By Tommy L. Berry, Chief Business Officer of PointTrade Services, Inc.
As one begins to understand the impact of sea ports and inland ports and their role in attracting and maintaining value-added services to their respective communities, it is advantageous to understand what a Foreign Trade Zone (FTZ) is. An FTZ is a secure and defined location that acts as an extension of a U.S. Port of Entry. Established in 1934, the United States FTZ Program was developed to promote economic development through international trade. FTZs have been established in all fifty states and Puerto Rico. FTZs may allow for delayed and/or reduced duty payments on imported merchandise. Duty deferral, reduced Merchandise Processing Fees (MPF), duty elimination on scrap and exports, reduction or elimination of a drawback process, supply chain efficiencies, inverted tariff savings and increased compliance are some of the benefits offered through a zone. Some areas in the country also offer additional benefits such as a tax break on inventory.
Based on the most recent data available in the Annual Report of the Foreign Trade Zones Board to the Congress of the United States, there were 179 FTZs that were active during 2014 accounting for approximately $798 billion in merchandise received, with approximately $99 billion in direct exports. These zones were utilized by around 2,700 firms employing approximately 420,000 persons. There were more than 300 active production operations, the largest industries accounting for the production activity included the oil refining, automotive, machinery/equipment, consumer electronics and pharmaceutical sectors. The top five states for merchandise received in FTZs were Texas, Louisiana, California, Kentucky and Illinois. The top five states for exports from FTZs were Texas, Louisiana, South Carolina, Alabama and Mississippi.
FTZs are significantly influenced by the intermodal transportation services through major ports and inland port destinations. Inland ports are providing a growing number of strategic locations for warehousing, distribution and manufacturing operations. Expansion and consolidation of current multi-operational sites in the U.S. into regional or single locations is increasing as companies take advantage of available inland transportation options in an effort to reduce transit times and allow a company to benefit from lower warehousing costs and regional labor.
Many importers have historically moved goods through major west coast ports to the Midwest, paying Customs Broker fees, duties and other related costs on every container before they physically receive the merchandise. Importers often discover substantial savings as a result of the ability to defer the duties and Harbor Maintenance Fees (HMF) by moving merchandise in-bond to an FTZ and consolidating a week’s shipments out of the FTZ into U.S. commerce into a weekly Customs entry. FTZs can allow the duty and fees to be deferred for weeks, or even months, after the inventory is received into a zone as Customs entry is not made until the goods actually ship from the facility, resulting in significant cash flow savings. The FTZ can also eliminate duties and excise taxes for exports from the FTZ. There are opportunities for domestic products that are subject to state and federal excise taxes to be stored in an FTZ for export, eliminating the tax payments in advance of the sale of the merchandise to a foreign location.
High volume importers often find that a zone offers a significant reduction in MPF for warehousing and distribution operations. Under weekly entry filing procedures, a company can roll all of their imports for a week into one entry. Each Customs entry is subject to an MPF rate of 0.3464%, with a $485 maximum. Under weekly entry procedures in an FTZ, the merchandise processing fees can be reduced to $25,220 annually (based on 52 entries capped at $485 per entry). Weekly entry filing often also results in a reduction in Customs Broker fees.
Using modern software that is currently on the market, various trade programs are facilitating an increase in the movement of freight through major ports to inland destinations. A growing number of companies are starting to use FTZs to streamline the global supply chain and optimize their use of the various trade programs in the U.S. to reap significant savings each year. The savings potential depends on the scenario and volumes for each importer, including where they import from, what they import, and where they store or further process their products.
It is not uncommon for a domestic manufacturer to face a situation where the duty rate for a finished good they produce has a lower duty rate than the duty rates for the imported components. This creates an unfair advantage for companies producing these products overseas. FTZs can benefit manufacturers who are combining U.S. and foreign components to produce a finished good that is subject to a lower duty rate in addition to encouraging U.S. value added services to occur instead of importing a 100 percent foreign-sourced product. With Foreign-Trade Zones Board approval, it may be possible for a company to take advantage of inverted tariff savings by electing the duty rate of either the imported material or the finished good, whichever is lower. As an example, if an automotive manufacturer imports components with duty rates ranging from zero percent to 12 percent to use in the manufacture of a passenger car (that would have had a duty rate of 2.5 percent if imported into the U.S.), the manufacturer could elect the lower duty rate of 2.5 percent (duty rate of the finished good) on the value of the imported components. For the foreign components that are duty free or less than 2.5 percent, the manufacturer could elect the duty rate of the component to ensure there are no increased duties.
