Laredo, Texas; Columbus and Cleveland, Ohio; and Seattle and
Blaine, Washington) about their targeting activities and roles. Together,
these ports represent CBP service ports that processed 55 percent of
textiles and apparel imported into the United States in 2002. However, we
recognize that activities among individual ports of entry within CBP
service port areas may vary from ports that we visited. To gain additional
perspectives on CBP's targeting operations, we interviewed officials of
the Department of Commerce and the Office of the U.S. Trade Representative
(USTR), as well as former Customs officials and private sector business
associations.

To examine CBP's textile review process to prevent illegal textile
transshipment, we reviewed internal planning documents, directives, and
reports of the Office of Field Operations' Textile Enforcement and
Operations Division, the Office of International Affairs, and the Office
of Strategic Trade's STC and Regulatory Audit Division covering the years
1999 to 2003. We visited seven ports of entry and observed operations. To
review CBP's foreign factory visits, we observed a Textile Production
Verification Team (TPVT) visit in El Salvador. To report on CBP's overall
textile review activity, we collected data on TPVT visits and port-level
textile review activity from 1996 to 2003 from CBP's internal database and
documents. We reviewed how CBP collected the data and examined the data
for their reliability and appropriateness for our purposes. We found the
data to be sufficiently reliable to represent CBP's foreign factory
inspections and port-level activity. We interviewed CBP officials in the
Office of Field Operations, the Office of International Affairs, the
Office of Strategic Trade, and the seven ports of entry we visited. We
also interviewed officials of the Department of Commerce, including the
Committee for the Implementation of Textile Agreements (CITA) and the
Office of Textiles and Apparel; USTR; and the Department of State; as well
as former Customs officials and private sector business associations. In
addition, we interviewed customs and trade officials in Hong Kong and

Appendix I
Objectives, Scope, and Methodology

Macao, as well as a Mexican embassy trade official in Washington, D.C.,
and Mexican port officials in Nuevo Laredo, Mexico. We communicated with
Canadian officials through an exchange of written questions and answers.

To review how CBP uses its in-bond system to monitor foreign textiles
transiting the United States before entering U.S. commerce or being
exported, we observed in-bond operations at six of the ports of entry we
visited: Newark, New Jersey/New York, New York; Long Beach/Los Angeles,
California; Cleveland and Columbus, Ohio; Laredo, Texas; and Blaine,
Washington. We reviewed documents on CBP's in-bond operations from the
Office of Field Operations' Cargo Verification Division, as well as
documents on in-bond penalties from the Office of Field Operations' Fines,
Penalties, and Forfeitures Branch. We conducted interviews on the in-bond
system with CBP officials in the Cargo Verification Division; the Fines,
Penalties, and Forfeitures Branch; and the Textile Enforcement and
Operations Division at headquarters; and at the ports of entry and Bureau
of Immigration and Customs Enforcement (BICE) headquarters and Field
Offices.

In addition, we conducted a survey of in-bond activities at 11 major U.S.
area ports that process the highest levels of textile and apparel imports
and 2 smaller area ports that also process textile and apparel imports.
For each area port, we also requested that the survey be distributed to
two additional subports that also processed textile and apparel imports.
We asked ports to respond to the survey, based on in-bond activities from
October 2001 to May 2003. We received responses from all 13 area ports and
29 subports we surveyed. We selected ports for our survey, based on four
criteria: (1) ports with the highest value of textile and apparel imports;
(2) geographic distribution that included coastal, in-land, northern, and
southern border ports; (3) ports with the highest value of textile and
apparel imports by trade preference program (such as the African Growth
and Opportunity Act and the Caribbean Basin Trade Partnership Act); and
(4) ports of various sizes, allowing us to include smaller ports that also
process textile and apparel imports. We found the data to be sufficiently
reliable to review how the in-bond system monitors foreign textiles
transiting the United States. Not all ports were able to provide data for
the entire time period requested; therefore, we were not able to use some
of the data for the missing time period. In addition, although we received
a 100-percent response rate, the in-bond data we received from the 13 area
ports and 29 subports are not representative of in-bond operations at all
Customs ports. Copies of the survey are available from GAO.

