Foreign-Trade Zones—Global Expansion at Reduced Cost
Economic developers can leverage the benefits of FTZs to attract jobs and investment, while facilitating maintenance and expansion of their industrial base.
The U.S. Foreign-Trade Zones (FTZs) Program has existed since 1934. In times of global expansion and implementation of cost-cutting strategies to support U.S.-based manufacturing and distribution, interest in the program is intensified. Combined with a weak dollar and renewed interest by foreign investors in the U.S., economic developers also can leverage the benefits of foreign-trade zones to attract jobs and investment, and to facilitate maintenance and expansion of their existing industrial base.
Financial savings from U.S. FTZs are derived from a combination of benefits including traditional duty savings of deferral, reduction and/or elimination along with logistics and time savings. Fundamentally, instead of filing a customs entry and paying U.S. duty (import tax) when a shipment arrives at a U.S. port, duty payment is deferred until the goods are actually withdrawn from the zone for consumption in the U.S., providing valuable cash flow benefits.
In a pure distribution FTZ environment, merchandise from abroad can be deconsolidated and inspected and, in some cases, repairs, repackaging, labeling and marking may be performed to prepare the goods for final sale. For those products exported out of the FTZ, U.S. duty is eliminated entirely upon export of the goods from the FTZ. Returns to vendors or destruction of product in the zone also may supplement duty elimination benefits in FTZs.
For manufacturing, assembling and processing operations, FTZs can mean reduction of U.S. duties in addition to deferral. With permission from the U.S. Foreign-Trade Zones Board, a federal agency housed in the U.S. Department of Commerce, applicants may seek permission to classify their goods for duty purposes in their condition after manufacturing and processing in the U.S. FTZ. Many finished goods have a lower duty rate than components and only the foreign value of the inputs is taxable so U.S. value added in the zone is exempt from duty.
Here’s an example: Part A is imported into a U.S. FTZ at a duty rate of 5% and valued at $100; Finished Good 1 is made in the FTZ and is dutiable at 2.5% with a total value of $1,000.
The FTZ program provides importers the ability to apply for permission to withdraw Finished Good 1 from the U.S. FTZ for sale in the U.S. at a duty cost of 2.5% times $100 or $2.50. Compare this outcome to the $5.00 in duty due if Part A was customs cleared upon arrival into the U.S. This represents a 50% reduction in the amount of duty owed in this example and encourages U.S. based production and value added activities. Over time and volume, the savings can be significant. In this manner, value added activity is encouraged in the U.S. while equalizing the duty treatment with products finished abroad and imported into the U.S. without the addition of U.S. labor or inputs. If Finished Good 1 is exported from the FTZ, no U.S. duty is owed except for exports to Canada and Mexico based on an exception provision under the North American Free Trade Agreement that applies to manufactured goods in U.S. FTZs.
In addition to duty savings, FTZ usage as part of an integrated supply chain strategy can result in lower inventory levels and expedited movement of goods to and from the zone. Direct delivery provides for imported shipments to move directly from the port of unloading to a U.S. manufacturing or distribution facility in-bond, eliminating certain types of delays that can be associated with Customs entry at the port. Full security reviews are still in place at the port and are supplemented by additional security at the FTZ to complement government efforts to secure international cargo.
Outbound from the FTZ, users may qualify for weekly entry procedures allowing for one weekly entry summary for all goods shipped from the FTZ over a seven-day period. For high volume, 24/7 operations, weekly entry equates to flexible and just in time delivery schedules to customers as well as fewer Customs entries driving associated administrative savings in the form of customs broker filing fees and merchandise processing fees. From an import compliance perspective, by filing Customs entries after goods have been physically received, verified and shipped, high volume importers find that FTZs support their Customs compliance efforts by allowing for more accurate Customs reporting and reduced post entry adjustments and amendments.
Companies can also position themselves to realize FTZ benefits throughout the supply chain for inventory moves between facilities using zone-to-zone transfers. Transfer of title can be performed in an FTZ, providing flexibility in support of vendor-managed inventory strategies. For new or expanded capital investments in the U.S., certain FTZ benefits also apply to imported production equipment for use in the zone. Given the high value and extended timeframe for shipping, assembly and testing of production equipment, associated duty benefits can be significant.
