16 Oct Can manufacturers use a foreign trade zone to be competitive?
Can manufacturers use a foreign trade zone to be competitive?
In 2000, Congress passed the Trade and Development Act, to create Foreign Trade Zones. Foreign Trade Zones (FTZ’s) exist throughout the USA to help domestic manufacturers save money and defer expenses. Think of an FTZ as a small island somewhere in the USA that is exempt from US Customs duties. An FTZ can be a port, part of a port, acreage in an industrial park, a warehouse, or even an office building! Anywhere goods can be imported, stored and then re-exported can be an FTZ.
According to the National Association of Foreign Trade Zones (www.naftz.org) activities that can occur in an FTZ include: assembling, packaging, destroying, storing, cleaning, exhibiting, re-packing, distributing, sorting, grading, testing, labeling, repairing, combining with foreign or domestic content, or processing. Hence. Almost any manufacturers dealing with imported material can benefit from an FTZ.
An example might be a bicycle manufacturer in Colorado. If the manufacturer is working with any imported components they can keep those components in an FTZ until they are ready to use them. They can also work on those components while they reside in an FTZ.
This means that the bicycle company will not pay any US duties on these components until they are ready to exit the FTZ (thus “entering” the US market).
This is a great boost to the company’s cash flow. By saving money on duties, the firm can order more pieces of components and take advantage of bulk pricing. And when properly managed, the finished product wouldn’t leave the FTZ until a customer was ready to buy bicycles. If the bicycles were being exported, there would be no US Customs duty whatsoever.
In our example, if the bicycle firm bought components from Japan, steel from China, and tires from Malaysia, and built bicycles for export to the UK, the firm could import all of these pieces duty free, build the bicycles, and then export them, duty free.
This alone could make any US manufacturer more competitive.
The benefits continue though. If that bicycle company uses imported machinery to assemble bicycles, then a portion of that imported machinery would also not incur US duties. The labor and overhead affiliated with the production process (for export) would also be exempt for US customs duties.
If the UK client returned bicycles to the FTZ, there would be no duty collected on those returns either.
Many firms don’t export, so let’s take an example with a domestic customer. What if the bicycle company was in Colorado, but its clients were say, in Pennsylvania?
The Colorado firm could store parts and produce goods in a nearby FTZ. After completed, the finished products could be shipped to an FTZ near the Pennsylvania client. Duty would only be collected when the bicycles leave the Pennsylvania FTZ for delivery to the client.
In many cases, such as with Swedish giant Ikea furniture, the duties incurred upon leaving the FTZ are borne by the customer. Ikea is able to offer its clients better pricing provided the clients take that burden, as many are willing to do.
Most manufacturers reading this article will be able to calculate their cost of duties, and their cost of capital to estimate their savings. However, few will be able to calculate the costs of the paper work associated with paying duties and registering goods. By consolidating into an FTZ, much of the paperwork associated with individual imports can be minimized.
FTZ users can engage a practice known as the Weekly Entry Procedure. This procedure allows the FTZ user to file one Customs Entry per week (as opposed to filing one Customs Entry per shipment). Picture our bicycle maker getting several hundred boxes per month, from various suppliers.
Only an employer can tell you their costs per employee, per minute. But if we assume a two dollar per employee minute cost rate, and save hundreds of hours in filing time per month, savings add up quickly.
The FTZ has several other benefits. Savings can occur on personal property tax, harbor fees, spare parts inventory, destruction of obsolete parts and insurance rates on inventory.
Landlords can greatly benefit by activating an FTZ within their real estate. If our bicycle manufacturer has several locations to choose from, it may pick the location that is already established as an FTZ.
According to the NAFTZ there are over 250 U.S. communities with zones, and all 50 states have zone projects. The FTZ’s handle some $400 billion worth of merchandise, and FTZ’s employ over 300,000 people. $19 billion worth of goods are exported from FTZ’s
So in short, some paperwork and compliance can save a manufacturer money and hassle, very quickly.
How much money can be saved?
To stay with a bicycle example, Huffy Bicycles of Centerville, Ohio claims to save over $1 million a year in duties and paperwork.
If your business spends more than $100,000 in duties and paperwork, an FTZ should be part of your plan.