What subjects are covered in compliance and sustainability relative to fashion and luxury, and specifically related to production, import and export?
There are a myriad of subjects covered in compliance and sustainability relative to fashion and luxury, and specifically in the areas of import and export. Some of them are exclusive to these areas (duties and taxes, as example), but most of them ‘touch’ these areas, bestowing responsibility on the brand itself to comport with laws and regulations in supranational, national and local jurisdictions, and allowing for regulatory architecture at ports of entry to be mechanisms of enforcement.
This article will help define what these constructs are and how they relate to the role of cross border transportation in their enforcement in the European Union, the United Kingdom and the United States.
We will group these issues within the following four areas:
- Tariffs (duties and taxes)
- Environmental
- Social
- Safety and Quality
We will also categorize these issues into areas that can be ‘enforced at the border’ and those that are not.
Tariffs (duties and taxes)
Tariffs (including proper classification), as an overall subject is complex and far-reaching. It is the most impactful single topic relative to imports in general and fashion and luxury imports in particular, for the purposes of this article. Customs authorities in the EU, UK and US have sole enforcement duty and tax authority at all ports of entry, and it is their primary activity, if not their primary responsibility. This article will attempt to describe the constructs in the EU, UK and US with high level information about how tariffs are applied in each jurisdiction.
In the European Union (EU), customs duties and value-added taxes (VAT) are two distinct taxes that are applied to imported goods.
Customs Duties
Customs duties are calculated based on the classification of goods using the Combined Nomenclature system, their origin and value. The duty rates can be ad valorem (a percentage of the value), specific (a fixed amount per unit), or a combination of both. Customs duties are collected by the customs authorities of the member state where the goods are imported. Importers are responsible for declaring the goods and paying the duties at the time of import. Certain goods may be exempt from customs duties or eligible for reduced rates under specific trade agreements or preferential schemes. Goods not being consumed in the importing country (articles for a traveling fashion show, as example), can avoid duties and taxes entirely, if they are properly declared when they enter.
Value Added Tax
Value Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production and distribution. It is calculated as a percentage of the sale price, and the standard rate varies across EU member states (minimum 15%) for most products. VAT on imported goods is usually collected at the time of import, along with customs duties, either by remitting directly or accounting for import VAT in their VAT returns.
It's crucial for businesses involved in importing goods into the EU to understand and comply with both customs duties and VAT regulations to avoid penalties and ensure smooth customs clearance. Additionally, depending on the ultimate destination and use of the goods being imported, reduced or eliminated duty and/or VAT is possible. Ensure you work with a shipping partner who fully understands all the nuances of fashion and luxury in order to be fully compliant as well as take all lawful advantage of reductions or eliminations of duty and VAT.
In the UK, customs duties are calculated based on the value of the imported goods, their classification under the UK Global Tariff and the origin of the goods. The rate of duty can vary depending on the type of product and its origin. Customs duties are usually collected at the time of import by HM Revenue and Customs (HMRC).
VAT is charged on the value of the imported goods, including any customs duties and shipping costs. The standard VAT rate in the UK is 20%. VAT is typically collected at the time of import by HMRC.
The UK has trade agreements with certain countries that may reduce or eliminate customs duties on imported goods. There may be reliefs or exemptions from customs duties and VAT for certain types of goods or under specific circumstances. Similar to the EU, fashion and luxury importers will benefit from working with shipping partners who are particularly versed in these industries, not only ensuring full compliance but also ensuring duties and taxes aren’t paid for goods that would not be subject to them if they were advantageously, yet correctly, declared.
The US has no VAT as described above in the EU and UK. VAT is a national goods and service tax, and in the US there are state sales taxes only, in lieu of VAT. CBP is not responsible for state sales tax collection but is responsible for administering and collecting duty, merchandise processing fees (fees charged for processing the entry of imported goods into the U.S., typically a percentage of the value of the shipment), anti-dumping and countervailing duties (only when shipments are found to be being sold at less than fair value, or subsidized by foreign governments) and user fees (if CBP perform extra services such as laboratory testing, marking and labeling verification and/or intellectual property rights enforcement).
Duties are assessed according to the following three elements:
- Classification: Goods are classified based on the Harmonized Tariff Schedule (HTS), which assigns a unique code to each product based on its material, composition and purpose.
- Valuation: The value of imported goods is determined usually, but not exclusively, based on their transaction value.
