International Trade Strategic Practices Reducing Import Expenses by using a FOREIGN TRADE ZONE Renza, Inc © 2013 Renza, Inc.

What is a Foreign Trade Zone? …….….…1 How Importers Use Foreign Trade Zones..2 Benefits of Foreign Trade Zone Use … What Firms Currently Use a FTZ ……….. 6 Distribution Cost Reduction Examples …. 7 Production Cost Reduction Examples … 9 Foreign Trade Zone Participants ……….. 10 FTZ Costs …………………………………….. 11 Options for Using FTZ …………………. 12 TABLE OF CONTENTS:

A Foreign Trade Zone (FTZ) is a physical site located within the U.S., but considered outside the U.S.A. customs territory for duty purposes. This means imported goods may be admitted or delivered into the FTZ without formal customs entry or the payment of duty and MPF fees. (U.S. goods may also be brought into the FTZ.) FTZ allow avoidance, reduced or delayed duty payments on foreign merchandise, in addition to other savings. While in the FTZ, merchandise may be assembled, exhibited, cleaned, manipulated, manufactured, mixed, processed, relabeled, repackaged, repaired, salvaged, sampled, stored, tested, displayed, & destroyed. The FTZ reflects U.S. trade policy. Its purpose is to encourage activity and jobs within the U.S. in competition with foreign alternatives. Page 1

Store merchandise until sold, delaying payment of duty and MPF. Warehouse & distribute merchandise in the U.S., delaying payment of duty and reducing MPF. Warehouse & distribute merchandise for export, eliminating payment of duty and MPF fees. Inspect for defects and avoid duty on merchandise that is returned or destroyed. Manipulate imported goods by combining (possibly with domestic goods) into kits to reduce or avoid payment of duty. Manufacture imported & domestic goods, delaying and avoiding payment of duty on parts and components used in a finished goods with an upside down tariff. Page 2 Importers Use Foreign Trade Zones to:

Foreign Trade Zone What are the Benefits of A Foreign Trade Zone ? The benefits are both financial and operational. Duty Deferral Duty Elimination Merchandise Processing Fee (MPF) Reduction Simplified Procedures – Upon arrival at the port of entry, goods move into the FTZ without CBP formalities. Blanket authority to admit goods immediately into the FTZ is available. Goods leaving the FTZ can be declared on a weekly entry that summarizes all activity. FTZ inventory control & reporting requirements may be automated and integrated with ERP systems. Page 3

Foreign Trade Zones Page 4 1.Importer of seasonal merchandise purchases goods in January & stores them in FTZ until April when they are sold. Duty payment is made in April, when goods leave the FTZ. Improves cash flow by delaying duty payment. 2.High volume importer brings goods into FTZ without paying duty or MPF. Daily shipments are consolidated into one weekly entry, with one maximum MPF fee instead of several daily MPF fees. Reduces MPF fees, delays duty payment, improves cash flow. 3.Importer brings various goods (some of which are dutiable) into FTZ and packages them in a manner that qualifies as a kit with a lower duty rate. Example – Cell Phone, a case, head set and battery. 4.Importer experiences a certain percentage of waste, scrap or obsolete merchandise. If destroyed in the FTZ, no duty is payable. Reduces duty that would have been paid. How a FTZ is used to Reduce Cost

5 Importer warehouses goods in FTZ for export to other countries. No duty is payable on exported goods. 6Goods are returned to vendor from FTZ. No duty is payable if goods do not enter U.S. customs territory. 7Manufacturer imports parts & components into FTZ and produces a finished good. Duty is payable at the finished good rate. Duty reduction equal to difference in duty rate for finished good and average duty rate on parts. 8Importer of goods with a high duty rate (apparel, footwear, etc.) admits goods to FTZ for distribution within the U.S. Duty payment deferred for the time that goods remain in warehouse. Weekly entry reduces MPF. Foreign Trade Zone Page 5

Firms of all sizes and types use FTZ. Their activities include manufacturing, warehousing and distribution. Their common objective is the streamlining of operations and cost reduction. Foreign Trade Zone Page 6 Companies Currently Using FTZ BMW Yamaha Music Kia Motors Black & Decker Honda Deere-Hitachi Hyundai Dell Mercedes-Benz Matsushita Ricoh Makita Yamaha Motor Stihl Onkyo Sketchers Adidas CNH America

