05/14/2024
See How Retailers Benefit from FTZs—GEODIS Insights
Understand how retailers and importers can use foreign-trade zones to lower their costs and improve profit margins.
Foreign-trade zones (FTZs) are an extremely helpful tool for retailers to significantly lower their duties and other import costs. In this research, we share background on FTZs, discuss the Import Security and Fairness Act, explain the benefits of FTZs for retailers, and help you figure out if an FTZ will save you money.
Key takeaways
- FTZs provide a well-established way for importers to avoid duty and fees on products imported into the U.S. until those products exit the FTZ warehouse
- An FTZ warehouse must meet certain strict requirements to be classed as an FTZ and they must comply with US Customs and Border Protection guidelines
- FTZs save retailers money through deferring duty, consolidating processing fees, and using duty drawback to get refunds on goods that are re-exported or meet other criteria
- FTZs can help with cash flow and inventory management, and really start to make sense for ROI when retailers are importing more than $1 million to $1.5 million worth of products
Welcome to GEODIS Insights. These longer pieces provide you with deep dives, research, and industry authority for logistics and the supply chain. Use our findings and expertise to help decide what's right for your business. In this article, we're sharing research originally published on Multichannel Merchant in 2022, lightly edited and republished here with their kind permission. Visit Multichannel Merchant to download a PDF of this content.
FTZs are a powerful resource, but U.S.-based retailers face stiff overseas competition
Foreign- trade zones, a program established by New Deal legislation in 1934 to drive American industry and competitiveness at the height of the Great Depression, is seeing increased interest from retailers who are realizing significant savings on import costs. Efforts are underway in Washington D.C. to level the playing field for U.S. ecommerce sellers using FTZs. The intent is to give them the same advantage of import tariff avoidance under Section 321 of the 2015 Trade Facilitation and Trade Enforcement Act (TFTEA) now enjoyed by foreign competitors shipping orders directly to domestic consumers.
TFTEA increased the so-called de minimis threshold on imports from $200 to $800, exempting any imported item valued below that figure from import duties, taxes, or fees assessed by customs. Meanwhile, those who import from a U.S. FTZ cannot take advantage of de minimis when shipping out domestic orders. A change being sought by various FTZ coalitions and legislators would remove this exemption.
The Import Security and Fairness Act would help to strengthen U.S. importers
The Import Security and Fairness Act is another bill that would prohibit Chinese importers from taking advantage of de minimis, as well as bad actors whose accounts have been suspended by U.S. Customs and Border Protection (CBP). China is the only country designated because it’s listed both as a non-market economy for violating antidumping regulations, and is on a U.S. Trade Representative (USTR) watch list for intellectual property theft.
In the other direction, China’s de minimis is just $7, exposing most imports to duties and tariffs. The above bill, originally put forward by U.S. Rep. Earl Blumenauer (D-OR), was cut at the 11th hour from the larger America Competes Act, intended mainly to drive U.S. semiconductor production, along with other trade measures. The bill has been reintroduced in 2024.
Want to find out how an FTZ can help your retail or importing business? Get in touch with GEODIS to learn more.
FTZ availability impacts retailer choices on where to locate fulfillment centers
Angela Atwood, FTZ program manager at the Columbus Regional Airport Authority, said a major unintended consequence of Section 321 is that many U.S.-based retailers are redirecting imports to Canada or Mexico and sending out orders to U.S. consumers duty free. Jobs and revenue are thereby sucked out of the U.S. economy, the very thing the FTZ act was designed to counter.
Blumenauer’s bill, she noted, wouldn’t stop companies from purchasing goods in China, shipping them to another country and then taking advantage of de minimis to skirt duties on orders from U.S. consumers. “This is not about getting more business into FTZs, it’s about saving U.S. jobs, and not just current jobs that are moving offshore but future growth of ecommerce jobs,” said Atwood, adding Section 321 imports totaled 771.5 million in 2021, and are projected to top 1 billion in 2022. “Companies are deciding right now whether to locate ecommerce fulfillment centers in the U.S. or another country. They can serve customers here from Mexico, Canada, or even China quite easily.”