Appendix I
Objectives, Scope, and Methodology

To examine the challenges CBP experienced in using penalties and other
means to deter illegal textile transshipment, we reviewed internal
planning documents, memorandums, and reports, dating from 1999 to 2003,
from former Office of Investigations officials now in the BICE, as well as
from CBP's Offices of Chief Counsel; Field Operations (including the
Textile Enforcement and Operations Division and the Fines, Penalties, and
Forfeitures Division); Strategic Trade, (including the STC and Regulatory
Audit Division); and Regulations and Rulings. We also reviewed CBP's
enforcement authorities in the relevant statutes and federal regulations,
as well as reviewing informed compliance publications and other
information on CBP's and BICE's Web sites. We collected data on CBP's
enforcement and penalty actions for the years 2000 to 2002, from CBP's
internal databases and documents. We reviewed how CBP collected the data
and examined the data for their reliability and appropriateness for our
purposes. We found the data to be sufficiently reliable to represent CBP's
enforcement and penalty actions. We interviewed officials in BICE and in
CBP's Offices of Chief Counsel; Field Operations (including the Textile
Enforcement and Operations Division and the Fines, Penalties, and
Forfeitures Division); Strategic Trade (including the STC and Regulatory
Audit Division); and Regulations and Rulings, as well as at the seven
ports of entry we visited, and associated BICE Field Offices. We also
interviewed officials of the Department of Commerce, including CITA and
OTEXA; as well as former Customs officials and private sector business
associations.

We performed our work from September 2002 through December 2003 in
accordance with generally accepted government auditing standards.

Appendix II

U.S. Textile and Apparel Trade, Production, and Employment

U.S. textile and apparel imports have grown considerably over the past
decade and have been comprised largely of apparel products. In 2002, China
surpassed Mexico as the largest foreign supplier of textile and apparel to
the U.S. market, followed by Caribbean Basin countries that benefit from
preferential access.1 New York and Los Angeles are the service ports that
receive the largest share (by value) of textile and apparel imports, with
Miami, Florida, and Laredo, Texas, important service ports districts for
imports from Latin America. The United States is in the process of
gradually phasing out textile and apparel quotas under a 1995 World Trade
Organization (WTO) agreement, but a significant number of quotas are still
to be eliminated at the end of the agreement's phase-out period on January
1, 2005. Elimination of these quotas is likely to affect trade patterns as
more efficient producers acquire greater market share. Tariffs and other
potential barriers, however, such as antidumping and safeguard measures,
still exist and could still affect trade patterns and create an incentive
for illegal textile transshipment. Also, as quotas are removed, a more
competitive market may place increasing pressure on the U.S. textile and
apparel industry. Industry production and employment in the United States
has generally been declining in recent years, with employment in the
apparel sector contracting the most.2

Imports of Textile and Apparel

U.S. imports of textile and apparel products have nearly doubled during
the past decade (1993 to 2002), rising from about $43 billion to nearly
$81 billion.3 Because overall imports have also nearly doubled during the
decade, textile and apparel products have maintained about a 7 percent
share of total U.S. imports throughout this period. As figure 10 shows,
the majority of U.S. textile and apparel imports are apparel products
(about 73 percent in 2002). The remaining imports consist of yarn (10
percent),

1The Caribbean Basin Trade Partnership Act (CBTPA) provides Caribbean
Basin countries (see note to fig. 11 for list of countries) reduced or
eliminated tariff rates for qualifying textile and apparel products.

2The textile and apparel industry we refer to in this report is the
manufacture of textile and apparel products, but not the distribution and
retail of textile and apparel products.

3Textile and apparel imports, as we define them in this report, include
all textile and apparel products, whether or not quotas or other
restrictions affect them. See appendix I for more information on our
methodology.

     Appendix II U.S. Textile and Apparel Trade, Production, and Employment

uncategorized textile and apparel products (9 percent), made-up and
miscellaneous textile products (7 percent), and fabric (2 percent).4

Note: Uncategorized imports of textile and apparel are those products not
listed under the U.S. quota category system. These products may still fall
into one of the four other categories, such as yarn or fabric.

