IMPORT/EXPORT

Industry Voices: How to Use Free-Trade Zones to Save When Importing Apparel

Foreign-trade zones offer great opportunities for lowering the overall cost of imported apparel and other products. While more and more companies are taking advantage of these opportunities, a clear understanding of FTZ rules and regulations is critical to ensuring maximum savings and avoiding problems.

FTZs are places within the United States that are considered to be outside the U.S. customs territory. Goods in your warehouse in Kansas, for example, could be treated by customs as if they were still outside of the U.S. if they were in a free-trade zone.

Merchandise shipped from a foreign country into an FTZ is not dutiable until it is removed from the zone. This allows companies to avoid paying altogether on products that are exported to another country, such as Mexico, or destroyed. Merchandise can be stored in an FTZ with duty payment deferred until the merchandise is removed from the zone. This duty-deferral mechanism can yield substantial cash-flow savings for apparel that has high duty rates or sits in inventory for long periods of time.

Apparel companies operating in an FTZ realize immediate cash-flow savings when the zone is first established and continue to save by paying duties closer to the time of final sale.

For example, an apparel company with an average inventory of $100 million would pay $15 million in duties (assuming an average 15 percent duty rate) when the goods are imported, but by operating in an FTZ the company could delay payment of that $15 million, possibly for several months on slower-moving merchandise.

President Obama’s National Export Initiative, along with the worldwide demand for U.S. branded products, has pushed apparel companies to find new markets abroad. Along with the new opportunities, exporting brings new complications and likely double payment of duties.

A U.S. company not operating in an FTZ typically imports products and pays duties to U.S. customs, and, when products are then sold to a foreign customer, the company or the customer pays duty a second time to customs in the customer’s country of residence. By using an FTZ, the company could avoid the duty payment to U.S. customs.

FTZs are also eligible for a unique benefit referred to as weekly entry. All goods withdrawn from an FTZ during the week are reported to customs at the end of the week on a single entry. Companies can ship goods from their FTZ warehouse any time during the week.

The weekly entry can provide immediate and significant savings through lower merchandise-processing fees. For example, the MPF is calculated at 0.3464 percent of the value of each shipment but is capped at $485 per entry. A company importing 10 shipments per week each valued at $140,000 and filing a separate entry for each will pay $4,850 per week in MPF, or more than $250,000 per year. The same company importing the same number of shipments but operating in an FTZ and filing a single weekly entry, on the other hand, would pay only $485 in MPF per week, resulting in a savings of more than $225,000 annually.

Weekly entry also provides an opportunity to save on customs brokerage fees. For high- or medium-volume importers, this savings alone is enough to justify applying for FTZ designation.

FTZs provide importing companies with additional, non-financial benefits as well. Cargo shipped to an FTZ is eligible for direct-delivery benefits from the port of entry, reducing long lead times at crowded ports of entry, and can move cargo directly into the FTZ without formal customs entry.

Country of origin and Federal Trade Commission labels (content, registration numbers, care, etc.) are not required until the items leave the zone. Items without labels or with incorrect labels can be relabeled in an FTZ without the delays experienced by other importers. FTZs may also be used for quality-control inspections to ensure that only merchandise that meets specifications is imported and duty paid; all other items may be repaired, returned to the foreign vendor or destroyed without payment of duty.

There are several misconceptions about FTZs. Many believe that apparel is not eligible for entry into an FTZ and that the process for setting up an FTZ is complex, lengthy and cost prohibitive. Additionally, some assume that their operations would have to be relocated to an area that has already been designated as an FTZ. These misconceptions are based on the more stringent rules that applied in the past, but most of these have since been changed, and the FTZ application formats and requirements have been dramatically simplified.

More leading apparel companies are taking advantage of FTZs today to control the total landed cost of their products. Now is a great time to examine whether an FTZ is the right strategy for your company as well.

Tom Gould is senior director, customs and international trade, for Sandler,Travis & Rosenberg P.A. He is based in Los Angeles. He works with retailers, importers and exporters of textiles, apparel, footwear, consumer electronics and other products.