he global economy is completely reliant on an optimized transportation system with little room for failure of each vital link in the supply chain. Foreign Trade Zones (FTZ or Zone), while thought of as bastions of job creation and tax savings schemes in the manufacturing process, also allow for flexibility and fluidity in the inherent variant in process interface between logistics links.
For example, ship to port to rail or truck. With the flood of global freight which is now under heightened security scrutiny, an FTZ can aid improved logistics operations.
“With or without manufacturing, FTZs allow for the delivery and redirection of cargo regardless of the original shipping commitment made,” notes John Koch, Director International Sales & Marketing, CSX Transportation, Inc.
Inland FTZs connected to a Port of Entry are the best place for clearing and inspection of cargo by Customs. Sealed cargo moves quickly off the docks without getting bogged in cramped quarters where Customs has to provide the bulk of clearing and inspection service.
An FTZ can cut off transit time, according to George Klapischak, Principal, Seaboard Trade Centers, a FTZ port developer. Improving both speed (inventory cost) and reliability of delivery of freight, the FTZ has an added benefit to users above and beyond traditional benefits of tax savings. Customs-Trade Partnership Against Terrorism (C-TPAT) promulgates minimum security rules for U.S. and Foreign-based Marine Port Authority and Terminal Operators. According to Klapischak, C-TPAT executives find that FTZs are the current best practice model for handling international freight.
Today’s supply chain manager looking to optimize logistics flows should consider the benefits of an FTZ. Joseph Trocino, Principal, Joseph R. Trocino & Associates, notes, “since 9/11 the FTZ program provides a good a platform for supply chain because of the fluid environment through security arrangements that are managed locally. It gives the domestic shipper or receiver a degree of control over freight if Customs is comfortable with the FTZ operator. Customs also recognizes that FTZs are taking the strain off dockside operations. Saving the duty tariff is good, but good security is better.”
Foreign Trade Zones have been in place almost as long as interstate highways. In 1970 there were 8 General Purpose Zones and 3 special purpose Sub-zones in the United States. Today, those numbers exceed 250 and 400 respectively. Zones were created to help level the international playing field for U.S. business, but only as a result of other laws and trade rules on the books already. Nevertheless, as international trade continues its rapid growth and sourcing for manufacturing on final assembly is a global logistics exercise, FTZ are improving U.S. companies’ cost competitiveness.
A designated FTZ created in public-private cooperation is used for relief of inverted tariffs; provides duty exemptions for re-export; duty deferral; no duty on value added; elimination of duty on rejected freight, damaged or non-conforming items; and zone-to-zone transfers. If you’re interested in this type of benefit for your company, you first need to assess your tariff liability and costs that can be reduced by the services offered in a FTZ.
If you are a community thinking about establishing a FTZ to benefit local economic development, you need to complete a feasibility analysis starting with identification of local companies that can financially benefit from the Zone services. If there are no beneficial customers, the cost of the Zone’s establishment and operation will be a burden, not a benefit, to the economic development program.
Zones are tied to Ports of Entry and if there is already an established General Purpose Zone for a port, it becomes the applicant’s burden to prove the “need” for an additional General Purpose Zone. It may be simpler to use a sub-zone of the existing General Purpose Zone to serve the need of local companies and economic development target areas. Major users of Zones include sectors like oil refining, automobile assembly and parts, and pharmaceuticals. Distribution has recently stepped up to utilize the benefits of Zones to allow freight to pass through Ports of Entry more efficiently, because it travels to the companies’ deconsolidation centers before the freight is brought out of bond and avoids port congestion – an issue which will continue to escalate with increased security issues.
As of 2005, according to the National Association of Foreign Trade Zones, FTZs received $410 billion in freight, a 34-percent increase over the previous year. Additionally, the FTZ program supported 343,622 US jobs.
Exports from FTZs to foreign countries totaled $23 billion in 2005. These figures demonstrate that the FTZ program is retaining U.S. jobs, supporting local and state economic development goals and helping U.S. manufacturers continue to be globally competitive.
The original reasons for using an FTZ still hold, but now the security benefits are important to supply chain optimization as well.
Charles McSwain is assistant vice president of regional development for CSX Transportation, found on the Web at www.csx.com.