Free zone, bonded warehouses and free trade agreements

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Foreign free zones

Free Zones have been an excellent source for reducing “landed costs” in the face of rising freight costs and long delays in the global supply chain, over the past two years due to the pandemic and this impact which now lasts until 2022.

The main reasons to consider free zones in your global supply chain are:
– Ease of movement of freight to and from borders between trading countries
– Reduction or elimination of duties, taxes and other import/export costs
– Financial incentives at local level
– Reduces “landed costs” in your import/export business model
– Provides financial incentives that result in reduced operating costs in your import and export transactions

There are other benefits that may be unique to geographic location and industry verticals.

The automotive industry, which is dominated by foreign competition, has been one of the key industry verticals to capitalize on free zones here in the United States, as well as in many countries abroad.

The basic free zone model allows a company to manufacture or assemble finished goods in a foreign country using local labor for the specific purpose of reducing landed cost.

For example, a German automaker sells a car in the United States for $50,000. Duties and taxes can add an additional $1,500 to the landed cost.

Through the use of a strategically placed Free Zone here in the United States. This German automaker could import parts from Germany and use American labor to work in its American factory.

When entering the US Free Zone, duties and taxes on parts are deferred. Once assembly is complete, the car leaves the free zone for final sale and that is when the deferred portion of tax and duty is paid. If the labor costs represent 50% of the value of $50,000, … only $25,000 is applicable for duties and taxes.

This model (simplified by design for this article) reduces the “landed cost” by approximately $750 per vehicle. Compare that to 200,000 units and the savings could be over $150,000,000.00 per year.

There are many other benefits of free zones that should be considered in any business model assessment.

In the FTZ model above, the use is assembly and manufacturing. Newer options allow high-volume importers to move their goods through free zones as they move from the front door to their warehouses and distribution facilities.

This step allows for “Weekly Manifest Clearance” which reduces entry fees and Goods Handling Charges (MPF), creating significant financial savings impacting landed cost.

Consulting firms can help companies assess the benefits of a free zone and weigh them against the costs and challenges of achieving it.

Bonded warehouses

Another option, similar but different from a free zone, is the Bonded Warehouse. Bonded warehouses are a supply chain option that allows importers and exporters to temporarily hold freight when importation is deferred as well as duties, taxes and other import costs, until the goods enter the country or are exported from that country.

For example, consider a Cleveland-based electronics distributor that imports consumer music products from Asia, totaling over $200 million annually with an average duty rate of 4.5%. About 20% of the products are then re-exported to Canada, the Caribbean and Latin America.

Under their current supply chain model, they use CBP’s drawback program to obtain up to 99% of the duties and taxes for these exports, totaling $1.8 million per year. While drawback is a great program, it can be cumbersome and expensive to manage and it takes time to get the duty refunded.

As an alternative, the distributor can ask CBP to make their warehouse a bonded location. This will defer duties and taxes on goods entering the warehouse at the time they are checked out of the facility.

In addition, the 20% of goods that are re-exported enter and leave the United States in bond and no duties or taxes are payable, resulting in significant savings on supply chain costs.

Bonded warehouses offer additional benefits, but the operations allowed in a bonded warehouse are limited, such as sorting, weighing and repackaging. If the goods enter the warehouse as a widget, they must leave as a widget.

For Bonded vs. FTZ… four steps must be completed to decide who can present the best option for the main company.

These four steps allow for a detailed assessment of options, benefits and challenges, ROI, operational insight… followed by implementation.

The process can take 60 to 180 days and will incur costs involved in all stages which are generally outweighed by the residual and ongoing financial benefits.

Free Trade Agreements (FTAs)

FTAs offer many benefits to both importers and exporters. Currently, the United States participates in more than thirteen agreements and many more are pending. The best-known FTA is the USMCA (formerly called NAFTA), which has consistently provided an overwhelming return on investment in Canada, Mexico and the United States.

When the three participating countries…the United States, Canada, and Mexico trade with each other, there is a significant reduction in duties and taxes on qualifying goods and merchandise.

The most beneficial benefit in FTAs ​​is the free movement of goods between participating countries where duties and taxes are reduced or eliminated.

“Near Sourcing” is the recent phenomenon in global commerce where trade flows back to the United States or our USMCA partners. FTAs provide a more level playing field, especially compared to lower Asia-based sourcing models.

Reduced transportation costs, reduced turnaround times, and the elimination of duties and taxes can very easily make manufacturing in Mexico or a U.S.-based free zone… a much more competitive option, thus taking advantage of the critical options of the logistics business model.

Mexico enjoys a “Maquiladora Program” which greatly enhances USMCA benefits where manufacturing and assembly is done in Mexico for goods that will eventually be shipped to the United States.

Other countries such as, but not limited to:

Australia Bahrain

Canada Chile
Colombia Costa Rica
Dominican Republic El Salvador
GuatemalaHonduras
Israel Jordan
Korea Mexico
Morocco Nicaragua
OmanPanama
Peru Singapore

When looking for trading partners as sourcing or selling options… Countries that are signatories to a free trade agreement can provide a competitive advantage to buyers and sellers.

As political issues increase with China and trade disruptions are now happening with what we have with Russia…this is incentivizing US companies to buy and sell from trading partners where there are more favorable working environments and durable…and this can be leveraged to each party’s advantage.

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