Foreign-Trade Zones

Bruce Frallic – Moderator

Greg Jones – FTZ CorporationPam Berry – Marisol InternationalRuss Clark – Austal USA

The Global Trade Environment

Today’s Global Trade Environment is characterized by:

Cheap and efficient transportation and telecommunications

Multilateral, bilateral and regional tariff reduction initiatives

The Global Trade Environment

Environment drives:

Outsourcing manufacturing operations to low-cost countries; or,

Streamlining (reducing costs of) global supply chain

One solution: U.S. FTZ program

Types of Zones General-Purpose

May be multiple sites May be non-contiguous sites Must be in or adjacent to a port of entry

Subzone Special purpose conditional site Limited purpose Generally a single firm site

Structure of the Zones Program

FTZ Board Secretaries of Commerce and Treasury Staff Reviews applications, issues grants of authority Regulates certain types of Zone activity Reports to Congress

Grantee Establishes and operates Zone project Delivers FTZ program to the community

Operator Uses Zone procedures Realizes Zone-related savings and efficiencies

CBP/other government agencies Responsible for oversight of day-to-day operations Uses Audit-inspection methodology

Zone Benefits: Duty Deferral

No duty is paid until the merchandise enters the commerce of the U.S.

Zone Benefit: No duty on Re-exports

Goods stored in Zones are exempt from duties if they are subsequently re-exported without being entered into U.S. commerce.

Goods manufactured/produced in Zones are exempt from duties if they are subsequently re-exported to non-NAFTA countries without being entered into U.S. commerce.

Zone Benefit: Relief From Inverted Tariff Rates

Duty rate reduction on manufactured or produced merchandise that subsequently enters U.S. commerce.

Zone Benefit: Reduction in Customs Fees

FTZ “Weekly Entry” process may result in lower Merchandise Processing Fees (MPF) MPF is assessed on a “per Entry” basis MPF = .3464% of Entry Value (with $25 minimum and $485 cap) Zone admissions are not Customs Entries

Subzone Zone Operator can consolidate all shipments during a calendar week

into 1 Customs Entry Pays 1 MPF Cap remains at $485

FTZ FACILITY

MonMPF=$0

TueMPF=$0

WedMPF=$0

ThuMPF=$0 Fri

MPF=$0

Mon

Tue

Wed

Thu

Fri

SHIPPED TODOMESTIC U.S.

MPF With Weekly Entry

No MPF on Admissions

Only one EntryPer WeekMPF =$485

MPF Savings of $1,940

How are FTZ Benefits Obtained?

What are overall processes for implementation? What are operational requirements?

Implementation: FTZ ApplicationRequired for: Manufacturing/Production within the General-

Purpose Zone Establishment of a Subzone Alteration of boundaries or scope of

manufacturing activity

FTZ Application

Generally, the application must demonstrate a positive economic effect for the U.S. economy. Evaluation criteria include:

Overall employment impact Enhancement of U.S. value-added activity Overall effect on imports Impact on domestic and foreign competitors

FTZ Application

Recent FTZ Board regulations provide opportunities for faster approval of site designation and FTZ Production authority:

“Subzone” site designation can take as little as 3 months in FTZ Board processing time

Alternative Site-Management Framework can further shorten site designation timeframe

Non-controversial Production activity can be approved in as little as 120 FTZ Board processing time

Activation

Actual use of Zone procedures requires prior “activation” of Zone site.

Activation involves the approval of: Zone Grantee (Operator Agreement) Bureau of Customs and Border Protection

Zones Program in Mississippi and Alabama: a 2012 Snapshot

Zone-related activity = 25% of Mississippi economic output and 12% of Alabama economic output. Major industries:

Shipbuilding and Maritime Energy Exploration Chemical Production and Oil Refining Automotive Manufacturing Furniture Manufacturing Textile and Apparel Distribution

Zone Users by Industry

Shipbuilding and Maritime Energy Exploration: Aker Subsea Austal USA BAE Systems Huntington Ingalls Signal International Technip VT Halter

Zone Users by Industry

Chemical Production and Oil refining: Chevron DuPont Shell

Zone Users by Industry

Automotive Manufacturing: Hyundai Mercedes-Benz Nissan

Zone Users by Industry

Furniture Manufacturing: Bauhaus USA Lane Furniture Max Home H.M. Richards

Zone Users by Industry

Textile and Apparel Distribution: Channel Control Merchants Gum Tree fabrics Morgan Fabrics Levi Strauss & Company

To and From the Zone:

Success of Zone operation requires management of movements to and from the Zone.

