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North Bay Business Journal

Friday, October 19, 2012, 8:30 am

Foreign trade designation could help manufacturers

Exporters can get breaks on duties, tariffs, taxes

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Helps local manufacturers

Local manufacturers see this as beneficial process in helping to improve profitability.

“We are exploring the possibility of distributing our products in Central and South America,” said Annette O’Connor, president of Castle USA in Petaluma. The manufacturer of woodworking machinery currently is marketing products through a dealership in the United Kingdom and directly to customers in Canada, Mexico, China and the U.S.

“If a product has a slim margin, whatever helps to reduce costs can make it available to a broader customer base,” she said. ”Being located within a foreign trade zone benefits our business and others facing volatile exchange rates, handling costs, import-export fees and taxes.”

Being in a zone can also be favorable for the region’s wine industry.

“There has to be an import component to receive a Customs duty benefit,” Mr. Maloney said. “Many wine producers today import wine, juice, corks, bottles and barrels and, therefore, can benefit from being located within an FTZ environment through lowered or deferred duties. If they then export their final products to other nations, they can avoid paying duty on the imported inputs.”

Boost for wine exports

A new foreign trade zone will enable North Coast wine exporters to establish strong brands in foreign markets, creating a long-term strategic advantage, while making the export process less expensive and leaving more room for profits, according to Liz Thach, Ph.D., a Sonoma State University professor focusing on the wine business and management.

“California also has a good market for its wines in the U.S.,” Dr. Thach said. “We had a bigger winegrape harvest than expected in 2012. Higher export levels typically track with larger harvest yields.”

The Wine Institute reported in February that U.S. wine exports in 2011 reached a new record of $1.39 billion in revenues, an increase of 21.7 percent from 2010. About 90 percent, or $1.25 billion of the total, represented wines exported from California.

These exports went from the U.S. to about 125 countries, included the 27 European Union nations. Canada, Hong Kong, Japan and China imported the most U.S. wine with increases of from 23 percent to 42 percent from 2010.

At the same time, about 26 percent of wine consumed in the U.S. is imported.

Similar to duty-free

A federal trade zone is similar to an airport duty-free zone for consumers, but one in which local firms can defer, reduce or eliminate duties on imported, exported or stored goods as they operate under a series of special exemptions and guidelines, according to Mr. Stone.

“General-purpose FTZs include all firms within their boundaries,” he said. “In addition, companies engaged in foreign trade in other areas often want to move within these zones to take advantage of cost savings.”

Duty-free treatment is accorded items that are processed in trade zones and then re-exported. At the same time, duty payments are deferred on items until they are brought out of the zones for sale in the U.S. market. This helps to offset Customs advantages available to overseas producers that compete with domestic industries.

Federal trade zones are considered to be outside of a Customs territory for the purpose of duty payment. Therefore, goods entering a zone are not subject to tariffs until the goods leave the zone and enter Customs territory.

Product assembly tax breaks

Merchandise shipped to foreign countries from the trade zones is exempt from Customs duties, excise or ad valorem taxes. This provision is especially useful to firms that import components in order to manufacture finished products for export.

“Now, our manufacturers have more options and the freedom to make the best economic choices when it comes to assembling products here or closer to a particular market,” said Dick Herman, president of North Bay manufacturing group 101MFG.

He said the expansion of the Port of San Francisco’s foreign trade zone is important to North Bay manufacturers because it could reduce costs by as much as 2 percent to 8 percent associated with handling and duty fees for imported products used to add value to specific parts and assemblies.

“These savings are a real economic benefit,” Mr. Herman said.

There is no time limit on goods stored inside a trade zone, and certain foreign and domestic merchandise held in the zones also may be exempted from state and local inventory taxes. This allows companies to minimize costs while products are waiting to be shipped.

In addition, quota restrictions are in some cases waived for items entering a zone. However, restrictions would apply if these items were to enter the U.S. market, as previously discussed.

Collectively, benefits derived by businesses within the zones include:

  • Delayed duty payments on imported products.
  • Choice of the finished-product tariff rate for goods further processed inside the zone, subject to public-interest consideration.
  • Complete duty avoidance if products are exported directly from the zone or if products are assembled, packaged and then exported.
  • Payment of duties only on the value of the foreign components, not on labor, overhead or profit.
  • Exemption from state and local inventory taxes on foreign merchandise.
  • Potentially lower insurance premiums because of Customs security requirements, which provide protection against theft and defalcation.
  • Temporary or complete avoidance of quota restrictions.

Makes North Bay more competitive

“Companies today are looking for financial incentives from government, and they’re getting them from many other cities, counties and states,” said Carolyn Stark, executive director of the Sonoma County job-creation project BEST (Building Economic Success Together). ”Creating a foreign trade zone that offers tax incentives is an exceptional move to make Sonoma County and the North Bay even more competitive.”

For many years, foreign trade zones were associated only with big-city ports near an ocean. In recent times, however, the definition of such a zone has been changed to include industrial areas adjacent to, or relatively close to, ports of entry.

The Sonoma County Economic Development Board plans to hold an information session for chambers of commerce and companies and local-government representatives participating in BEST to review the guidelines and rules associated with the new trade zone.

The zones were created by the Foreign Trade Zones Act of 1934 to expedite and encourage foreign commerce in the United States and to provide special customs procedures for U.S. plants engaged in international trade–related activities.

U.S. Customs, part of the Homeland Security Council, as well as the U.S. Department of Commerce’s Foreign-Trade Zones Board supervises the zones.

Today, there are more than 230 foreign trade zone projects and nearly 400 sub zones in the United States. California currently has 17 general-purpose trade zones, including ones in Oakland, San Francisco and San Jose.

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