Demystifying Foreign-Trade Zones: Tackling 3 Myths to Leverage FTZs in 2022
Bigfoot, the Boogie Man, the Loch Ness Monster, and… Foreign-Trade Zones? Despite the overwhelming advantages offered by U.S. Foreign-Trade Zones (FTZs), there are still many misconceptions — and sometimes a little fear — surrounding the program. Much like Bigfoot, the reality of FTZs is far less scary.
To better understand FTZs, let’s get back to the basics. Foreign-trade zones, also referred to internationally as “free-trade zones” (and formerly named “free ports”), are areas where goods may be received, packaged, manipulated, manufactured, processed, and re-exported without the intervention of the customs authorities. These zones are designated sites authorized by the U.S. FTZ Board. A site that has been granted zone status must be approved for FTZ activation by the U.S. Customs and Border Protection (CBP) to receive FTZ benefits. While FTZs are considered to be outside CBP territory, foreign-trade zones still fall under the supervision of CBP.
These guidelines and procedures allow domestic activity involving foreign items to take place prior to formal customs entry. As a result, businesses — typically manufacturers and distributors — that leverage these zones drastically reduce or eliminate duty costs, encourage U.S. trade, and improve supply chain productivity.
FTZs have been in existence since 1934, and despite the fact that the program offers distribution and manufacturing companies tremendous reductions in duties, customs fees, and even logistics costs, FTZs still seem to be a misunderstood or even unrecognized trade program. How prevalent are FTZs in the U.S.? Who uses them? Are they still a viable solution?
According to the 2020 FTZ Report to the U.S. Congress, there were 195 active FTZs across all 50 states and Puerto Rico, and 3,400 companies taking part in the program. Last year also saw $625 billion in shipments made through FTZs, despite the challenges the global supply chain faced in 2020.
It’s understandable for CSCOs and business leaders to have concerns when introducing a new trade program. Some companies may be dragging their feet due to the current strain on the supply chain, and others may believe common FTZ misconceptions. However, companies that are taking advantage of FTZs are realizing impressive savings, and in many cases, obtaining relief from a number of supply chain issues. It’s time to debunk some common myths to demystify FTZs, explore the benefits of the program, and learn how to leverage FTZs in an increasingly competitive world. Let’s get started.
Myth #1: “My entire company and supply chain will be disrupted if I start using an FTZ.”
Over the past 20 years, the FTZ program has changed significantly. These changes make it far easier to establish and operate an FTZ. In fact, if an FTZ is implemented by a knowledgeable advisor, there should be little change to a company’s daily processes and procedures, including logistics.
With the right FTZ inventory and record-keeping system in place, the only changes a company will notice will be placed on the designed FTZ administrator. Today’s FTZ solution providers establish and manage the entire FTZ program and its inventory. Therefore, there is also no longer a need to physically separate foreign and domestic inventory between FTZ and non-FTZ areas within the facility.
Essentially, your supply chain will look and operate the same tomorrow in a foreign-trade zone as it did yesterday, with two notable exceptions. Firstly, the FTZ program can speed up your supply chain so that you receive foreign shipments quicker; and secondly, after implementing an FTZ, you will have access to all the benefits — which brings us to myth #2.
Myth #2: “Zones only benefit companies that have long inventory turns, or re-export. Our company turns inventory quickly and has limited exports, so the FTZ program will not benefit us.”
It is well-known that FTZs defer duty payment on merchandise brought into a zone and that duties are paid only when the goods enter into U.S. commerce. This holds a lot of value and can lead to additional cash flow, but that isn’t the only benefit to using an FTZ. Other benefits include:
Relief from inverted tariffs: There are many cases where a component or raw material is subject to a higher duty rate than the finished product. An FTZ allows the manufacturer to pay duty at the manufactured item rate, rather than the higher component rate. This helps U.S.-based producers serve the domestic market on a level playing field versus importers of the same finished product.
Duty exemption from re-exports: This one is pretty simple and a huge advantage for FTZ users: there are no duties on or quota charges on re-exports. Therefore, if you were to export goods to another country, they would generally be exempt from duties. Generally, with an FTZ, the only time you have to pay is when the item enters U.S. markets.
Savings with weekly entries: Under standard importing procedures, companies have to pay a Merchandise Processing Fee (MPF) for every Customs entry. As of October 1st, 2021, the MPF is capped at a maximum of $538.40 per entry. Under Weekly Entry procedures, zone users can group all imports within a week into a single customs entry and pay a single MPF. This can yield substantial cost savings and reduce processing time and labor. For instance, a company that has 2,500 Customs entries a year would pay $1,346,000, assuming each entry hit the cap. If the company utilized Weekly Entries, 2,400 entries would be reduced to only 52. This offers savings of $1,318,003 just on MPFs.
No duty on waste, scrap, and yield loss: Without a zone, an importer pays the Customs duty owed as material is brought into the U.S. In a zone, no duty is paid on irrecoverable yield loss, or merchandise that is scrapped or destroyed. This can lead to tremendous benefits with even a low scrap rate. There are also advantages for recoverable scrap that can be sold or recycled, as the most common duty rate for scrap sold into the U.S is zero.
The ability to fix damaged or non-conforming items: Savings can be further increased because when an item that is considered “damaged” or “non-conforming” is tested and repaired, no duties are owed. Items can even be altered, repackaged, or relabeled to meet U.S. requirements with no extra cost.
State and local benefits: Foreign and domestic goods held for export are exempt from state and local inventory taxes. In addition, FTZ status may also make a site eligible for state and local benefits that are unrelated to the FTZ Act.
Free zone-to-zone movement: More savings are to be had when transferring goods from one FTZ to another. In this scenario, regardless of the number of shipments you make, you are not subject to duty on the goods. A beneficial use of this would be the duty-free transport of raw materials and components, eliminating any fees until the finished product is officially shipped into the U.S. market.
These benefits can add up to millions of dollars in cost savings and offer a strong competitive advantage for U.S. manufacturers and distributors. What’s keeping companies from taking advantage of these benefits? Here we find myth #3.
Myth #3: “The process is too overwhelming.”
The process to implement an FTZ can seem overwhelming, but with the right advisor and software, implementing a zone comes down to four easy steps:
Step 1: Get an in-depth analysis. Contact a trusted provider of FTZ solutions and schedule a call to discuss your goals and challenges; request a complementary evaluation and cost/benefit analysis with a service provider (like this one). This will ensure you understand the net savings the FTZ program can offer your company.
Step 2: Choose an FTZ solution provider. Your selected partner should assist your facility to receive FTZ designation. If you are a manufacturer or producer, your partner will assist in securing FTZ production authority. In addition, they will help activate your facility with CBP.
Step 3: Implement the software. Probably the most important step in maximizing net FTZ benefits, is choosing the right FTZ inventory control solution. A comprehensive software solution will ensure you compliantly maximize FTZ savings while minimizing administration costs.
Step 4: Reap the benefits. It’s that simple.
The supply chain and e-commerce underwent rapid transformation in the past several years due to COVID-19, Brexit, newly imposed tariffs, and other challenges. As consumer behavior evolves, the global e-commerce market is expected to grow by $1 trillion by 2025, too. These trends are causing global manufacturers to rethink the “just in time” lean manufacturing strategy into a “just in case” model. FTZs are the perfect solution, allowing them to store more inventory in the zone without incurring inventory costs and duty over time.
Debunking common FTZ myths helps unmask the many benefits they bring for manufacturers and distributors. As e-commerce grows and the world regains control of the supply chain, now is the time to get ahead and take advantage of them.
Corey Rhodes is the President of QAD Precision
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