I asked Bruce Tompkins, Executive Director of the Tompkins Supply Chain Consortium, to share his insight on using Foreign Trade Zones (FTZs).
--Jim
I’ve been hearing more and more discussion recently on the topic of FTZs. And in turn, I’ve learned a lot about the pros and cons of obtaining and using an FTZ.
The overriding question appears to be, “Are FTZs right for me?” For the most part, the biggest “con” is time: It could take up to a year and a half to get started. But on a positive note, there are professionals who can help you expedite the process and make sure you have dotted your “i”s and crossed your “t”s.
The “pros” – and this should catch your attention – are mostly based around cost savings.
To make sure we’re all clear on this topic, I’ll start with the definition of an FTZ:
Foreign Trade Zones are areas (or zones) in or near U.S. Customs Ports of Entry that allow companies to receive merchandise as if it were outside of U.S Customs territory (i.e., special treatment of duties and taxes, etc.).
Many organizations are beginning to realize how establishing an FTZ gives their global supply chain an advantage. (Click here to see a list of companies that have taken advantage of zones by state.)
To give you a scenario of benefits, let’s look at two consumer packaged goods companies that manufacture similar products. Say the first company, “Company A,” manufactures its product in the U.S. We’ll call this product, “Product X.” Product X is made up of five different component parts that are imported into the U.S. As each of those components enters the U.S. commerce territory, each is taxed separately.
OK, the second consumer products industry company, “Company B,” manufacturers its product, “Product Y,” in a foreign country and imports the final product to the U.S. Product Y uses the same number of similar component parts, but none of the components of Product Y has been taxed. The product being imported from Company B is cheaper to manufacture than the product from Company A that has been made in the U.S. This leads to an unfair advantage for foreign-made goods.
An FTZ will level the playing field for Company A. That is, by using an FTZ to manufacture its products in the U.S., Company A may be able to reduce or eliminate the duties or tariffs placed on the components, which will bring down the cost to make the final product. For cost savings and speed to market, companies producing fast moving consumer goods especially reap the benefits of FTZs.
There are also other major benefits – relief from inverted tariffs, duty exemption on re-exports, duty elimination of waste, scrap and yield loss, weekly entry savings, and duty deferral – that can be found at the Foreign Trade Zone Resource Center’s website: http://www.foreign-trade-zone.com/benefits.htm.
And these benefits can be substantial depending on a number of different factors such as:
The number of inbound shipments per week;
How your supply chain network operates;
What is imported versus produced in the US;
Scrap rates on imported materials and goods; and
The total amount of Customs tariffs paid.
What are your thoughts on FTZs? Are the benefits worth the effort? What have you been hearing? I’m working on a second blog post about the costs and resources needed to implement an FTZ. You’ll be hearing more from me on this later.
-- Bruce Tompkins
More Resources
Strategic Sourcing and Procurement
Global Trade Management and Supply Chain Visibility
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