The major foreign suppliers of textile and apparel to the U.S. market are
China, Mexico, and the Caribbean Basin countries. However, as figure 11
shows, no major supplier had more than a 15 percent share of overall
textile and apparel imports in 2002. Also, after the top 10 suppliers,
remaining suppliers still provided more than a third of imports. These
smaller suppliers include Africa Growth and Opportunity Act (AGOA)
countries, which supplied $1.1 billion (about 1.4 percent) of imports, and

4Made-up and miscellaneous textile products include such products as
bedspreads, blankets, pillow cases and sheets; towels; floor coverings;
handbags; and luggage. Uncategorized imports of textile and apparel are
those products not listed under the U.S. quota category system. These
products may still fall into one of the four other categories, such as
yarn or fabric.

Appendix II U.S. Textile and Apparel Trade, Production, and Employment

Andean Trade Promotion and Drug Eradication Act (ATPDEA) countries, which
supplied $790 million (about 1 percent) of imports.5

5AGOA beneficiary countries are Benin, Botswana, Cameroon, Cape Verde,
Central African Republic, Chad, Republic of the Congo, Cote d'Ivoire,
Democratic Republic of the Congo, Djibouti, Eritrea, Ethiopia, Gabon, the
Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Madagascar, Malawi,
Mali, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda,
So Tome and Principe, Senegal, Seychelles, Sierra Leone, South Africa,
Swaziland, Tanzania, Uganda, and Zambia. However, not all beneficiary
countries are eligible for textile and apparel benefits. According to CBP,
Botswana, Cameroon, Cape Verde, Cote d'Ivoire, Ethiopia, Ghana, Kenya,
Lesotho, Madagascar, Malawi, Mali, Mauritius, Mozambique, Namibia, Niger,
Rwanda, Senegal, South Africa, Swaziland, Tanzania, Uganda, and Zambia are
eligible for these benefits. Countries eligible for ATPDEA benefits are
Bolivia, Colombia, Ecuador and Peru.

Appendix II U.S. Textile and Apparel Trade, Production, and Employment

Note: Caribbean Basin Trade Partnership Act (CBTPA) beneficiary countries
include Antigua and Barbuda, Aruba, Bahamas, Barbados, Belize, British
Virgin Islands, Costa Rica, Dominica, Dominican Republic, El Salvador,
Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Montserrat,
Netherlands Antilles, Nicaragua, Panama, St. Kitts and Nevis, Saint Lucia,
Saint Vincent and the Grenadines, and Trinidad and Tobago. However, not
all beneficiary countries are eligible for textile and apparel benefits.
According to CBP, Barbados, Belize, Costa Rica, Dominican Republic, El
Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Nicaragua, Panama,
Saint Lucia, and Trinidad and Tobago are currently eligible for these
benefits.

     Appendix II U.S. Textile and Apparel Trade, Production, and Employment

Countries with free trade agreements (FTA) with the United States
accounted for 18.8 percent of total textile and apparel imports in 2002.
This includes the North American Free Trade Agreement (NAFTA) countries,
Mexico and Canada, which supplied 17.1 percent. Other FTA partners- Chile,
Israel, Jordan, and Singapore-supplied the remaining 1.7 percent.6 In
addition, the United States is negotiating FTAs with several other
countries, which combined accounted for 15 percent of U.S. imports.7 The
most important (in terms of imports) of these potential FTA partners are
the countries in the Central American FTA negotiations (Costa Rica, El
Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican Republic,
all of which are also part of the overall Free Trade Area of the Americas
(FTAA) negotiations.

Top U.S. Ports	The service ports of New York and Los Angeles were the top
two recipients of textile and apparel imports into the United States in
2002. Together they accounted for more than 40 percent of imports.
Furthermore, the top 10 U.S. service ports accounted for about 77 percent
of textile and apparel imports in 2002 (see fig. 12). Overall, Customs has
42 service ports, encompassing more than 300 individual ports of entry.
For example, the New York service port encompasses the individual ports of
JFK Airport; Newark, New Jersey; and New York City.

6However, imports in 2002 from Chile and Singapore did not yet qualify for
free trade status. In addition, some textile and apparel imports from FTA
countries may not have qualified for free trade status if they did not
meet rules of origin requirements.

