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Why are Foreign Trade Zones Making a Comeback?

While the buzz around the trade war between the United States and China has died down, tariffs and other taxes are still impacting many companies with a global supply chain. Foreign trade zones are making a comeback as an additional incentive to help reduce taxes for manufacturing, e-commerce and other retail companies throughout the U.S. 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.

Q3 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.
FTZs Are Making a Comeback
There was a double-digit growth in foreign trade zone use [in 2018], according to the federal government's report for that year. When the 2019 report comes out, that double double-digit growth will have increased even more. The reason is that these tariffs are a whole new way to save money, compared to before, when the most important things were speed to market, using direct delivery and weekly entry, cutting your supply chain time and lowering your cost of operations. Now it's cut your supply chain time, lower costs and mitigate the tariffs.

The number one thing we will see in the future is economic development professionals becoming more knowledgeable about foreign trade zones, so they add that one more thing to their toolkit. I work with several states that have low incentives compared to all 50 states. They may be down in the second half of states in terms of traditional incentives, but when they add the foreign trade zone in there, they jump right up to top 10. It's amazing.

Which Large Companies Can Benefit from FTZs?
Any manufacturer that has $10 million or more in imports really needs to look at the FTZ opportunities and potential benefits right now. It doesn't matter when we're talking. It doesn't matter who's in the administration. You got to look at this right now if you import more than $10 million of components or parts, that's number one. FTZs can also be a huge benefit to retailers who are facing these tariffs, including some specific ones that are currently being applied on patio furniture, or footwear. Any company that faces punitive tariffs and doesn't want to pay it up front, but rather only when the products are sold, needs to learn more about FTZs.

Every product that's imported for e-commerce poses a huge benefit through FTZ because, in an FTZ environment for e-commerce, you've got to hold that merchandise longer because you’re selling “eaches” [individual items], not pallets, of goods going to a store. With pallets of goods going to a store, they’re coming in a container and you’re moving those quickly. When it's eaches, you’ve opened the carton and you’ve got, say, 24 in there. You may sell five today and five tomorrow and then nothing for a while. So, you end up holding more inventory. You certainly don't want to pay 25% to 50% duty on what you’re holding for more than a week.

How Can Small- to Mid-Sized Companies Benefit from FTZs?
So, the biggest change we've seen in the FTZ world has been the rate at which small- and medium-sized companies have been utilizing FTZs. It’s worth noting that their margin of profit is much smaller than a Procter & Gamble or Johnson & Johnson. They've got to have as much of their profit to reinvest and hire new people as they can. When they go to an FTZ environment and they get back another $100,000 to $200,000 a year, net of all costs, by just changing the way they do their import process, that could end up doubling their profit.  I work with states that… are down in the second half in terms of traditional incentives, but when they add the foreign trade zone, they jump right up to top 10. It's amazing.

Who is Taking Advantage of FTZs?
The top industries we’re working with today are manufacturers, ranging from beverage manufacturers all the way to construction goods manufacturers, such as people that make windows and doors. The higher end includes the larger import retailers. REI is a pretty specific specialty retailer, but REI uses an FTZ at their warehouse distribution facility. There are also very large companies that are taking advantage of FTZs, like Dick’s Sporting Goods.

What Site Selectors Need to Know About FTZs
Site selectors have begun in the last several years to be a lot more educated on the whole FTZ issue. One of the things they're doing is making sure that the community they’re looking at has a robust FTZ program, that there are knowledgeable people that run the FTZ or they contract with knowledgeable people that work with them during the FTZ question-and-answer period—the big qualification process in an FTZ.

Your company has to meet the tests of customs in the Commerce Department. These are not ridiculously difficult tests. It's kind of like tests for the other incentives: How many employees are you going to have? Are those employees going to be in high-wage jobs or low-wage jobs? Site selectors deal with that all the time. They're all about numbers and putting things on the spreadsheet and coming out with a really good, full-blown incentive package for their clients. FTZs just add to that, especially in states like Texas and Arizona, where a state tax component is added to this new, much higher federal tax or duty savings. So it's becoming something that the site selectors really looking at.

Transferring Foreign Trade Zone Designations
I've been asked several times about the value of having an FTZ on a building. The regulations change in 2012 required that the designation switched from the owner of a site to the user, not to the piece of real estate. So, the easiest answer is that the designation stays with the user. If the user moves to another building, that building loses FTZ status and the user can get FTZ at the new building super-fast.

However, there still are industrial park FTZs and, in that case, there are maybe five or six buildings, and the zone is approved on those five or six buildings. So, if the tenant moves out, those buildings still have the FTZ capability.

In terms of value, FTZs cannot be a specific line item on an appraisal in terms of value-add. But it absolutely is a huge benefit, especially in states that have the tax advantage, such as Texas, Arizona, and to some extent Kentucky and Louisiana. So in those states, it's really important that you're in an industrial park that has an FTZ, because you don't have to go back and ask for permission anymore.

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