FTZ Update: Cross-border Trade May Be New Sweet Spot for Supply Chain Managers

While confronting the challenges posed by the current global pandemic, logistics managers continue to work on expediting everything from the smallest parts to finished products in order to meet market demand. Meanwhile, some supply chains need to be slowed in response to the same market forces.

The use of a foreign trade zone (FTZ) is often tied to delaying or doing final assembly of goods until the market is ready for them or until a company has a new plan. At other times, inventory is built up in FTZs to prepare for events such as holidays or back-to-school when demand will peak. In both cases, utilizing an FTZ allows a company to defer payments made to U.S. Customs, as payments are triggered based on when the material leaves the FTZ and enters the flow of U.S. commerce.

At the same time, shippers can narrow their risk window by utilizing FTZs now, says Resilience360 chairman David Shillingford. “The establishment of foreign trade zones can have an impact on the network risk profile,” he says. “For example, the creation of an FTZ may lead to the development of logistics and industrial clusters, which generally means fewer miles need to be traveled between nodes, reducing transportation risk.”

Conversely, adds Shillingford, it can also create industry-specific risk concentration because multiple suppliers are in the same place. “That could increase the impact of a major event such as a natural disaster or a pandemic.”

DHL, the parent company of Resilience360, made a deeper commitment to cross-border trade late last year in anticipation of the U.S.-Mexico-Canada Agreement (USMCA) by expanding its FTZ facility in El Paso, Texas. Fortunately, FTZs are now eligible for the first time to use the USMCA rules of origin to receive the same tariff benefits for products they make for the U.S. market that companies in Canada and Mexico enjoy when exporting products to the U.S.

And now that the treaty has come into play, logistics managers charged with adjusting to the new rules are facing fresh sourcing challenges. “This is a key pillar for our southern border region,” says Alejandro Palacios, regional vice president of the south region for DHL Global Forwarding. “Our goal is to foster shippers’ own business in the area, with a special focus on key industries including technology, automotive, manufacturing and aerospace.”

According to Palacios, the southern region of the U.S. represents one of the largest manufacturing centers in North America, and it is largely due to El Paso’s unique bi-cultural and bilingual workforce. Furthermore, it’s the largest metro area along the Texas-Mexico border and the 6th-largest city in Texas.

Further evidence of the FTZ border advantage is given by ProTrans, a sister company of freight forwarder TOC Logistics International. It was recently fortunate to avoid “inventory chaos” at its El Paso facility even though several containers were already in transit when the pandemic came to light.

“This caused an overflow in inventory as plants were shut down and no freight was moving out from the zone,” says Maria Torres, FTZ coordinator ProTrans. “The U.S. Customs Border Protection was helpful in working with the FTZ warehouse and allowed for additional segregated space to accommodate for the overflow. As of today, we still have freight pending in the segregated area.”

Political pressure

Adjusting to the new USMCA rules will not be without its challenges for many shippers, however. According to Erik Autor, president of the National Association of Foreign-Trade Zones (NAFTZ).

Autor says that his organization is fighting to make sure that “a harmful, anti-FTZ provision from the old NAFTA trade agreement” is not slipped back into the new USMCA through a legislative maneuver known as a “technical correction.”

According to Autor, the bill to implement the original 1993 NAFTA included a restriction on manufacturing companies located in a U.S. FTZ that prevented those companies’ products from qualifying for NAFTA preferential treatment when entered into the commerce of the U.S.

“Under this restriction, a U.S.-based FTZ manufacturer making a product for U.S. consumption that complied with the NAFTA rules of origin was nonetheless required to pay U.S. duty on any non-NAFTA components,” Autor explains. “But the rules allow manufacturers in Canada and Mexico to ship to the U.S. duty free.”

During the many months of NAFTA renegotiation and subsequent enactment of USMCA’s implementing legislation, NAFTZ repeatedly testified and argued for this harmful restriction to be repealed. Many NAFTZ members—grantees, operator/users and service providers—joined the association in that effort.

“And ultimately, we succeeded,” notes Autor. “The USMCA bill that was signed into law earlier this year repealed all the old NAFTA bill, and no comparable provision was included in the new law.” Still, there’s concern that the Office of the United States Trade Representative (USTR) may be trying to re-impose this restriction by inserting a similar provision in what is known as a “technical corrections” bill.

Autor maintains that USTR evidently claims that it was an oversight when they did not ask Congress to include the restriction in the USMCA bill.

“We believe that without the harmful NAFTA restriction, the new USMCA can provide FTZ-based manufacturing firms with new opportunities to succeed throughout the nation. Now we need to convince members of Congress to stand up to USTR’s pressure and keep the FTZ Rules-of-Origin provision out of the technical corrections bill,” Autor concludes.

On a positive note, however, logistics managers can finally look forward to FTZs being eligible for the first time to use the new USMCA rules of origin to receive the same tariff benefits for products they make for the U.S. market that companies in Canada and Mexico enjoy when exporting products to the U.S.

Onshoring advantage

Logistics managers are also discovering that FTZ operations are an important process in support of reshoring—an important consideration considering that international trade issues remain a top concern for U.S. companies.

“Operations within an FTZ, whether manufacturing, kitting, warehousing or repairing goods, create jobs for Americans that might otherwise exist only overseas,” says Rosemary Coates, President of Blue Silk Consulting, adding that FTZ manufacturing operations are particularly important as they contribute to the nation’s overall manufacturing economy.

In addition to FTZ-specific jobs, there’s also a “magnifier effect” on local economies and related jobs such as customs import processing and documentation as well as trucking operations. Coates believes that, overall, FTZ operations have a very positive effect on the U.S. manufacturing economy.

“COVID-19 has been a real wake-up call for manufacturers, with most of them in a world of hurt,” says Coates. “Demand has fallen to dangerously low levels resulting in plant shut-downs, closings, and layoffs. But most importantly, this global pandemic has exposed the risks in global sourcing and manufacturing and the risk that is now evident in the broad deployment of Lean techniques.”

According to Coates, manufacturers can now clearly see that dependence on suppliers solely from China can be devastating, and she contends that it’s time to mitigate this risk through developing alternate sources and multi-country manufacturing sites.

“The fact that many manufacturers embrace ‘lean’ techniques and processes has also backfired, not because the ideas were wrong, but because lean inventories are kept to a minimum,” adds Coates. “With no spare inventory, even the smallest disruption can have catastrophic results. Over the coming months, manufacturers should develop their strategic thinking about risks in their global supply chains and create alternative plans—and this includes bringing products into an FTZ until the trade war subsides and penalty tariffs are reduced.”