Foreign-Trade Zones: Q&A with FTZ Expert Greg Jones

Leveraging the US Foreign-Trade Zone (FTZ) program offers many advantages. The United States Foreign-Trade Zones program was established in 1934 when Congress passed the US Foreign Trade Zones Act. The act allowed for the creation of “Foreign-Trade Zones” — that is, specifically designated, secure areas under the oversight of US Customs and Border Protection (CBP) but outside US commerce.

Which industries benefit from an FTZ ?

The benefits of FTZs are very much dependent on individual company circumstances. However, there seems to be a growing number of industries and types of business operations that find that the FTZ program improves their bottom lines. 

In the 1980s, automobile manufacturers went for FTZs in a big way. Now auto parts producers have followed them, and the list of these just keeps growing. Pharmaceutical companies and their contract manufacturers are also big users of FTZs, as are other high-tech industries involved in the development of clean or renewable energy products. 

Also, distribution and order fulfillment operations — even those which handle duty free products — are making ever increasing use of FTZs. The same goes for 3PL operations. Any company that is importing — even at a modest level — should look at what the FTZ program can offer.

Are there any industries that would not benefit from an FTZ?

There are a few. For example, you can store alcoholic beverages or cigars in a zone, but you can’t manufacture them there. This type of prohibition on zone activities is very rare. The whole idea behind the FTZ program is to encourage economic investment and activity here in the USA. However, in terms of any industry-by-industry evaluation, it’s important to keep in mind that the FTZ program is designed to remove disincentives to conducting value-added operations in the United States, and that the benefits are applied on a highly targeted basis.

Can you detail a few of the FTZ benefits for both importers and exporters?

One of the classic benefits of FTZs — and when I say “classic,” I’m talking all the way back to ancient Mediterranean civilizations — is the ability to re-export a product free of domestic customs duties. Some versions of this model are available in many countries around the world today. 

However, the US FTZ model goes much further in a couple of really important ways.

First, the American model enables US-based manufacturers to obtain relief from unintentional quirks in the overall US tariff structure. These quirks actually add irrational tariff costs to manufacturing a given product in the USA. The slang term that’s often used to describe such a quirk is an “inverted tariff” rate relationship. An inverted tariff is when the duty rate on a given finished product is lower than the duty rate on one of its imported inputs. 

What the US FTZ program authorizes on a company-by-company, location-by-location, product-by-product basis, is the ability of the US-based business to pay the same finished-product tariff rate on inputs used in the production of products destined for the domestic market. Thus, companies do not have to export the manufactured product to obtain the FTZ benefit. 

There are a number of US-based operations that use this specific benefit to help them displace imports of competing products. These include pharmaceutical  and chemical companies, automotive manufacturers, producers of energy and energy technologies, among numerous others. There are literally hundreds of US-based manufacturers who utilize this one unique benefit of the US FTZ program.

The US FTZ model also offers opportunities to streamline international supply chain movements and costs. One benefit that’s popular among medium and large-scale distribution and manufacturing operations is the FTZ Weekly Entry procedure. This procedure not only saves US Customs and importers lots of time in dealing with import transactions, it also helps some FTZ users reduce so-called “Merchandise Processing Fees” associated with filing multiple Customs Entries. 

Under the FTZ Weekly Entry procedure, the FTZ user files a single Customs Entry for all of its shipments that leave its FTZ facility and enter US commerce during a given calendar week. It’s another example of the FTZ program’s ability to help the bottom line without the necessity of re-exporting the product that leaves the Zone.

How does being in an FTZ impact your existing standard operating procedures?

If you do it right, not much. Part of the art and science of the products and services offered by QAD is integration of systems and procedures that create efficiencies, reduce costs, and actually enhance overall import compliance.

What are some common FTZ misconceptions?

Well, a few misconceptions immediately come to mind.

Some folks still have the idea that to use the US FTZ program, your business must first locate at a previously designated FTZ industrial park area. This is not true. On the contrary, the local FTZ project — and there are more than 250 local FTZ projects in the United States —  the local Zone project can come to your individual business facility. 

