Supply chain managers know volatility all too well, and while some thrive amidst the chaos, enterprise leaders want stable results, even during economic uncertainty. Few things bring boardrooms peace of mind like healthy cash flow, and supply chain managers have a trick up their sleeve to help with this: Foreign-Trade Zones (FTZs).

FTZs have been around for almost 100 years in the US, yet they remain underutilized by many enterprises. If people are familiar with FTZs, they often know they offer savings on duties and tariffs. However, many people fail to realize that they can make a significant difference in cash flow because of the timing of these savings.

Understanding FTZs and their Benefits

Foreign-Trade Zones are designated areas within the United States that are considered outside the US for customs and duties purposes. This classification means imported goods can be stored, processed, or assembled without being subject to customs duties, tariffs, and taxes until they are officially imported to the domestic market. 

Because of this, FTZs offer a unique opportunity for companies to delay or even reduce their duty payments until the goods are removed from the zone and officially entered into the US market. As a result, duties are paid much closer to the final sale of the product rather than paying import fees on parts long before the finished product is ever made or sold. 

How FTZs Improve Cash Flow

Duty deferral and fee mitigation through FTZs can have major cash flow advantages. Here’s a quick breakdown of the top three:

Duty Deferral 

One of the primary benefits of using FTZs is the ability to defer customs duties and tariffs until the goods are moved out of the zone and into the US market. Under normal circumstances, a company importing parts or products into the US would pay duties upon arrival of the goods. For manufacturers or assemblers, this can mean they’re paying duties on parts for products that won’t be sold for months. In an FTZ, you only pay duties on the finished product upon entering the market because goods in an FTZ aren’t in the US for customs and duties purposes. This delay can boost companies’ cash flow, enabling them to allocate resources more strategically during uncertain times.

Duty Reduction 

Frequently, finished products will have a different duty rate than their constituent parts. If the duties on the finished product are lower than the duties of the sum of its parts – and this is common – then there is a net savings by using an FTZ to bypass duty payments on the parts and only paying duties on the finished product. 

Merchandise Processing Fee Savings 

Dramatically decrease merchandise processing fees (MPFs) by enabling your company to consolidate multiple shipments into a single “weekly entry”. This means your business pays only one MPF per week instead of one for each individual shipment, leading to significant cost reductions, particularly for companies with substantial import volumes.

Case Study: FTZ Benefits for Domestic Vacuum Manufacturing

Perhaps an illustration could help. Imagine a company that manufactures vacuums. Even while manufacturing in the US, the company will likely still rely on imported foreign parts. The duty costs for this can add up.

Importing a vacuum motor from Vietnam would result in a 5.3% duty charge, and plastic wheels from China would incur the same duty rate of 5.3% ad valorem. If it’s a cordless vacuum, a rechargeable battery from China will incur duties at 3.4%. Meanwhile, a finished vacuum can be imported duty-free, making it difficult for US manufacturers to compete. Using the FTZ program, a company could bypass the duties on parts and only pay duties on the finished product – which, in this case, is zero. Not only does this improve cash flow, but it helps promote domestic manufacturing. 

Navigating Economic Uncertainty with FTZs

Healthy cash flow can be a lifeline to businesses during times of economic uncertainty. By using FTZs, supply chain managers can improve their company’s financial resilience, bringing much-needed stability. 

From duty deferral and reduced fees to inventory management flexibility, FTZs provide significant cash flow advantages and other benefits. Furthermore, the simplified customs procedures and compliance advantages of FTZs empower companies to pivot swiftly and respond to changing market dynamics.

As supply chain managers consider optimal strategies for navigating economic challenges, integrating FTZs into your supply chain operations can play a crucial role. With QAD’s Foreign-Trade Zone solution, companies can achieve the delicate balance of managing costs, optimizing cash flow, and maintaining operational agility, positioning themselves for success despite uncertainty.

To find out how QAD Foreign-Trade Zone can benefit your business, please book a consultation with an FTZ expert, or visit our website.