Leveraging the Economic Benefits of Foreign Trade Zones

July 11, 2011
An FTZ can enable strategic product releases motivated by demand rather than dictated by overseas shipment timing.

Foreign Trade Zones (FTZs) confer clear financial benefits to manufacturers and retailers. Using an FTZ can expedite product flow to market or enable strategic product releases motivated by demand rather than dictated by overseas shipment timing or the need to recoup tariff costs. In addition, FTZs can provide a methodology for overcoming quota restrictions. If your firm has taken all the obvious steps-outsourced production to the lowest-cost overseas manufacturer, analyzed the supply chain and identified the most cost-effective carriers and transport methods, and maximized automation across operations-consider the FTZ as your next best strategic option to be more competitive in today's challenging economy.

Foreign Trade Zone ABCs

The U.S. Customs and Border Patrol (CBP) designates FTZs as locations that, for purpose of customs duty payment, are outside its jurisdiction. Thus, until imported goods actually enter territory within CBP's jurisdiction, companies need not pay duty. This provision can reap economic benefits for U.S. retailers and manufacturers, particularly those companies that opt to produce goods in foreign locations and then bring them back to the United States for repackaging, finishing or distribution. FTZ status allows these firms to import the items, apply whatever intermediate processes it desires and then export them without incurring duty. Sometimes, these secondary processes can even result in a new Harmonized Tariff Schedule (HTS) code that confers a lower duty rate when the goods do become subject to duty payment.

Likewise, companies can defer duty payments on imported goods by warehousing items in an FTZ until more favorable market conditions prevail. Notably, any goods imported into an FTZ can be transferred, duty free, to other FTZs, whether they are located in the United States, Canada or Mexico. While stored, some goods may even be exempt from inventory taxes levied by state and local authorities. Further, FTZ status can translate to reduced customs clearance and service fees.

Compliance Is Critical

To leverage the economic benefits of an FTZ, importers must first obtain FTZ status from CBP and then institute methodologies and procedures to ensure compliance with CBP's detailed regulations governing FTZ operations. The key concern is controlling inventory and creating audit trails of goods movement in, out, and within zones, subzones, and business sites. Otherwise, any financial benefits will be lost to focused assessments, fines and penalties. While the regulations governing FTZs are quite detailed, software is available that automates all aspects of compliance; creates, generates, submits and maintains an audit trail of all the required paperwork; and updates compliance requirements in real time via an electronic interface with CBP. Acquisition adds a one-time expense for software purchase and integration.

Alternatively, some third-party logistics providers (3PLs) are branching out, acquiring FTZ status and offering this service as a new business line. This strategy enables 3PL customers to leverage FTZ benefits-deferred duty on raw goods and reduced customs clearance and service fees, among others-without undertaking the process of applying for FTZ status and managing the zone themselves. Luckily, FTZ software exists that allows 3PLs to manage the inventory of multiple clients concurrently using one software application.

Compliance Specifics

The manufacturing and manipulation processes companies perform in FTZs impose additional requirements, often industry specific, that affect inventory management and compliance. In particular, companies must track bill of material (BOM) components; record manufacturing costs such as assists, labor, packaging, etc.; and document extra-, inter- and intra-zone transfers.

These tasks, which are subject to CBP audit, can be time consuming. Automation eliminates the labor costs associated with manually performing these tasks. Ultimately, the ideal solution achieves intervention-free automation, which means the software can fully execute day-to-day compliance requirements and will require human intervention only when an exception (some activity that falls outside predefined system parameters) occurs. As stated previously, the system must possess audit proof functionality. That is, it must create audit trails, advise users when potential non-compliance issues arise, allow on-demand verifications and offer comprehensive analytical and reporting features.

Integration Requirements

Several key integration points must exist between the FTZ and ERP and/or WMS applications. The first point allows importation of material master data from the ERP and/or WMS into the FTZ. Then, the warehouse receipts can be integrated into electronic admissions; integrated balance reconciliation procedures can become fully automated and product under-/overages adjusted into additional admissions; and FTZ consumption movements can be tracked, including import entries. Integration points also can involve product manipulation, manufacturing, exhibit and destruction requests with or without BOMs. These allow the system to automatically generate the application for foreign-trade zone activity such as CF214, CF216, CF7501, CF3461, CF7512, Bills of Lading, AWBs, Inventory Labels and much more. Last, export and domestic consumption packing lists must interface with freight forwarders and customhouse brokers.

Integrating the FTZ with CBP import-export systems allows additional compliance and cost-saving features. These integration points include: import shipments (bills of lading data, automated manifest system, or ISFs from overseas freight forwarders) into admissions; automated in-bonds integrated into admissions or transfers; export packing lists integrated directly into automated in-bonds and automated export system (AES); domestic consumption lists and balance adjustments integrated directly into CBP automated broker interface [ABI] or automated commercial environment [ACE]; and automatic compliance notifications from CBP to importers.

Look to an Expert

Automating FTZ management is best left to experts who possess expertise in software design, a full grasp of CBP regulations and familiarity with the nuances of FTZ operations. Fortunately, the marketplace offers several quality systems from which importers can choose. Evaluating the alternatives can present a formidable task; however, expert advice is available. Beyond that, careful due diligence is advised. A good rule-of-thumb is: Look for a firm that specializes in GTM software and is ABI and ACE certified. Also, look for scalability, flexibility and a proven record of ongoing software updates. These characteristics speak to a firm that has fully thought out the FTZ "universe" and anticipates future or alternative uses to which its software can be adapted. It also attests to a firm that is dedicated to keeping its product up-to-date so that companies will not need to revisit software acquisition again in the future.

If you keep these points in mind, your firm, too, will be in a position to leverage the financial benefits FTZs offer.

Wayne Slossberg is Vice President of QuestaWeb, Inc., a Westfield, N.J.-based provider of Web-based global trade and logistics management solutions, including FTZ software.

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