The Supply Chain Benefits of a Foreign Trade Zone
Foreign Trade Zones were created by federal legislation in 1934 and were designed to foster economic stimulus by way of investment and employment opportunities in U.S. manufacturing. Historically under-utilized until the 1970’s, when larger companies such as auto manufacturers began using the program to gain advantage from manufacture in the Zone of products made from components with HS tariff classifications carrying high duty rates. Still applicable today, this Foreign Trade Zone scheme allows finished products to be imported from the Zone at a lower duty rate, effectively reducing landed cost and enabling more competitive positions for U.S. manufactured products. The purpose of this document is to illustrate the more salient benefits of a Foreign Trade Zone and impact on the importer supply chain.
Increased Supply Chain Efficiency through the Foreign Trade Zone (FTZ) Process
In general, imported cargo must clear U.S. Customs prior to container movement from Ocean Carrier custody at the piers and ultimately for merchandise to move into U.S. Commerce. Even with electronic entry submission made in advance of vessel arrival, the process is fraught with pitfalls often resulting in delays getting cargo moved from the pier to warehouse where orders can be filled and shipped.
A key Foreign Trade Zone provision known as Direct Delivery allows for immediate movement off the pier upon vessel arrival. Authorized through use of Blanket Permit to Transfer, which is a document with permission granted in advance and renewed annually, Direct Delivery greatly reduces clearance delays, including lengthy customs exams.
Another Foreign Trade Zone provision sanctions weekly (advanced) approval for U.S. Customs release of merchandise into U.S. Commerce from the warehouse. Known as ‘Weekly Estimated Entry’, this process allows for immediate availability of product for order fulfillment and shipment upon arrival at a FTZ warehouse.
The Direct Delivery authorization combined with Weekly Estimated Entry process can reduce cycle time, port to warehouse to domestic shipment, by as much as 2 days relative to normal customs handling process. As such, increased inventory turn, quicker invoicing and better cash flow are the key benefits to the supply chain of these efficiencies.
FTZ’s Improve Supply Chain Financial Performance
Customs Duty Deferral
Payment of Duty on merchandise entered into a Foreign Trade Zone can be deferred indefinitely and or until such time as movement from the Zone into U.S. Commerce. With typical inventory period ranging 30 to 60 days, importers can improve cash flow during that time frame and save on interest cost in dollars required for the transaction.
Elimination of Duties
Duties are eliminated when imported product is re-exported from a FTZ, which is a key factor for importers who distribute product in Canada as well as the U.S. FTZ processing enables such importers a single logistics source for North American distribution while saving money and improving cash flow.
Harbor Maintenance Fee Deferral
A Harbor Maintenance Fee, assessed at 0.125% of import value, typically is levied by U.S. Customs at the time of formal entry. However, importers utilizing Foreign Trade Zones can defer disbursement of these fees by making Quarterly payment, thus saving interest costs on dollars required while improving cash flow.
Merchandise Processing Fee Savings via FTZ Weekly Entry
The Merchandise Processing Fee (MPF) is a user fee levied by U.S. Customs at time of formal entry into U.S. Commerce. This fee is assessed at 0.21% of merchandise value, with maximum of $485 per Customs Entry. For importers of higher valued products with significant number of Customs Entry’s, MPF assessments totaling $10,000 or more per week are routine. However, Federal legislation affecting FTZ’s enacted in year 2000 created provisions allowing for one consolidated entry per week with the maximum $485 assessed. With progressive 3PL’s promoting this latest development, importers have become increasingly aware of this significant opportunity, with many saving hundreds of thousands of dollars on MPF fees annually. This has resulted in reduced supply chain cost and the ability for importers to compete more effectively.