Comfort Zone: A Better, Faster FTZ

Foreign trade zones (FTZs) are often perceived like the regulatory governance they operate under: inflexible, complex, and slow—a product of bureaucratic red tape run amok.

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The ABCs of FTZs
If the FTZ Fits…
PortMiami Launches FTZ Satellite Program

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But some of those perceptions have changed considerably over the past few years, much to the benefit of U.S. importers and exporters.

The Foreign-Trade Zones Board announcement in 2009 that it would adopt a proposal for an Alternative Site Framework (ASF) opened the doors to a more streamlined FTZ program. The advantages remain the same. Importers and exporters still gain by distributing and performing value-added activities within the zone’s confines, and without entering product through Customs. But it is quicker, easier, and more flexible to tailor these regulatory allowances to unique user facilities rather than general-purpose sites.

It has been four years since the ASF initiative eased restrictions and FTZs, shippers, third-party logistics (3PL) providers, and area economic development authorities are beginning to see the new measure as a major stimulus for supply chain economy and efficiency, while growing industrial activity around U.S. ports of entry.

“The ASF is designed to serve zone projects that want the flexibility to both attract users/operators to certain fixed sites, and to serve companies at other locations where demand for FTZ services arises in the future,” according to the FTZ Board’s official application form.

This new model contrasts with the traditional framework that centers on attracting FTZ activities to a few fixed magnet sites or general-purpose zones—many of which serve multiple users at ports and industrial parks. The alternative framework allows users to simplify the process while expediting the benefits through their own existing facilities.

Columbus Discovers ASF

One example of this new directive is the Columbus Regional Airport Authority, a grantee of Foreign-Trade Zone No. 138. It is part of the Rickenbacker Inland Port, an international multimodal logistics hub encompassing central Ohio. The Columbus FTZ has been in the ASF program since 2010, and its fourth new site was recently approved.

“A traditional program application could take six months to one year to process,” notes Angie Atwood, FTZ administrator at Columbus Regional Airport Authority. “But with ASF, companies determine their needs and justification up front, and the FTZ board provides 2,000 acres to locate anywhere in their service area.”

The same core FTZ stipulation remains unchanged under the new ASF. Usage-driven and magnet zone sites need to meet the “60-mile, 90-minute” from port of entry adjacency provision. In central Ohio, this touches 25 counties, with Rickenbacker International Airport as the anchor. Following ASF approval and designation, companies go through the process of securing and activating the site per Customs guidelines.

“Companies still have to apply to the FTZ board, but it’s a simplified process. And the board guarantees approval within 30 days,” adds Atwood. “That has re-energized our zone.”

Timing is Right

The ASF couldn’t have come at a better time. The recession that swept through the United States in 2009 pressed companies to turn over stones looking for ways to squeeze out costs—and FTZs are one area where some shippers turned. It’s not a silver bullet solution, but for product categories that incur high duties, or have significant volumes entering U.S. commerce, gains can be appreciable.

FTZ No. 138 is home to textile, footwear, pharmaceutical, and electronics companies—all of which have established pedigrees using FTZs. And a growing 3PL presence provides support capabilities to companies that operate in the area, creating a robust network of manufacturing and logistics activities.

Much activity in and around Columbus is geared toward distribution. The area has become an intermodal logistics hub along Norfolk Southern’s Heartland Corridor that links Norfolk, Va., to Chicago. The region also has an established airfreight legacy, of which Rickenbacker International Airport is the centerpiece.

A pure distribution environment offers fewer inverted tariff or duty reduction gains because product generally moves swiftly through the facility. But when companies are manipulating product or re-exporting goods, the savings can be significant.

“One pharmaceutical company using our FTZ does distribution and some manufacturing,” says Atwood. “Medicine in raw form has a duty, but when it becomes a pill it has a zero duty rate.”

Heavy textile importers using the FTZ file one Customs Entry per week, therefore paying only one merchandise processing fee, rather than filing and paying a merchandise processing fee for each entry. They also re-export to their international stores.