- Country of Origin: The country of origin is important for determining duty rates, as different countries may have different trade agreements with the US.
As in the EU and UK (and most countries globally), there may be opportunities to discount or eliminate the obligation of duty payments in the US, depending on the shipment’s characteristics or ultimate destination. Conversely, there are significant risks (which will be covered in a separate article) for mis-classifying or under-declaring a shipment, and it’s highly recommended that your brand work with a customs broker (working in partnership with your shipping partner, in the US only licensed customs brokers can clear commercial imports) who is highly experienced in fashion and luxury imports to fully comply with regulations yet be most efficient in duty payment.
Environmental Regulations
Some topics we’ll discuss regarding environmental regulations include:
- Carbon Emissions: Regulations to limit greenhouse gas emissions from production, transportation, and use of goods.
- Waste Management: Rules on proper disposal and recycling of products and packaging materials.
- Hazardous Substances: Restrictions on the use of chemicals and other substances that can harm human health or the environment.
Carbon Emissions
There are a number existing, pending and proposed regulations, taxes and trading schemes in the EU, UK and US relative carbon emissions. The customs services of all three jurisdictions currently do not provide enforcement in these areas, however it should be noted that their enforcement mandate is broad, and legal changes would not be required if customs agencies’ remits were to expand to include this area.
Waste Management
Several existing and upcoming waste management laws in the US, UK, and EU will significantly impact fashion and luxury imports in the coming years, with customs agencies playing a crucial role in their enforcement.
In the EU, existing laws include the Waste Framework Directive, which sets the framework for waste management in the EU, including imports, and rules on packaging waste, superseding the previous Packaging and Packaging Waste Directive, which aims to reduce the environmental impact of packaging and promote its use reuse and recycling. Customs authorities in each member state play a role in verifying compliance with both of these directives, inspecting shipments they believe may violate. Upcoming laws and proposals include the EU Strategy for Sustainable and Circular Textiles, which includes mandatory recycled content requirements and extended producer responsibility for textiles, as well as the EU Ecodesign for Sustainable Products Regulation, which would set eco design requirements for various product categories, including textiles. The extent to which customs authorities in each member state will be remitted to enforce these regulations is unclear as they are not yet in force.
In the UK, existing laws include the UK Environmental Protection Act 1990, which regulates waste management, and Packaging Waste Regulations, which set targets for the recovering and recycling of packaging waste. HMRC’s mandate includes enforcement of both of these regulations. The UK government is also considering Extended Producer Responsibility, which would make producers responsible for the collection and recycling of their products at end of life, though enforcement of this would be unlikely at the import level.
In the US, there are no laws specifically regulating waste commonly associated with fashion and luxury, though the Resource Conservation and Recovery Act and the Lacey Act, both enforced in part by CBP, cover hazardous waste and wildlife in imports, respectively. While there are currently no future, national laws regarding waste management being debated, several states are considering legislation to restrict the use of microplastics in textiles and cosmetics. While not directly enforced by CBP, these laws could create labeling requirements and restrictions on imported products containing microplastics.
Hazardous Substances
There are several laws in the EU, UK, and US that regulate hazardous substances in fashion and luxury goods, which customs authorities enforce in their respective jurisdictions.
In the EU, REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) governs the registration, evaluation, authorization, and restriction of chemicals used in products, including fashion and luxury items. It sets limits on the use of certain hazardous substances and requires companies to provide safety information to consumers. The Restriction of Hazardous Substances (RoHS) Directive restricts the use of certain hazardous substances, such as lead, mercury, cadmium, and certain flame retardants, in electrical and electronic equipment. While primarily aimed at electronics, it also applies to some fashion accessories with electronic components (e.g., smartwatches, illuminated clothing). EU customs authorities are responsible for enforcing both these regulations at EU borders by inspecting imported goods and verifying compliance with chemical restrictions.
In the UK, the government established its own version of REACH and RoHS after Brexit.
HMRC is responsible for enforcing these regulations at UK borders, including inspecting shipments and verifying compliance with chemical restrictions.
In the US, the Toxic Substances Control Act (TSCA), regulating the introduction of new or existing chemicals into the US market, requires manufacturers and importers to provide information on chemical safety and allows the Environmental Protection Agency (EPA) to restrict or ban chemicals that pose unreasonable risks. The Consumer Product Safety Improvement Act (CPSIA) safety standards for children's products, including apparel and accessories, and restricts the use of lead and phthalates. CBP’s mandate includes enforcing these regulations at US borders by inspecting shipments and ensuring compliance with chemical restrictions and labeling requirements.