While FTZs are flexible in terms of operational setup, for example, allowing commingling of foreign and domestic status merchandise, FTZs are secure areas requiring physical security as well as access and inventory controls. As such, FTZs complement and support secure supply chains. Participants in the Customs Trade Partnership Against Terrorism (C-TPAT) should know that U.S. Customs and Border Protection recognizes use of U.S. FTZs as a C-TPAT best practice.
Northeast Ohio and FTZ 181: Combination for Success
To compete effectively in the global marketplace, businesses need the kind of advantages that Northeast Ohio offers. The tax structure is ideal, with the state of Ohio’s sweeping tax reform that lowers operating costs for Ohio businesses and offers the lowest new capital investment tax structure in the Midwest. The location is ideal, with Northeast Ohio geographically centered to provide easy access to major U.S. and Canadian markets, enabling lower transportation costs. The logistics capabilities are ideal in Northeast Ohio, with a superb intermodal logistics system that includes the nation’s 4th largest highway system, three Class 1 railroads, numerous ports on Lake Erie and the Ohio River, and four commercial airports. Plus, Northeast Ohio offers the ideal business tools to ensure growth and profitability, including Foreign-Trade Zone 181. The zone offers thousands of acres of prime industrial and warehouse space at 35 sites throughout Northeast Ohio. These sites—strategically linked to the region’s efficient transportation network—provide unbeatable opportunities for companies serving global markets.
FTZ 181 is one of the most active and successful of the more than 270 foreign-trade zones in the U.S. In fiscal year 2007, more than $2.7 billion of merchandise was received in the activated areas of the zone. The benefits of the FTZ and Northeast Ohio’s many other assets have been instrumental in attracting dozens of companies into the zone, including L’Oreal and LeedsWorld. Nine companies in FTZ 181 have already activated, and these nine companies alone employ a total of nearly 2,100.
“FTZ 181 is a unique global supply chain management tool that provides significant, ongoing cost savings for Northeast Ohio companies engaged in international commerce,” says Ron DeBarr, president and CEO of the Northeast Ohio Trade and Economic Consortium (NEOTEC), grantee of FTZ 181. “The FTZ program helps to level the playing field with foreign competition by offering a variety of benefits including deferral, reduction or elimination of duties; elimination of drawback; weekly entry to reduce merchandise processing fees; and direct delivery which reduces transit times.”
Geographically centered within a day’s drive of half of all U.S. and Canadian markets, Northeast Ohio is a major industrial corridor and an intermodal transportation nexus, enabling efficient movement of goods to domestic and international markets.
Low-cost water transportation is available via Lake Erie ports that connect the upper Midwest with the St. Lawrence Seaway. Inland ports along the Ohio River provide shipping opportunities via the Mississippi River and Port of New Orleans. A multimodal facility that is nearing completion at the northernmost tip of the Ohio River system in Wellsville will help move millions of tons of maritime cargo through the region annually. The facility offers container-on-barge handling capacity, rail service via Norfolk Southern and direct interchange on four-lane Ohio State Route 7.
Northeast Ohio also is a leading trucking center offering direct market access via the nation’s 4th largest highway system. Rail transportation is a viable and attractive shipping option, with hundreds of miles of tracks operated by three Class 1 railroads and several regional railroads. The region’s four commercial airports connect passengers and freight to the global marketplace.
NEOTEC works as a regional force to enhance economic opportunities in Northeast Ohio and strengthen its distinct advantages as a business location. A private, nonprofit organization, NEOTEC serves as administrator of FTZ 181 and provides export assistance services through its International Trade Assistance Center division. NEOTEC also works to improve regional market access through well-defined logistics initiatives addressed by the Northeast Ohio Logistics Network, an organization of more than 250 regional logistics and management professionals.
The Port of Brownsville: World-Class Service
The Port of Brownsville, located at the southern tip of Texas and the terminus of the Gulf of Mexico Intercoastal Waterway, is an inland deepwater port with access to the Gulf of Mexico by way of a 17-mile ship channel. The port offers full utilities service and excellent ship, barge, truck, and rail transportation. A total of 2,000 acres, located anywhere within the port’s approximately 18,000 acres of developable properties, may be activated as part of Foreign Trade Zone #62.
FTZ #62, strategically located at the Port of Brownsville near the Texas-Mexico border, has always relied heavily on trade between the two countries. The port received its Grant of Authority in 1980 and was instrumental in the development of the maquilladora trade.