A Business Model Fit

The FTZ doesn’t change the way a company manages its supply chain—unless it wants to. Importers can bring shipments in and bypass Customs at any port of entry, then put the freight on a train, truck, or plane using bonded carriers. Companies still have to fill out a Customs form to admit goods into a zone, but technically cargo is not entered, so shippers can defer, reduce, or eliminate duties until product eventually leaves the FTZ.

The FTZ fits seamlessly within many small shippers’ business models (see sidebar below). For larger companies, it becomes a platform for a more strategic change.

“One large distributor had to retool what it was doing to fit the FTZ into its network,” Atwood explains. “The company is saving a lot of money, not only on weekly entry, but it is using that facility to fulfill orders for international stores.”

For more complex manufacturing, such as automotive, the benefits of using an FTZ grow exponentially. Automakers have always been active FTZ users because they source myriad components from around the world for assembly—components that often carry a high duty rate. Foreign auto companies that manufacture in the United States, and ship finished cars for worldwide distribution, stand to gain the most. Many are making parts overseas, importing them to the United States for assembly, then re-exporting—without ever entering U.S. Customs and therefore paying zero duty.

The promise of luring more value-added manufacturing and distribution activities to the Columbus area stokes even greater optimism for how the FTZ can transform the local economy. And it provides a blueprint for other trade hubs around the country trying to stimulate industrial growth.

“Whether it’s a manufacturing company or a distribution facility, it’s all about attracting and retaining business in our service area,” says Atwood. “We want the FTZ to affect a company’s bottom line so it can hire more people and expand business in Ohio. We don’t disqualify any company that provides a benefit.”

Grand Plans in Michigan

A similar development is happening in Grand Rapids, Mich., the home of Columbian Logistics and the location of Kent-Ottawa-Muskegon (KOM) Foreign-Trade Zone No. 189. The zone is under the grantee authority of the Van Andel Global Trade Center, which, in turn, is managed by Grand Valley State University. Columbian Logistics operates two magnet sites as part of the FTZ.

KOM received its FTZ authority in 1993, but just recently sought designation for restructuring as an ASF. “The application process was seamless,” says Sonja Johnson, executive director of the Van Andel Global Trade Center at Grand Valley State University.

“The KOM board, which includes county commissioners, economic developers, and small businesses across the three counties, took its time in reviewing the new ASF program. They spent one year evaluating how other zones responded, and how well it was received in their communities,” she says. “We finally submitted our application to restructure in February 2012, and in August received our formal designation under the new framework. It sparked a lot of interest with companies we work with.”

The speed and ease with which companies can now activate a user-driven FTZ zone—versus participating in a traditional magnet site or general purpose zone—has become a major game changer.

“The flexibility factor—the shorter, more definitive timeline—is paramount to getting companies to look seriously at this program,” Johnson says. “I’m getting answers from the Foreign-Trade Zones Board within 30 days of receiving an application.”

Case in point: Johnson started working with a client for its first usage-driven site under the new ASF designation in late June 2012. In September, they began discussions to outline details of the project. With the client and Customs, she toured the production facility on Nov. 7, 2012. One day later, they submitted a draft proposal and received feedback. They formally entered the application on Nov. 28, and received the designation on Nov. 29.

“Because it’s a manufacturing site, it still has to go through Customs’ production notification and activation process,” she adds. “But it’s moving right along. The board is looking to approve projects quickly as long as paperwork is filed correctly.”

The convenience with which companies can now submit applications for FTZ designation at their own sites is a major incentive. As in Columbus, companies can explore opportunities at existing inbound facilities without entirely re-circuiting their networks. As long as a location meets Customs’ requirements, companies can designate a warehouse that they own or sub-lease without having to redirect product into a designated structure.

A Magnet for Trade Growth

From Columbian Logistics’ perspective as a magnet site, the ASF directive doesn’t change day-to-day operations. The company’s talent is inventory management, which complements activities within an FTZ.

