How to unlock savings with Foreign Trade Zones
U.S. Today, manufacturers are faced with a hostile, complex and volatile trade environment. Geopolitical tensions are a major concern in many parts of world. They impact supply chains and trigger the threat of trade tariffs under Donald Trump’s new presidency. Foreign-Trade Zones: What’s the idea? Moreover, new Section 301 tariffs are constantly being added on products such as steel, aluminium, EV, lithium-ion batteries, and many other commodities, meaning that companies must be proactive to stay ahead in this fast-changing landscape.
Against this backdrop, using a Foreign-Trade Zone (FTZ) could be a smart move to mitigate risk, while unlocking significant cost savings.
Foreign-Trade Zones: What’s the idea?
FTZs give domestic manufacturers a level playing field with offshore rivals, by alleviating the tariff burden that would otherwise make it more cost-effective to base operations overseas.
Think of FTZs as duty-free shopping areas. FTZs may be located in the United States, but the goods and materials inside them have not yet been “customized” and have not entered the Commerce of the United States. Duties are only collected when goods or materials enter the U.S. marketplace from the FTZ. And if the goods are exported from the FTZ there is an opportunity to eliminate duty payment altogether.
They offer multiple ways to reduce import duties, including deferral, elimination, and reduction through tariff shifts. Companies can also save on local state taxes and generate cost savings by streamlining supply chain operations.
FTZs are not just for large corporations or those near ports or airports. FTZs are available anywhere in the U.S., so even small and medium-sized businesses can benefit. Businesses can designate their own or third parties’ existing facilities as FTZs – there is no need to build new plants or warehouses.
How do FTZs help save money and mitigate risk?
FTZs enable companies to save money, increase competitiveness and mitigate risk by:
- Insulating them against trade policy volatility – FTZs allow businesses to make strategic choices that lower costs and provide certainty overpayments. For example, they can choose to lock in tariff rates at the point where goods enter the FTZ, or at the time they leave it, enabling them to pay whichever rate is lower.
- Allowing them to manage deployment – When using FTZs, companies can defer duty payments indefinitely until the goods enter the U.S. market, helping smooth out cash flow. Exporting goods to another country will not incur any U.S. duties. Manufacturers can also take advantage of “inverted tariffs”, whereby they can elect to pay duty on the raw materials or component parts instead of on the finished product if doing so results in a lower tariff.
- Facilitating compliance – Using FTZs for duty-free storage and export also reduces the risk of incurring penalties for non-compliance with complex trade regulations because they give trade compliance professionals space and flexibility to manage risk and make informed sourcing decisions.
- Enabling inventory optimization – There’s no time limit on whether to send goods to the U.S. market for sale or to export them to another country. Businesses can store safety stock in times of high demand without paying duty, and wait until the best time to release the product. It’s also possible to mitigate the duty on scrap or unusable materials by reporting these in a particular way under FTZ rules.
- Streamlining customs operations and supply chains – Goods can get where they need to go quicker because many FTZ operators enjoy direct delivery privileges and simpler filings to secure release from the port of unlading. FTZs also open up other non-U.S. market opportunities, such as Canada and Latin America. They can help mitigate risks associated with international trade, such as fluctuations in currency exchange rates, trade disputes, or supply chain disruptions.
Creating strategic advantage in a high-stakes environment
The stakes are high: millions of dollars could be on the line. Trade compliance professionals are gaining more influence in companies because they understand the importance of making the best decisions to protect the bottom-line and avoid risk. As this happens, they are increasingly being seen as a strategic partner, rather than as a cost center.
Companies operating in an FTZ have to adhere to strict procedures and requirements, and compliance is key. Companies must keep detailed records for each product and include information about their inventory control and recording systems (ICRS) in the reports they submit to Customs. Sophisticated FTZ software specifically designed for this purpose is invaluable, to ensure that compliance is robust and that the process of meeting those obligations is as straightforward as possible, such as by using software that enables self-filing.
Delivering flexibility and stability in an uncertain world
An FTZ isn’t the right route for every business, but companies shouldn’t ignore the potential advantages or be put off by the perceived complexity of setting them up. Cost-benefit analyses can be used to determine if it is worth it and what the potential benefits are. If just one area can be identified where tax can be deferred, minimized or eliminated, the substantial dollar savings could be a powerful inducement.
In an uncertain and volatile environment, the flexibility and stability that FTZs provide should not be underestimated. They can help businesses reduce risk and compete better in a global marketplace, especially when trade tensions are high.