The Brownsville/South Padre Island Airport, Harlingen Industrial Airpark, FINSA Industrial Park at the Los Indios Industrial Park, and the Titan Industrial Park located at the entrance to the Port of Brownsville, all are part of FTZ #62 and have acreage and warehouses available for activation.
During the last fiscal year, the FTZ served six business firms ranging from public warehousing, liquid bulk terminals, auto parts production and oil rig repairs and manufacturing. Port of Brownsville FTZ users employed almost 1,000 full-time employees and 2,100 contract workers and handled 126 different items from 24 countries of origin. Total merchandise that was received and forwarded into and from FTZ #62 totaled $2.04 billion last year.
The port’s newest projects include the development of Short Sea Shipping capability. Short Sea Shipping utilizes both brown water and ocean- going barges to provide an economical method of transportation to move cargo with expected service routes from the port to:
• Houston via Express Barge
• Port Manatee, FL
• Progreso, Mexico
The port also is working on deepening and widening the Brownsville Ship Channel which will allow it to accommodate new, larger ocean-going ships, which will offer a cost savings through economies of trade and expand on the Port’s growing transportation capabilities.
The Port of Brownsville is continuously working on improving its future by providing adequate facilities for cargo loading and off-loading. In addition, authorities continue to pursue opportunities for expansion of a deep draft, heavy lift general cargo dock to expand break bulk capabilities and for the construction of an additional oil dock as petroleum and liquid cargo business continues to grow.
The Port of Brownsville, a deepwater facility, continues to grow and keep up with the ever-changing global marketplace. It is expanding and updating, all in an effort to continue to provide world-class service at this world-class facility.
Port Freeport: A Catalyst for Growth
Port Freeport currently ranks 13th among U.S. ports in international cargo tonnage handled. With a current channel depth of 45-feet, soon to be widened and deepened, and just three miles from open Gulf of Mexico waters, Port Freeport offers more than 7,500 acres for future development. Port Freeport serves its customers and stakeholders through development and marketing of competitive world-class navigational capabilities, technically advanced marine and multimodal terminal services and port-related industrial facilities while achieving profits and creating jobs as a leading economic catalyst for the Texas Gulf Coast.
Port officials have embarked on its first major terminal development endeavor in four decades. “This new project is a direct product of Port Freeport’s master planning effort and comes at a critical time in our Port’s history in which unprecedented growth is taking place,” said Port Commissioner J.M. “Mike” Lowrey at the groundbreaking. “The Velasco Terminal will facilitate Port Freeport having a still-greater positive economic impact upon the community we serve.”
Port Freeport Executive Port Director A.J. “Pete” Reixach Jr. says the Velasco Terminal, which is to include the Port’s seventh cargo berth and involves the completion of that berth’s initial 800-foot length and related backland development. The entire Velasco Terminal project is planned for a total of 2,400 linear feet of berth space with approximately 100 acres of backland development that could handle as many as 800,000 to one million 20-foot-equivalent container units annually. The Velasco Terminal plan already has attracted substantial interest throughout the world, Reixach says.
Also, culminating more than seven years of efforts, the Freeport LNG (liquid natural gas) terminal on Port Freeport’s Quintana Island property is in operation, having received its first vessel shipment of liquefied natural gas in April.
The $750 million-plus project, developed by Freeport LNG Development L.P. and ConocoPhillips, already has been a generator of more than 1,500 construction jobs and will maintain a role as a significant force in the economic well-being of Port Freeport and Brazoria County, as well as in providing a ready source of eco-friendly energy.
The Freeport LNG receiving terminal and regasification facility, which entered planning stages in early 2001, now is in service on 172 acres on Quintana Island, where its twin white tank domes quickly have become a landmark for mariners.
The terminal’s first vessel call came on April 15, when a 908-foot-long LNG tanker arrived from Trinidad & Tobago carrying 133,000 cubic meters of LNG. On May 9, a second vessel brought a similar shipment, with the combined offloaded cargo sufficient to fill the two tanks to 80 percent of storage capacity.
“We’re really excited about bringing additional ships and LNG into Port Freeport,” says Bill Henry, vice president of Freeport LNG Development L.P.
By the end of 2008, wind energy units capable of producing enough electricity to power two million U.S. homes are anticipated to have moved through Port Freeport, according to officials of RBC Projects LLC.
