Using foreign trade zones to assist global supply chains

August 16, 2010
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Van Andel Global Trade Center, Seidman College of Business, Grand Valley State University is the grantee administrator of Kent Ottawa Muskegon Foreign Trade Zone No. 189, and is responsible for oversight and assisting businesses to understand benefits of using the zone.

Foreign trade zones were developed in the United States to allow U.S. firms to engage in international trade-related activities and encourage manufacturing in their domestic industry. Here are some basics of the FTZ program and how it may benefit your organization.

What are foreign trade zones?

A foreign trade zone is a special program granting restricted access to a site physically located within the United States, but deemed to be outside the territory of the U.S. for the purposes of U.S. Customs and Border Protection. The procedures were designed to encourage manufacturing in the domestic industry. The specially licensed commercial and industrial areas are located in or adjacent to a U.S. Customs port of entry.

Foreign and domestic merchandise may be admitted to FTZs for certain activities without being subject to formal customs entry procedures, payment of customs duties, or payment of federal excise taxes in some cases. When merchandise is removed from foreign trade zones, customs duties may be completely eliminated if the goods are directly exported from the U.S. zone to another country or countries. The main purpose of a zone is to encourage U.S. businesses to participate in global trade by making it more cost effective to do so. 

Types of foreign trade zones

There are two types of foreign trade zones: general purpose zones and subzones/special purpose zones.

General purpose zones are required to be located within 60 miles, or 90 minutes driving time, of the outer limits of a U.S. Customs port of entry. They are usually situated at ports or industrial parks, and consist of either a single site or multiple sites; they are required to be available to multiple zone users. Most GPZ activities revolve around storage, inspection and distributing. However, manufacturing and processing activities may be undertaken with appropriate permission of the Foreign-Trade Zones Board located in Washington, D.C.

The Kent Ottawa Muskegon foreign trade zone No. 189 is operated by Columbian Logistics Network, with two locations serving GPZ activities within the Grand Rapids metropolitan area and the potential to expand within the tri-county area as local business needs change.

Subzones or special purpose zones are typically established when a GPZ cannot accommodate the activity of a particular firm’s proposed activity. They are most often designated for one firm’s manufacturing. Subzones must be sponsored by a general purpose grantee. All activity is overseen by Customs Border Protection ensuring oversight and functions are within the grant of authority given to the subzone.

In March 2009, Wolverine World Wide Inc. became the most recent sub zone to be activated in West Michigan. It currently operates three distribution centers within its subzone, utilizing its zone to receive, deconsolidate, inspect, store, package and ship goods to its customers located throughout the U.S. and Canada. Receiving the subzone designation was critical to attaining key benefits, including greater operation efficiencies, through the consolidating of its facilities. Wolverine was able to close its Canadian distribution center and shift work to its Michigan operations. The company has seen export growth since activation, from less than 1 percent of total sales to 10 percent. This has contributed to increasing employment in the local area through utilization of temporary workers during peak increases, as well as adding jobs to transportation service providers.

Benefits to business

U.S. companies involved in global trade that use the FTZ program may improve or maintain a competitive edge with other global businesses around the world. The FTZ program allows for the reduction of and potential elimination of customs duties on goods entering a zone. Companies may combine foreign merchandise with domestic goods to create a new product that may qualify for lower duty or even the elimination of customs duties when the product exits within the FTZ and enters the U.S. for domestic consumption. Foreign goods brought into the zone may be manipulated duty free while inside the zone. The zone allows users to inspect imported goods for quality prior to the payment of the duty. 

Zone users may benefit from streamlining Special Customs Procedures, including direct delivery, weekly entries and automated zone admissions processes. Cash flow benefits also are seen as merchandise held in an FTZ is not subject to state and local ad valorem taxes. Any quotas and safeguards do not apply to merchandise stored in FTZs. Supply chains may be simplified, as zone-to-zone transfers are allowed, moving product closer to where the goods will be brought into or out of the U.S. There are efficiency gains to inventory control. International businesses may eliminate duty drawback programs.

Benefits to surrounding community

As in the Wolverine example, companies using the FTZ program bring the communities they are located in the benefit of seeing economic growth or retained jobs associated with zone activities. Zones often have indirect employment benefits to the communities, as well, through additional opportunities for service providers and suppliers in the areas in which they are located. Foreign companies are attracted to FTZ benefits and may invest operations inside a zone, bringing new investment into the area in which a zone is located. Finally, zones often improve infrastructure and expand the tax-base of the community.

Activity permitted in FTZs

Merchandise may be assembled, exhibited, cleaned, manipulated, manufactured, mixed, processed, relabeled, repackaged, repaired, salvaged, sampled, stored, tested, displayed and destroyed while inside a zone. Any activity that changes the tariff classification, for example manufacturing or processing, must be approved in advance by the FTZ board. Note: Retail trade is prohibited from inside a FTZ.

Types of merchandise that can be placed in FTZs

Any merchandise not prohibited from entry into the U.S. may come into an FTZ. Goods that require import licenses or permits from other government agencies may still be required to bring the merchandise into a zone.

Where in Michigan are FTZs located?

Michigan currently has seven general purpose zones. They are :Battle Creek; Detroit; Kent, Ottawa and Muskegon counties; Lansing; Saginaw/Bay City/Flint; Sault Saint Marie; and St. Claire County.

For more information: Van Andel Global Trade Center, Seidman College of Business, GVSU, (616) 331-6810 or www.gvsu.edu/komftz/ or visit the U.S. Foreign Trade Zones board, www.ia.ita.doc.gov/ftzpage/index.html

Sonja Johnson is executive director of the Van Andel Global Trade Center, a Grand Valley State University Seidman College of Business outreach center.

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