Within the last few weeks, the Neosho chamber announced plans for a Foreign Trade Zone (FTZ) in the Neosho Industrial Park. I’ve been asked a number of questions about it so I thought I’d pass on what I know and share some ways that a FTZ can help existing businesses grow while attracting new business at the same time.
First off – what is a Foreign Trade Zone? According to the Department of Homeland Security, FTZ’s are areas inside the U.S. that are considered “outside” of the territory for U.S. customs purposes. In other words, items coming into FTZs from foreign countries are still considered to be “outside” the U.S. for purposes of assessing duties and entry procedures. Authority to establish FTZs dates back to the 1930s during the Great Depression as a way to accelerate trade.
Today, there are hundreds of FTZs around the country. In 2011, 12 percent of foreign goods entered the U.S. through FTZ’s – 75 percent of that as crude oil. Other key products include autos, consumer electronics, and machinery. Worldwide, foreign trade zones employee over 66 million workers. That includes 320,000 workers in the U.S. All 50 US states have at least one FTZ. Forty-five states have at least one subzone. As of 2012, there are 132 active zones and 263 subzones scattered across the U.S.
So how does an FTZ benefit a business? There are a number of benefits, but I’ll focus on the three I think are most important: duty deferral, inverted tariffs, and duties only on products ultimately sold in commerce.
Duty deferral is first. Without an FTZ, if a company imports a product that is subject to duties, those duties are typically paid to the government when the goods enter the country. For example, if a container of widgets costing $100,000 has a 5 percent duty, you’d normally pay that $5,000 duty when the goods arrive in the U.S. at a port – regardless of when you ultimately sell them. With a FTZ, that duty payment isn’t eliminated, but it is shifted to be when the goods are “sold” and shipped out of the FTZ. That means companies that import (and warehouse) sizable amounts of dutiable inventory can postpone payments for duties – and ultimately only pay for it when they sell it. That helps prevent having a large amount of money tied up in duty on inventory that is sitting in a warehouse.
Another benefit is that of avoiding inverted tariffs. In simple terms, that allows for tariffs on imported components to be eliminated if those components are used to make something that, as a finished item, wouldn’t be subject to tariffs. An example for me would be fabric used on a chair. If I import fabric from China, the duty on that fabric is 10 percent. But if I’m in a FTZ and I use that fabric to make a cushion and put that cushion on a chair, the 10 percent duty is never charged because the finished item – in this case a chair – is not subject to import duty. So by “converting” the component into something that has no duty, you avoid the duty altogether.
Page 2 of 2 - Finally, there is a benefit if part of what you import is consumed, wasted or scrapped during processing. This comes into play a lot in chemical processing. An example would be if you brought in 100,000 gallons of a chemical that was mixed with another chemical in the U.S. to create a finished product. If during the process, 15 percent of the imported chemical is consumed (maybe it evaporates, maybe it’s burned off, etc.,) you’d only pay duty on the 85 percent that ultimately ends up in the final product. (It may not sound like much, but for big chemical companies, it can save millions of $$.)
So, at the end of the day, there are some very interesting (and likely beneficial) things that can come with establishing an FTZ here in Neosho. It’s not going to be a slam dunk for drawing in new businesses, but it certain looks like it will be yet another arrow in the quiver of economic development that can give Neosho yet another advantage that it doesn’t have today. For me and my small business, I see opportunities I can capitalize on. And for other local companies who do much more importing, the opportunities are even greater. Anything we can do to help level the playing field and help our current employers while creating more draw for new industry in Neosho is a good thing. I look forward to seeing how it all comes together.
I hope to see all of you at the Neosho High School homecoming tonight. The weather looks to be perfect for a great night of football and fun!
Until next time: stay the course, keep the faith, and may God bless Neosho!
Richard Davidson is mayor of Neosho.