When I think of “FTZ” my mind doesn’t first conjure up a place. It views “FTZ” as a set of procedures and systems integrated into the normal, day-to-day activities of any given distribution, order fulfillment or manufacturing operation. It’s a money saving tool that really has gone mainstream in America over the past four decades. There’s nothing at all exotic about it.

Earlier we discussed instances in which none of the products that leave the Zone are re-exported, yet the company using the FTZ benefits significantly. So, just to be clear: FTZs can benefit companies that ship products only to customers in the United States. You don’t necessarily have to export to benefit.

Another misconception is that only large companies stand to benefit from using FTZs. It is true that a certain level of activity is necessary. Otherwise, the company does not obtain benefits sufficient to justify the costs associated with using FTZ procedures. 

However, I can immediately think of one of our clients who operates a 10,000 square-foot distribution warehouse right in the middle of a downtown area of a relatively small city. This particular company does order fulfillment for food products and uses the FTZ to streamline its process of obtaining routine FDA clearances for its product lines. 

The company was able to obtain FTZ status for its individual warehouse site. Additionally, it was also able to get set up to use Zone procedures in about 90 days from the time it made the decision to use the FTZ.

How can becoming an FTZ be a competitive advantage for companies?

I’ll try to answer this question without being confusing. The so-called “competitive advantage” of using an FTZ is, in reality, the ability to compete on a level playing field versus your overseas counterparts. 

When you think about it, relief from inverted tariff rates and other customs costs peculiar to manufacturing in the United States enables the US-based manufacturing operation to enjoy the same tariff treatment as a foreign producer of the same product. In many cases that foreign producer is the US plant’s sister plant within the same multinational corporate structure. 

So, the competitive advantage is actually the removal of an unintended disadvantage created by changes in the US tariff structure. These are very likely to have resulted from a larger multilateral trade initiative. Oftentimes, leveling the playing field in this way enables US-based manufacturers to win production share within their respective multinational families of production plants.

The benefit for US communities, companies and their workers is that the FTZ program contributes to their ability to displace imports of the very same manufactured goods with which they compete.

Simply put, the FTZ advantage is the removal of certain competitive disadvantages created by tariff costs.

Can you explain what weekly entry is and how that can be a benefit for companies?

Sure. I mentioned  the Weekly Entry process earlier. I’ll try to explain the benefits in a bit more detail.

First,  when imported goods are in a Zone, they’re treated as if they’re outside US commerce. As the goods are not inside the US customs territory, a company pays no duties on the goods unless and until they leave the Zone for US consumption. 

The movement of imported goods from a Zone into US commerce requires a Customs Entry. Now, it wouldn’t make any sense for large-scale manufacturing or distribution operations to file a separate Customs Entry every time a truckload of product leaves the Zone. It wouldn’t make business sense, or make sense for the federal government either. 

The FTZ Weekly Entry process became available for both distribution operations as well as for manufacturing operations in the year 2000. This enables the FTZ Operator to file a single weekly estimate for the goods it anticipates to ship into US commerce during the following 7-day period. The FTZ Operator can also file an Entry Summary for all the goods it shipped into US commerce during the previous 7-day period. 

Companies pay all duties and Merchandise Processing Fees on the single Weekly Entry Summary. 

Now comes the part that sometimes gets a bit confusing. Companies file a Customs Entry once a week. Therefore, any Merchandise Processing Fees associated with that Entry are also calculated once a week. The Merchandise Processing Fee (MPF) depends on the value of a given Entry — it’s just a bit over one-third of one percent, and it’s capped at just over $528. 

So, for a manufacturer of bulk goods that receives one shipload of goods per month, but ships daily, the benefit of the Weekly Entry procedure is purely one of convenience. The company would pay more MPFs than it would have if it made one Entry per month. 

However, this is different for companies that receive multiple inbound shipments per week. Now, the Weekly Entry procedure can provide MPF savings as well as convenience. 

