FTZs Increasingly Vital to Nation’s Trade Policy

26 Jan, 2016

Foreign trade zones are a multi-faceted concept, extending beyond tax break advantages.

By Rachel Duran

In 2016, the greatest challenges to foreign trade zones (FTZs) will be compliance related, exacerbated by the expected increase of activity within these zones. In 2014, a record-high $99.2 billion in merchandise was exported from America’s FTZs, according to data from the Foreign-Trade Zones Board. The figure also represents a threefold growth of FTZ exports from 2009 to 2014.

Future increases will include the creation of new zones, the broadening of the geographical reach of zones, and/or adjustments in permitted economic activities. What’s more, trade volumes are growing, there is greater product diversity, and more complex ancillary services are taking place, writes Raphael Madarang, director of global trade compliance and management for APL Logistics, in an email correspondence. He has assisted companies in setting up and managing FTZ operations in a number of Southeast Asian countries and China.

“There just are not enough resources for customs and other authorities to monitor the value, volume, product classification, status, and value-add incorporated into each and every commodity/equipment that enters and leaves an FTZ,” Madarang writes. “As such, customs is taking a more selective risk management approach comprised of random checks and surprise audits to maintain compliance standards within FTZs and keep companies on their toes.”

FTZs are areas in the United States, in or near a U.S. Customs port of entry, where foreign and domestic merchandise is considered to be outside the country, or at least, outside of U.S. Customs territory, according to the National Association of Foreign-Trade Zones. The zones offer a deferral, reduction or possible elimination of duties. Activities taking place in these zones includes assembly, testing, manufacturing, repackaging and processing, among others.

In regard to other issues affecting FTZs, on February 28, the Automated Commercial Environment (ACE) will go into effect, despite the fact that businesses, brokers associations and the National Association of Foreign-Trade Zones asked U.S. Customs and Border Protection to move the date forward because the industry isn’t ready, says Kathy Wilkins, vice president, Alliance Operating Systems, based in Dallas. In her role, Wilkins analyzes the supply chains of importers and builds FTZ solutions that will sit on top and mirror what their supply chains are doing in order to report to U.S. Customs.

“ACE will impact the entire import industry, zones or not,” Wilkins says. “We feel it will affect zones a little more only because our type of entry to get product out of a zone is not even in testing yet, where other types of entries are already in testing — and customs is trying to fix the problems they are having with that.”

ACE is Customs and Border Protection’s plan to create a single window, a primary system through which the trade community will report imports and exports, with the government determining admissibility. The move is expected to support the international trade community in more easily and efficiently complying with U.S. laws and regulations.

Madarang says the higher volumes and complex transactions involved with FTZs will drive technology and data analytics to a more prominent role in the future of compliance. “Technology and software systems that automate FTZ monitoring and reporting requirements will be increasingly used both by companies and regulatory agencies to manage and enforce compliance in the future,” he writes.

The Coming Revolution

Madarang writes 3-D printing will be another technological advancement that will revolutionize both logistics and trade compliance. “Some expect 3-D printing to further encourage the nearshoring of production or value-added processes closer to markets. To a significant degree, these processes are currently handled in logistics hubs and customs supervised areas such as FTZs.”

He points out the debate on customs duties and export/import controls on intangible items such as software and blueprints for 3-D items will continue and it is likely that newer forms of regulations (FTZ or otherwise) will be enacted. “Nonetheless, although these emerging trends are still in their infancy and government regulations have yet to catch up, we can more or less be sure that FTZs will continue to play a pivotal role in a future dominated by innovations in ecommerce and 3-D printing.”

Benefits Beyond Tax Breaks

“Foreign-trade zones continue to be hubs of manufacturing activity where domestic and foreign-sourced inputs are combined by American workers on U.S. soil to produce value-added final products for export and domestic consumption,” said Daniel Griswold, president of the National Association of Foreign-Trade Zones, when the organization presented its annual report to the U.S. Congress in August 2015. “Key U.S. industries depend on the FTZ program to remain competitive.”

Wilkins says the largest industry sectors making use of FTZs are oil and refineries. “Every drop of crude that comes into the country goes through an FTZ,” she says. These sectors are followed by the automotive, electronics, pharmaceuticals, and machinery and equipment industries.

In 2015, Alliance Operating Services had a somewhat different FTZ business landscape than in previous years, and saw a lot of retail-related activities. The company typically deals with manufacturing-related activities. “We really changed gears because visa quotas are gone and we have had a lot more “fun” product, if you will, which we will also deal with in 2016,” Wilkins says.

