BY ROY HARRYMAN
This article originally appeared in Expansion Management.
VT Halter Marine, like any American company, is searching for ways to remain viable in a fiercely competitive international market.
One ace up its sleeve is its location within a Foreign-Trade Zone, which saved the company $150,000 in its last fiscal year.
VT Halter, headquartered in Pascagoula, Miss., reports that its Foreign-Trade Zone status gave it a competitive advantage in the construction of two fisheries research vessels and a 579-foot car carrier.
“It’s able to compete in an industry that includes a lot of foreign competition,” said consultant Greg Jones, who counts the shipbuilder among his clients. “It’s nice to see companies using their smarts, and it’s great to see government programs that make sense and help them remain competitive.”
Foreign-Trade Zones are unique among government incentive programs. They do not reduce property taxes or provide tax credits. Nor do they provide huge cash grants or work force training funds.
Instead, companies that receive federal Foreign-Trade Zone Board approval are eligible for import and export tax benefits that help them gain a competitive edge against foreign firms. The program defers, reduces or eliminates U.S. Customs duties on products that are admitted to the trade zone.
Each zone is a U.S. location aligned with a customs port of entry where products are considered to be in the stream of international commerce. For the purposes of tariff law and customs duty payments, zones are treated as being outside the customs territory of the United States.
“The overriding benefit is that the use of the zones enables U.S.-based companies to lower their costs of production,” said Jones, corporate secretary and senior consultant with Foreign-Trade Zone Corp., in Mobile, Ala. “This enables them to better compete in today’s global economy.
“The zones program offers a number of cost-saving strategies that make it economical for a company to conduct value-added activities in the United States rather than outsourcing those activities to offshore locations.”
- Duty exemption on exports: No duty must be paid on products that are exported after being placed in a zone. If the merchandise is sold in the United States, duty is paid only when it leaves the zone.
- If materials are manufactured into a product with a lower duty rate than the raw materials, then the lower rate applies when duty is paid.
- Elimination of duties on most waste and scrap.
- No duties on rejected or defective products.
- Deferred duty: Products (including spare parts) can sit in a zone for an unlimited period of time without being charged duty.
- Elimination of inventory taxes: Foreign products and merchandise awaiting export are free from state and local inventory taxes.
- Duties are not owed on labor, overhead or profit attributed to zone operations.
- Duty is waived on sales to the U.S. military or NASA.
- Simplification and streamlining of import and export processes.
There are about 250 Foreign-Trade Zones in all 50 states and the U.S. Commonwealth of Puerto Rico. In addition, there are more than 450 subzones that usually serve the needs of individual companies.
According the Foreign-Trade Zones Board, the industry that makes the most prominent use of the zones is petroleum refining. Other significant zone users include the automotive, electronic and pharmaceutical industries.
“There are a number of industries that have not discovered the program yet,” Jones said. “Sometimes a tariff problem can exist in an industry for several years before a company makes a move to a zone, then its domestic counterparts often follow suit.”
To zone or not to zone?
Should your business locate in a Foreign-Trade Zone? It depends on your particular importing and exporting requirements. Consultants such as Jones and the staff of some local trade zone offices provide cost-benefit analysis services.
Although any company can locate in a zone, businesses must get approval from the U.S. Foreign-Trade Zones Board in order to participate in the program and receive the economic benefits. The board must determine that the decision will result in a net economic benefit to the U.S. economy.
Application fees range from $4,000 to $6,500, depending on the number of classes of products that will be assembled and the particular zone status the company is seeking. In addition, local zone administrative offices charge user fees.
Jones described the paperwork and application process as manageable in terms of return on investment.
“The trouble and cost to meet the requirements are modest compared to the benefits,” he said. “In operational terms, you have to go to a little bit of extra trouble, but not that much.”
Subzones are created when general purpose zones can’t meet the needs of a company. An example is the Mercedes-Benz plant between Tuscaloosa and Birmingham, Ala., which needed a greenfield site, not the urban general-purpose zone that was available nearby.
“Mercedes-Benz would never consider putting an automotive assembly plant in a downtown area,” Jones said. “If you can’t go to the zone, the zone can come to you. It’s of greater benefit to the U.S. economy for Mercedes-Benz to build vehicles in the United States than in other locations.”
Zone locations are diverse
Properties available in zones are as diverse as the American real estate market itself.
With more than 10,000 acres, the Kansas City, Mo., area contains more zone space than any metro area in the nation, with corporate giants such as Sony, General Motors Corp., Ford Motor Co. and Bayer occupying real estate. Some of the zone is in the Hunt Midwest SubTropolis. At five million square feet, it’s the world’s largest underground business complex.
Kansas City is seeking to maximize its zone benefits for businesses by establishing a Mexican Customs office in the city. That way, merchandise could be cleared more locally and quickly instead of at the Mexican border. In addition, efforts are underway to develop a multimodal trade corridor connecting the city to Asia by way of a ships-to-rail terminal at the Port of Lazaro Cardenas in Mexico. Combined with recently-reduced Mexican customs fees, this would provide an alternative to California’s congested ports of Long Beach and Los Angeles.
Atlanta’s Foreign-Trade Zone will soon have 10 industrial parks within its boundaries. Once additional space is added, the zone will contain 5,000 acres of developed land, including spec buildings and general purpose warehouses. The area ranks fourth in the nation in terms of its logistics employee base.
“There are a variety of zone environments,” Jones said. “You have waterfront sites, mature industrial parks and industrial parks under development. The program offers flexibility to companies.”