The US FTZ program has been in place since 1934, yet many companies are still unsure about the details of the program. As such, they’re hesitant to embark on the process.
However, the effectiveness of FTZs just got a lot clearer as the US released a five-year study on the operations and impact of the US FTZ program and similar FTZ-type programs in Canada and Mexico. The document is daunting, with over 300 pages, but this article will cover key findings and offer advice for those considering establishing an FTZ.
Key Findings From the US FTZ Program Study
1. Duty reduction and duty exemption are the primary reasons companies engage in the FTZ program
FTZs present many benefits to companies operating in the United States. However, the data shows that two benefits are by far the most important to current FTZ users: duty reduction and duty exemption.
Duty reduction takes advantage of inverted tariffs. Inverted tariffs refer to situations where the duties owed for a finished product are less than those of the combined duties owed on its parts. Outside of an FTZ, companies importing foreign parts for assembly in the US must pay duties on all the individual parts upon entry to the US. However, since FTZs are considered outside of the US for duty purposes, companies can import foreign parts without paying duties, assemble them in the US, and then only pay duties on the finished product.
For many products, this can result in significant savings. Take vacuums, for instance. If a US company wants to manufacture onshore, they’ll likely still import many parts overseas. Importing a vacuum motor from Vietnam would incur a 5.3% duty charge, and plastic wheels from China would incur the same duty rate of 5.3% ad valorem. Assuming it’s a cordless vacuum, the rechargeable battery from China will incur duties at 3.4%. However, a fully-assembled, ready-to-sell vacuum can be imported duty-free. Using the FTZ program, a company would bypass the duties on parts and only pay duties on the finished product – which, in this case, is zero.
Duty exemption can happen in two ways. As illustrated above, some inverted tariffs result in owing no duties because of the classification of the finished product. Another avenue to gain duty exemption is assembling products in the US and exporting finished products to foreign markets. Once again, because an FTZ is considered outside the US for duty purposes, a company assembling or manufacturing products within an FTZ does not pay duties on the parts it imports. Then if it doesn’t enter this product into the US market, it does not owe any duties. After all, that product never technically entered the US for duty purposes since it was in an FTZ.
2. For firms with large inventories of foreign-status goods, cash flow improvement through duty deferral is a significant benefit
In addition to duty reduction and duty exemption, companies that import large quantities of foreign goods cite duty deferral as a significant benefit. For these companies, if they operated outside of an FTZ, they would have to pay duties as soon as products entered the US, which in some cases could be months before they are sold. Given the supply chain disruptions that have rocked world economies for the past few years, many companies have started stockpiling inventories closer to their end customers. However, this can create cash flow problems as the window between duty payments and selling products widens. With an FTZ, companies can delay duty payments until the product leaves the FTZ and enters the US market, improving cash flow.
3. Though not the primary consideration, some firms have expressed that the FTZ program helps them expand US production or avoid off-shoring
The study, which the US government commissioned, examines whether FTZs promote domestic jobs. The answer is yes and no. On the one hand, very few companies said expanding US production or avoiding off-shoring was their primary consideration for engaging in the FTZ program.
While this may not be the answer people in the US want to hear, upon further investigation, this response doesn’t tell the whole story. Many respondents noted that the FTZ program has helped them expand production or avoid off-shoring. It’s just not their primary reason for using the program. Given that these are for-profit enterprises, perhaps it should be no surprise that financial incentives outweigh economic ones.
One of the most compelling instances of the FTZ program safeguarding US jobs is the upholstered furniture industry. When the 2008 economic crisis hit the US, it looked as though upholstered furniture manufacturing would finally complete its move overseas to take advantage of lower labor costs amidst thin margins. However, when this industry, predominantly located in Northeast Mississippi, learned of the FTZ program, the duty savings were significant enough to keep the industry alive on US soil. To this day, nearly all upholstered furniture manufactured in the US comes out of FTZs, and eight years after the recession, this industry that was on the brink of collapse employed 50,000 people in Northeast Mississippi.
Using FTZ Software to Streamline the Process
With the many benefits of FTZs also come a few administrative concerns. For instance, FTZs require accurate reporting on inventories and annual report preparation to maintain FTZ status. Done manually, this can be highly time-consuming. However, many companies operating FTZs are now turning to FTZ management software to populate these reports automatically, integrate with US Customs and Border Protection’s ACE software, and ensure compliance. This helps reap the full benefits of the FTZ program without needing to hire extra administrative staff to keep up with the necessary reporting.
Seizing the Opportunity
With $1.2B saved in 2021 alone through FTZs, it’s clear that FTZs significantly benefit companies. Of course, there are other benefits other than duty savings as well. FTZs can help companies reshore operations, shorten supply chains, and improve logistics. They can also help multinational companies diversify their supply chains by bringing parts of their operations to the US. FTZs aren’t a cure-all solution, but for businesses importing foreign goods to the US, FTZs should be a serious consideration.
