When high-performance outerwear manufacturer Helly Hansen set out to revamp its North American distribution system, the Norway-based company thought it made sense to consolidate operations in its existing warehouse located in British Columbia, Canada. This was thought to be a logical decision since the company had recently been acquired by a Canadian company and because it had a larger market share in Canada than in the United States.
However, the manufacturer soon realized a tremendous opportunity that was hiding in plain sight: one of its existing warehouses in Auburn, Washington, was located in proximity to the Seattle Foreign-Trade Zone (FTZ #5), which offered the potential for significant cost savings and supply-chain efficiencies.
After a careful cost-benefit analysis, Helly Hansen management submitted an application to the controlling Foreign-Trade Zones Board (FTZ Board), and following approval and a meticulous planning process, the company activated its FTZ “subzone” and began to reap the savings. Millions of dollars in savings. The company has benefitted from unique opportunities to defer duty payments, pay reduced duty amounts, and, in some instances, avoid paying any duties at all. In addition, it has dramatically reduced customs brokerage fees and also helped drive down transportation costs by 40–60 percent.
The manufacturer’s experience was so successful that it found itself in need of a larger warehouse, which it found in Foreign-Trade Zone #86 — the Port of Tacoma. The company subsequently moved its consolidated operations to the larger facility in 2016.
With its decision to utilize the Foreign-Trade Zone program, Helly Hansen joined a growing number of businesses that have recognized the benefits of this important — but not well understood — incentive program.
Administered by the Foreign-Trade Zones Board, which is part of the U.S. Department of Commerce, foreign-trade zones are areas within the United States that are considered to be outside of U.S. customs territory. Certain types of merchandise can be imported into an FTZ without going through formal customs entry procedures or paying import duties. Customs duties and excise taxes are due only at the time materials leave the FTZ and enter U.S. commerce. If the merchandise never enters U.S. commerce, then no duties or taxes are paid on those items.
With such lucrative benefits, it’s not surprising that FTZs have become integral to the U.S. economy. The National Association of ForeignTrade Zones (NAFTZ), in its 2018 Annual Report, notes that goods exported directly from U.S. FTZs exceeded $75 billion, an amount equivalent to 5.2 percent of total merchandise exports. Further, NAFTZ found that in 2017, the value of shipments into zones totaled $670 billion, of which $410 billion (61 percent) was for production operations and $259 billion (39 percent) for warehouse/distribution operations.
“The U.S. FTZ program continues to demonstrate its value to the U.S. economy,” NAFTZ President Erik Autor said in the Annual Report. “Companies in many key American industries, including oil refining, automotive, electronic, pharmaceuticals, and machinery/equipment, gain significant global competitive advantage by locating their production and distribution operations in U.S.-based FTZs, thereby boosting American exports, manufacturing, investment, jobs, and standard living.”
As beneficial as FTZs can be, they are not for everyone. For one thing, there are cost and time commitments associated with the application process, including FTZ Board and U.S. Customs and Border Protection requirements. Other considerations include procuring physical assets, development of operational materials, and staff training. This is in addition to ongoing compliance and reporting requirements.
Businesses, especially high-volume importers and exporters, that do successfully implement foreign-trade zones stand to reap significant cost savings and operational efficiencies. The process starts with an understanding of the FTZ program, including its origins, benefits, and mechanics. The following discussion will shed light on these and other significant aspects, which are important considerations in determining the feasibility of the Foreign-Trade Zone program for a particular business.
According to U.S. Customs and Border Protection (CBP), foreign-trade zones (FTZs) are secure areas that are generally considered to be outside U.S. customs territory for duty assessments and other customs entry procedures. Specifically, zones are physical areas into which foreign and domestic merchandise may be moved for lawful operations, including storage, exhibition, assembly, manufacture, or processing. FTZs are licensed by the ForeignTrade Zones Board and operated under the supervision of CBP.
