The current trade war between the United States and China has caused a mountain of headaches for U.S. retailers, manufacturers, and other businesses that rely on imported goods to keep shelves stocked or production lines running. While these rising import costs may eventually encourage American business leaders to reshore production and source from domestic suppliers, restructuring the supply chain takes time—in many cases, years.

Additionally, while China is getting special attention in U.S. tariff policy, tariffs have also impacted imports from key trading partners across the EU, North America, and South America. In response, businesses are looking for ways to reduce the financial impact of these tariffs. Foreign-Trade Zones (FTZ) offer an opportunity for these companies to mitigate the cost of new tariffs as they arise.

What is a Foreign-Trade Zone?

For the purposes of assessing customs duties, FTZs are located on U.S. soil but treated by U.S. Customs & Border Protection (CBP) as if they are outside of U.S. Customs jurisdiction. Essentially, imported goods or materials come in through a port of entry like a seaport or airport and get transferred via rail or truck directly to the FTZ. Goods bound for an FTZ are treated as if they have not yet entered the United States, so the owner of those goods does not have to pay any customs duties until the goods leave the FTZ and enter the U.S. market.

FTZs have been a long-established practice for manufacturers, assemblers, and importers to avoid paying upfront duties on goods that are not necessarily ready for sale. These zones are certified by the Foreign-Trade Zones Board, or FTZ Board, which is a joint operation between the U.S. Department of the Treasury and the U.S. Department of Commerce.

How FTZs Help with Tariffs

Frank P. Crivello, Chairman and Founder of Phoenix Investors, offered the following insights into how FTZs can help mitigate the cost and business impacts of tariffs:

• Only paying the lowest possible tariff. Say a manufacturer makes a widget that has a low tariff classification, but they also rely on imported steel to make that widget, which has a high tariff. The manufacturer can bring the steel materials to an FTZ and proceed with their production run of widgets, then only pay the lower tariff on the final widgets that leave the FTZ while avoiding the high steel tariff.
• No tariffs for re-exported goods. If a company imports parts, components, or materials into the FTZ and then exports the finished goods to a foreign market, they do not have to pay tariffs since none of the raw materials or finished products ever entered the U.S. market. This may be especially useful for companies that want to use the U.S. as an assembly hub in advance of exporting to multiple markets, since they only pay tariffs on the inventory that enters the U.S. market.
• Flexibility around tariff volatility. By using an FTZ to hold imported goods, companies can more easily navigate the on-again, off-again nature of the current tariff environment. There is currently no limit on how long inventory can be stored in an FTZ, so businesses can conserve capital by waiting for an optimal moment to move the goods into U.S. Customs territory.

When used effectively, Foreign Trade Zones give importers a chance to strategize around tariffs and avoid paying more than necessary. This level of flexibility is not just useful in the current trade environment, but essential.

If your business is interested in leveraging the benefits of Foreign Trade Zones in your tariff management strategy, Phoenix Investors can help. Reach out to us to see how.

About Phoenix Investors

Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven record of accomplishment of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.