Mitigate Tariff Risk – Consider Foreign Trade Zone (FTZ)

Tariffs are again grabbing headlines and sending reverberating uncertainty across the c-suites of global companies. Will he or won’t he, and if he does how long can my cash flow absorb the impact of my inventory carrying costs suddenly increasing 10 – 25%? These are some of the questions keeping CEOs and CFOs up at night.

If your company is seeking to mitigate risk to its financial stability from potential new tariffs on your imported components and inventory, activating your facility as a foreign trade zone (FTZ) can reduce your cash flow risk. We don’t know yet how the new tariffs may be structured, so we don’t know the full extent to which an FTZ may be used to reduce your tariff liability in terms of real dollars. For example, we don’t know whether you would hypothetically be able to take advantage of the inverted tariff benefit. We do know that at a minimum an FTZ should be able to be used in the following ways:

  • Defer your tariff paymentsimproving cash flow – At a minimum, activating your facility as an FTZ would allow you to import foreign product into your facility, and hold the inventory in your facility indefinitely, deferring the payment of import tariffs until such time that your product leaves your facility and enters U.S. customs territory; if your product leaves your facility to be re-exported or to be transferred to another FTZ or customs bonded facility, then your tariff payment may be eliminated (in the case of re-export) or further deferred (in the case of zone-to-zone transfer).
  • Eliminate your tariff payment on re-exports outside of USMCA territory –If your imported components are being manufactured into a finished good that will be re-exported outside of U.S., Canada and Mexico, then you will likely be able to eliminate your import tariff completely. This is because your imported product will never enter U.S. customs territory, it is destined for export and your FTZ provides a platform for global commerce outside of U.S. customs territory.
  • Eliminate your tariff payment on scrapped material – For product that never enters U.S. customs territory due to being scrapped, Customs and Border Protection may authorize the product to be destroyed in your FTZ, eliminating the tariff payment completely. The tariff does not apply to product that is sold for scrap value, and again specific authorization must be provided by CBP to take advantage of this benefit.

Should I activate as an FTZ if my tariff payments are just deferred, and not eliminated?

Take a look at your warehouse and estimate the value of your imported components or products. Is your inventory worth $1 million dollars? $2 million? Let’s say it’s worth $1 million, and you are facing a potential 25% tariff. The cash flow impact of the new 25% tariff could be $250,000. Is your company prepared to take that hit to its cash flow? With a $250,000 impact on cash flow, activating your facility as an FTZ can easily pay-off in its first year. With the cost of cash still relatively high and not likely to come down as quickly given these inflationary pressures, cash flow benefits of activating as an FTZ will continue to payoff.

How do I activate my facility as an FTZ?

If you are located in FTZ #176 service area, we can activate your facility as an FTZ through the grant of authority of the Greater Rockford Airport Authority. We can help walk you through the process. It takes some investment, but we will make it as easy as we can.

For next steps, Contact:

Carrie Zethmayr
FTZ #176 Administrator
312-221-1115
carrie@zethmayr.com