By Greg Jones, Vice-President, FTZC™ (Foreign-Trade Zone Corporation)
In his Magnum Opus commonly known as “The Wealth of Nations,” 18th century Enlightenment philosopher and economist Adam Smith noted, “Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.” If one were to update this observation, one might say that every man and woman’s livelihood depends on the exchange or trade of goods, services, and every form of property. Since ancient times, trade in goods has fueled the growth of cities, the construction of roads, ports, and other infrastructure, and indeed, nations and empires. In those days the trade of goods was – literally – a pedestrian affair. Merchants loaded goods and commodities on a beast of burden and hoofed-it to the village, town, or city where the goods would be sold. Today, trade ranges across the globe, with raw materials, parts and components, and finished products being produced, marketed and transported in every country, city, town, and household via multiple modes of transportation: ocean, air, rail, and highway.
As trade has expanded and become more complex, competition has become global. The competition to attract and retain value-added business operations, and thereby reap investment, employment and prosperity is also global in scope.
An essential element in the attraction and retention of value-added activity is the ability of a given locality to provide the means by which value-added operations can profitably thrive. The U.S. Foreign-Trade Zones program is a valuable tool which is often used by local and state economic development teams in concert with other site selection tools as they endeavor to attract or retain value-added businesses engaged in international trade.
Although the U.S. Foreign-Trade Zones program is national in scope, its immediate effects are most manifestly evident on a local and regional level. This holds true not only for large metropolitan areas, but also for medium and smaller communities. FTZ procedures enable Zone users to lower their trade-related costs in several important ways:
Relief from “Inverted Tariffs”
In certain instances, imported components used to produce a finished product are dutiable at higher tariff rates than the tariff rate that applies to the finished product itself. These “inverted tariff” relationships actually penalize companies that manufacture their products in the United States. They provide a lower effective duty rate for finished products manufactured overseas and imported into the U.S. market. The Foreign-Trade Zones program levels the playing field in these circumstances by allowing the Zone user to pay the lower finished product rate on foreign components incorporated into a product manufactured for domestic consumption.
FOR EXAMPLE: A Foreign-Trade Zone user imports a motor (which carries a four percent duty rate) and uses it in the manufacture of a vacuum cleaner (which is duty-free). When the vacuum cleaner leaves the FTZ and enters the commerce of the U.S., the duty rate on the motor drops from the four percent motor rate to the free vacuum cleaner rate. By participating in the Zones program, the vacuum cleaner manufacturer has eliminated duty on this component, thereby reducing the component cost by four percent.
Duty Exemption on Re-Exports
When not utilizing a Zone, an importer is required to pay Custom duties at the time the imported merchandise enters U.S. commerce. Merchandise in a Foreign-Trade Zone is considered to be outside the commerce of the United States and the U.S. Customs territory. When foreign merchandise is brought into a Foreign-Trade Zone, no Customs duty is owed while the merchandise remains in the Zone. If the foreign merchandise is exported from the U.S., no Customs duty is ever due.
Two Zone procedures can be used in concert to improve an operation’s logistics.
The Direct Delivery procedure allows foreign merchandise to be transported in-bond directly to the Zone user’s facility without clearing Customs at the first port of unlading, and without the necessity of the in-bond carrier reporting to the local Customs office prior to the delivery of the merchandise to the Zone site. Direct delivery procedures often save one to two days in delivery of foreign merchandise to the Zone user. This shortens the Zone user’s international pipeline, thereby eliminating inventory within that pipeline.
Since the formal Customs entry takes place when merchandise leaves the Zone for domestic commerce, Zone users often use the so-called Weekly Entry procedure to streamline shipments and Customs paperwork. Under the Weekly Entry procedure the Zone user files one Customs Entry per week, rather than filing one Customs Entry per shipment. This allows the Zone user to serve the domestic market without paperwork delays. Pursuant to the provisions of the Trade Development Act of 2000, the Weekly Entry procedure has been made available to all kinds of FTZ operations, including manufacturing and distribution operations.
The FTZ Weekly Entry procedure often provides significant benefits to both the Zone user and the U.S. government. For Zone users operating in today’s Just-In-Time environment, use of the FTZ Weekly Entry procedure means that hundreds, or even thousands, of import receipts over the course of a year are entered into the domestic commerce on only 52 Customs entries per year. In addition to saving the Zone user lots of paperwork, the company can reduce its payments of so-called ‘Merchandise Processing Fees’ that are associated with the filing of a Customs Entry. The U.S. government saves by the corresponding reduction in the number of entry filings and the reduction of the costs associated with processing each Customs Entry1.
Cash Flow (Duty Deferral)
No duty payment is required on merchandise brought into a Foreign-Trade Zone unless and until the goods are imported (entered) into the United States. This allows these funds to be used as working capital to earn interest or be invested.
No Duty on Value Added
No duty is assessed on domestic parts or materials, OR on domestic labor, overhead, or profit.
A vendor located at one Foreign-Trade Zone may sell goods to a company in another Zone or Subzone anywhere in the U.S. and transfer those goods to the purchasing company’s FTZ with no duty paid on the goods.
