Leveraging the US Foreign-Trade Zone (FTZ) program offers many
advantages. In the QAD Precision Report we do a Q&A session with
FTZ expert Greg Jones.
The benefits of FTZs are very much dependent on individual company
circumstances. However, there seems to be an ever-growing number of
industries and types of business operations that find that the FTZ
program improves their bottom-lines.
In the 1980s, automobile manufacturers went for FTZs in a really big
way. Now auto parts producers have followed them, and the list of
these just keeps growing. Pharmaceutical companies and their contract
manufacturers are also big users of FTZs, as are other high-tech
industries involved in the development of clean or renewable energy products.
Also, distribution and order fulfillment operations — even those
which handle duty-free products — are making ever increasing use of
FTZs. The same goes for 3PL operations. Any company that is importing
— even at a modest level — should look at what the FTZ program can offer.
Very, very few. For example, you can store alcoholic beverages or
cigars in a zone, but you can’t manufacture them there. These sorts of
prohibitions on zone activities are very rare. The whole idea behind
the FTZ program is to encourage economic investment and activity here
in the USA.
One of the classic benefits of FTZs — and when I say “classic,” I’m
talking all the way back to ancient Mediterranean civilizations — is
the ability to re-export a product free of domestic customs duties.
Some versions of this model are available in many countries around the
However, the US FTZ model goes much further in a couple of really
First, the American model enables US-based manufacturers to obtain
relief from unintentional quirks in the overall US tariff structure.
These quirks actually add irrational tariff costs to manufacturing a
given product in the USA. The slang term that’s often used to describe
such a quirk is an “inverted tariff”. An inverted tariff is when the
duty-rate on a given finished product is lower than the duty
rate on one of its imported inputs.
What the US FTZ program authorizes on a company-by-company,
location-by-location, product-by-product basis, is the ability of the
US-based business to pay the same finished-product tariff rate on
inputs used in the production of products destined for the
domestic market. Thus, companies do not have to
export the manufactured product to obtain the FTZ benefit.
There are a number of US-based operations that use this specific
benefit to help them displace imports of competing products. These
include pharmaceutical and chemical companies, automotive
manufacturers, producers of energy and energy technologies, among
numerous others. There are literally hundreds of US-based
manufacturers who utilize this one unique benefit of the US FTZ program.
The US FTZ model also offers opportunities to streamline
international supply chain movements and costs. One benefit that’s
popular among medium and large-scale distribution and manufacturing
operations is the FTZ Weekly Entry procedure. This procedure not only
saves US Customs and importers lots of time in dealing with import
transactions, it also helps some FTZ users reduce so-called
“Merchandise Processing Fees” associated with filing multiple Customs Entries.
Under the FTZ Weekly Entry procedure, the FTZ user files a single
Customs Entry for all of its shipments that leave its FTZ facility and
enter US commerce during a given calendar week. It’s another example
of the FTZ program’s ability to help the bottom-line without the
necessity of re-exporting the product that leaves the Zone.
If you do it right, not much. Part of the art and science of the
products and services offered by QAD Precision is integration of
systems and procedures that create efficiencies, reduce costs, and
actually enhance overall import compliance.
Well, a few misconceptions immediately come to mind.
Some folks still have the idea that to use the US FTZ program, your
business must first locate at a previously designated FTZ industrial
park area. This is not so. On the contrary, the local FTZ project —
and there are more than 250 local FTZ projects in the United States —
the local Zone project can come to your individual business facility.
When I think of “FTZ” my mind doesn’t first conjure up a place. It
views “FTZ” as a set of procedures and systems integrated into the
normal, day-to-day activities of any given distribution, order
fulfillment, or manufacturing operation. It’s a money saving tool that
really has gone mainstream in America over the past four decades.
There’s nothing at all exotic about it.
Earlier we discussed instances in which none of the products that
leave the Zone are re-exported, yet the company using the FTZ benefits
significantly. So, just to be clear: FTZs can benefit companies that
ship products only to customers in the United States. You don’t
necessarily have to export to benefit.
Another misconception is that only large companies stand to benefit
from using FTZs. It is true that a certain level of activity is
necessary. Otherwise, the company does not obtain benefits sufficient
to justify the costs associated with using FTZ procedures.
However, I can immediately think of one of our clients who operates a
10,000 square-foot distribution warehouse right in the middle of a
downtown area of a relatively small city. This particular company does
order fulfillment for food products and uses the FTZ to streamline its
process of obtaining routine FDA clearances for its product lines.
The company was able to obtain FTZ status for its individual
warehouse site. However, it was also able to get set up to use Zone
procedures in about 90 days from the time it made the decision to use
I’ll try to answer this question without being confusing. The
so-called “competitive advantage” of using an FTZ is, in reality, the
ability to compete on a level playing field versus your overseas counterparts.
When you think about it, relief from inverted tariff rates and other
customs costs peculiar to manufacturing in the United States enable
the US-based manufacturing operation to enjoy the same tariff
treatment as a foreign producer of the same product. In many, many
cases that foreign producer is the US plant’s sister plant within the
same multinational corporate structure.
So, the competitive advantage is actually the removal of an
unintended disadvantage created by a change in the US tariff. These
are very likely to have resulted from a larger multilateral trade
initiative. Oftentimes, leveling the playing field in this way enables
US-based manufacturers to win production share within their respective
The benefit for US communities, companies, and their workers is that
the FTZ program contributes to their ability to displace imports of
the very same manufactured goods with which they compete.
Simply put, the FTZ advantage is the removal of certain competitive
disadvantages created by tariff costs.
Sure. I mentioned the Weekly Entry process earlier. I’ll try to
explain the benefits in a bit more detail.