“If the program attracts more usage-driven sites, that makes the magnet site more valuable,” says John Zevalkink, CEO of Columbian Logistics. “The opportunity to do zone-to-zone transfers allows service providers to support an FTZ site with logistics services and still be considered within the zone.”

Columbian Logistics remains a vital cog in the FTZ machine. Many small and medium-sized shippers don’t have enough volume to warrant designating their own site, but still see the benefit of deferring duty and tariff rates, and other ancillary taxes. Or maybe they don’t have the advanced tracking systems and capabilities to feed FTZ transactions. They can work with a 3PL such as Columbian Logistics that has a magnet site, is bonded, and can execute immediately on a transactional basis.

“It’s an opportunity for small businesses to bleed out some cost and stay competitive by taking advantage of a structure that already exists,” says Johnson.

Companies also have opportunities to expand zone-to-zone transfers. “One customer doesn’t have space in an existing facility to stage additional inbound product, so it’s considering Columbian Logistics,” she adds.

As a 3PL, Columbian supports manufacturing by maintaining inventories of raw materials or finished goods that move in and out of a plant. Columbian Logistics does in the FTZ environment what it excels at in the commercial 3PL space.

“We support some manufacturing plants that process foods, for example,” says Zevalkink. “They may partially process a product on the line, and end up with work-in-process inventory. In between, that product might be moved to a magnet site for storage, then transferred back when the processor is ready to finish the work.

“That’s what we do every day in the domestic world,” he adds. “The new FTZ rules made it easier to set up a usage-driven site, expanding our benefits as a magnet site.”

Zone-to-Zone Transfers

Zone-to-zone transfers present new opportunities for some companies to explore more strategic initiatives. For example, Wolverine, a Michigan-based footwear and apparel company, is a partner in the KOM FTZ. As a growing business, it’s looking to streamline product flow throughout its North American supply chain.

“Wolverine will be taking advantage of zone-to-zone transfers across North America to defer duties until it actually pulls product out of the supply chain, because footwear and apparel carry considerable duties,” says Johnson.

Wolverine has also looked at zone-to-zone transfers as a way to manage seasonality. It’s another option to mitigate peak-season spikes without completely structuring a new solution. And if the company takes advantage of weekly entries, it can hold more inventory for a longer time without paying additional duties on frequent inventory turns.

Since filing for the ASF, Johnson has had interest from companies focused on inverted tariffs—how importers can use the FTZ to bring in product components or pieces that have a higher duty rate than the finished goods that ultimately leave the zone. That’s a major selling point for companies that are moving more complex shipments. And it can impact how and where in the supply chain companies decide to add value to their products. Even with apparel, a business can cut a bolt of fabric and sew it on to a particular item, and the finished good may change the duty classification when it leaves the FTZ.

“If a company can get a 3.5-percent duty item down to a zero or 0.5-percent duty rate, it can start to look at supply chain costs from the origin point,” says Johnson. “It can consider a lot of variables.”

The ASF opens up more doors to look through in terms of supply chain structure. “It challenges supply chain managers; it’s not the same old way we did business before,” she adds.

From Bound to Boundless

Before the Columbus Regional Airport Authority received ASF designation, its plan was to grow the FTZ around six expansion sites throughout central Ohio.

“It was challenging to get prospective customers to come to a pre-designated location, whether a building was there or not,” recalls Atwood. “Invariably, they wanted the building across the street that wasn’t part of the FTZ. We’d get interest, but then we had to move forward with lengthy modifications. That’s why we got involved with the ASF.”

To say that the new ASF designation is a step forward would be an understatement. In many ways, it’s a leap in a new direction that provides U.S. industry with much-needed stimulus. It allows companies to embrace and execute the FTZ concept without jumping through complicated and lengthy regulatory hoops. It’s also tearing down walls within organizations.