For certain FTZ users, the savings can be substantial. This is another reason why a good cost-benefit analysis is important. Companies can easily gather figures for actual MPF costs. These are then compared to what MPF costs would be if the company could limit its MPF costs to $528 per week by using the FTZ program.

What is duty deferral, and how can that be an advantage for companies in an FTZ?

Without using the label, “duty deferral,” I described it previously. As I mentioned, companies pay no duty on goods while they’re in the Zone. Payment of duties occurs only if and when the goods leave the Zone for domestic consumption. While the goods are in the Zone, the company gets to retain the money that it otherwise would have paid on the Customs Entry filed at the time the goods first arrived in the US.

For companies that operate in what most people would describe as a “lean” supply chain environment — especially those with imported products that are subject to low rates of duty — then the actual savings attributable to duty deferral are very modest at best.

However, for distribution or order fulfillment operations that handle significant volumes of high duty rate items — such as textiles or apparel items — then the FTZ duty deferral benefit can add up to be quite a sum.

In these situations, the FTZ user gets the benefit of cash flow savings. However, thanks to the Weekly Entry process, the zone user doesn’t have to sacrifice the ability to ship to customers based on real-time market demands. It’s the best of both worlds.

What do you see as the future trends for FTZs?

Based on what I’ve seen for the past 37 years, I think that the use of FTZs will continue to grow. It’s really been something for me to behold when I see how new demand for the FTZ program has remained relatively steady in both good economic times and bad. 

During good times, I’ve seen companies put the implementation of FTZ procedures on the back burner. They have done a cost benefit analysis and figured out that FTZ procedures can save them “only $500,000” per year. Then, along come the bad times. The company’s volume shrinks by 20 percent, and suddenly, savings of 80 percent of $500,000 per year seem quite important. 

So, during good times, a certain number of companies have the capital budget to go ahead and proceed with implementing FTZ procedures and gaining zone status. Conversely, in the bad times, when operating margins sometimes approach zero, companies look to reduce any costs they can. This includes Customs duty costs. From my experience, I’ve seen relatively steady growth in the FTZ program irrespective of overall economic conditions.

Another factor that seems to be fueling the consistent growth of the FTZ program is the intensification of global competition. This really squeezes operating margins tighter and tighter. As this squeeze occurs, then FTZ savings as a percentage of overall operating margins goes up.

Finally, advances in technology also drive new uses of the FTZ program. It’s noteworthy from my perspective to have witnessed the successive buy-in of automobile manufacturers, pharmaceutical companies, high-tech materials manufacturers, aerospace companies, and distribution and order fulfillment companies into the FTZ program. As the world changes and competitive pressures grow, more companies seem to recognize the value of the FTZ program.

If I think an FTZ is right for my company, what are the next steps?

The first thing is to do some cost-benefit number crunching. For an existing business, this really is a straightforward process. 

Members of the QAD FTZ team have years of experience in helping companies examine their customs related costs. They can quantify the ways that FTZ procedures can lower those costs. Furthermore, they can also budget the one-time and on-going costs of implementing Zone procedures and keeping them running.

Companies are often surprised at the return on investment that the FTZ program offers. I’ve seen many, many cases in which the Year 1 FTZ savings exceeded the entire start-up and Year 1 expenses associated with putting their FTZ projects into place. 

In one instance, we had a client that realized more FTZ savings on its very first shipload of product received into the Zone than the entire cost of implementing its FTZ operation. 

I remember another instance in which the first year of a company’s savings exceeded the combined cost of its building and the land on which it was situated. 

Of course, these are rare examples. But in my experience, the number crunching makes for an easy decision. Either the FTZ is a no go, or it presents an opportunity for an exceptional return on investment.

How can companies verify that the costs of establishing an FTZ don’t outweigh the benefits?

That’s an easy one. Contact us for a cost-benefit analysis or visit our website. Crunch the numbers, and the answers will become readily apparent.