FTZ Corp has joined QAD Precision. In this QAD Precision Report we look back at tariffs instituted by recent US presidents, and examine the benefits of foreign trade zones.

In January Joe Biden was inaugurated as the 46th president of the United States. The US is the world’s largest economy. Given this, any new administration is carefully watched by leaders around the world. 

A new president can mean changes to US global trade and/or foreign policy — issues that reverberate far beyond the US. As the expression has it, “When America sneezes, the world catches a cold.”

One issue that the world will be watching closely is how US-China relations might change with the new administration.

President Biden has stated that he will not be repealing the so-called “Trump tariffs” — at least not immediately. Furthermore, his pick for US Trade Representative, Katherine Tai, has long taken a tough stance on China. [For further analysis on this, please see our report on Katherine Tai.]

Tariffs were a defining characteristic of former President Trump’s administration. However, tariffs have long been a strategy that US presidents have deployed when it comes to trade. Former presidents, Barack Obama and George W. Bush both used tariffs to achieve specific goals. Like President Trump, and now President Biden, these tariffs were not always welcomed by the business community.

The Rubber Hits the Road: President Obama’s 2009 Tire Tariffs

Tariffs are often used to protect a country from competition. Back in 2009, then-President Barack Obama was concerned that the US tire industry was being overwhelmed by cheaper imports from China. 

Figures from the United Steelworkers Union concluded that tire imports from China had increased 215 percent between 2004 and 2008. The union stated that US production had fallen by 25 percent and that 4,000 tire workers had lost their jobs as a result of this competition. In response, President Obama imposed a 35 percent tariff on Chinese tires.

Unsurprisingly, the US bought a lot less tires from China. However, purchases of tires from countries such as Canada, Mexico, Japan and South Korea increased.

Steel Yourself: President Bush’s 2002 Steel Tariffs

Like his successors, former President George W. Bush used tariffs to protect US national interests. In March 2002, he imposed tariffs of up to 30 percent on steel imported from Asia, South America and Europe.

The European Union threatened the US with retaliatory tariffs. More importantly, the EU filed a complaint with the World Trade Organization. The WTO found in the EU’s favor. By December 2003, President Bush rolled back the tariffs.

The tariffs proved controversial at home as well as abroad. While steel manufacturing jobs may have been saved, critics contended that a high number of jobs were lost in other industries, including in automotive manufacturing.

More Than Tariff Reductions: The Benefits of Foreign Trade Zones 

Business leaders can be vocal in their disapproval of government tariff strategies. That is unsurprising — no company wants to pay more taxes!

However, there are a number of strategies that companies engaged in international trade can legally use to reduce their duty obligations. One of the most comprehensive ways of doing this is by leveraging foreign trade zones — FTZs. We will examine these now.

DELAYING OR AVOIDING DUTIES

Using an FTZ allows a company to legally delay, or avoid paying certain customs duties entirely. 

Imagine a US company importing sports equipment manufactured in China. If the company brings these goods into an FTZ, duties are payable only if and when the goods are sent to US retailers or end customers. 

If the goods are re-exported to another country, the company is not legally liable for any US import duties. Since the goods were stored in an FTZ, they were, legally speaking, never imported into the US.

INVERTED TARIFF RELIEF

An FTZ can also help a company to reduce its duty obligations. A company that brings in parts or raw materials into an FTZ and finishes production there, can pay the duties on finished goods, if this is lower than the duty rate for the parts.

ZERO DUTIES ON WASTE, SCRAP, AND YIELD LOSS

A further benefit of FTZs is that companies do not need to pay duties on by-products of manufacturing, such as waste.

In addition, companies are not obliged to pay duties on scrapped merchandise or irrecoverable yield loss that is destroyed in the FTZ. 

REDUCED MPFS WITH WEEKLY ENTRIES

FTZs also reduce customs headaches. Importers can file one entry every week with customs authorities instead of needing to file every single shipment.

This also results in significant savings. In the US, companies not using an FTZ must pay a .021 percent Merchandise Processing Fee (MPF) for every shipment. The MPF can be as low as $25 or as high as $485, depending on the value of the shipment. 

Since importers using an FTZ only need to file weekly, they only pay one MPF per week.

ZERO DUTIES ON DAMAGED OR NON-CONFORMING GOODS

Companies using an FTZ are not liable for duties on damaged or non-conforming goods. If goods are defective or damaged in some way, no duties are liable while the goods are being tested, repaired, or stored in an FTZ.

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Further Reading

THE NEW USTR KATHERINE TAI AND TARIFF MITIGATION STRATEGIES

IRELAND, THE EU, THE UK AND POST-BREXIT PARCEL SHIPPING

IMPORT MANAGEMENT: THE IMPORTANCE OF CORRECT CLASSIFICATION