Foreign-trade zones offer a range of financial benefits to companies by allowing them to reduce, eliminate, or defer duty payments on goods manufactured or stored in FTZs before they enter U.S. commerce or are exported. Located in or near CBP ports of entry, foreign-trade zones are the United States’ version of what are known internationally as free-trade zones.
As noted by the FTZ Board: “Zones have as their public policy objective the creation and maintenance of employment through the encouragement of operations in the United States, which, for customs reasons, might otherwise have been carried on abroad.”
Foreign-trade zones were authorized by the U.S. Congress under the Foreign-Trade Zones Act of 1934 as a way to expedite and encourage international commerce. Although U.S. businesses failed initially to embrace FTZs, the concept has taken hold, especially over the last 30 years. According to the Foreign-Trade Zone Corporation, in 1970 there were eight U.S. FTZ projects, whereas today the Foreign-Trade Zones Board lists more than 250 authorized FTZs, with at least one in each state and in Puerto Rico. In addition, there are almost 500 “subzones,” which are individual businesses or manufacturing facilities.
Although FTZs have broad appeal across many sectors, CBP cites the petroleum refining industry as the largest zone user, along with the automotive, electronic, pharmaceutical, and machinery/equipment industries. The 2018 NAFTZ Annual Report notes that during 2017, roughly 3,200 businesses were actively using FTZs.
A 2019 update by the FTZ Board provides a partial listing of U.S. companies currently benefitting from FTZ participation. That list includes:
A business considering the merits of the FTZ program will need to be familiar with the different types and subcategories of foreign trade zones. CBP designates two main categories of FTZs:
General Purpose Zones: Usually located in an industrial park or port complex with facilities available for use by the general public.
Subzones: Sites sponsored by a general-purpose zone that are normally for a single-purpose and cannot be moved or accommodated in a general-purpose zone. An individual company’s qualified warehouse is a common example of an FTZ subzone.
Alternative Site Framework: The FTZ Board attempted to add flexibility to zone management when, in 2008, it approved the “alternative site framework” (ASF) option. According to the Foreign-Trade Zone Corporation, the ASF option provides previously approved FTZ grantees with a streamlined process for expanding operations within their established service area. A zone grantee that wishes to accommodate either an existing site user or a new user can utilize ASF’s “minor boundary modification” process, which provides accelerated review by the FTZ Board, with approval likely within 30 days.
Helly Hansen took advantage of the ASF option in having its Auburn, Washington, warehouse designated as an FTZ subzone. The outerwear manufacturer’s FTZ application process began by gaining approval from the Port of Seattle, which is the grantee for Foreign-Trade Zone #5. Once that approval was obtained, the Port of Seattle then submitted a “request for minor boundary modification” on behalf of Helly Hansen. Using this process, the time to approve zone status was reduced from 8-12 months to 30 days.
Businesses interested in the ASF option may encounter terms that include the following, as defined by the International Trade Administration:
Usage-Driven Site (Subzone): Designation tied to a named company and limited to the space needed for that company’s use. If the named company vacates its usage-driven site, the FTZ designation automatically terminates. (Similar to definition for subzones located in non-ASF FTZs.)
Once a zone location has been established by the FTZ Board, companies are required to “activate” the zone with CBP prior to beginning FTZ operations. According to CBP, oversight responsibilities include:
The CBP port director, in whose port a zone is located, serves as the local representative of the FTZ Board and is responsible for day-to-day zone activities. The port director controls the admission of merchandise into the zone, the handling and disposition of merchandise in the zone, removal of merchandise from the zone, and compliance with all applicable laws.
