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  October 3rd, 2015 | Written by

FTZs Rising

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  • How An Increasing Number Of U.S. #Shippers Are Taking Advantage Of #FTZs

In January of this year, DHL Global Forwarding (DGF), the logistics arm of DHL, completed construction of its $35 million, 491,000-square-foot container freight station in Chicago, which is the company’s largest cargo facility in the United States. Part of it has been designated a foreign trade zone (FTZ), which is a secure area under the supervision of U.S. Customs and Border Protection and considered outside the customs territory of the U.S. for the purpose of duty payment.

According to Cindy Allen, the company’s vice president who heads its customs brokerage, interest in FTZs has been growing. This is echoed by Bob Imbriani, executive vice president, International at forwarder Team Worldwide. “We have seen bigger interest,” he confirms. “We work with a lot of companies who look to go into foreign trade zones.”

In 2013 there were 177 active FTZs in the U.S. turning out exports valued at $79.5 billion, up 13.7 percent over the previous year, which had seen a 29 percent rise in export value over 2011. Total trade of the 177 zones in 2013 amounted to $835.8 billion, 14.1 percent more than in 2012, which had recorded a 14.4 percent increase over the 2011 volume. Between 2009 and 2013, exports from FTZs almost tripled, according to the National Association of Foreign-Trade Zones.

The authorities have done their share to boost the attractiveness of FTZs. The reporting process has been simplified, and FTZ designation can be obtained within 30 days, a process that used to take eight months. “It is easier to create sub-zones,” notes Imbriani. “If your facility is within a certain distance of a zone, you can designate it a sub-zone.”

He regards near-shoring as one of the chief engines of the lively interest in FTZs, citing the rising cost of producing in China over the past 10 years.

“Many companies that bring production back to the U.S. look to foreign trade zones,” he says.

DGF has grown into one of the biggest FTZ operators in the U.S., Allen says. “This is an area that we intend to focus on in the next five years,” she adds.

Some companies that look to relocate to North America favor Mexico as a production base. “In Mexico you have lower labor cost, a lower corporate tax rate and short supply chains to the U.S., but Mexico creates some other problems,” remarks Imbriani, pointing to security issues and a “very complex customs system.”

For her part, Allen has not experienced many conversations pitting FTZs against Mexico, nor is she convinced that near-shoring is a massive factor. It is basically about whether a company brings goods into the U.S. and what it wants to do with them, she remarks.

These factors are often not what they were 10 years ago. Imbriani has seen a shift toward more sub-assembly in FTZs, while Allen finds that in the past FTZ users tended to be highly specialized firms that required significant investment. Companies from the automotive industry continue to be among the leading users of FTZs, but others, such as producers of pharmaceuticals and electronics, have embraced FTZs, she notes.

Arguably the biggest shift in the FTZ user landscape is the rising number of importers that embrace the concept. In 2013, 32 percent of the merchandise received in FTZs was for warehousing and distribution. In 2011, this segment had accounted for 17 percent of the overall value of merchandise received in U.S. FTZs.

One of DGF’s clients is a major retail distributor that uses the FTZ to consolidate imports from Europe with inventory produced in a manufacturing location in Mexico for distribution in the Americas. The logistics firm, in tandem with sister company Exel, secured designation of a warehouse site from the Foreign Trade Zones Board, activated the site with U.S. Customs and managed data flow to the agency.

The operation has since expanded to cover two larger sites, and planning for a new site is currently under way. The estimated imported value of goods into the foreign trade zone last year was $600 million. The arrangement saves the company an estimated $6 million annually.

ASA Electronics, which produces an extensive range of mobile electronics, uses FTZ 125 in South Bend, Indiana, predominantly for the distribution of products manufactured overseas. About 90 percent of its products are made in Asia. Some assembly work, kitting and light soldering are performed in the FTZ, but more than 80 percent of the products move straight in and out of the facility. About 10 percent of the volume is exported.

Originally, ASA set up the FTZ in 2001 to avoid a state inventory tax that Indiana was levying at the time, which saved the company more than $100,000 a year, according to Julia Willis, the company’s CFO.

For most firms that carry out manufacturing inside an FTZ, the biggest appeal lies in the choice of paying duties either on the value of the imported components or of the finished product. Moreover, there are no duties on finished products that are re-exported from the zone. Companies that bring in production machinery from outside the U.S. can defer duty on these acquisitions until they commence operation.

ASA can only avail itself of these elements to a relatively minor degree, but there are other benefits. Operating in an FTZ allows companies to consolidate their merchandise processing fee in one weekly batch. As there is a cap of $485 for an entry, companies that import and hold or consolidate their goods in the zone pay less. “We saved $40,000 on that last year,” says Willis.

The cap on merchandise processing fees does not apply to bonded warehouses, Allen points out.

There is also an advantage with regard to the harbor maintenance fee, notes Cori Owens, ASA’s FTZ administrator. “We still pay this, but on a quarterly basis. It assists with the cash flow,” she says.
Imbriani finds that many of the more successful FTZs bring these benefits in conjunction with additional incentives from state or municipal governments, such as tax rebates for a number of years or tax credits for local hires.

“The concept has benefits without state or community help, but it is more potent with it,” he says.

Owens points out that there are soft benefits. Over the years, ASA’s cooperation with U.S. Customs and Border Protection has grown, she says. “Our relationship with CBP is unique. They audit the security at our facility. Since 2001, we have not had any incidence of theft.”

ASA decided at the outset that it wanted to take control of its FTZ, rather than use one provided by a third party like a logistics partner. This meant more involvement and time spent on running the zone and inevitably entailed a steep learning curve. Nobody takes classes on running an FTZ in college, notes Owens. “Educate yourself, work with consultants, with people who have experience with FTZs,” she advises.

She adds that one of the biggest lessons from the company running its own FTZ has been to tighten up controls on the inventory side.
For those who want to play a less active role, logistics providers are happy to take over. “We have customer-operated or customer-driven FTZs that DGF operates. We manage FTZs on behalf of clients, and we also operate FTZs directly at clients’ facilities,” says Allen. In addition, DGF has general purpose zones that anyone can use at five major locations across the U.S.

Where should an FTZ be located? Being close to an airport or a seaport brings certain advantages, but overall infrastructure is more important, says Imbriani. So are target markets. “A company that sees Canada as a major market may look at upstate New York or close to the border,” he says.

He urges companies to scrutinize their whole manufacturing process, the value of foreign components and the various duty rate scenarios. “There may be companies that look at FTZs when all they need is a bonded warehouse,” he says, adding that shopping around is equally important.

“FTZs are not for free and there is not a national price schedule. Charges vary by zone and operator,” he advises.