Manufacturers today are continually being confronted by competitive globalism; and those who were once provincial in their sales markets are now looking to export more products overseas.
Supply chains often bring part components used in the manufacturing process from overseas distributors with a sizeable tariff to be paid. To offer a degree of relief to importers of components, some have been using Foreign Trade Zones (FTZs) to import their product.
FTZs are jurisdictions which allow a producer under particular circumstances to bring foreign product to U.S. locations and treat the imported goods as though it had never entered the US.
Thus, FTZs may eliminate duties or defer them into the future to allow current capital to be utilized on other high return, short run investments.
As an example, if an off-road vehicle manufacturer had specific modifications to the wheels which they normally part out to a nearby contracted shop, they may be able to have the duty eliminated on specialized valves or tire rims under a FTZ if they bring those parts in from overseas straight to the main FTZ and transport them to the contracted shop from there. If a producer brings in several high duty components and ships its final product to dealers within the US, using a FTZ they may be able to obtain tariff reductions on the overall finished vehicle (rather than paying all the individual duties on the components). The same firm may be able to save on the opportunity cost of the dollars it usually has tied up in the large duty payments when a sizeable component inventory shipment comes in as with an FTZ, the firm only has to pay the duty on each component when it leaves the FTZ as a part of the finished product. And lastly, if the imported components are used in the finished product and then exported directly overseas, the imported components may be treated as if they never entered the U.S., leaving the manufacturer free of such duties.
Expanding Foreign Trade Zones
Firms that are currently manufacturing or distributing products containing high tariff part components may be able to decrease input costs leading to an increased profitability by having a Foreign Trade Zone designation with the U.S. Department of Customs. This designation originates from legislation that is over three-quarter of a century old, yet many firms are not familiar with it. In order to better explain Foreign Trade Zones as an additional way of saving costs, the three Foreign Trade Zone Authorities in Minnesota (Twin Cities, Duluth and International Falls) developed a new approach in cooperation with The EDA Center at the University of Minnesota, Crookston (www.edacenter.org ).
A further expansion of the Foreign Trade Zone concept requires a much more holistic and integrated approach. Companies need to be better supported in their decision making and implementation process. Yet the ideas and details behind Foreign Trade Zones (FTZs) can be intimidating and frustrating for businesses. Professional assistance throughout the application and approval process and providing the best possible support in the decision making process are key elements for expanding the use of FTZs.
New Cost and Benefit Calculator
There are already numerous savings calculators available on FTZ-related websites. These calculators generate a fairly good overview of the potential savings as described, however it is only a part of the picture that decision makers need to have in order to see whether the FTZ designation is beneficial for the company and worth pursuing. Establishing a FTZ requires payments of various fees and the application, approval and implementation process in some cases takes more than a year. Therefore having effort related cost factors included, besides benefits, would create a much better basis for a FTZ decision. From a company’s standpoint, applying for a FTZ designation is a project in competition with other projects, all of which require valuable resources and time.
Additional Component: Associated Cost
There are three main cost drivers that need to be reflected in creating a more comprehensive FTZ calculator. Fees related to grantees of the FTZ and Customs are one category. Another one is potential consulting fees to help with the application and approval process if the company does not have any specialists in-house who could cover this. A third category is the purchase of record keeping software if needed, and the effort to adequately maintain the records. These costs vary depending on the type of FTZ that will be sought after and whether the company is planning to manufacture inside the FTZ or simply use the FTZ to warehouse the imported inventory. To operate within an existing General Purpose Zones (GPZ) is much less expensive compared to setting up a specific Subzone (SZ) for a manufacturing or distribution facility. The associated and accumulated one-time and ongoing costs have to be reviewed in perspective of the expected benefits, (especially for smaller companies). All cost factors should be based on worst case assumptions to minimize any risks of additional cost that were not anticipated or may have been estimated too low.
Additional Component: Required Time and available Support for Implementation
The type of zone will drive the length of time it takes to apply and get approval for a FTZ. Zone Type (General Purpose Zone or Subzone) and existence of planned manufacturing on the FTZ (yes or no) lead to process times of less than 30 days on the low end and up to 15 months on the high end. Required expenses and time make a big difference in the decision making process as to whether a FTZ should be considered or not. If the appropriate support for the application is lacking, the length could be further extended and delayed. The FTZ Authority in Minneapolis offers assistance in the application process of all FTZ’s in Minnesota for a rapid and successful implementation.
Results for Decision Making
This new cost and benefit calculator is now available for free on the Minnesota FTZ website (www.mnftz.com). The results are a much more comprehensive and a more complete overview of expected savings and associated costs, as well as an accurate source for an estimated time of the application and approval process. This overview puts companies in a position to see the full picture in advance; and therefore avoid their gradually finding out about associated cost/time and then stepping back from the project. The tool delivers the main components to give companies some confidence and support in their decision and ultimately supports the perseverance to implement it successfully. The features are:
• Estimated Savings
• Estimated Cost (new)
• Estimated Implementation Time (new)
For further information and assistance go to the Minnesota FTZ website www.mnftz.com and/or contact your closest FTZ Authority.
* Denis Maier is an assistant professor of management, Art Nash is a U of M extension educator, and Jack M. Geller is a professor and director of the EDA Center at the University of Minnesota, Crookston.