There are several advantages available to companies through the use of an FTZ depending on the type of product and activity. Besides inverted tariff and MPF savings, FTZ Operators approved for direct delivery procedures can move their cargo from the port of arrival to their facility on an expedited basis, often without undergoing commercial selectivity exams at the port. From a just-in-time inventory standpoint, the FTZ program supports a seamless supply chain from vendor to customer without the need to maintain unnecessarily high levels of inventory as merchandise moves in and out of the facility in a more efficient manner.
Recent regulatory changes provide easier FTZ access to more companies. Across the U.S. there are approximately 275 Foreign-Trade Zones that sponsor zone sites. Of those zones, more than 150 have elected to organize under the Alternative Site Framework and offer an expedited application process for zone designation within a pre-approved ASF service area. An ASF service area usually encompasses a portion of a county or multiple counties in their entirety. Grantees also sponsor subzones for facilities outside of the ASF service area. Many businesses are not aware that they are already located within an approved ASF service area. Under ASF, companies can designate their existing facilities as an FTZ with a relatively quick and simple designation process.
Site selection consultants and real estate professionals should understand the value of being located within an approved ASF service area. Grants of authority to establish an FTZ are held by various airport and port authorities, cities, counties, townships, economic development agencies and others. These “Grantees” are given the authority to apply on behalf of interested companies who wish to establish an FTZ site. The FTZ can be used to make an inland port or industrial park cost competitive with other areas of the U.S. The total cost advantages and disadvantages assist in the decision of investment in facilities, jobs creation and use of the intermodal transportation systems. An FTZ program allows inland ports and communities to lower operating costs for companies re-locating to their area. Location, tax benefits and local labor resources are some of the factors used by Grantees in marketing their zone offerings to attract business.
The changing global climate is spurring the growth of the FTZ Program in the Unites States. The FTZ Program complements the Customs-Trade Partnership Against Terrorism program’s focus of improving the security of supply chains for participating private companies. FTZ facilities usually meet or exceed the security requirements of C-TPAT and moving goods through an FTZ has been noted as a C-TPAT best practice.
Infrastructure improvements that have resulted from the Panama Canal expansion provide additional opportunities for existing and potential FTZ users. Shipping companies are streamlining their fleets by operating fewer ships that can carry more cargo. Increases in port capability and capacity will only raise the ceiling for potential FTZ opportunities and supply chain efficiencies. Ports in Norfolk, Houston and Baltimore are already equipped to accommodate the larger post-Panamax vessels that are now able to transit the Panama Canal. Expansion projects are currently in the works for several ports including those in Jacksonville, Port Everglades, Miami, Brunswick, Savannah, Charleston and the Port of New York and New Jersey.
The Panama Canal expansion is anticipated to increase international trade overall for the U.S. The expansion offers new and expanded trade opportunities such as for refrigerated cargo and increased exports of liquefied natural gas (LNG). Prior to the expansion, the Panama Canal could not accommodate the larger LNG tankers. The expansion project significantly reduces transit time from most domestic LNG export facilities which are located on the Gulf Coast to markets such as South America and Asia. The Panama Canal Authority also offers incentives such as tolls that encourage LNG traffic. Beyond the LNG export markets, the expansion has resulted in toll reductions for certain trades for the Suez Canal as it competes for vessel traffic. Exporters not already operating under FTZ procedures should evaluate whether they could benefit from an FTZ project, especially as their volumes increase.
For companies interested in determining whether an FTZ offers significant savings opportunities for their operation, PointTrade Services, Inc. (PTSI) offers a complimentary FTZ feasibility analysis to assist a zone prospect in determining what the potential savings, benefits and costs are. PTSI provides consulting services to guide companies through the set up and implementation of a zone project in addition to turnkey solutions for companies not equipped to administrate their zone in-house.
PointTrade Services, Inc. is an international trade consulting firm consisting of two divisions – PointTrade Services Consulting and PTSI Managed Services focusing on assisting companies in achieving cost efficiencies and savings, global supply chain enhancements, advanced systems automation, and increased compliance with U.S. Customs and Border Protection, Foreign-Trade Zone laws and regulations, trade agreements and other governmental agency requirements.