In the zone

In the zone Foreign trade zone advocates tout benefits FTZs play in growing exports.

By Chris Dupin

      Discussions of U.S. foreign trade zones usually highlight the benefits they offer importers. After all, the ability to defer payment of duties, or reduce tariffs by taking components that have relatively high duty rates and making them into products subject to lower duties before they enter the commerce of the United States, are lucrative reasons to take advantage of FTZs.
      But the National Association of Foreign-Trade Zones highlighted the role FTZs can play in assisting with President Obama's 'National Export Initiative' (NEI), which seeks to double exports over the next five years.
      Use of zones to export product 'is one of the most compelling benefits for using a zone, I think, and it is done a lot,' said Linda Hothem, chairman of the NAFTZ and a senior advisor to Matson Global Distribution Services, at an association seminar in Chicago in May. 'We think that NEI is a great initiative. We are very excited to be part of a program that facilitates exports. It puts trade and commerce on the federal agenda.

Many of Valero's U.S. refineries ' including this Texas City, Texas delayed coker unit, which processes imported oil ' are located in foreign trade zones.

      'We look forward to increasing exports through the zones and reaching out to people who are looking to increase exports and seeing if an FTZ can expedite the process,' she said. 'It's so common that importers are also exporters. I would say that 75 percent of all importers are also exporting something. In many cases to generate exports we have to import parts and pieces that we do not manufacture here in the U.S.'
      Lewis Liebowitz, vice chairman of the group and attorney with Hogan & Hartson in Washington, said, 'People who are in zones are traders. They work at international trade more intensely than the general population. Therefore they can build export competitiveness and export markets more quickly. Using zones to help achieve the president's goal just makes sense, because the people who in zones are the ones who trade already.'

FTZ Export Value. According to the U.S. Foreign Trade Zones Board, part of the Commerce Department, exports from FTZs more than doubled from $19.2 billion in 2004 to $40.5 billion in 2008, said Brandi Hanback, managing director at Rockefeller Group Foreign Trade Zone Services.
      'We are very proud of the fact that exports in the program have doubled in the past five years and we know that is something that is of interest to the Obama administration,' she said. 'We think we have somewhat of a recipe for success.'
      FTZ Board statistics actually understate the value of exports from the zones, Hanback said, because they are based on the value of goods when they enter a zone, ignoring domestic inputs, work done to add value to a product, inland transportation to the port of export, and insurance. In contrast, when general exports are measured, the sales value includes all those additional factors, she said.
      Import dross and spin it into gold in a trade zone and the government still would value it as dross when it was exported.
      Hanback and Hothem said they'd like the FTZ Board to review how they value shipments from zones to more accurately reflect their importance to exports.
      Both said they were pleased with remarks by Andrew McGilvray, the FTZ Board's executive secretary, who noted the agency was looking at ways to facilitate exports, particularly for zones used exclusively for exports.
      'Right now, you go through a very onerous process in applying for a foreign trade zone, seeking concurrence with Customs, and it takes some time,' Hanback said. 'So that was encouraging, because looking for ways to make the application and activation process easier for people to use, could certainly encourage more exports through FTZs.'
      Hothem said that when there are objections to an FTZ application, the board sometimes becomes 'skittish,' not wanting to invite controversy. This is particularly true if the planned use for a zone involves certain commodities ' she pointed to dairy products, sugar, steel and cotton.
      'Typically they get some sort of minimized benefits: no inverted tariff benefit for imports or quota benefits,' she said.

Challenges. The challenges exporters may face when wanting to use FTZs are illustrated in a current request by German steel maker ThyssenKrupp to make its new carbon and stainless steel mills in Calvert, Ala., a subzone of the City of Mobile's FTZ.
      The FTZ Board said in April it was approving the application, but 'with a restriction limiting the FTZ benefits to ThyssenKrupp's production for export,' because unfettered approval 'could have a negative impact on domestic raw material suppliers as well as other domestic steel producers.'
      That was disputed by ThyssenKrupp, which said its $3.7 billion facility would benefit the domestic steel industry, noting that from 2003 to 2006 imports of carbon steel increased 75 percent and stainless steel increased 23 percent.
      It said it would not only provide a domestic alternative to imported steel, but planned to export 27 percent of its stainless steel and 5 percent to 10 percent of the carbon steel it makes in Calvert.
      The FTZ Board raised concerns about whether import of some alloys ThyssenKrupp plans to use in making stainless steel might hurt U.S. producers, and about the impact of the Alabama plant's plans to import steel slabs from Brazil for rolling into carbon steel and to ship finished stainless steel to Mexico.
      Both ThyssenKrupp and the NAFTZ oppose the restrictions and are asking the board to change its mind, or monitor actual impact of its mill and then 'adjust approval' if its impact on the steel industry is inconsistent with the plans it outlined in its application. They contend many of the alloying elements are not available in the United States and note there is no duty on slab imports.
      The restriction 'is not in the interest of the international competitiveness of United States manufacturing,' said Willard Berry, executive director of the NAFTZ. 'The proposed limitation to production for export of products totally ignores the competitive reality that steel imports (both carbon and stainless steel) are a reality for the U.S. market.'
      ThyssenKrupp competitors can capture the same benefits by applying for FTZ status themselves, the company and NAFTZ added.