FTZs make a substantial contribution to the U.S. import and export economy
In 2022, there were 197 active FTZs in the U.S., according to the National Association of Foreign Trade Zones (NAFTZ), with thousands of companies participating. Commerce activity within FTZs represented $835 billion in goods sold and 6.7% of U.S. exports in 2020. 44% of activity within FTZs was related to warehousing and distribution, with the balance coming from manufacturing and production.
Especially since Section 301 tariffs were imposed on Chinese imports in 2018 and 2019, based on findings of IP theft and other illegal trade activities by the USTR, FTZs have become much more attractive. According to Thomas Cook, managing director of the National Institute for World Trade, Section 301 tariffs impose a 25% duty on about 40% of imports from China, which totaled $2.69 trillion in 2021.
“That’s having a huge impact,” said Cook, who also heads up foreign trade consultancy Blue Tiger International. “A lot of companies are searching for options to reduce or eliminate duties and tariffs, particularly from China, which we are still heavily dependent on as a global source. There are other options companies can use to mitigate the impact, but FTZ is at the top of the list.” “If a company imports merchandise, they can qualify and possibly recognize FTZ benefits,” said Paul Killea, SVP of Freight and Services Compliance and Security for GEODIS, which has had an FTZ practice since 2013. “There are very few industries that would not benefit.”
Requirements for an FTZ
FTZs are secured, designated locations where foreign merchandise is designated as within international commerce and therefore outside of U.S. Customs and Border Protection (USCBP) territory.
FTZs are required to be within 60 miles or 90 minutes driving time from the outer limits of a port, so CBP can conduct compliance reviews; exemptions are sometimes made at the discretion of the port director. A grantee is the local organization tasked with administering and marketing the zone in a local community. They are usually state or local governments, port authorities, or economic development organizations.
FTZs must comply with strict USCBP and other regulations.
How companies save on import and duty fees with an FTZ
Businesses set up in an FTZ can defer, reduce, or eliminate import duties and take advantage of other benefits, encouraging foreign commerce within the U.S. FTZs incorporate FTZ warehouses—storage and distribution centers that can handle order fulfillment, logistics, and distribution for retailers.
FTZs reduce merchandise processing fees
One of the biggest pluses of an FTZ is saving on merchandise processing fees (MPF) for import entries. Normally, a company pays the MPF on every shipment processed through customs, up to the current maximum of $575 per entry. In an FTZ utilizing weekly entry processing, there is only one entry, thus only $575 charged for all merchandise transferred into U.S. commerce within that week. Those fees are only assessed weekly, regardless of the number of entries. Major importers can save millions on this benefit alone.
FTZs avoid retailers needing to claim "duty drawback" for refunds
Duty drawback allows companies to apply to CBP and reclaim up to 99% of import duties, taxes, and fees paid when an item is re-exported from a U.S. facility or destroyed. There are costs associated with this, which can be avoided by using an FTZ to prevent duty payment. You can eliminate the need for duty drawback if the merchandise is exported in bond, except for goods re-exported to Canada or Mexico under the U.S. Mexico Canada trade agreement (USMCA).
FTZs allow retailers to defer duties until products leave the zone
Under duty deferral, duties and federal excise tax are deferred on imports until they leave the zone and enter Customs territory. In duty reduction or inverted tariff, a manufacturing FTZ can select either the normally lower duty rate of the finished product or of each component—based on Harmonized Tariff Codes—to recognize the greatest reduction when a manufactured item leaves the FTZ and enters commerce. In addition, duty is not owed on labor, overhead or profit attributable to production in an FTZ.
