I interviewed Scott Massie who discussed Foreign Trade Zones in the USA.
It’s good to speak with you today, Scott. I’m looking forward to hearing your views on the topic of foreign-trade zones in the U.S.A. Before we start, can you provide a brief background of yourself?
I’m Scott Massie, born and raised in the U.S.A. I’ve been in the field of logistics for over 40 years and worked in just about every aspect of transportation, distribution, project management, and the whole gamut with all the different airlines, trucking companies, steam ships, et cetera. The subject I wanted to talk about is the U.S. foreign-trade zones and the impact on the whole economy and how they’re being perceived and the fact that many, many companies, the majority, aren’t taking advantage of the opportunities available. You want to ask me some questions?
What is a foreign-trade zone?
A foreign-trade zone is a designated area that’s set aside in the U.S. which that zone itself—it could be a building, it could be a big facility, small facility, as long as it meets the qualifications—is not considered not in the U.S.A. even though, physically, it is in the U.S.A. until the goods that were received leave that facility. When they leave that facility, if they’re shipped within the U.S., at that time you’d pay U.S. customs duty. If they’re shipped outside the country, you would not pay any duty. If you say, “I can’t sell these things, and I’m going to destroy them,” you don’t pay any duty.
They don’t enter U.S. commerce until they’re actually shipped to a customer in the U.S.A., as opposed to without a foreign-trade zone, when an ocean container comes from China and lands in Savannah, Georgia, the customs people charge you the duty, whatever it is, immediately, whereas with foreign-trade zone, the container would just get shipped right to your facility, like, in this case, Atlanta, Georgia, where I’m at. You follow the rules and then you get some great benefits out of it. I can elaborate on that.
What are the advantages of being associated with an FTZ?
There are some really great benefits, and I’ll just kind of give you an overview. There’s duty deferral. For instance, I was importing some women’s lingerie products that had a 32 percent duty coming from Huangdao, China, into the U.S., and they were paying 32 percent as soon as it hit the port in Savannah. You don’t pay the duty until they sell those products, and they may never sell them. There’s a duty deferral—in this case, quite a substantial amount of money. Each country has different duty rates, but it’s typically anywhere from 10 to 20, sometimes 50 percent duty, depending on what it is.
Also, when you ship out of the country, you don’t pay duty at all. If it came in to the zone and left and went to Canada, for instance, you never pay duty, whereas you would’ve already paid the duty coming in, and you’d be paying it again going out. They have what’s called a duty drawback, but it’s almost impossible to collect because you have to prove pretty much the same item went out a year ago, was received a year ago, shipped out, and trying to match it, but most people don’t even bother to do it. With the foreign-trade zone, you don’t worry about that.
If you have scrap or something you want to get rid of, you get permission from the U.S. Customs to destroy it. They may want to come watch you do it, or they may just take your word you’re going to do it, and there’s no duty. You don’t pay any duty if you’re shipping anything to the military; that’s duty-free. There’s an advantage also called the inverted tariff relief rate; that has to do with foreigners who are shipping to the U.S. Say they’re shipping cups and saucers and calling it a serving set, and they pay 10 percent duty, but the U.S. company paying those saucers and cups from different places are paying a higher duty possibly, because each one’s on its own rate. Once you’re in a foreign-trade zone, you can put them together as a cup and saucer and then ship them; you’d have the same advantages as the foreign companies. A lot of people think they’re getting advantages unfairly against the domestic ones, but that’s because the domestic ones aren’t involved with a foreign-trade zone; it’s designed to give them a lot of benefits.
Another benefit is that there’s no timeline. They can sit in storage for five years, it doesn’t matter—ten years—and you don’t pay any duty until it moves out. Faster service is as soon as that container hits the port, it gets shipped right to your facility. Sometimes containers can sit at a U.S. port for two or three weeks before they can move.
There’s another big advantage called duty entries. Typically, companies will pay brokers as much as $50 to $100 for entry, and you might have 20 to 30 entries in a week, $2000 to $3000. Well, you can permission to have one entry per week and just pay $100; huge savings. There are also benefits for tax exemptions, insurance savings, plus you can actually create jobs for people in the United States.
Can you talk about how difficult it is to get involved in FTZ?