Among the many benefits of operating in an FTZ is the fact that a company will realize net cash flow to its bottom line immediately, Wilkins says. “All the inventory that you have on hand has already had the duty paid. So everything new goes in behind that. You can immediately stop paying duty while you deplete what you have.”

Companies located in zones can also cap the merchandising processing fees customs collects based on the value of the shipment to manage the paperwork. “We have some electronics clients who were paying upwards of $2 million in these fees,” Wilkins says. “And with the weekly cap it brings it down to the $25,000 range per year.”

Madarang adds that FTZs promote entrepôt trade and facilitate innovative supply chain solutions such as cross-border ecommerce because inventory can be stored and managed closer to home markets within an FTZ thereby reducing lead time and cash flow implications. “In the case of China, they facilitate the exit and re-entry (U-turn) of goods without the need of physically exporting goods overseas to comply with inbound documentation requirements,” he writes.

A trend in FTZs finds the zones being utilized in conjunction with Free Trade Agreement transactions involving transit hubs. This is due to the fact that the customs supervision within FTZs is a common condition for the issuance of so-called back to back or non-manipulation certificates for goods to maintain their eligibility to claim preferential duty benefits at their ultimate destination, Madarang says.

As we head into 2016, Wilkins says every new project Alliance Operating Services brings in continues to bring with it new talent. “We doubled our staff this year [2015].” Which bodes well in order to serve expanding FTZ programs in the United States and similar programs abroad.

For complete details on the organizations featured in this article, visit:

Alliance Operating Services, www.allianceops.com

APL Logistics, www.apllogistics.com

Side Note 1

Butte-Silver Bow, Mont.: Well Connected

FedEx loves operating from the Montana Connections Business Development Park, says Kristen Rosa, TIFID administrator. At the park, FedEx brings in shipments from Alberta, Canada, to the park located in Butte, where the company redistributes packages for delivery. Business park officials would like to see more packages come down from Canada to Butte in the near future.

Montana Connections is served by two class I railways, provides access to interstates 90 and 15, and features a tax increment district under Montana statute, Rosa says. A majority of the property within the district is owned by the city and county of Butte-Silver Bow, which they sell at $2,000 an acre.

Montana Connections features physical infrastructure, and officials are working to bring potable water services in; potable water is available from wells at this time. “We are also working to install 2 gigabytes of fiber-optic cable into the park,” Rosa says.

Montana Connections features the Port of Montana, which is a full transloading facility located within the park’s boundaries. The port features Foreign Trade Zone No. 274, and a general purpose warehouse to support foreign trade related to the zone. “REC Silicon is a subzone of the zone, where they import product, manipulate it, export it and avoid paying duties on that product,” Rosa says.

Montana Connections continues to attract companies that want to take advantage of its logistics infrastructure. A developer has built a 5,000- square-foot warehouse and distribution facility for Frito Lay. A 12,000-square-foot spec is going up; 6,000 square feet has been sold to SepticNet. And another developer in the agriculture field will build a 10,000-square-foot facility at the industrial park.

For complete details, visit www.montanaconnectionspark.com.

Side Note 2

Dieppe, N.B., Bets on Air Cargo

Business operating from Dieppe are located in the middle of Canada’s Maritime Provinces, able to reach the majority of the region’s consumers within a three-hour drive. Dieppe is located near several major Canadian and Northeastern U.S. markets and is within a 24-hour delivery time of more than 70 million consumers.

Dieppe’s logistics and warehousing cluster is anchored by the Greater Moncton International Airport, which offers more than 100 all-cargo flights weekly, and the 1,100-acre Dieppe Industrial Park and Aviation Avenue. The Aviation Avenue expansion includes 90 fully serviced acres that are available for commercial and industrial development.

Dieppe Industrial Park is home to more than 200 companies, including FedEx. Xtreme Cold Storage, a seafood wholesaler, opened in the spring of 2015, and has offices and a refrigerated warehouse located partly in the industrial park and partly backed up against the air lands of the airport, says Louis Godbout, executive director, Expansion Dieppe.

Dieppe’s officials are focused on developing an air cargo business strategy, and are partnering with the land transportation side of the network as the region is home to the headquarters for three of Canada’s largest trucking companies.

At this point, Godbout says a foreign trade zone isn’t part of the area’s logistics strategy at this time. “That would be something someone would want down the line,” he says. One component may include the initiatives that result from the Comprehensive Employment and Training Act, which Canada is negotiating with the European Union, and which is billed as the next generation of free trade.

For complete details about the logistics advantages found in Dieppe, visit www.expansiondieppe.ca.

Rachel Duran

Rachel Duran is the editor in chief for Business Xpansion Journal. Contact her at rduran@latitude3.com.

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