“Based on our FTZ experience in western Michigan, the idea of ‘build it and they will come’ couldn’t be further from the truth,” explains Zevalkink. “It’s still a complex process, and the value is complicated because it’s tax-driven.

“Using an FTZ takes some serious evaluation. It typically requires buy-in from outside the logistics group,” he adds. “One reason the FTZ concept hasn’t grown as fast as it could is because it’s not logistics managers who want it; it’s finance managers trying to reduce taxes and costs. That’s why we are so excited about these changes; they make it easier to gain benefits.”

Companies should consider using an FTZ, where appropriate, as part of their U.S. distribution network for myriad reasons. A waffling economy has logistics and supply chain organizations on alert for ways to squeeze costs out of their operations.

Companies can leverage a usage-driven or magnet FTZ—or both—to perform countless value-added activities beyond standard distribution. It can serve as a quality-control checkpoint before importers file an entry—if a product gets rejected they don’t have to pay the duty. The FTZ can be a temporary staging area for products that require additional testing before regulatory inspection—especially food-grade shipments.

And, as industry becomes more attuned to sustainability efforts, shippers can tap the zone as a place to process and recycle manufacturing materials, then sell scrap at a reduced duty rate.

FTZ adoption similarly raises the profile of 3PLs, customs brokers, and consultants that operate in that space. It provides 3PLs with new opportunities to expand their service capabilities and value proposition.

These opportunities are boundless. Zone-to-zone transfers have added a dynamic that only expands an FTZ’s value. It’s akin to creating a self-supporting, multi-dimensional, and functional network behind a Customs firewall. Often the concept of using an FTZ drives shippers to reevaluate how they look at total landed costs, and how adding value to work-in-process goods closer to demand may create additional savings. At the very least, it can initiate a more strategic dialogue.

The ASF is a major progression for customs and trade regulations often perceived as onerous and archaic. It motivates shippers to expand manufacturing and logistics activities around ports of entry. It facilitates and supports U.S. trade and commerce.

Says Atwood: “The FTZ program now runs at the speed of business rather than the speed of government.”

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The ABCs of FTZs

FTZ User Benefits:

1. No duties or quota charges on re-exports.
2. Customs duties and federal excise tax deferred on imports.
3. When zone production results in a finished product that has a lower duty rate than the rates on foreign inputs (inverted tariff), the finished products may be entered at the duty rate that applies to their condition as they leave the zone.
4. Foreign and domestic goods held for export are exempt from state/local inventory taxes. FTZ status may also make a site eligible for state/local benefits unrelated to the FTZ Act.

FTZ Public Benefits:

1. Helps facilitate and expedite international trade.
2. Provides special customs procedures as a public service to help firms conduct international trade-related operations in competition with foreign plants.
3. Encourages and facilitates exports.
4. Helps attract offshore activity and encourages retention of domestic activity.
5. Assists state/local economic development efforts.
6. Helps create employment opportunities.

Current U.S. FTZ Statistics:

1. U.S. communities with zones: 200+
2. States with zone projects: 50
3. Pending cases for new zones, expansions, sub-zones, and manufacturing: 60
4. Value of merchandise handled by zones: ~$534 billion
5. Employment at active zone facilities: 300,000+
6. Exports: $34.8 billion

Nearly 60 percent of incoming zone shipments are of domestic status (most of this figure represents domestic origin goods, but a small percentage are duty-paid/duty-free foreign items).

Source: U.S. International Trade Administration

 

If the FTZ Fits…

Drew Shoe Corporation, headquartered in Lancaster, Ohio, has been involved in the FTZ program since December 2009, when it had its location set up as a subzone of Columbus FTZ No. 138. The company specializes in selling orthopedic footwear.

“We don’t do any manufacturing,” says Pete Struzzi, CFO and treasurer at Drew Shoe Corporation. “We just receive product, store it in the zone, pick it, and ship it.”

Since the company made the move in 2009, it has been able to take advantage of the FTZ in different ways.