Export Uses. FTZ's are used in a variety of ways by exporters.
      Hothem's company, Pacific American Services, was the operator of Oakland's FTZ No. 56 when it was acquired by Matson in 2008 and the city has since transferred the contract to run the zone to Matson.
      She said much of the work done at the Oakland FTZ is export-related, including the consolidation and shipment of wines and spirits by companies such as Diageo.
      'Because of the consolidation of liquor companies, they own brands from all over the world, so when you are shipping to your market, say in Tokyo, there are not huge amounts of space to be storing huge amounts of any one brand,' she said.
      'So they rainbow pack those containers in Oakland,' she explained. Combine, say, California wines with spirits from Canada or other parts of the world and French champagne, then ship them to a distributor in the Far East. It's a nice fit for other cargo moving through the Port of Oakland, she said, which is an export point for agricultural products and other goods bound for Asia.
      'It is also very common to find high-value products such as computer chips in foreign trade zones coming in from Asia and then common to find that some of that shipment may be broken off and shipped to Canada or Latin America,' she said.
      Yuki Orimoto, a sales assistant at DNP Electronics' factory in Chula Vista, Calif., said the Japanese company has found its status as a foreign trade subzone useful because it is able to import components that are then made into large television screens without paying duties. Those screens are then re-exported to Mexico where they are incorporated into big-screen television sets.
      The ability to re-export product from foreign trade zones is the reason Hanback said about 85 percent of the refining capacity in the United States is located in FTZs.
      Jim Ervin, customs compliance specialist for Valero, said many of its U.S. refineries ' Paulsboro, N.J.; St Charles, La; Ardmore, Okla.; and Texas City, Port Arthur, Houston, Corpus Christi and Three Rivers, Texas ' are located in FTZs.
      Crude oil is subject to tariffs ranging from 5.25 cents per barrel for heavy crude to 10.5 cents per barrel for lighter crudes. By being located in an FTZ, refiners can eliminate paying tariffs on products such as diesel fuel, which is re-exported to markets such as Europe.
      Duty can also be avoided on jet fuel that is shipped in bond from a zone to U.S. airports and used to fuel an aircraft flying abroad. Similarly, bunker fuel can be moved in bond to fuel ships sailing overseas. Ervin said customs rules even allow raw and finished products to be moved in bond via pipeline to and from FTZs.
      A number of refined products such as sulfur, asphalt and petroleum coke are duty free. By combining both domestic and foreign oil at a refinery, some oil companies are able to totally eliminate tariffs on imported crude, said Ervin.

Dickson

      Jim Dickson of ATC Logistics and Electronics, whose company kits and packages consumer electronic products for both domestic and foreign markets, said, 'the economic feasibility of doing work in the U.S. is better justified' when using an FTZ. Not having FTZ status would actually punish a company for performing certain tasks in the United States.
      Located at an FTZ in Ft. Worth, ATCL&E performs logistics and testing for manufacturers of products such as global positioning system units and cellular telephones.

ATC Logistics and Electronics, find using a foreign trade zone 'justifies the economic feasibility' of doing work in the United States.

      GPS units are duty free, but some of the accessories that accompany them, such as charging units, USB cables and carrying cases, are subject to duties that can range from 7 percent to 15 percent.
      When the units enter the United States, the company avoids paying duty on the accessories, because the complete kit is given the harmonized tariff system code of the GPS unit.
      By doing the packaging here instead of overseas, the company is able to achieve savings on expensive air transportation by densely packing items like GPS units and cell phones using cardboard 'egg crates,' and combining them with accessories like batteries, wall or car chargers and pouches that have been shipped by ocean, and domestically sourced owner's manuals and packaging materials like cartons and plastic clamshells in the United States.
      Neither completed kits nor accessories that are shipped overseas are subject to duty as they leave an FTZ, and by doing all its packaging in a single location the company can keep a lean inventory and reduce the number of models it stores.
      For example, GPS units can all be the same no matter where they are going, then customized by loading maps for the country they are destined for at the last moment.

Irmen

      Another major benefit for companies using FTZ is speed within the supply chain, said Melissa Irmen, senior vice president of products and strategy for Integration Point Inc., whose products include software aimed at FTZ users.
      'If you are the owner of the goods and can show the repetitive nature of your business, you can get a benefit called 'direct delivery,' which means you can be authorized to move your goods directly from the port to the zone and then report after the fact so you don't have to wait at the port for approval for entry. Some distribution facilities take advantage of that just for time-to-market purposes.' Products to be re-exported can also be moved in bond back to a port or airport.
      The automobile industry, including companies such as Nissan, Honda, Kia, Volkswagen, BMW and Daimler Benz, have assembly plants in zones.
      It's particularly useful for companies like BMW and Daimler that make certain models ' the BMW X-3, X-5, and X-6 and Mercedes-Benz's M, R, and GL models ' exclusively in the United States, and export them all over the world.
      'There is very little savings for us on imports, because the duty on most automobile parts is about the same as it is on the automobile. There is not really an inverted duty,' said Donnie Barnes, customs compliance manager at BMW. 'In the first quarter our savings from the inverted tariff was about $122,000.'
      While BMW's intention, when it set up its manufacturing plant in Greer, S.C., was to sell most of its product in the United States, high demand in Germany for the U.S.-made cars means about three quarters are exported out of the country.
      By operating in an FTZ, 'we have saved quite a bit on exports by not having to pay the duty and then go through a drawback process,' Barnes said. That amounted to about $7.5 million in the first quarter. BMW exported about 24,000 cars worth a total of about $945 million in the first quarter.
      'Most companies that export, first import,' she said. 'They do both. And for companies that are doing importing, if they can defer paying the duty for what they are exporting there could be a benefit,' she said.