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Why Foreign Trade Zones are Good for the Apparel and Textile Industries

Apparel and textile companies could greatly benefit from reduced costs, improved global market competitiveness, fewer bureaucratic regulations and speedier inventory turnaround if foreign-trade zones (FTZs) were a part of their sourcing strategies, but many of the zones remain underutilized.

According to the Foreign Trade Zones Board’s 76th Annual Report to Congress released in August, there were 179 U.S. FTZs active during the year, with shipments valued at over $798 billion. Exports (not including certain indirect exports) from FTZs were over $99 billion.

While retail sales are prohibited in a U.S. FTZ, many other activities aren’t. Merchandise can be assembled, exhibited, cleaned, manipulated, manufactured, mixed, processed, relabeled, repackaged, repaired, salvaged, sampled, stored, tested, displayed and destroyed in an FTZ. The cost savings that stand to be realized by using an FTZ can reach into the millions of dollars.

The zones arguably offer more benefits than any other Customs program, and below are some ways U.S. company’s can use FTZs to boost their bottom line.

  1. Relief from inverted tariffs. In some cases, tariffs on U.S. component items or raw materials have a higher duty rate than the finished product, putting a U.S. manufacturer at a cost disadvantage to an importer. However, by participating in an FTZ, the U.S. manufacturer pays whichever duty is lower. In many cases the tariff of the manufactured good is zero, eliminating any costs associated with importing raw materials and goods. There is no way to take advantage of inverted tariffs without operating in an FTZ.
  2. Duty exemption on re-exports. Since an FTZ is considered outside the commerce of the United States and U.S. Customs, a company importing components or raw material into the FTZ doesn’t pay Customs duty until it enters U.S. commerce. If the good is exported from the FTZ, no Customs duty is due.
  3. Duty elimination on waste, scrap and yield loss. Since a manufacturer operating in an FTZ doesn’t pay duties on imports until its goods leaves the FTZ and enter the United States, it essentially is paying for the duties on the raw materials after they have been processed. Thus, duties owed do not include manufacturing by products, such as waste, reducing the amount of goods taxed.
  4. Weekly entry savings. Instead of filing an entry every time a shipment enters the country, an importer operating in an FTZ only needs to file one Customs entry a week, reducing bureaucratic headaches and costs associated with entry filings. There is a 0.21% merchandise processing fee for every entry, with a minimum of $25 and a maximum of $485 per entry, which is for goods with a value of over $230,952. A company with 10 shipments a week, each of which are over $230,952, would save $226,980 annually with weekly entries. Weekly entries also save on customs brokerage fees.
  5. Improved compliance, inventory tracking and quality control. FTZs allow companies to more closely track their inventory. By bringing goods into an FTZ warehouse that you control, you can identify and classify goods at the warehouse instead of at the port at a Customs control location.
  6. Indefinite storage. A company can hold its goods indefinitely in an FTZ until a port opens up, or if there are quotas on a good, until they can be entered into U.S. Commerce without falling under quota restrictions.
  7. Waived customs duties on zone-to-zone transfers. FTZs can be used to manage transshipping operations, saving money on manufacturing processing fees. While most companies are focused on using FTZs for exports, FTZs can also be used to take advantage of cross docking and transferring goods from one FTZ to another without paying Customs duties. Many mid-level companies in particular are using this capability to transfer goods to FTZs both within and outside the United States.

However, running a compliant FTZ operation requires strict inventory and procedural controls. Per the U.S. FTZ manual, zone operators are required to have an inventory control and record keeping system in place to track goods and provide the information necessary to enter U.S. commerce. Customs regularly audits FTZs and has the authority to penalize and stop operators if it deems they are in violation. Companies also need to be able trace withdrawals, production orders, determine whether material came from domestic or international sources, and classify goods for duty deferrals and reductions.

With complex or high volume operations, software can alleviate the burden of managing the FTZ process, particularly since high volume operations can make it extremely difficult, if not impossible, to manage manually. The data needed for classifying goods, for example, is voluminous and frequently changes and must be pulled from country-specific lists. Software can serve as a central information repository and help with managing inventory and record keeping, tracking inbound foreign shipments, accurate customs and financial reporting, ensuring product and vendor compliance and establishing procedural controls.

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While complying with FTZ regulations requires strict controls, they can substantially benefit apparel and textile companies by improving the bottom line and lessening administrative burdens. How much a company saves by using an FTZ depends on the size of the company and its business model, naturally. But reducing merchandise processing fees alone can save substantial sums of money. Using automation enables companies with complex or high volume operations to take advantage of FTZs by eliminating difficult, if not impossible, manual management of FTZ processes and regulations.

By Matt Robeson, FTZ product manager, Amber Road