7Countries with which the United States had publicly announced its intent
to negotiate free trade agreements as of November 25, 2003, include
Australia, Bahrain, and Morocco; the countries of the Southern African
Customs Union (Botswana, Lesotho, Namibia, South Africa, and Swaziland);
and the 34 countries of the Free Trade Agreement of the Americas (FTAA).
In addition to the FTAA, the United States is intent on negotiating
separate free trade agreements with Central American countries (Costa
Rica, El Salvador, Guatemala, Honduras, and Nicaragua), Andean countries
(Bolivia, Colombia, Ecuador, and Peru), and the Dominican Republic.

Appendix II U.S. Textile and Apparel Trade, Production, and Employment

On the West Coast, Los Angeles receives a large portion of its imports
from Asian suppliers such as China and Hong Kong; while in the South,
Miami and Laredo receive a large portion of their imports from Caribbean
countries. In-land ports, such as Columbus, Ohio, receive imports shipped
across country by truck or rail from other ports or flown directly into
the airports in its district.

     Appendix II U.S. Textile and Apparel Trade, Production, and Employment

Textile and Apparel Products Affected by Quotas

Under the WTO's 1995 Agreement on Textiles and Clothing (ATC), the United
States and other WTO members agreed to gradually eliminate quota barriers
to textile and apparel trade during a 10-year transition period, ending by
January 1, 2005.8 By 1995, the United States, the European Union, Canada,
and Norway were the only WTO members to maintain quotas on textile and
apparel. Each agreed, however, to remove a share of their quotas by
January 1 in 1995, 1998, 2002, and 2005. Based on 2002 Department of
Commerce import statistics and our analysis, the United States still
maintains quotas on products that account for about 61 percent of its
textile and apparel imports by value. Not all of these imports, however,
are subject to quotas because not all U.S. trade partners are subject to
quotas on these products. For instance, U.S. textile and apparel
categories 338 and 339 (men and women's cotton knit shirts and blouses)
account for over 12 percent of U.S. imports of textile and apparel
products, and categories 347 and 348 (men and women's cotton trousers and
shorts) account for about another 13 percent. Although several countries
face U.S. quotas in each of these categories, not all countries are
restricted. Therefore, quotas only limit a portion of the 25 percent of
imports accounted for by products in these categories. Customs, though, is
concerned with the trade flows relating to all the products under quotas,
despite which country they originate in because the country of origin may
be misrepresented.

Future Barriers to Trade in Textile and Apparel

Under the ATC, the United States agreed to remove by 2005 textile and
apparel quotas maintained against other WTO members. These quotas have
created significant barriers to imports of certain types of textile and
apparel products from quota-restricted countries. For example, in 2002,
the U.S. International Trade Commission estimated that quota barriers
amounted to an approximately 21.4 percent tax on apparel imports and a 3.3
percent tax on textile imports.9 However, these estimates were calculated
across all textile and apparel products and countries. Therefore, actual
barriers may be significantly higher for certain highly restricted
products. Upon removal of these quotas, trade patterns are likely to

8Of the $81 billion in U.S. imports of textile and apparel products in
2002, the ATC covered about 95 percent.

9See U.S. International Trade Commission, The Effects of Significant U.S.
Import Restraints (Washington, D.C.: International Trade Commission,
2002).

Appendix II U.S. Textile and Apparel Trade, Production, and Employment

change, with more efficient foreign suppliers that were formerly
restricted under the quotas capturing a larger share of the U.S. market.

FTAs, though, will still provide preferential access to products that meet
rules of origin requirements from FTA partners. FTAs generally provide
tariff-free access, while 2002 tariff rates on more restricted textile and
apparel products ranged from 15 to 33 percent. Also, the United States
provides similar preferential access unilaterally to countries from the
Caribbean Basin, sub-Saharan Africa, and the Andean region under the
CBTPA, AGOA, and ATPDEA preferential programs.10 Officials and experts
that we spoke with said they believed these tariff differentials to be a
significant incentive for continued illegal textile transshipment because
they act as a tax on textile and apparel products from non-FTA partners.
Also, under WTO rules, the United States may impose antidumping or
countervailing duties on imports from certain countries if it can be shown
that these products have either been "dumped" in the U.S. market or were
subsidized.11 Furthermore, under China's accession agreement with the WTO,
members may impose a special safeguard mechanism on imports from China if
they are shown to cause market disruption.12 In fact, in December 2003 the
United States imposed this mechanism against imports from China of certain
types of knit fabrics, dressing gowns and robes, and brassieres.

