Foreign Trade Zone (FTZ) Basics

In today’s global economy, US manufacturers and importers face heavy competition from international companies in manufacturing and selling goods. To even the playing field, the United States enacted the Foreign Trade Zone (FTZ) Act of 1934. These FTZs are geographical areas “in or adjacent to” U.S. Ports of Entry, designed to allow local manufacturers to compete with foreign enterprises by creating special economic zones that are “outside” of U.S. commerce. Merchandise can be held in these zones without being subject to duties and other taxes. In essence, a Foreign Trade Zone (aka Free Trade Zone) is a highly regulated bonded facility that supports US import and export activities.

 

Who benefits from using FTZs?

  1. United States
    1. Job growth
    2. Increased competitiveness in the global economy
  2. Manufacturers
    1. Inverted tariff rule allows for importing raw materials, components, and/or partially finished goods and then manufacturing/assembling into a final, single tariffed good
    2. When selling this final good domestically, manufacturers declare only one product, thereby potentially reducing duty rate
    3. Ability to export goods in-bond without ever having to pay duty to the United States, bypassing duty drawback
  3. Importers with their own distribution centers
    1. Direct delivery in-bond prevents delays at port
    2. Weekly Customs Entry minimizes MPF (Merchandise Processing Fee) payment
    3. Importing goods in-bond into own warehouse delays duty payment until time of order placement (unlimited storage time)
      1. Re-export or destroy goods without ever paying duty
    4. Importers using a forwarder’s FTZ
      1. Import goods into the U.S through an FTZ warehouse in order to gain Weekly Custom’s Entry benefits. Note: this method slows the movement of freight by adding an extra stop before delivery to the final destination.

Weekly Entry:

One of the more financially interesting benefits of having an FTZ is the ability to declare customs on a weekly basis vs. a per shipment basis. This allows shippers to maximize their MPF payment at $485 on all shipments imported during the zone week, instead of on a per shipment basis.

Thinking about converting your facility to an FTZ?

Companies looking to convert their facilities will need to apply with the FTZ Board. After the board has reviewed your application, you can expect a 9-12 month process before your FTZ is up and running. Having an FTZ comes with the responsibility of running a bonded facility, so Customs will require tight security and robust inventory software to provide real-time accountability of any goods moving in and out of the zone. The “Operator” of the FTZ is liable for any goods that leave the zone and are unaccounted for, and customs needs to ensure that duty is paid on any item leaving the zone for consumption into the United States. Heavy fines are issued by CBP for any unaccounted inventory.

Incoterms Explained: Protecting Yourself in International Trade

At last, you’ve found the perfect manufacturer. Samples looks great, pre-orders are rolling in… and then your supplier brings up incoterms. Who has the patience to memorize a dozen confusing acronyms with such subtle nuances? To better wrap your head around incoterms, we’ve come up with a scenario equally as complicated but a bit more relatable: buying a bed off Craigslist.

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Here’s the situation

You’re in the market for a new bed. After identifying a trustworthy owner on Craigslist, you successfully negotiate a fair price. Then comes the tricky part: how are you supposed to get the bed from point A to B? The bed is in Oakland and you’re across the bay in San Francisco. And did they mention the 5th floor walkup? Who is going to pay to move this? There’s no standard agreement for who does what in these situations, is there?

In your perfect world, the Seller would just take care of everything and bring the bed right to your bedroom. Guess what? Craigslist owner would prefer you come to them and do all the work. Actually, in practice both parties would prefer to pay a third party to make the arrangements, hence why moving companies–or freight forwarders for international cargo–exist (perhaps hiring your younger brother in this case). When you break it down, there’s actually a lot of work, fees, and risk involved here, which closely mirror the processes involved with international trade:

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Like most exchanges in life and business, moving stuff involves a little negotiating. After all, there are a variety of different methods of transporting the bed (via car, U-Haul, drone) which have unique cost structures and ultimately will require one party or the other to pony up more of their time, money and liability for the movement of the furniture.

On an international scale, this is exactly why we have incoterms–to clearly communicate the tasks, costs and risks associated with the transportation and delivery of goods. We can visualizing this example’s breakdown of responsibilities in the following table:

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You can interpret the divisions in the table as the points in which ownership and responsibilities transfer from Seller to Buyer. When negotiating incoterms, it helps to ask yourself: what parts of the shipment process do I want control over?

We generally recommend importers buy FOB terms for savings, protection from liability in origin country, and better control and oversight as the Buyer names the freight forwarder. Similarly to moving a bed through the Bay Area, you wouldn’t want the Seller to have her friend with the banged up pickup truck handling your new bed and risk it getting damaged, so you purchase the furniture on FOB terms and take charge of your own destiny once it’s in your van!

West Coast Ports Return to Normalcy

Update: West Coast ports from San Diego to Seattle resumed business as usual on Monday, concluding a nine-month saga of negotiations and slowdowns that left a long trail of economic damage in its wake. Both importers and exporters breathed a huge sigh of relief on Friday evening when dock workers and port owners finally agreed on a tentative labor contract.