Social Responsibility
Social responsibility laws primarily focus on human rights and labor standards throughout the supply chain. Although these laws are not always directly enforced by customs authorities, they can significantly impact the fashion and luxury industries due to the global nature of their supply chains and the potential for human rights abuses in manufacturing processes.
In the EU, the upcoming (not yet in effect) Corporate Sustainability Due Diligence Directive (CSDDD) will require companies to identify, prevent, and mitigate adverse human rights and environmental impacts in their own operations and value chains, including those related to imported goods. While customs authorities may not directly enforce due diligence, they could play a role in verifying the origin and production conditions of imported goods, especially if suspicions of non-compliance arise. The EU Conflict Minerals Regulation requires EU importers of tin, tantalum, tungsten, and gold to conduct due diligence on their supply chains to ensure that these minerals do not finance armed conflict or human rights abuses. While customs authorities do not directly enforce this regulation, they can play a role in verifying the origin of imported minerals and ensuring compliance with documentation requirements.
In the UK, the Modern Slavery Act 2015) requires companies with a global turnover of £36 million or more to produce an annual statement outlining their efforts to identify and address modern slavery risks in their supply chains, including those related to imported goods. While not directly enforced by customs, this law creates transparency and potential reputational risks for companies that do not comply, which could indirectly influence customs scrutiny of their imports.
In the US, the Tariff Act of 1930 (Section 307) prohibits the importation of goods made with forced labor. CBP enforces this provision by detaining and potentially seizing goods suspected of being produced with forced labor. The Uyghur Forced Labor Prevention Act (UFLPA) creates a rebuttable presumption that goods originating from Xinjiang, China, are made with forced labor and are therefore prohibited from entering the US unless proven otherwise. CBP plays a crucial role in enforcing this act by detaining shipments and requiring importers to provide evidence of non-forced labor practices.
Product Safety & Quality
Several product safety and quality laws in the EU, UK, and US relate to fashion and luxury goods and are enforced by customs authorities at their borders.
In the EU, the General Product Safety Directive (GPSD) is the cornerstone of EU product safety legislation. It requires all products placed on the market to be safe and mandates producers to provide consumers with relevant information to enable them to assess and prevent risks. As mentioned earlier, REACH also indirectly impacts product safety by restricting the use of certain hazardous chemicals in products, including fashion and luxury goods. The EU also has a textile label regulation which is being revised. This regulation mandates that textile products be labeled with their fiber composition and other relevant information, including care instructions. It also sets safety standards for certain textile products, such as children's clothing and nightwear.
European customs authorities are responsible for checking imported goods for compliance with these regulations. They may inspect shipments, request documentation, and take enforcement actions, such as detaining or seizing non-compliant products.
In the UK, the General Product Safety Regulations 2005 maintains the same principles of ensuring product safety and consumer information as its EU counterpart. As with the GPSD, after Brexit the UK retained the EU's REACH regulation and implemented its own version with equivalent requirements for chemicals used in products. Textile Products (Labeling and Fibre Composition) Regulations 2012 are regulations that are the UK's equivalent to the EU Textile Regulation, requiring labeling of textile products with fiber composition and other relevant information.
HMRC is responsible for enforcing these regulations at UK borders, including inspecting shipments and verifying compliance with safety and labeling requirements. In the US, the aforementioned Consumer Product Safety Improvement Act (CPSIA) sets safety standards for various consumer products, including children's apparel and accessories. The Flammable Fabrics Act (FFA) regulates the flammability of clothing textiles and vinyl film, setting standards for resistance to ignition and flame spread. Federal Trade Commission (FTC) Textile Rules require proper labeling of textile fiber content, country of origin, and care instructions on clothing and other textile products.
CBP enforces these regulations at US borders by inspecting shipments and verifying compliance with safety and labeling requirements. They can detain or seize non-compliant products and impose penalties on importers.
Conclusion
As we’ve discussed here, there are a myriad of subjects covered under the broad headings of compliance and sustainability. We believe it is essential for a brand to partner with shipping companies that are extremely versed in the nuances related to fashion and luxury when it comes to imports and exports; logistics generalists could miss large or even small details that may have substantial consequences or benefits.
Our next article will be about the risks of non-compliance or non-sustainability, from the legal, fiscal and brand reputational standpoints.