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Foreign Trade Zones: A Key Tool to Navigating Tariffs

With an ongoing trade war between the U.S. and China, tariffs don’t seem to be going away any time soon. But foreign trade zones can be a helpful tool for companies looking to mitigate the impact of tariffs on their bottom line. We interviewed Curtis Spencer, President, IMS Worldwide, Inc., at the 2019 Area Development Consultants Forum in Houston about some of these insights. Below are some excerpts from our interview, which you can also watch here.

Q2 2020
Area Development interviewed Curtis Spencer, President, IMS Worldwide, Inc., at our Houston Consultants Forum. Our discussion covered how companies can leverage foreign trade zones to mitigate the impact of tariffs on their bottom line. Interview conducted by Margy Sweeney, Founder and CEO, Akrete, Inc. and Area Development Editorial Board member.
What Is a Foreign Trade Zone?
A foreign trade zone, or FTZ, is any facility in the United States that's properly approved by both the Commerce Department and U.S. Customs to be able to receive goods in duty free status, to manipulate, manufacture, or just store and distribute into the United States, or export those goods. Then the duty is only paid on that which comes into the United States. No duty is paid for anything that's destroyed, returned to vendor, no duties paid for any export. An export includes Mexico and Canada… So, it is really a duty mitigation process, which before two years ago was all about processing fee mitigation. Customs has a processing fee, and what they would do is that fee kept going up, up, up… it was in the millions of dollars for retailers. [With FTZs] that fee is mitigated to only $500 a week. When you add high tariff rates to the fee issue, now you've got a double whammy reason for being in a foreign trade zone.

In the last couple of years, we've really seen a growth in the utilization of foreign trade zones because of the tariffs that have been occurring because of the trade wars. Everybody is trying to mitigate those tariffs. If you're a manufacturer, if you're a warehouse through third party logistics provider, if you're a retailer, you are fraught with all of these ridiculous tariff increases which changes your margin, changes your bottom line, and you're looking for any kind of incentive, any kind of extra benefit that could help you mitigate these tariffs. So, the question has been, will we get rid of these tariffs if we change administration? I don't think so. Curtis Spencer, President, IMS Worldwide, Inc.

How Do Foreign Trade Zones Work?
There is the benefit of the merchandise processing fee being reduced. That's a significant benefit for every importer of scale. If you're importing more than 800 to 1,000 containers a year, you need to be looking at the MPF savings. But for manufacturers, I'm allowed to reduce the duty rate on non-trade sensitive tariff issues from higher parts rates, to lower finished product rates. However, with these new tariffs in place, I'm not allowed to reduce those punitive tariffs… [They] have to be just held inside the foreign trade zone and then they're paid upon entry into the customs territory. However, when I looked at it before as a manufacturer and I'm saying I've got to mitigate 2% duty rate and on my 3% exports going to Mexico and 2% going to Canada, so I've got 5% exports, mitigating 2% is not really worth it. Well, now the duty rates are 25% that I'm mitigating on that 5% that got re-exported, I'm saving $250,000, $500,000 as a medium-sized company, I need a foreign trade zone. I can't do it any other way. I can't do with a bond in warehouse. I can't do it with any other customs mechanism. So, the foreign trade zone has to be [considered] by every company that has any kind of import components in manufacturer or in large scale retail distribution import operations.

The Trade War, Tariffs, and Foreign Trade Zones
The number one question I get is whether or not the change in administration equals a change in these tariff rates. So, I'll put the question back to you, the audience. Have you ever seen the Congress of the United States pass up a 10-times increase in their revenue and give it right back to the people? I don't think so. So, my perspective is, now that Congress, who holds the purse strings, has gone from $2 billion collection per month average over the last 20 years to now $11, $12, $13 billion in collections? There's going to be some money that wants to be held back by Congress. They're going to be very, very deliberate about how they reduce those tariffs.

Plus, remember, with China being the country that we’re primarily doing these tariffs against, there's a lot of people on both sides of the aisle that feel like China's gotten away with some IP infringement. They've gotten away with the obfuscation of the intellectual property, and that's kind of universally agreed on in the United States. We're all together on that one. We need a fair playing field. We charge foreign car companies 2.5% when they import the automobiles in the U.S. Most of those countries charge a Ford or Chrysler GM being made here in the United States, even a BMW made in South Carolina, 25% when it's exported into their country. That's just patently unfair. I think that's what both sides of the aisle are going to keep. So, the question has been, will we get rid of these tariffs if we change administration? I don't think so.

An FTZ acts as tariff insurance and acts as a mitigation process by this fact alone: We can't change the fact that tariffs are going to be added to our products coming into the United States. What we can do is we can mitigate the time that we have to pay those. As a human being, I'd much rather pay for something after I sell it versus pay for it, you know, six weeks or a month early, right? I mean, it's just natural human nature. Your CFO is going to love that because he's all about cash flow. And back when we had high interest rates and high duty rates, cash flow is a big deal… Now we've got those high tariffs again, even though we have low interest rates.

Where Are FTZs Located?
When I started – I have to give my age away now – back in the late seventies, working for my dad in the foreign trade zone world, there were 30 zones, all located at borders or at ports. Today there are 300 zone projects. There are 5,000 to 6,000 companies using foreign trade zones. They are in every major city, and under the new rules in 2012, they expanded out from those major hub cities. So, Columbus, Ohio, for example, their foreign trade zone includes 15, 16, 17 counties. Harris County, a county in Houston, has all the counties surrounding it, and then those other counties surrounding it have their own foreign trade zone. So, there's been a really huge improvement. I found one location in South Carolina where I couldn't get a foreign trade zone without an extra customs approval, but those things are going away. So virtually, the answer is I can get a foreign trade zone anywhere.

How to Seek Out FTZs
So, the best and the second most asked question is: “Can I just get a foreign trade zone on my own property?” And the answer is absolutely. When the law changed in 2012, actually it was a regulatory change, it made it a lot easier. Federal governments knocked down from about six months to one month the time it takes to approve of a foreign trade zone site without manufacturing, that's another process, but just to get a site approved now it's 30 days once you have all the paperwork in. To get manufacturing, it used to take 12 to 18 months, and it's now five months. For 85% of the cases in five months you can get a manufacturing permit. So, the speed to market by the government running the foreign trade zone program, which is called the FTZ board, is now cut by 60, 70, 80%.

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