Foreign Trade Zones
FTZ’s have been an excellent source for lowering “landed costs” in face of increasing freight costs and long delays in the global supply chain, over the last two years due to the Pandemic and that impact which is now lasting well into 2022.
The primary reasons for considering FTZ’s in your global supply chain are:
– Ease of moving freight to and from the borders between trading countries
– Reduction or elimination of duties, taxes and other import/export costs
– Financial incentives on a local level
– Lowers the “landed costs” in your import/export business model
– Provides financial incentives that translates to lower operating costs in your import and export transactions
There are other advantages that may be unique to geographic location and industry verticals.
The automotive industry which is dominated by foreign competition has been one of the major industry verticals to capitalize on FTZ’s here in the United States, as well as many countries abroad.
The basic FTZ model allows a company to manufacture or assemble finished products in a country abroad utilizing local labor for the specific purpose of reducing landed cost.
For example, a German car manufacturer sells a car in the U.S. for $50,000. Duties and taxes can add another $1500 to the landed cost.
Through the utilization of a FTZ strategically placed here in the United States. That German car manufacturer could import parts from Germany and utilize U.S labor to work in their U.S. factory.
Upon entry into the U.S. FTZ, duties and taxes on the parts are deferred. Upon assembly completion, the car leaves the FTZ for ultimate sale and that is when the deferred portion of the tax and duties are paid. If labor costs make up 50% of the $50,000 value, … only $25,000 is applicable to duty and tax.
This model (simplified by design for this article) reduces the “landed cost” by approximately $750.00 per vehicle. Compare this against 200,000 units and the savings could amount to over $150,000,000.00 annually.
There are numerous other benefits to FTZ’s that would need to be considered in any business model assessment.
In the above FTZ model, the utilization is assembly and manufacturing. More recent options allow high volume importers to have their goods pass through FTZ’s as they transit from the gateway through to their warehouses and distribution facilities.
This step allows a “weekly manifest clearance” which reduces entry fees and Merchandise Processing Fees (MPF) creating a significant financial savings impacting landed cost.
Consulting companies can help companies assess the benefits of an FTZ and weigh them against the costs and challenges to make it happen.
Bonded Warehouses
Another option, similar to but different from a FTZ is the “Bonded Warehouse”. Bonded warehouses are a supply chain option which allows importers and exporters to temporarily hold freight where the import is deferred along with duties, taxes and other import costs, until such time the goods enter the country or are exported from that country.
For example, let’s take a Cleveland based electronics distributor importing consumer music products from Asia, totaling over 200m annually with an average duty rate of 4.5 %. Approximately 20% of the products are then re-exported to Canada, the Caribbean and Latin America.
Under their current supply chain model, they utilize CBP’s drawback program to obtain up to 99% of the duties and taxes for those exports, totaling 1.8m annually. While drawback is a great program, it can be arduous and costly to manage and takes time to receive the refund of duties.
As an alternative, the distributor can apply to CBP to make their warehousing facility a bonded location. This will defer the duties and taxes to goods entering the warehouse to the point in time they are extracted from the facility.
Additionally, the 20% of the goods that are re-exported come in and leave the USA in bond and no duties or taxes are obligated to be paid providing significant savings in supply chain costs.
Bonded warehouses provide additional benefits, but the operations permitted in a bonded warehouse are limited so sorting, weighing and repacking. If the goods enter the warehouse as a widget, they must leave as a widget.
For Bonded versus FTZ … four steps must be completed to decide which may present the best option to the principal company.
These four steps allow a detailed assessment of the options, the benefits and challenges, a ROI, an operational overview … followed by implementation.
The process can take from 60-180 Days and will have costs involved in all the steps that are typically outweighed from the residual and ongoing financial benefits.
Free Trade Agreements (FTA’s)
FTA’s offer numerous advantages to both importers and exporters. Currently the U.S. participates in over thirteen agreements with numerous ones pending. The most well-known FTA is USMCA (Previously called NAFTA), which has consistently provided overwhelming ROI to Canada, Mexico and the United States.
When the three participating countries … USA, Canada and Mexico trade with one another there is a serious reduction of duties and taxes on qualified goods and merchandise.
The most advantageous benefit in the FTA’s is the free movement of goods between participating countries where duties and taxes are reduced or eliminated.
“Near Sourcing” is the recent phenomenon in global trade where trade is coming back to the USA or our USMCA partners. FTA’s provide a more level playing field, particularly against lower Asian based sourcing models.
Lower freight costs, reduced lead times and elimination of duties and taxes can very easily make manufacturing in Mexico or in a USA based FTZ … a much more competitive option, thereby leveraging critical logistics business model options.
Mexico enjoys a “Maquiladora Program” which greatly enhances USMCA benefits where manufacturing and assembly is done in Mexico for goods which will eventually be shipped to the USA.
Other countries such as but not limited to:
Australia Bahrain
Canada Chile
Colombia Costa Rica
Dominican Republic El Salvador
Guatemala Honduras
Israel Jordan
Korea Mexico
Morocco Nicaragua
Oman Panama
Peru Singapore
When searching out trading partners as sourcing or selling options … Free Trade Agreement Countries can provide competitive advantage to the buyers and sellers.
As political problems increase with China and disruptions in trade happen now with what we have with Russia … it makes the case for American Companies to buy and sell from trading partners where there are more favorable and sustainable working environments … and that can be leveraged to each party’s advantage.
