what is a foreign trade zone, and how do they work?

Filed under: Global Business — October 27, 2009 @ 4:25 pm

Use a foreign trade zone to be more competitive

In 2000, Congress passed the Trade and Development Act, creating Foreign Trade Zones (FTZs).
FTZs exist throughout the United States to help domestic manufacturers save money and defer expenses. Think of an FTZ as a small island somewhere in the United States that’s exempt from U.S. 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, it can keep those components in an FTZ until ready to use them. The manufacturer also can work on those components while they reside in an FTZ.
This means the bicycle company won’t pay any U.S. duties on these components until they’re ready to exit the FTZ (thus “entering” the U.S. 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 doesn’t leave the FTZ until a customer is ready to buy bicycles. If the bicycles are being exported, there is no U.S. Customs duty whatsoever.
If the bicycle firm bought components from Japan, steel from China and tires from Malaysia, and built bicycles for export to the United Kingdom, the firm could import all of these pieces duty-free, build the bicycles and then export them, duty-free.
This alone could make any U.S. manufacturer more competitive.
There are more benefits. If the bicycle company uses imported machinery to assemble bicycles, then a portion of that machinery also won’t incur U.S. duties. The labor and overhead affiliated with the production process (for export) also is exempt from U.S. customs duties.
If the UK client returns bicycles to the FTZ, there’s 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 completion, the finished products could be shipped to an FTZ near the Pennsylvania client. Duty would be collected only when the bicycles leave the Pennsylvania FTZ for delivery to clients.
In many cases, such as with Swedish giant Ikea furniture, the customer bears the duties incurred upon leaving the FTZ. Ikea can offer its clients better pricing, provided the clients take that burden — as many are willing to do.
Most manufacturers can calculate their cost of duties and of capital to estimate their savings. However, few can calculate the costs of the paperwork 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 in 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 its costs per employee, per minute. But if we assume a $2-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 benefit greatly by activating an FTZ within their real estate. If our bicycle manufacturer has several locations to choose from, it may pick the location that’s already established as an FTZ.
According to the national association, there are more than 250 U.S. communities with zones, and all 50 states have zone projects. The FTZs handle some $400 billion worth of merchandise, and FTZs employ more than 300,000 people and export $19 billion in goods.
So in short, some paperwork and compliance can quickly save a manufacturer money and hassle.
How much money can be saved?
To stay with a bicycle example, Huffy Bicycles of Centerville, Ohio, claims to save more than $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.

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