FTZ Update: New tariffs drive demand for solutions

While the U.S. government wages its next round of trade wars with China, global logistics managers will have to become more creative.

An option to consider are the Foreign Trade Zones (FTZs) that are scattered throughout the nation near ports of entry that operate under the auspices of U.S. Customs and Border Protection (CBP), yet are generally regarded to be outside of CBP jurisdiction.

With the quiet compliance of the U.S. government, shippers can import goods into the zone with reduced duties on an individual basis. And although FTZs do not represent a “loophole” for tariff avoidance on goods destined for U.S. markets, they can give shippers a break on duties for re-export.

The announcement made in September that Canada, Mexico and the United States had agreed to replace the North American Free Trade Agreement (NAFTA) with the United States, Mexico and Canada Agreement (USMCA) has many trade analysts trying to determine its impact on FTZs.

Nick Bailey, head of research for the London-based consultancy Transport Intelligence (Ti), notes that the new agreement certainly contains provisions that affect several logistics intensive industries, including automotive manufacturing. “One provision increases the threshold at which vehicles made in the region qualify for tariff exemptions,” says Bailey.

“The second provision mandates that, by 2023, at least 40% of a vehicle be made by workers earning at least $16 an hour if the company is to qualify for tariff exemption. This provision is directly aimed at stopping the flow of jobs from higher wage locations in the U.S. to lower cost locations in Mexico.”

The implications for FTZs at cross-border locations have yet to be measured, however. “We’ve seen a tremendous surge in demand recently for more information on FTZs,” says Curtis Spencer, president of IMS Worldwide, Inc., a Houston, Texas-based trade consultancy.

“While the international trade marketplace is especially volatile at this point in time, we take issue with the idea that it’s negatively disruptive. Logistics managers will just have to be more selective about transport vendors and providers, and where they want to do business domestically.”

As one of the first consultants to advise shippers to leverage FTZs, Spencer recalls that at the time the zone at the Port of Houston was established it was considered “a radical concept” due to the fact that no other FTZ location had been approved just outside of a major cargo seaport in the United States.

Today, that zone—FTZ84—is one of the busiest FTZ projects in the country, averaging $3 billion dollars of international shipments per year. “With the re-negotiated USMCA, we expect to see even more business here in Houston related to automobile assembly,” says Spencer.

“But the FTZ solution may not be right for every kind of manufacturer or distributor,” he adds. “Shippers have to work with us to determine if there’s real cost savings every step of the way.”

Two FTZ options Melissa Harrington, a director of global trade content at Descartes Systems Group, agrees that considerable diligence must be taken before logistics managers determine the best FTZ option to explore.

“An FTZ can be used for either manufacturing or distribution,” she explains, “or an FTZ can be created as a stand-alone facility or as part of an existing building.” But first, shippers must decide which of two FTZ types would work best for them.

Their options include a “general purpose (GP) zone,” which is often an industrial park or port complex whose facilities are available for use by the general public. The second choice might be for a “subzone,” which is designated as a single-purpose site when the firm’s operations can’t be moved to, or accommodated in, a GP zone.

“FTZs can be a very effective way to reduce duty expenditure,” says Harrington, “however, they take time and money to get set up, and there’s also a lengthy application process to even get approval. Shippers must also adhere to critical CBP regulations and compliance standards or risk fines or penalties…or worse, like being entirely shut down.”

Harrington notes that when the Trump Administration’s tariffs were first enacted, there was some confusion on how or if they would apply to goods imported into an FTZ. Typically, FTZs are considered outside of the U.S. commerce, but these tariffs were different and were enacted under a law as a matter of national security.

CBP later announced that articles imported into an FTZ with “privileged foreign status” shall maintain that status and are not subject to the 232 duties unless they’re subject to the same duties upon export from the FTZ.

Courtney Rickert McCaffrey, manager of thought leadership for the global business policy council at A.T. Kearney, concurs that shippers should exercise caution before committing to an FTZ too soon.

“Exposure to risk has intensified,” says Rickert McCaffrey. “And shippers must examine the best way to structure the company to take advantage of global scale and efficiency while simultaneously adapting to the growing pressures of localization.”

Clarifying quirks

Making sense of all this has been the principle mission of The National Association of Foreign-Trade Zones (NAFTZ) for the past several months. One outstanding example of its concern has been with manufacturers being assessed additional duties under Section 201 and 301 trade actions on products manufactured and substantially transformed in a U.S. FTZ.

“We’re pursuing all avenues to ensure the Office of U.S. Trade Representative corrects this unintended and unfair discriminatory treatment,” says Erik Autor, president of NAFTZ. Currently, “a quirk” in the Customs entry process for zone-manufactured merchandise has resulted in the unwarranted assessment of Section 301 duties on some of these finished products.

“This exclusion is necessary,” says Autor, “because some finished products are manufactured and substantially transformed into different products in U.S. foreign-trade zones, but correspond to Chinese-origin products.”

Autor explains that collecting traderemedies duties on U.S.-origin products from an FTZ would have a number of unintended consequences, and would undermine the ongoing goal for creating manufacturing jobs in the U.S. In the meantime, shippers looking for a way to soften the blow are advised to speak directly to the U. S. Trade Representative (USTR) regarding the unfair treatment of tariffs applied to “nonprivileged” parts and materials.

Julie Gibbs, director of the San Francisco-based trade consultancy BPE Global, notes that removal from the zone of Section 301 items must be reported at “the highest value foreign component country of origin” on entry documentation.

This means that the value of non-privileged foreign status parts and materials legally admitted to an FTZ for manufacture into a different finished product will be assessed the additional tariff, even when substantial transformation takes place to create a U.S. origin good.

“If your company uses FTZs for manufacturing, consider commenting to the USTR about utilizing duty drawback,” says Gibbs. “Importers can get a 99% refund of duties paid on imported Section 301 items that are subsequently exported or assembled into a finished good then exported. If this program didn’t have a benefit in the past for your company, it may now.”

Reshoring success story

A new case study published by The Reshoring Institute, a non-profit focused on bringing manufacturing back to the United States, demonstrates how GP zones can provide lean, just-in-time manufacturers with third-party logistics (3PL) provider support.

According to Rosemary Coates, executive director of the institute, RK Logistics Group is an ideal example of how a third party can facilitate trade for a handful of manufacturers in Fremont, Calif. RK has over 700 employees, and a network of 14 warehousing centers in the greater San Francisco Bay area that represents nearly 1 million square feet of commercial distribution space for inventory management, manufacturing support and e-commerce fulfillment.

“We chose to make this investment in an FTZ as part of our 3PL-plus philosophy of providing services with capabilities and value that goes beyond simple logistics,” says Rock Magnan, president of RK Logistics.

Such a strategy is well timed, adds Coates, who says that the new tariff wars will cause a lot of re-thinking of global strategy at the C-level. “Executives and their organizations will be carefully considering where in the world to manufacture and how much risk is involved in global supply chains,” she says.

“Trade compliance people and supply chain people will finally get noticed and asked for input into strategic decisions.” Coates observes that in the past, supply chains, operations and trade compliance were often considered an after-thought by executive leadership teams.

However, with the rise of globalism, global sourcing and manufacturing, as well as the new trade wars, these functions within organizations are front and center. “Risk in global operations has become a strategic consideration,” adds Coates.

“Trade compliance people are being listened to regarding how tariffs impact the company’s financials, and strategic decision-making is now more broadly based on global operations—not simply financial results.”