Since April 2007, Houston-based cargo specialist RBC Projects has imported into Port Freeport from India wind turbines able to generate power for nearly 700,000 homes.
“We are hoping to increase the shipments to nearly 500 turbines in 2008,” RBC President Prasad Menon says.
“We also are anticipating an increase in ship calls from 12 ships presently to about 25 ships in 2008.”
Philadelphia Regional Port: Hidden Jewel Ready to Shine
The Port of Philadelphia is the number one perishables port in the U.S. But Philadelphia offers much more: the ports of the Delaware River rank third in the U.S. for steel imports, and are among the nation’s key entry points for forest products and cocoa. Philadelphia has grown over 20% in container throughput for three years in a row, according to the Philadelphia Regional Port Authority (PRPA).
In addition to its state-of-the-art marine terminals, the Port of Philadelphia has the supporting infrastructure necessary for quick and efficient cargo transport. This infrastructure includes adequate channel depths, rail linkages, major highways, hundreds of trucking services, and a network of private warehouses.
Currently, the port’s facilities are serviced by three class-one railroads: CP Rail, CSX, and Norfolk Southern. CP Rail provides regular services between Philadelphia and the major eastern Canadian points of Montreal and Toronto. CSX provides daily service between Philadelphia and major Midwestern, Southern and Southeastern U.S. destinations. Norfolk Southern provides double-stack intermodal service between Philadelphia and major Midwest destinations.
All of the terminal facilities are located in close proximity, and have easy access to all major trucking routes. I-95 runs adjacent to the port facilities, and I-76, a major east-west thoroughfare, has entrance ramps close to the terminals. Over 400 local trucking companies operate in the region, with a combined total of over 20,000 trucks. These trucking companies offer experience in every type of cargo handling, and regularly meet a demand for as many as 1,500 reefer trucks per week, as well as heavy lift and specialized trucks.
In June, Governor Edward G. Rendell applauded the signing of a historic agreement that will officially begin a five-year, $379-million project to deepen the Delaware River’s shipping channel, calling it a major milestone in ongoing efforts to expand commerce and enhance economic development in the region.
“I consider this to be the most important project in the history of the Port of Philadelphia,” said Governor Rendell at the signing ceremony. “It is a major milestone that will shape the future of maritime commerce on the Delaware River.”
The agreement allows the U.S. Army Corps of Engineers, in partnership with the PRPA, to increase by five feet the current 40-foot depth of the river’s shipping channel from Camden’s Beckett Street Terminal to the mouth of the Delaware Bay—a distance of 102 miles. The new, 45-foot channel depth will allow Delaware River ports to compete more effectively for cargo, to provide safe passage for vessels, and to increase jobs and cargo to the region.
This process will take from five to seven years. The deeper channel will be beneficial to both Pennsylvania and New Jersey. In Pennsylvania, the Packer Avenue Marine Terminal, Piers 78, 80, 82, 84, 96, 122, and 124, Penn Terminals, the Aker Philadelphia Shipyard at the Philadelphia Naval Business Center, the three Sun Oil refineries, and the Tosco refinery all will benefit from a deeper navigation channel. In New Jersey, Beckett Street and Broadway Terminals, Gloucester Marine Terminal and the Eagle Point and Paulsboro refineries among others, also will benefit from a deeper navigation channel.
“We have the highest marine productivity on the East Coast,” says Leo Holt, president of Holt Logistics Corp. On the container front, pick rates average 36 moves per hour and have topped out at a record 92 for twin-lift operations.
Among Philadelphia’s many niche commodities, years of experience produce similar efficiencies in handling a wide range of breakbulk, project and temperature-controlled products. Steel, perishables, forest products and cocoa are some of the mainstays. The key to this high handling effectiveness remains the port’s workforce, which is trained, experienced, flexible, equipped and on board with the port’s vision.
At minimum, port officials expect 100 to 200 acres to be reserved for future development at the PRPA’s highly anticipated Southport project. The commonwealth of Pennsylvania is also onboard.
Philadelphia’s port players are partnering to extend their vision across the river. Cooperation among Pennsylvania, New Jersey and Delaware maritime and political concerns was instrumental in securing the recently announced channel-deepening project. Taking the channel to a 45-foot navigable depth will put Delaware River ports on an equal footing with their Atlantic competitors in attracting deeper-draft large container ships, dry bulk vessels and breakbulk ships emerging from the world’s shipyards.