Supply chain managers know volatility all too well, and while some thrive amidst the chaos, enterprise leaders want stable results, even during economic uncertainty. Few things bring boardrooms peace of mind like healthy cash flow, and supply chain managers have a trick up their sleeve to help with this: Foreign-Trade Zones (FTZs).
FTZs have been around for almost 100 years in the US, yet they remain underutilized by many enterprises. If people are familiar with FTZs, they often know FTZs offer savings on duties. However, many people fail to realize that they can make a significant difference in cash flow because of the timing of these savings.
Understanding Foreign-Trade Zones (FTZs):
Foreign-Trade Zones are designated areas within the United States that are considered outside the U.S. for customs and duties purposes. This classification means imported goods can be stored, processed, or assembled without being subject to customs duties and taxes until they are officially imported to the domestic market.
Because of this, FTZs offer a unique opportunity for companies to delay or even reduce their duty payments until the goods are removed from the zone and officially entered into the U.S. market. As a result, duties are paid much closer to the final sale of the product rather than paying import duties on parts long before the finished product is ever made or sold.
Duty Deferral, Reduction, and Elimination with FTZs
Duty deferral, reduction, and elimination through FTZs can have major cash flow advantages. Here’s a quick breakdown of the three:
- Duty deferral: One of the primary benefits of using FTZs is the ability to defer customs duties and taxes until the goods are moved out of the zone and into the U.S. market. Under normal circumstances, a company importing parts or products into the U.S. would pay duties upon arrival of the goods. For manufacturers or assemblers, this can mean they’re paying duties on parts for products that won’t be sold for months. In an FTZ, you only pay duties on the finished product upon entering the market because goods in an FTZ aren’t in the U.S. for customs and duties purposes. This delay can boost companies' cash flow, enabling them to allocate resources more strategically during uncertain times.
- Duty reduction: Frequently, finished products will have a different duty rate than their constituent parts. If the duties on the finished product are lower than the duties of the sum of its parts—and this is common—then there is a net savings by using an FTZ to bypass duty payments on the parts and only paying duties on the finished product.
- Duty elimination: Building off the idea of duty reduction, in some cases, the duties owed on the finished product are zero, resulting in duty elimination.
Perhaps an illustration could help. Imagine a company that manufactures vacuums. Even while manufacturing in the U.S., the company will likely still rely on imported foreign parts. The duty costs for this can add up.
Importing a vacuum motor from Vietnam would result in a 5.3% duty charge, and plastic wheels from China would incur the same duty rate of 5.3% ad valorem. If it’s a cordless vacuum, a rechargeable battery from China will incur duties at 3.4%. Meanwhile, a finished vacuum can be imported duty-free, making it difficult for U.S. manufacturers to compete. Using the FTZ program, a company could bypass the duties on parts and only pay duties on the finished product—which, in this case, is zero. Not only does this improve cash flow, but it helps promote domestic manufacturing.
Navigating Economic Uncertainty with FTZs
Healthy cash flow can be a lifeline to businesses during times of economic uncertainty. By using FTZs, supply chain managers can improve their company’s financial resilience, bringing much-needed stability.
From duty deferral and reduced fees to inventory management flexibility, FTZs provide significant cash flow advantages. Furthermore, the simplified customs procedures and compliance advantages of FTZs empower companies to pivot swiftly and respond to changing market dynamics.
As supply chain managers consider their strategies for navigating economic challenges, integrating FTZs into your supply chain operations can play a crucial role. With FTZs, companies can achieve the delicate balance of managing costs, optimizing cash flow, and maintaining operational agility, positioning themselves for success despite uncertainty.
