Managing Tariff Fluctuations: The Strength of Free Trade Zones
In the face of escalating geopolitical upheaval, supply chain disruptions, and tariff volatility, importers are seeking innovative solutions to manage costs and maintain operational efficiency. One such solution gaining traction is the use of Foreign Trade Zones (FTZs).
FTZs, secure areas authorised by the federal government and located near U.S. ports of entry, offer a compelling option for mitigating tariff volatility. These zones function as either a warehouse/distribution centre or a manufacturing/production facility, depending on the company, products, and trade requirements.
The primary reason companies elect to establish an FTZ is for cost savings. By integrating FTZs into their supply chain, businesses can reap several benefits that contribute to significant cost reductions.
One of the top advantages is duty deferral and reduction. Companies can defer paying customs duties until goods leave the FTZ and enter the U.S. market. This delay in duty payment improves cash flow significantly, allowing more manageable tariff installments rather than lump-sum payments upon import. Furthermore, if imported components are assembled or manufactured into finished goods within the FTZ, companies can choose to pay duties on the lower tariff rate applicable to the finished product instead of the often higher rate for components—a concept known as "inverted tariff" relief.
Another advantage is duty elimination on re-exports. If goods imported into the FTZ are later re-exported outside the U.S., importers can often avoid paying duties altogether, reducing costs for export-oriented businesses.
FTZs also reduce customs brokerage fees, Merchandise Processing Fees (MPF), and harbor maintenance fees by consolidating customs entries into fewer, often weekly, filings. This consolidation streamlines import costs and paperwork, resulting in fee savings, sometimes in the millions annually for larger importers.
Moreover, FTZs help businesses better manage working capital and cash flow by aligning tariffs to the timing when the goods leave the FTZ and enter U.S. commerce. This arrangement shortens the cash cycle, optimising cash flow.
FTZ operations often lead to a reduction in supply chain lead times by 3-5 days and encourage improved inventory management processes, further contributing to operational and cost efficiencies. Additionally, FTZs provide increased speed of delivery to both the warehouse and customers, with "direct delivery" available.
Foreign entities can ship orders to U.S. customers from FTZ inventory within a day or two, improving brand loyalty and driving repeat orders. By using an FTZ provision that permits consolidating weekly shipments into a single customs entry, importers can save on broker entry fees and MPF charges.
As of 2023, there were 200 active FTZs within the U.S., bringing in nearly $950 billion worth of goods. With C-suite leadership increasingly looking for ways to drive efficiencies and cost savings, FTZs are increasingly on their radar.
However, it is essential to note that FTZs do not eliminate tariffs for imports subject to Section 232, 301, and IEEPA, and companies should engage a consultant to determine if FTZs are a good fit for their operations.
In conclusion, the flexibility, cost savings, and efficiency gains FTZs deliver can be a valuable asset in the current tariff environment. By leveraging the benefits of FTZs, businesses can optimise their import operations, manage cash flow more effectively, and enhance their competitiveness.
The use of Foreign Trade Zones (FTZs) is a strategic approach for businesses in the global trade industry, often utilized to mitigate tariff volatility through duty deferral and reduction, and duty elimination on re-exports. Leveraging FTZs can also help reduce customs brokerage fees, Merchandise Processing Fees (MPF), and harbor maintenance fees, ultimately contributing to significant cost savings for companies, particularly for larger importers.
In the current business landscape characterized by geopolitical upheaval, supply chain disruptions, and tariff volatility, FTZs offer a compelling solution for maintaining operational efficiency and managing costs, benefiting various sectors of the industry, including finance and commerce.