First, when goods are in a Zone, they’re treated as if they’re
outside US commerce. As the goods are not inside the US customs
territory, a company pays no duties on the goods unless and until they
leave the Zone for US consumption.
The movement of goods into US commerce requires a Customs Entry. Now,
it wouldn’t make any sense for large-scale manufacturing or
distribution operations to file a separate Customs Entry every time a
truckload of product leaves the Zone. It wouldn’t make business sense,
or make sense for the federal government either.
The FTZ Weekly Entry process became available for both distribution
operations as well as for manufacturing operations in the year 2000.
This enables the FTZ Operator to file a single weekly estimate for the
goods it anticipates to ship into US commerce during the following
7-day period. The FTZ Operator can also file an Entry Summary for all
the goods it shipped into US commerce during the previous 7-day period.
Companies pay all duties and Merchandise Processing Fees on the
single Weekly Entry Summary.
Now comes the part that sometimes gets a bit confusing. Companies
file a Customs Entry once a week. Therefore, any Merchandise
Processing Fees associated with that Entry are also calculated once a
week. The Merchandise Processing Fee depends on the value of a given
Entry — it’s just a bit over one-third of one percent, and it's capped
at just over $528.
So, for a manufacturer of bulk goods that receives one shipload of
goods per month, but ships daily, the benefit of the Weekly Entry
procedure is purely one of convenience. The company would pay more MPF
than it would have if it made one Entry per month.
However, this is different for companies that receive multiple
inbound shipments per week. Now, the Weekly Entry procedure can
provide MPF savings as well as convenience.
For certain FTZ users, these savings can be substantial. This is
another reason why a good cost-benefit analysis is important.
Companies can easily gather figures for actual MPF costs. These are
then compared to what MPF costs would be if the company could limit
it’s MPF costs to $528 per week by using the FTZ program.
Without using the label, “duty deferral,” I described it a minute
ago. As I mentioned, companies pay no duty on goods while they’re in
the Zone. Payment of duties occurs only if and when the goods leave
the Zone for domestic consumption. While the goods are in the Zone,
the company gets to retain the money that it otherwise would have paid
on the Customs Entry filed at the time the goods first arrived in the US.
For companies that operate in what most people would describe as a
“lean” supply-chain environment — especially those whose imported
products are subject to low rates of duty — then the actual savings
attributable to duty deferral are very modest at best. However,
for distribution or order fulfillment operations that handle
significant volumes of high duty-rate items — such as textiles or
apparel items — then the FTZ duty deferral benefit can add up to be
quite a sum.
In these situations, the FTZ user gets the benefit of cash flow
savings. However, thanks to the Weekly Entry process, the zone user
doesn’t have to sacrifice its ability to ship to customers based on
real-time market demands. It’s the best of both worlds.
Based on what I’ve seen for the past 35 years, I think that the use
of FTZs will continue to grow. It’s really been something for me to
behold when I see how new demand for the FTZ program has remained
relatively steady in both good times and bad.
During good times, I’ve seen companies put the implementation of FTZ
procedures on the back burner. They have done a cost benefit analysis
and figured out that FTZ procedures can save them “only $500,000” per
year. Then, along come the bad times. The company’s volume shrinks by
20 percent, and suddenly, savings of 80 percent of $500,000 per year
seem quite important.
So, during good times, a certain number of companies have the capital
budget to go ahead and proceed with implementing FTZ procedures and
gaining zone status. Conversely, in the bad times, when operating
margins sometimes approach zero, companies look to reduce any costs
they can. This includes Customs duty costs. Therefore, from my
experience, I’ve seen relatively steady growth in the FTZ program
irrespective of overall economic conditions.
Another factor that seems to be fueling the consistent growth of the
FTZ program is the intensification of global competition. This really
squeezes operating margins tighter and tighter. As this squeeze
occurs, then FTZ savings as a percentage of overall operating margins
Finally, advances in technology also drive new uses of the FTZ
program. It’s noteworthy from my perspective to have witnessed the
successive buy-ins of automobile manufacturers, pharmaceutical
companies, high-tech materials manufacturers, aerospace companies, and
distribution and order fulfillment companies into the FTZ program. As
the world changes and competitive pressures grow, more companies seem
to recognize the value of the FTZ program.
The first thing is to do some cost-benefit number crunching. For an
existing business, this really is a straightforward process.
Members of the QAD Precision team have years of experience in helping
companies examine their customs-related costs. They can quantify the
ways that FTZ procedures can lower those costs. Furthermore, they can
also budget the one-time and on-going costs of implementing Zone
procedures and keeping them running.
Companies are often surprised at the return on investment that the
FTZ program offers. I’ve seen many, many cases in which the Year 1 FTZ
savings exceeded the entire start-up and Year 1 expenses associated
with putting their FTZ projects into place.
In one instance, we had a client that realized more FTZ savings on
its very first shipload of product received into the Zone than the
entire cost of implementing its FTZ operation.
I remember another instance in which the first year of a company’s
savings exceeded the combined cost of its building and the land on
which it was situated.
Of course, these are rare examples. But in my experience, the
number-crunching makes for an easy decision. Either the FTZ is a
no-go, or it presents an opportunity for an exceptional return on investment.
That’s an easy one. Contact QAD
Precision for a cost-benefit analysis. Crunch the numbers, and the
answers will become readily apparent.
Greg Jones is an FTZ Advisor for QAD Precision. Greg has 35 years of
experience in the US Foreign-Trade Zones program. He was co-founder
and Vice-President of FTZC, and he is a past Chairman and an Honorary
Life member of the National Association of Foreign-Trade Zones.
Greg has been successful in expanding FTZ benefits into several new
industry sectors. He has also been involved in a number of successful
regulatory and legislative initiatives. This includes the effort to
expand FTZ Weekly Entry procedures to all types of Zone operations.
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