Commentary | IT Matters

Three Top Myths About Foreign Trade Zones Dispelled

Tags: Global Logistics

Anand Raghavendran is Chief Operating Officer, Netwin Solutions, 714-903-2121

When supply chain and logistics managers think Foreign Trade Zone—the program that allows companies to defer paying customs duties, fees, and taxes on merchandise imported into the United States until consumed, used in construction, or leaving the zone—several adjectives come to mind. Usually those descriptors are not: smooth, cost-effective, and easy to manage. Instead they may include: expensive, over-regulated, and complex.

But, increasingly, more companies are seeing the value of setting up a Foreign Trade Zone (FTZ) and managing the process. In fact, many are gaining a strategic and financial advantage from internally managing it themselves and/or with partners. These companies are dispelling the three top myths about FTZs.

Myth #1: FTZs are Risky

When many executives contemplate setting up a foreign trade zone, they assume there will be an abundance of audits, regulatory issues, red tape, tracking, and reporting. While these aspects can be true, and customs does have the ability to walk into a company to assess the FTZ process at any time, the reporting can be greatly simplified, and the benefits of the potential cost savings can far outweigh the risks.

Most of the feelings of risk come from the fear of the unknown. The benefits of a foreign trade zone, however, have been proven time and time again. The FTZ program was authorized by Congress in 1934 to encourage activity at U.S. facilities. The purpose was to create healthy competition with foreign businesses by reducing production and other logistics-related costs, allowing delayed or reduced duty payments, and allowing special entry procedures. This reduction in costs through FTZ helps maintain U.S. operations, activity, and jobs.

While a lot of data is required in managing FTZ operations, logistics managers not already doing it may be surprised to learn that everything required is not FTZ-specific, and is likely already being used for inventory control and/or the import/export process. Information such as bill of lading, commercial invoice, and inventory transactions are also used in FTZ. With FTZ, it is just a matter of grabbing that data at the right time, which can be made easy with software solutions on the market.

Myth #2: FTZs are Hard to Use

If you want to see if an FTZ is a good fit for your company, there are many sources of information on what is required, the potential payback, and how to simplify the process. There are also consultants who specialize in zone services and getting a company set up.

Here are a few details to keep in mind in determining if FTZ is right for you.

FTZs can be used for items that are:

  • Sold as-is online or at a store—shoes, for example. No assembly is necessary in this case; the final product is available, and as it is consumed, the company pays the required duties.
  • Manufactured at an FTZ site, such as cars. The company would pay duties on goods used in manufacturing, as they are consumed, destroyed, or leave the zone.

FTZ activities can occur at:

  • The manufacturing plant at the customer's location
  • Zones offered by the economic development council. At these multi-purpose zones, anyone can apply to get approval to operate out of the location.

With government run multi-purpose zones, there is already a location available to rent out. Someone has already gained approval. Hence, this may be the easier option for many companies.

To create a foreign trade zone at a company's manufacturing plant, the organization must go through various stages of an approval process. This includes pre-docketing and submitting a complete application (including identifying what constitutes the zone boundary, and what point outside the plant is considered the zone area); docketing (a notice is published in the Federal Register for public comment on the proposal for up to 60 days); review of the application by an FTZ analyst, and interagency clearance.

Once the zone is established, the company is responsible for managing it, and can be fined if there are items in the zone that should not be. Most companies have systems already in place, with inventory management and control, to help ensure compliance.

Myth #3: FTZs are Costly

Though it is true that mistakes with FTZ can bring fines, just as with standard import/export procedures, the cost benefits can outweigh the risks. Certainly customs can walk in to an FTZ to perform an audit, and fees may be determined based on how much violation exists. As long as the company is not deliberately violating FTZ rules, however, and has the proper systems and software in place to track processes, fees can be minimized.

FTZ usage enables companies to defer duties and not have to pay customs fees up front. This can greatly help with cash flow management, something becoming increasingly important these days. It can also help to save money through the consolidation of transactions, as noted above.

With FTZ, companies can also:

  • Avoid paying duties on imported goods that are later re-exported
  • Delay payment of duties on goods that enter the U.S. market
  • Eliminate duties on waste, scrap and rejected or defective parts
  • Reduce or eliminate duties on quota charges on re-exports

And, the real value of FTZ is that instead of doing one or more customs entries for shipments on a daily basis, the zone operator can file a single customs entry for a week, resulting in significant savings on customs merchandise processing and broker fees, as applicable. FTZs also allow the operator to take benefit of tariff inversions where in the operator can pay the duties at the rate of the finished good for all imported items that constitute the finish goods. Imported goods held for export may also be exempt from state/local inventory taxes.

Is FTZ for you and your company? Increasingly, many organizations are saying yes. With today's growing global and competitive marketplace, it is becoming more important for companies to take a look at all of their options.