Businesses that take advantage of FTZs can avail themselves of a multitude of benefits that can help drive down — in some cases eliminate — duty payments, and improve supply chain operations. With regard to the previously cited Helly Hansen example, analysis by The Trade Partnership cited $200,000 in annual savings along with logistics efficiencies the company is able to achieve through use of an FTZ. Those savings opportunities include:
The National Association of Foreign-Trade Zones provides an overview of common FTZ benefits and opportunities that include:
The duty rate to import foreign-sourced microcrystalline cellulose is 5.2 percent. However, a company can use it to manufacture a final product such as dietary supplement capsules in a foreign-trade zone and import the capsules into U.S. commerce with a duty rate of 0.00 percent. If 50 percent of each capsule is foreign-sourced microcrystalline cellulose, and if Company A imports $1.5 million worth of capsules each week, it can save $39,000 per week in duty payments, about $2 million per year.
According to the FTZ Board, a foreign-trade zone is created when “a local organization, such as a city, county or port authority, applies to the FTZ Board for a grant to establish and operate a zone to serve a specifically defined geographic area.” Upon approval of the zone by the FTZ Board, the organization becomes known as the FTZ “grantee.” Grantees are then able to submit applications to the FTZ Board to establish subzones for use by companies in that area. In addition, a company can apply to designate only a part of its facility as an FTZ.
In some instances, an entity may opt to file as an “alternative site framework” (ASF), which allows zones to use quicker and less complex procedures to obtain designation for eligible facilities.
Businesses must follow the application process established by the ForeignTrade Zones Board.
A business must also comply with “implementation phase” requirements, which can be initiated concurrent with the application phase. This includes coordination with CBP to ensure that proper security controls and site prerequisites are in place that may include:
Once the application is approved and all requirements have been addressed, the FTZ applicant will conduct a final walkthrough with CBP personnel to confirm full compliance with all requirements. CBP will then issue an “activation letter.” At this point, the company is authorized to begin using its foreign-trade zone.
According to the Foreign-Trade Zones Board, foreign and domestic merchandise may, subject to FTZ Board and CBP regulations, “be moved into zones for operations not otherwise prohibited by law involving storage, exhibition, assembly, manufacturing, and processing.” All FTZ sites are subject to the laws and regulations of the United States as well as those of the states and communities in which they are located.
International law expert Sandler, Travis & Rosenberg explains that the director of the CBP port in which an FTZ is located controls the admission of goods into the zone, the handling and disposition of goods in the zone, and the removal of goods from the zone. Zones are supervised by FTZ coordinators, which may include CBP officers, import specialists, entry specialists, or agricultural specialists, among other professionals.
Goods entering an FTZ are not subject to usual entry procedures. Further, payments of duties are not required on foreign goods unless and until they enter the U.S. customs territory for domestic consumption, at which point the importer generally has the choice of paying duties at the rate of either the original foreign materials or the finished product. Domestic goods moved into the zone for export may be considered exported upon admission to the zone for purposes of excise tax rebates and drawback.
According to the International Trade Administration, when a company receives authority from the FTZ Board, it must closely adhere to the precise scope of activities included in the application and must only allow entry to the listed finished products and foreign-status components.
Production in a zone may include traditional manufacturing activities as well as kitting or assembly applications. However, if activity within a zone results in a change in a product’s tariff classification code, or a “substantial transformation,” specific approval will be required from the FTZ Board.
Following is the list of current U.S. foreign-trade zones (not including subzones), as published by the U.S. International Trade Administration:
In compiling a 2019 analysis of the impact FTZs have on the companies using them, researchers from The Trade Partnership spoke directly with hundreds of companies to learn firsthand about the benefits — or obstacles — of using an FTZ. Among the findings:
Clearly, FTZs can be a win-win in helping U.S. businesses compete in today’s increasingly global marketplace. U.S. businesses benefit from significant duty savings and logistical efficiency, while the American economy benefits from a boost in manufacturing, job creation, and increased revenue sources. But the decision to pursue an FTZ strategy is not without risk and will incur significant investments in time and resources. This means conducting a thorough cost-benefit analysis to ensure it’s the right decision. But given the potential benefits, it could be time well spent.
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