“It allows us quicker access to incoming inventory because we clear it at our facility,” says Struzzi. “This eliminates any delays at the railhead due to processing backlogs, for example. It also allows us to better plan resources, because delivery times are more certain.”

Prior to participating in the FTZ, all goods were cleared at the Columbus port of entry. Any backlog, and Drew Shoe’s product fell in line behind everything else. Now inventory comes directly off the rail in Columbus and moves to its facility without undue delay. Most of Drew Shoe’s product comes from China through the West Coast in Seattle-Tacoma, then via train to the Midwest. The company imports a smaller volume of product from Italy and Holland that is channeled through the East Coast.

“A large part of our business involves direct fulfillment, which necessitates higher inventory levels and slower turns,” Struzzi says. “This dynamic optimizes the duty deferral benefit of the FTZ by conserving cash and reducing interest expense. Adding to this benefit is the fact that the duty rate on our imported goods is relatively high.”

Using an FTZ may not make sense for smaller importers if their product has a low duty rate or small volume. “Every company is different,” notes Angie Atwood, Columbus Regional Airport Authority’s FTZ administrator. “Shoes have a 38-percent duty rate. That’s the difference. You have to have a bigger volume if your duty rate is only two percent.”

Drew Shoe also ships product to Canada and other countries, and using the FTZ enables it to avoid paying double duty on imported goods that are then re-exported. The alternative would be to use a duty drawback process, which is labor-intensive and time-consuming.

Struzzi has even found the FTZ’s record-keeping requirement further incentive to keep a sharp focus on inventory control. “In fact, it has complemented our efforts to make sure inventory is as accurate as possible at the SKU level,” he says.

“The FTZ program has been a definite advantage to our operation,” Struzzi adds. “This is especially the case with the ASF program, which dramatically cuts red tape, time, and expense to get set up as a zone.”

 

PortMiami Launches FTZ Satellite Program

With the completion of the Panama Canal expansion looming closer in 2015, PortMiami has been ramping up investment to accommodate the expected container volume surge. In August 2012, the U.S. Department of Commerce approved PortMiami’s application for Foreign Trade Zone designation, setting the stage for further commercial expansion and growth in surrounding Miami-Dade County.

Following the new Alternative Site Framework (ASF) model for FTZs, PortMiami is establishing satellite zones that will allow individual companies to leverage the benefits of an FTZ at their own secure warehouse locations.

Inbound Logistics asked David Banfield, director, sales and port development at Florida East Coast Railway, about the benefits of PortMiami’s new FTZ satellite program.

Q. How do the new ‘satellite zone’ concept and the FTZ’s Alternative Site Framework designation benefit shippers that locate a facility at PortMiami?

DB: PortMiami FTZ No. 281 creates a ‘mega’ zone, providing more accessible foreign trade growth opportunities for Dade County as a whole, while simultaneously reducing the application process time and the cost for companies that want FTZ status. Benefits to importers and exporters include: an expedited alternative to slower, off-shore transshipment models offered elsewhere in the Caribbean region; reduced and deferred import/export transactional costs; and the ability to establish a South Florida inventory base for the global market, linking Asian, Latin American, and European markets.

Q. How will this FTZ enhance trade flow at the port?

DB: The FTZ allows foreign products to enter the U.S. market at a lower cost, which is the fundamental basis behind any international transaction. If a foreign exporter encounters too many barriers to competitively sell product in U.S. markets, then international transactions are hampered from the onset. The investment in South Florida port, rail, and FTZ infrastructure not only increases shipment flow through PortMiami and Florida more efficiently, it creates the opportunity for the port to leverage growing foreign demand for U.S. exports.

Q. How will PortMiami’s FTZ integrate with the other FTZs in the area?

DB: The port’s new, expanded FTZ will reduce individual zones and create one larger, more efficient FTZ. This empowers companies to design their international trade patterns around one centralized hub that can link to other inland U.S. FTZs in the Midwest. Ultimately, this single hub will provide even greater market penetration for foreign imports into U.S. markets for resale or re-export.