That’s a very good question. There’s a perception out there that, first of all, it’s very complex, it’s very expensive, and you’ve got to be leery of the U.S. Customs people, because they’re out to get you. None of that is true. There is a start-up cost to get in, and part of why it’s relatively high right now—there are still benefits to doing it that way—is because there are only a few people involved. There are some consultants in two or three companies who have software and they have consultants and they make a killing on the companies that want to go into one. Now, if you’re a Wal-Mart or a Home Depot or somebody, money’s no big deal and you’ll pay the fees, but a smaller company may balk at the idea they have to pay maybe $300,000 to set one up even though the payback may be within a year. The truth of the matter is, the costs are so high because there are so few people. It’s almost like a monopoly—well, it is—in setting these up.
The bottom line is, the government is not out to get you. Yes, you’ve got to follow some rules, but the rules they have you follow are really no different than if you owned a company, you’d want to follow in making sure stuff is put in the right place at the right time, kept track of, that whoever comes in your facility has permission to be there, you complying with all the safety and fire hazards and things like this. They’re not asking you to do anything you should not automatically want to do yourself. There are a lot of myths that have prevented a lot of companies from not participating either in a multipurpose one, where you’re sharing with other companies that are in there or your own, you set up your own warehouse.
What does it cost to set up an FTZ?
Again, it can cost you a lot depending on how you go about it. It could cost very little if you have some understanding of how to do it, and it’s really just following any other government regulation. I’m actually working on a training program I’ve created to kind of help this process. Another company came out recently that has more affordable software. The government itself, the U.S. Customs Department is under the Department of Commerce, headed by the Secretary of Commerce, and they’ve been going around to the different foreign-trade zone groups and trying to encourage people to join. It’s not a political issue; both the Democrats, Republicans, and the Independents, everybody wants more business in the U.S., and if they don’t participate in a foreign-trade zone, it makes it difficult to do much more.
To give you an example, out of 300,000 companies that do import and export in the U.S. as of 2013, only about 4 percent of those were involved with foreign-trade zone. It seems kind of ridiculous. And the foreign-trade zones have been around technically since 1789 but more heavily since 1934; some of the auto companies were the first ones to get involved with that. It’s really not that difficult, and it could be a lot easier than people think. There’s a myth that’s put out there for reasons to keep it limited to a monopoly that wants to keep control over the money they’re making with the few companies that want to go into it.
What are the issues with the U.S. Customs organization?
Scott: The issues really are that you become a deputy, basically. When they say, “Okay, you want to set up this warehouse and make it a foreign-trade zone? Okay, we’re going to use some rules,” but you’ve got to keep the place secure, you’ve got signs there saying you’re going to go to jail for 20 years if you break in and steal something or conduct illegal activity like importing drugs or something like that. People come in, they have to sign a log book, you’ve got to keep track of that, there’s some administrative stuff. Technically, at the most, you might have to hire one person, but all in all, what they expect you to do, because they consider, until you pay the duty, they consider the goods belong to them; you owe them money. There’s really nothing wrong with that.
If you make mistakes, they’re not going to throw you in jail, especially if you bring it to their attention. And if you made a mistake and they caught it, they go, “Oh, you missed one of these items; you’ve got to pay duty on that one.” As long as there’s nothing that’s considered to be flagrant or somebody’s trying to take advantage of the system. They make human errors and mistakes and those get adjusted. If you’re doing well, you may see them once a year, have a visit, then everything’s fine. They really want to be your friend and not your enemy, but a lot of people always think the government is always the opposite and it’s not true.
Where do you learn how to set up an FTZ?
Again, there are limited resources right now. You can get the regulations, you can get those free if you download them online, and you can just read about it, or you can contact the various consultants. There’s what they call a grantee, which is sort of like the group that sets up the foreign-trade zone network in major cities. You can visit with them, and they’ll give you some pretty good information as well. You have to do a little digging—not too much—if you’re really interested, and you have to be in a place that’s considered a port. It doesn’t have to be an ocean port; land is 100 to 200 miles away from a port, but, well, Atlanta Airport is considered a port authority, so as long as you’re within 90 miles of the Atlanta Airport, you’re in an eligible area. There are some places that are probably out in the middle of nowhere that wouldn’t be. For the most part, where most industrial business takes place, almost anybody can join a foreign-trade zone, join somebody else’s or create your own. Creating your own is a little more involved, but it can be very beneficial to your organization.
Thanks, Scott, for sharing your views today on foreign-trade zones in the U.S.A.
Okay, you’re quite welcome.
About Scott Massie
Senior Program & Project Manager