Navigating shifting trade policies

The U.S. Foreign-Trade Zones Program was created in 1934 to level the playing field for manufacturing and distribution operations in the United States to help them compete with companies located in other countries. Foreign-Trade Zones (FTZs) are U.S. government approved, secure locations that grant companies within these Zones certain customs tariff, financial, and regulatory benefits to optimize the company’s supply chain. An FTZ can be a manufacturing plant, a distribution warehouse, or even a lay down area.

Within these secure locations, companies can perform value-added operations—such as manufacturing, warehousing and distribution, assembly, kitting, blending, and much more.

The FTZ program helps U.S.-based companies both contribute to the U.S. economy and create jobs in the U.S. It helps companies procure high quality and competitively priced inputs, both domestic- and foreign-made, while leveraging U.S. labor to incorporate the inputs into its value-add operations.

Today, FTZs are significant economic development tools. These zones are designed to promote international trade and boost economic growth by providing various benefits to businesses operating within them.

Here are some ways in which U.S. Foreign-Trade Zones serve as economic development tools.

Domestic content and U.S. value-add make up a significant portion of FTZ activity. According to a recent U.S. International Trade Commission (USITC) report, only 13% of the total value of U.S. FTZ shipments are comprised of foreign status inputs. The majority of the value of the goods is from value added in the U.S. (31%) and U.S. domestic content (56%). The U.S. FTZ program is dedicated to maximizing domestic manufacturing and leveraging the strengths and opportunities offered by the U.S. market.

U.S. FTZs have a positive, indirect “cluster” effect on economic development. The same USITC report underscores how major U.S. FTZ investments can stimulate additional employment and economic development benefits for the communities in which they are located. Supplier firms often cluster around an FTZ, creating thousands of indirect and multiplier-related jobs in the area.

Encouragement of manufacturing and processing. FTZs often attract manufacturing and processing activities by providing a favorable environment for these operations. Where zone manufacturing results in a finished product that has a lower U.S. harmonized tariff rate than the rates on foreign inputs, the finished product may be entered into the U.S. Customs territory at the duty rate that applies to its finished condition.

Moreover, duty is not owed on labor, overhead or profit attributable to zone production operations. This makes U.S. manufacturing more competitive with manufactured goods imported from other countries. And, as was mentioned earlier, these operations bring with them additional jobs supporting the manufacturing operation, further boosting the area’s economy.

Attracting foreign investment. The presence of FTZs can make a region more attractive to foreign investors as it offers cost-saving opportunities. Firms that are looking to locate closer to the lucrative U.S. market must weigh labor and other costs with the tariff impact of importing from outside the U.S. Increasingly, the U.S. is interested in having those operations locate within the U.S. for both supply chain resiliency and employment opportunities for U.S. workers. FTZs are an effective tool for recruiting such activity.

FTZs are also a supply chain tool for mitigating changes in Customs and Trade regulations that are sometimes dramatic and perhaps even without warning. As administrations change in the U.S., trade policy morphs. Now, more than ever, we see trade being used as a bargaining chip in other policy matters. This means that companies need to be more vigilant to their tariff exposure and look for ways to mitigate supply chain risks.

Retaliatory tariffs

Import duties on goods made or stored in an FTZ aren’t paid until the goods are shipped to a customer in the United States. This means companies can defer the payment of duties until the merchandise is sold, more closely matching expense with revenue.

This benefit became more valuable for both manufacturing and distribution companies when, under the Trump Administration, Section 301 and Section 232 tariffs were levied on imported Chinese and Steel and aluminum merchandise, respectively. These tariffs were levied via Presidential Proclamation, suddenly increasing the cost of certain imported goods.

When the cost of these goods started to rise, many U.S. importers utilized the duty deferment opportunity of FTZs to improve cash flow and delay the payment of tariffs only once a customer in the U.S. paid for the goods instead of paying it up front when the goods first arrived in the United States.

It’s important to note that FTZs can’t be used to avoid paying any trade remedy tariffs on subject goods that are entered into the U.S. commerce. However, if the goods are ultimately exported, no duty is owed on the goods, making the FTZ program the only means of recouping 232 tariffs on goods ultimately exported and not used in the United States.

And, if the economic viability of the goods change, those goods can continue to be stored in an FTZ indefinitely, without paying the duties, while the company looks for alternatives.

A new kind of trade agreement

The Biden administration has maintained the trade remedy tariffs put in place during the Trump administration. Some are currently under review, though, and we may see changes that will once again affect U.S. importers.

Also under this administration, there’s a trend of moving away from traditional trade agreements that offer lowered tariffs to arrangements such as the Indo-Pacific Economic Framework, which looks to advance trade policy in areas of resilience, sustainably, and inclusivity without including tariff reductions.

If this trend continues, U.S. importers may find less market access via trade agreements, which makes FTZs a primary tool for tariff management. With no duty or quota charges on re-exports, a company using an FTZ avoids the lengthy Customs duty drawback process and improves cash flow by not paying duties rather than waiting for a duty refund.

Area of opportunity: Section 321 de minimis provision

Some import program adjustments since the creation of FTZs have accidentally put U.S. companies at
a disadvantage.

The Section 321 de minimis provision, which is an informal customs entry procedure codified under 19 U.S. Code § 1321(a)(2)(C) where it gets its name, allows duty-free importation for shipments valued at $800 or less. In these instances, only minimal information is provided to CBP about the shipments, and even trade remedy tariffs are avoided by foreign entities.

Despite being outside the U.S. commerce just like foreign operations, U.S. companies utilizing FTZs are unable to use de minimis entry due to an interpretation of the language of the FTZ Act. So, companies outside the U.S. can ship to U.S. customers duty free, while U.S. companies are not able to service their customers from U.S. warehouses employing U.S. workers with the same duty-free treatment.

The FTZ program incentives companies to have a U.S.-based operation, employing U.S. workers, contributing to the U.S. economy and providing the supply chain resiliency that has been shown as critical for U.S. security.

Efforts are underway to introduce legislation to fix this lack of parity for U.S. firms by allowing Section 321 releases from FTZs. If Congresses passes this bill, it will be continuing the work started almost 90 years ago to ensure trade policy doesn’t inadvertently have a negative impact on the U.S. economy.