The ABCs of FTZs
America’s Bustling Foreign Trade Zones
In 2010, the Stanley Works company closed on a $4.5 billion merger with the Black & Decker Corporation, spawning an international tool industry giant with annual churn of nearly $8.5 billion. Stanley Black & Decker inherited more than a century of business practices, including a South American export market with double-digit annual growth, Asian sourcing, U.S. manufacturing and Panamanian distribution.
With small markets proliferating and shipping bogging down at the source, logistics needed quick attention. On the heels of the merger’s closing, the tool company relocated its southbound shipping—worth at least $300 million a year—out of Panama and into 160,000 square feet of leased warehouse space in South Florida’s Port Everglades. The Broward County warehouse featured intermodal transit connections and Foreign Trade Zone certification, a combination whose potential for increased efficiency and cost savings appealed greatly.
The move paid off immediately. One benefit came from deferring duties until shipping the finished product. If the product ships overseas, the company pays zero duties. Duty-free/duty-deferred is the Free Trade Zone’s chief selling point.
Advantages cited include less paperwork, greater transparency and expanded intermodal options. The company can pack a container and be in transit the next day. Shipping to Panama usually required a week’s wait.
At FTZ No. 25, the neighbors include TransMontaigne Product Services, Motiva Enterprises, South Florida Materials Corporation and Parbel of Florida. And because numerous cruise ship operators such as the Carnival Corporation call Port Everglades home, the zone hosts a bevy of liquor distributors, duty-free wholesalers and other suppliers who enjoy export status under federal guidelines. The value of assembled goods moving through Port Everglades’ general purpose Foreign Trade Zone exceeded $685 million in fiscal year 2011; multinationals shipped about 10 times that volume, much of it in petroleum and automobiles. Collectively, Sunshine State shippers helped boost FTZ No. 25’s exports to $3.7 billion in 2011, the most recent year for which data is available. The zone’s remarkable year produced a heady annual growth rate of 40 percent.
With all the activity, FTZ No. 25 glided into first place nationally last year in the FTZ category for distributors and light assemblers.
“We’ve been busier than a one-armed paper hanger around here,” jokes Robert Jacob, the zone’s long-time operations manager. The zone’s efforts were recognized by the National Association of Foreign Trade Zones, which deemed Broward County “one of the most export-intensive zones in the country.”
Broward’s traditional rival, neighboring Miami-Dade, has—this should come as no surprise—also been positioning itself for growth. Across South Florida, the Panama Canal expansion and the planned dredging of Miami Harbor have buffed local interest. Last summer, when the Department of Commerce named PortMiami to operate FTZ No. 281—the newest Foreign Trade Zone in the country—it was front-page news. FTZs, against the odds, became a water cooler topic across the state.
As in Broward and most of the newer programs, the new zone administrators will set up numerous satellite zones around Miami, encompassing dozens of existing warehousing and distribution facilities, rather than trying to recruit companies into fenced-in, third-party commercial lots.
In other words, you won’t have to go to the zone; the zone will come to you. On Aug. 10, the day after PortMiami got its designation, local warehouseman Ralph Gazitua applied for subzone status—and achieved it just before Christmas. Gazitua, president and chief executive of WTDC, a Miami customs-bonded warehouse and container freight station, says with his space inventory leased out, he has expanded into consulting to help clients obtain their own zone status. He’s also selling zone-focused software.
His conversation starter: “Become a Foreign Trade Zone.”
“I’ll target anyone who does five to 10 entries per week,” declares Gazitua. “Everyone is saving a quarter of a million dollars.”
Realistic expectations or marketing hype? Answers vary as to how much companies can actually save from FTZ status; certainly, each business must examine the issue for itself. “It’s a complicated question,” says Daniel Griswold, president of the National Association of Foreign-Trade Zones in Washington, representing administrators, companies and professional advisors. Savings, perhaps surprisingly, have never been tallied.