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However, a full recovery will not happen overnight. The five-year contract, brokered by Labor Secretary Tom Perez, still needs to be ratified before it can cover thousands of employees across 29 ports. Despite dock workers returning to work on Monday, operations have been far from smooth, with hiccups in Oakland ranging from absent crane operators to disputes over break times. Not to mention the ports are still facing their worst congestion since 2004–dozens of ships are anxiously waiting to berth in Long Beach, Los Angeles and Oakland. Estimates range from four to twelve weeks before the backlog is completed and port operations are once again able to handle a steady flow of vessels.

Until then, many retailers will likely continue to divert cargo to ports on the East and Gulf coasts or ship by air freight, incurring higher shipping costs on top of billions in lost sales to date. While the worst seems to have passed, the long-term impact on the competitiveness of the West Coast ports remains to be seen.

Fedex & UPS to calculate rates based on size in 2015

UPS and Fedex ground service rates will start taking into account the dimensional weight for all sizes of packages starting December 29 and January 1, respectively.  If your eCommerce business may be affected by the rate hikes, you may benefit from assessing your current shipping processes.

What is dimensional weight?

Dimensional weight (a.k.a. chargeable weight) is the weight “equivalent” of a package’s volume.  In other words, your package’s volume is multiplied by a dimensional factor to calculate the dimensional weight; in UPS and Fedex’s cases, this factor is 166 cubic inches per pound.

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Managing expectations in international trade: Incoterms

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How to manage expectations in international trade: Incoterms

Incoterms are terms of sale that define who arranges for the payment, handling, and – in some instances – insurance for the goods during shipping, from the moment the goods leave the seller’s door up until their arrival at the buyer’s warehouse. Besides negotiating the purchase price of your goods, Incoterms are likely the most important part of your international transaction. And yet these terms of sale are also often the most misunderstood and overlooked part, leading to unexpected charges, risks, and responsibilities.

Using Incoterms can reduce the likelihood of disputes between a seller and buyer over their respective responsibilities and costs. However, because these terms are so poorly understood, many great relationships flounder over misunderstandings of this basic issue. A clear understanding of Incoterms is necessary to avoid potentially disastrous consequences when importing goods.

Read more for details and a cheat sheet to download!

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On Packaging and Damage Prevention

 

On Packaging and Damage Prevention

To all importers and your suppliers and freight forwarders:

Packaging your goods securely is vital to avoid any financial loss that could result from potential damages that your shipment might incur as it gets transported from one place to another.

Yes, unfortunately it does happen! Though infrequent, a couple of our clients have received their shipment cartons poorly labeled and wrapped (and therefore almost unidentifiable) or some even partially crushed. Though they have all been fortunate enough so far to not have product damage within the boxes, we know that damage of any kind can be avoided by ensuring that the goods are packaged well as individual pieces and in each master carton.

In general, damages can result from:

  • Standard wear and tear (shipment handling)
  • Double stacked pallets
  • Insufficient inner packaging
  • Weak master carton structures

The best way to secure your goods against these possible damages is to ensure packaging strength from the inside out. In other words:

  1.  Start by making sure your goods themselves are wrapped or contained sturdily.
  2. Then ensure that they are positioned in the master carton to minimize empty space.
  3. Finally, make sure your master carton is structurally sound to support any extra weight or protect against mishandling.

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Hidden Costs From Freight: Fuel Surcharges

Fuel Surcharges

It has recently come to our attention that when freight forwarders quote their clients to move a shipment from point A to point B, they neglect to factor in any additional surcharges that are applicable at the time.  Instead, they advise you of the rate of the freight and forget to mention that there are peak season surcharges or fuel surcharges.

We discussed in another article the peak season surcharges and their ranges.  Now we would like to bring to the stage fuel surcharges, a common cost that importers may forget to consider when calculating their products’ landed costs.

What are fuel surcharges? 

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What is Volumetric Weight?

Not All Weight is Created Equal

Who knew that something light and fluffy could be considered as heavy as lead?

Every aircraft, truck, or ship – no matter the size – is ultimately limited in space or in weight. We’ve all tried to cram too much into the glovebox and tried to shut it to no avail. The same goes for all carriers moving your goods — their space will reach capacity.

For the carriers, no matter the mode – land, air, or sea – it all boils down to maximizing the load and consequently their revenue. In order to account for light shipments that take up a lot of space and prevent cargo space to be filled by other goods, carriers developed standard conversion factors to measure “volumetric (dimensional) weight” and compare it to the actual weight, to determine a more practical and revenue-raising method of charging freight. After all, the price to ship an airplane full of iPhones should be significantly different than a plane containing pillows.

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I made it through Customs! How do I get delivery arranged?

What happens after your products arrive in the country and successfully clear customs?

Currently freight brokerages, a $350 billion market of middlemen, lead the charge for domestic shipping, capturing as much as 24% margin per shipment. This means shippers spend more, drivers make less, and consumers pay premiums for products at their final destination.

Keychain Logistics’ vision is to consolidate the inefficiency of modern-day freight management with an intuitive, online platform that connects shippers directly with drivers. This means increased savings for shippers, better wages for drivers, and ultimately more competitive pricing for consumers nationwide.

So before you hire one of 19,000 freight brokerages to make expensive phone calls, consider the Flexport of domestic freight management — Keychain Logistics.

Get started with Keychain here, or learn more here.

Note: this post was written by a guest writer from Keychain Logistics, one of Flexport’s domestic shipping partners.