Each CBP entry is subject to the Merchandise Processing Fee (MPF) at the rate of % of the value of the goods. There is a minimum fee of $25 and a maximum fee of $485 per entry. There is no MPF payable for goods entering a FTZ. Daily withdrawals from a zone can now be consolidated into 1 weekly entry that is subject to one MPF with a weekly maximum of $485. An importer that imports $30M/year with above assumptions has an average MPF of $399 per entry & could reduce MPF fees by $78K per year [(5 X 52 X $399) – (52 X $485)]. Foreign Trade Zone Page 7 Examples for Distribution These examples assume an annual import value of $30M, 5 entries per week, inventory turns of 4 times/year, scrap / waste of 2%, exports equal 5% and an average duty rate of 24.9%. Proportional results can be expected from different value s. Goods that are exported from a FTZ, either as sales to foreign customers or as returns to foreign vendors are not subject to duty. Assuming an export / return rate of 5%, the cost reduction is approximately $373K. ($30M X 5% X 24.9%). The savings on scrap & waste of 2% is approximately $149K. ($30M X 2% X 24.9%)

Foreign Trade Zone Page 8 These examples assume an annual import value of $30M, 5 entries per week, inventory turns of 4 times/year, scrap / waste of 2%, exports equal 5% and an average duty rate of 24.9%. Proportional results can be expected from different values. Duty on imported goods is not paid until they are sold to the customer and withdrawn from the FTZ. Under the above assumptions and a 7.5% cost of money, the cost reduction on duty deferment is $140K. ($30M/4 X 24.9% X 7.5%) Duty on imported finished goods brought into the FTZ is not paid until they are withdrawn from the FTZ and sold to the customer. Assuming annual purchases of $50M, a duty rate of 20.0%, a cost of money of 7.5% and a finished goods inventory turns of 4 times a year, then this cost reduction component is approximately $187K: ($50,000,000/4 X 20.0% X 7.5%) The total cost reduction under the above assumptions for MPF avoidance, scrap & export duty avoidance and duty deferral is approximately $740K

Foreign Trade Zone Many parts of articles have a duty rate that is higher than the finished article itself. This is called an inverted tariff. A manufacturer or packager can reduce duty expense by an approximate amount equal to the average duty rate on the imported parts minus the average duty rate on the finished article times the value of the imported parts. Assuming an average duty rate of 6% on the imported parts and a finished goods duty rate of 1%, the manufacturing cost reduction is $1.5 M. ($30 M X 6% - 1%) Articles that are combined and packaged in a FTZ so as to qualify for classification as a kit will be entered at the duty rate equal to the article that determines the essential character of the kit. Example – If a cellular phone (0%), battery(3.4%), carrying case (20.0%), headset (4.9%) & a charger (1.5%) are combined in a package for retail sale, its essential character would be the cellular phone. The articles combined in the kit, when shipped from the FTZ, would be dutiable at the rate for the phone or 0.0%. Page 9 Examples for Production

Page 10 Foreign Trade Zone User – An importing company whose products are entered and located in a FTZ Administrator – Handles FTZ transactions and reports, ensures compliance with regulations. Can be employee of User or third party. Operator – Provides day-to-day operational responsibility and oversight over zone activities. Can be the Grantee, can be the User or can be a 3PL. Grantee – A governmental entity or private not-for- profit organization. Usually a city government or port authority. Foreign Trade Zone Board – Authorized by Department of Commerce to grant the privilege of establishing, operating and maintaining FTZs under the FTZ Act. Approves all applications. FTZ PARTICIPANTS

Foreign Trade Zone FTZ IMPLEMENTING COSTS Page 11 Initial Grantee Application Fee $7.5 to $10K Activation Fee - None Software License - $20K – $50K Bond Premium - $3K - $5K Miscellaneous - $3K On-Going Grantee Annual Fee - $7.5 to $10K Administration - $35K - $75K

General Purpose Zone – A single warehouse or part of an industrial park for use by the general public. Commonly operated by a 3PL. Features - Low or no startup costs, immediate use. Highest cost in the long run. Usage-driven site or Subzone – A single purpose site for one company. Features – Approvals require 1 to 3 months startup time. Initial cost, but lowest long-term costs. Foreign Trade Zone Page 12 STRUCTURE FOR USING FTZ