FTZs make it faster and easier to process goods via Direct Delivery
Under Direct Delivery, importers are allowed to have merchandise delivered directly from the port of entry to the FTZ, before receiving CBP authorization. They can also request permission to break and affix U.S. Customs seals. This especially benefits companies that import repetitive, high-volume, low-risk goods in bulk. “It expedites the process of receiving goods into the zone, by reducing administrative requirements for the operator to manage documentation,” said David Harlow, president of ITC-Diligence International, an import broker and FTZ consultancy. “Because it’s low risk and repetitive, there are significant savings.”
FTZs make many aspects of freight and logistics much easier
“In an FTZ, your goods sit outside the U.S. economy, so there’s no obligation to pay duties and taxes or customs clearance,” said Cook. “The benefit is ease of shipping into the U.S. as well as deferral of duties and tariffs. And an FTZ allows you to keep goods there for an unlimited amount of time.” Especially for companies that import component parts for kitting into finished goods, such as subscription box orders, cosmetics, and gift sets, the FTZ program provides obvious benefits, Cook said. “At the cosmetics counter, they’re selling kits as gift items,” he said. “A lot of retailers put those together. If you do kitting in an FTZ, there is a significant benefit in terms of tariff inversion. Most times now, retailers are pushing their suppliers to have partners (like a 3PL) do the kitting.”
Want to partner with a best-in-class, integrated FTZ provider? Talk to us.
Costs associated with setting up an FTZ
While the benefits of utilizing the FTZ program are significant, there are of course associated costs, and companies need to do the math and determine if the savings are worth the effort. As a general rule, companies that recoup startup costs and realize savings that cover ongoing fees by the second year should consider the FTZ program a success.
Costs include specialized software for tracking and managing inventory flowing in and out of an FTZ, to meet CBP’s stringent record-keeping and reporting requirements. In 2022, the major ERP providers like Salesforce, Oracle, and SAP don’t have modules to handle these types of transactions. Thomson Reuters, QAD, and Descartes all provide compliant FTZ software options. Fees are also paid annually to the FTZ grantee authority.
Setting up and managing an FTZ operation is a very specialized capability that most companies do not have in-house, so it’s generally recommended to hire an experienced consultant or third-party logistics company. There are, of course, associated fees here, but in most cases, ROI can be achieved fairly quickly.
The ROI for an FTZ makes more sense when importing $1 million or greater in product value
A former manager of two FTZs in the Columbus, OH area for a major apparel retailer said companies large or small can benefit from the program, and the ROI and ongoing savings are fairly straightforward calculations. This company imports merchandise into the FTZ, exports to its Canadian DCs for store replenishment and ecommerce fulfillment, and to other countries to balance inventory levels.
“You take the number of customs entries filed, times the brokerage rate, and you get to your current spend on broker fees,” he said. “Since there is just one import entry filed per week under FTZ, you can calculate the savings by multiplying the rate times 52, vs. how many you do currently. The same goes for MPF fees.” With information that is readily available, a company can determine a ballpark ROI and ongoing savings before making the call. “You can decide whether it’s worth it as you continue to review in more detail,” he said. “Almost instantly you know if the ROI is at a level that makes sense for your company. Not everyone will say it’s worth it for $300,000 a year, but for $1 million or $1.5 million, you pull the trigger.” Between 2015 and 2020, he said, the company saved an average of $10 million per year by utilizing the FTZ program.
The manager of trade compliance for a retailer of crafts and fabrics is in the process of applying for four separate FTZs on behalf of the company. Three of the four fall under the Alternate Site Framework (ASF) designation, an expedited process used in nearly all applications, in which FTZ Board approval can happen in days. One of the four is a so-called sub-zone application under one of the ASF locations, which can take three to four months. “The more volume, the more entries, the greater the savings,” he said. “For my company, even though it’s a bit lower volume, they saw the benefits, as it’s an annual savings that will continue to grow. Brokers are always raising their rates, and CBP is always raising merchandise processing fees.”