Perhaps now they will be. Rooted in New Deal politics and Depression-era economics, Foreign Trade Zones are suddenly more relevant than at any time in history. Recent changes in Washington over how the zones are accredited and administered have encouraged local governments and economic-development boosters to push for expansion and restructuring of existing programs—and to go out touting the benefits of participation to exporters small, large and all sizes in between.
Check out the numbers. Zone-based exporting has tripled in volume from 2000, reaching $54 billion in 2011. Texas still leads the nation in overall zone exporting, based on dollar value; Florida is fifth and surging. Other states whose zones rank among top-five FTZ activity in various categories include Louisiana, California, South Carolina, Illinois, Mississippi, Pennsylvania, Maryland and Alabama. Capital improvement projects driven by zone administrators, participating companies and service providers proliferate.
There are more than 170 FTZs active in the United States, with at least 269 manufacturing and production operations; thousands of distributors participate as well. Shipments into the zones totaled over $640 billion in 2011, up from $534 billion the previous year. Warehouse and distribution operations received nearly $106 billion in merchandise while manufacturing and production operations handled $535 billion. The zones move much of the nation’s exports in petroleum, automotive, electronics, pharmaceuticals, machinery and equipment, most of it through special purpose—read “private”—zones serving multinational clients.
Zone-based exporting has grown steadily throughout the young millennium, interrupted only in the recessionary year of 2009; since then it has doubled. Zone specialists and export advocates cite such growth factors as the president’s emphasis on exporting, expanding use of zones by multinationals, and vibrant overseas markets as contributing to the zone boom.
Another answer might be the loosening of bureaucratic oversight. Due to policy revisions at the Department of Commerce, many zone-related processes have been streamlined or simplified, resulting in a more business-friendly profile. Fenced-in physical campuses remain the norm. But more and more zones take the Florida approach, designating warehouses and assembly facilities miles from the nearest port—not to mention one another—as comprising zones or subzones. Bureaucratic delays and paper-centric rigmarole have given way to flexibility and—better sit down—speedy handling. Zone participation seems to make more sense now for more companies.
“People are surprised at how flexible the FTZs really are, and how streamlined the processes have become,” says Amie Ahanchian, a vice president with KPMG’s International Corporate Services division in Washington. “The old daunting image is out of date.” Sometimes, she adds, “You can recoup your investment in six months.”
Zone administration has also changed, shedding old images of political favoritism and bureaucratic inertia that dogged the program for decades. The new generation of zone administrators, coming from such backgrounds as logistics, urban planning and economic development, structure their programs to maximize cost-saving benefits while offsetting globalization’s less desired effects.
“Zones are very much tied to the global economy and can be set up in many different ways to produce various benefits,” says Jose Quinonez, manager of Foreign Trade Zone No. 68 at El Paso International Airport, the largest zone operating along the Mexican border—and, after Broward, the country’s second-largest zone. “FTZs act as buffers to decrease the logistical costs of bringing goods into the U.S.”
Opened in 1981 by a nonprofit organization, administration of zone No. 68 was taken over by the city the following year and assigned to the airport. Dozens of businesses flocked in, taking advantage of ways to save money on Mexican trade. The pace quieted down with the signing and implementation of the North American Free Trade Agreement, which seemed to reduce the value of the zone in the eyes of some businesses.
In the early ’90s, zone No. 68 needed to reinvent itself, and did, turning its focus to nurturing small businesses, providing access to transportation specializations and trade experts, and promoting itself aggressively in the region. The original site grew from 500 acres to more than 3,500 acres spread over five sites across the metropolitan region. By 2010, the zone led the nation in overall export activity, handling $1.7 billion in shipments.
Today, China has replaced Mexico as the largest trading partner of zone-based companies in the aggregate. Trade with Canada has surged and Bangladesh now ranks as a major import source. Over the years, Quinonez and his team have sought to learn the lessons of the past and apply them to the present and future, emphasizing ways to keep up with trade patterns, streamline procedures, help importers maintain compliance, make introductions to experts and specialists, and nurture local Mom and Pops seeking their first cross-border sale.
“We’re here and we’re going to be around a long time,” Quinonez promises. “The public sees the value of the zone.”
A Lesson in Hedging