10Some of these programs may be eliminated, as the countries become
members of FTAs with the United States.

11Antidumping or countervailing measures take the form of increased duties
on imports. Dumping is generally considered to be the sale of a commodity
in a foreign market at a lower price than its normal value. WTO rules
allow for the imposition of antidumping duties, or fees, to offset
dumping. Countervailing duties are special customs duties imposed to
offset subsidies provided on the manufacture, production, or export of a
particular good. Subsidies essentially lower a producer's costs or
increase its revenues.

12A safeguard is a temporary import control or other trade restriction
that a WTO member imposes to prevent serious injury to domestic industry
caused by increased imports. Upon joining the WTO, China agreed to a
unique safeguard provision that allows WTO members to impose restrictions
if imports from China disrupt their markets, as well as a special textile
safeguard that also allows restrictions on textile and apparel products
specifically. The China-specific safeguard provision expires in 2013, and
the textile-specific safeguard expires in 2008.

     Appendix II U.S. Textile and Apparel Trade, Production, and Employment

U.S. Textile and Apparel Production and Employment

U.S. textile and apparel employment has declined over the past decade
(1993 through 2002), while production has declined from 1995 through 2001
(latest year statistics were available for production data). Production of
apparel (and textiles to a lesser extent) in the United States tends to be
relatively intensive in its use of labor. Consequently, the U.S. industry
has faced strong competition from developing countries, such as China and
India, where labor rates are significantly lower than in the United
States. Employment in the U.S. apparel sector is higher than in the
textile sector, overall; however, employment declines in the U.S. textile
and apparel industry have primarily been due to declines in the apparel
sector. As figure 13 shows, employment in the overall textile and apparel
industry fell from about 1,570,000 jobs in 1993 to about 850,000 jobs in
2002. The majority of this decline was due to the fall in apparel
employment from more than 880,000 workers in 1993 to about 360,000 workers
in 2002.13 However, employment in the other sectors of the
industry-textile mills (yarns, threads, and fabrics) and textile product
mills (carpets, curtains, bedspreads, and other textile products besides
apparel)-also declined.

13The industry sectors described here (apparel, textile product mills, and
textile mills) are based on the North American Industry Classification
System (NAICS).

     Appendix II U.S. Textile and Apparel Trade, Production, and Employment

Regarding U.S. production (as measured by shipments) in the textile and
apparel sectors, figure 14 shows overall textile and apparel production
declined between 1997 and 2001.14 During that period, the value of U.S.
shipments of textile and apparel products (either to the U.S. market or
overseas) fell from nearly $158 billion to about $132 billion. This
decline was due to contraction in the apparel and textile mills sectors.
However, the textile product mills sector remained relatively stable
during the same time period.

14Prior to 1997, production data was classified by the Standard Industry
Classification (SIC) system into two industry sectors, rather than three.
Therefore, we do not show the individual sectors of the industry prior to
1997 for production data, as we do with employment data.

Appendix II U.S. Textile and Apparel Trade, Production, and Employment

Note: Data from the Annual Survey of Manufacturers only available through
2001.

Appendix III

Comments from the Department of Homeland Security

Appendix III
Comments from the Department of Homeland
Security

Appendix III
Comments from the Department of Homeland
Security

Appendix III
Comments from the Department of Homeland
Security

Appendix IV

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	Virginia Hughes (202) 512-5481 Leyla Kazaz (202) 512-9638

Staff 	In addition to those individuals named above, Margaret McDavid,
Michelle Sager, Josie Sigl, Tim Wedding, Stan Kostyla, Ernie Jackson, and
Rona

Acknowledgments Mendelsohn made key contributions to this report.

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