Various combinations of FTZ benefits affect the day-to-day operating margins of companies who use Zones. Equally as important is the way in which the FTZ program helps local communities attract and retain value-added economic activity.
Southwire Company, LLC, a home-grown American company located in Carrollton, Georgia, represents an example of the way in which the FTZ program can contribute to the competitiveness of U.S.-based companies who want to better-serve their domestic customers. Southwire is a major manufacturer of electrical wire and cable, and employs approximately 7,500 people worldwide, including nearly 2,000 in Carrollton. In addition to serving its customers with wire and cable used in the distribution and transmission of electricity, it also provides its own brand of hand tools designed for a variety of users, from residential and commercial electricians to power line technicians.
Jeff Williams, Director of Export/Import Compliance for the company says, “Since the company’s founding in 1950, its success has depended on the ability to offer the highest quality products at competitive prices. Our ability to develop newer, better products to deliver electricity has resulted in more than 500 worldwide patents. The people who use hand tools for electrical installation, maintenance, and repair rely on our products not only to perform the immediate task at hand, but also to assure their personal safety and the safety of the public in general. Therefore, our ability to provide the right tool at the right price is imperative.”
Recently, the company recognized the need to reduce Customs-related costs from its international supply chain. Williams adds, “We began investigating the benefits of the U.S. FTZ program in 2017. In keeping with our thorough approach to innovation, we carefully studied the ways in which FTZ use could lower our supply-chain costs, and most importantly, how we could actually obtain FTZ status and implement and manage FTZ procedures. At first we were concerned that our location in a town of just over 25,000 people might not qualify for FTZ status. We were happy to learn that thanks to the Alternative-Site Management Framework for FTZ site designation, this was no problem.”
The Alternative-Site Management Framework, often known by its acronym, “ASF,” allows FTZ grantee organizations – typically local or regional economic development agencies – to designate new “Usage-Drive” sites within a designated “Service Area” through a process that typically requires 30 days. This is much more expeditious than the traditional process of designating single-firm sites as “subzones.” In the case of Southwire, its location in Carroll County meant that its location was already within the 61-county Service area of the Greater Georgia Foreign-trade Zone, grantee of U.S. FTZ No. 26.
The ASF structure has appealed to an ever increasing number of Zone grantees. Since the reorganization of Zone projects under ASF became available in 2009, more than 170 of America’s nearly 300 Zone projects have taken the step of migrating from what is now known as the “traditional” site-management framework to ASF.
In addition to its use as a business recruitment tool, ASF has also proven itself as a valuable tool by which FTZ grantee organizations have helped local companies remain competitive as they managed growth. A case in point is the use of the ASF structure within FTZ No. 134 for which the Chattanooga Chamber of Commerce serves as grantee. Steve Hiatt, the Chamber’s Director of Existing Business Development, explains, “Our FTZ project was vital in recruiting Volkswagen’s automotive assembly plant to Tennessee. The plant began the U.S.-based manufacturing of the VW Passat model in 2011, and thanks in part to the FTZ program was able to win more production share for the Passat model, and then win production share for the VW Atlas SUV. Volkswagen chose one of our existing General-Purpose Zone sites as its American home. However, during one of the company’s growth spurts, it ran out of room to store and stage parts for its assembly line. It needed new FTZ space in a hurry. Thanks to ASF, we were able to help them obtain FTZ status for an offsite warehouse in less than 30 days, and help the company maintain full FTZ benefits without interruption.”
Adds Hiatt, “Reorganization under ASF is consistent with our regional approach to trade and economic development. Rather than focus on Chattanooga, Hamilton County, or even our six-county Metropolitan Area, we designated 11 counties in southeastern Tennessee as our ASF Service Area. If communities along our nation’s northern and southern borders are capable of effective cooperation in economic development with their neighbors to their north and south, then we certainly can do the same for our neighbors in eastern Tennessee and northern Georgia. ‘A rising tide lifts all boats’ sounds like a cliché, but it’s true. We fully realize that regions and communities who benefit from the economic activity conducted by firms engaged in international trade are those who make their own contributions to the competitiveness of those business operations. It is these regions and communities – not those who specialize in providing cheap low-skill labor – who stand to benefit from the globalization of trade.”
The Foreign-Trade Zones program serves as a tool for the communities who establish Zone projects to maintain and expand their economic base. For global companies with a desire to invest in U.S. production or distribution sites, the availability of Foreign-Trade Zone status is often an important factor in their ultimate success.
1 The Merchandise Processing Fee is a user fee that is associated with the filing of a formal Customs entry. The Merchandise Processing Fee (MPF) is based on .3464% of the value of the merchandise covered by a single entry, with a minimum of $25.67 and a maximum of $497.99 per Customs entry. As an example of MPF savings afforded by the FTZ Weekly Entry procedure, an importer who does not use the FTZ program and who receives 20 imported shipments (and files 20 Customs entries) per week, might pay as much as $9,959.80 each week in MPF. The same importer using the FTZ Weekly Entry procedure would pay $497.99 per week as shipments leave its FTZ facility, resulting in weekly savings of $9,461 and annual savings of $492,014.