Partnering with an experienced FTZ provider lowers risks for retailers
Trudy Huguet, Senior Director of FTZ Product for GEODIS, said while some companies have successfully implemented FTZ operations in house, most find risk is minimized by partnering with an experienced service provider. “FTZ operations are full supply chain and require daily operations, including CBP data transmissions and inventory reconciliation between the FTZ Inventory Control and Recordkeeping System (ICRS) and the WMS or ERP,” Huguet said. “For these reasons, many have found that partnering with a zone administrator ensures compliance and provides greater savings.” Huguet said many companies hit ROI in the first year, based on various savings including MPF and duty avoidance or delay, especially with provisional duties on Section 301 goods from China. “It becomes very valuable in a time of unprecedented supply chain challenges, freeing up cash flow,” she said.
Angela Atwood, FTZ program manager at the Columbus Regional Airport Authority said that the cost/benefit analysis depends heavily on the types of products imported and what their duty rate is based on the Harmonized Tariff Schedule from the U.S. International Trade Commission. About 70% of imported items carry no duty rates, but apparel and shoes are among the highest, at 16.5% and 37.5%, respectively. Of items that are subject to duty, the average is between 1% and 5%. For example, she said, a company selling shoes faces a stiff combined duty rate of 45%. But if the product is imported directly to an FTZ, those sizable fees are deferred until it leaves the zone. “For a small company that needs cash flow, that can be a big benefit,” she said.
FTZ programs are valuable for many retailers, but they are often overlooked
Thomas Cook, managing director of the National Institute for World Trade, said most retailers and brands are not aware the FTZ program exists, even though it’s been around for 88 years. The government, he said, isn’t doing much to get the message out, so it’s left to consultants and providers to raise awareness. “I recently spoke to a group of 100 food importers in New Jersey, and it was clear the majority of them had no idea this program was available,” Cook said. “Most people that do this kind of work, they put their head down to get the job done, and are not even taking the time to get the information. We’re in great demand, with trade associations asking us to present. Companies don’t realize the benefit and are learning it’s something they should be exploring.”
Trudy Huguet, Senior Director of FTZ Product for GEODIS, said it often happens that when a company learns their competitors have entered the program and are benefiting from it, they sign up as well. “It’s listed in the Federal Register so it’s public information,” she said. “Most industries do have participation. For instance, we have many customers in apparel who joined FTZ over time, after realizing their competitors were recognizing zone savings. Since then, there has been a surge in retail and ecommerce companies taking advantage of the program, largely because distributors can now also utilize weekly entry and MPF benefits.”
Much of the focus of FTZ is on large enterprises such as automakers and their suppliers—for instance, BMW’s operations in South Carolina—and major retailers include Dollar General, Home Depot, Lowe’s, Ikea, Macy’s, Michael’s and Five Below. But smaller companies can also realize dramatic savings that benefit the bottom line. Atwood said the Columbus Regional Airport Authority FTZ has a diverse group of 23 operators. The majority are apparel and footwear retailers and brands, but there are also companies dealing in pharmaceuticals, camera equipment, outdoor gear, bicycles, cell phone parts and fabrics/crafts as well as 3PLs. She agreed that everyone can benefit from the program. “Smaller companies want to stay and hire more people in the local community,” she said. “It’s a tool to make everyone better.”
How GEODIS can help
GEODIS is one of the biggest retail logistics, freight forwarding, and FTZ providers in the U.S. and around the world. Here's what you can expect when you work with us:
- Get completed, integrated FTZ warehouse capabilities to reduce costs
- Discover a trusted freight network of carriers to and from the U.S. and around the world
- Expect the highest standards of FTZ operations and control
- Leverage our team’s industry knowledge to meet your exact importing, freight, and FTZ needs
- Integrate with GEODIS customs brokerage, drayage, transportation, warehousing, and other logistics services
- Optimize your supply chain with leading freight and FTZ management technology
GEODIS manages millions of shipments a month, and we’re trusted with more than $3 billion dollars of freight value every year.