The objects of this management are: Avoid duty payments Proper permitting of all admissions and transfers of

Zone status merchandise

Admission and Transfer Permits: Necessity

Regulations: 19 CFR Part 146 All foreign status merchandise that is admitted to

or transferred from a Foreign-Trade Zone requires an executed Customs permit

No exceptions!!! Domestic status merchandise requires no Customs permit

Admission and Transfer Permits

Admission• Admission documents

Commercial documentation In-bond documentation CF214

Timeliness Requirements for Various Types of Movements/Transactions Zone Admission

• Standard admission sequence1) Arrival at port of unlading2) In-bond movement3) Approval of CF214/PTT4) Arrival at zone5) Completion of CF214/Close-out of manifest

Timeframe from arrival at port where zone is located: 15 days

Timeliness Requirements for Various Types of Movements/Transactions Zone Admission

• “Direct delivery” sequence1) Arrival at port of unlading2) In-bond movement3) Arrival at zone4) Completion of CF214/Close-out of manifest

Timeframe from arrival at port where zone is located: 15 days

Types of Transfers and the Appropriate Permits for Each

Goods leaving the Zone must be:• Entered into U.S. commerce

CF3461 followed by CF7501• Exported

CF7512: “IE” or “T&E” • Transferred to another zone

CF7512: “IT”

Timeliness Requirements for Various Types of Movements/Transactions Transfer to U.S. Customs territory

1) CF3461 is presented to Customs2) Customs approves in writing3) Goods leave zone (5 days)4) CF7501 is presented to Customs (10 days from approval of CF3461)

Re-exports1) CF7512 is presented to Customs2) Customs approves in writing (or via QP/WP)3) Goods leave zone (5 days)4) In-bond movement is closed at port of exportation

Timeliness Requirements for Various Types of Movements/Transactions

Transfers to another zone1) CF7512 is presented to Customs2) Customs approves in writing (or via QP/WP)3) Goods leave zone (5 days)4) Zone-related data sent to destination zone (10 days)

Timeliness Requirements for Various Types of Movements/Transactions

FTZ From a User Perspective

FTZ From a User Perspective

32

Zone Operators use Zones because it is in their financial interest to do so

• Benefits include Customs-related savings

• Costs include the costs of compliance and the costs of Zone privileges

Austal USAMobile, Alabama

Two Major US Navy Programs

Austal LCS and JHSV make up over 20% of the US Navy fleet by 2030

JOINT HIGH SPEED VESSELLength: 338 ftBeam: 94 ftSpeed: 35 knotsRange: 1200 nmPayload: 624 MT

LITTORAL COMBAT SHIPLength: 419 ftBeam: 104 ftSpeed: 40+ knotsRange: >3,500 nmModular Mission Payload:180 MT

Global Content

37

Austal imports $100 million+ annually…24% of material spend

Country of OriginGermanyNetherlandsAustraliaSwedenFinlandOther

2011 2012 2013$0

$20,000,000 $40,000,000 $60,000,000 $80,000,000

$100,000,000 $120,000,000

Imports

FTZ Benefits for Shipbuilders

38

Relief from Inverted Tariffs• Duties on all foreign-status components admitted to the Zone

are eliminated

Avoid duties, while also avoiding:• Drawback filings on export jobs• DOD certification process for military vessels• Merchandise Processing Fees on foreign purchases• CBP “Rate advances” on entered foreign merchandise

Speed• Reduces delays in clearance at port• Can get material to shop floor quicker

FTZ Benefits for Shipbuilders

39

Austal imports >$100 million annually• The majority of imports are incorporated into finished

ships• Duty rate on finished ship = zero

Example • Extruded aluminum from Sweden• Value of shipment = $103K • Normal duty rate = 3% ($3,090) • Duty rate as a finished ship = 0%• Savings using FTZ = $3,090

Total savings = $1.2 million annually

Once up and running, what’s required?

40

Compliance operational and recordkeeping requirements• Manage inbound and outbound logistics and permitting

processes• Manage internal processes (e.g. inventory control)• Manage periodic reporting requirements (Quarterly HMF, Annual

reporting)

Changes in contractual relationships with foreign vendors and customers• No DDP terms of purchase• Specify in-bond movement from port of unlading• Make FTZ available for customers’ foreign-sourced materials

FTZ Costs

41

Administration and Material Control• Must have good records of material used in finished product• Material leaving zone not as finished product must be reported

(temporary or permanent entry)• Need tight control over material and shipments

Scrap Must be reported if material was imported

Security• FTZ facility must adhere to Customs requirements

Freight• Material travels in-bond from port to destination

Periodic Reporting

42

Prompt submission of reports:• Harbor Maintenance Fees• CF216s (Annual Activity Permit)• Annual Reconciliation/Systems Review• Annual FTZ Board reporting• Special Report: Monthly Scrap

FTZ Operations 1-2-3

43

1. Have foreign goods move in-bond to FTZ

2. Use in the manufacturing process

3. Use “Temporary Removal” procedure for material temporarily outside FTZ (example: sea trials)

4. Account for foreign-status material in finished vessel

5. Make Customs Entry and deliver finished product at finished product rate of duty