Foreign Trade Zone Opportunities

2 Small Business Opportunities From 1987 to 1992, 5.8 million jobs were created in the U.S. by small business, while 2.3 million jobs were lost in large business. With this enormous shift of employment to smaller, growth-oriented industries, it is particularly important to make every community in America “small business friendly” and to promote an environment for them to grow and prosper. Zones are “equal opportunity enablers.” (Dept. of Commerce) Export-Oriented Business Propagation Exports account for 1 in 6 manufacturing jobs, and 1 in 5 service jobs in America (Dept. of Commerce). Jobs attributable to export grew 13.2% from 1987 to 1991 while total jobs grew only 7.9% in the same period (Dept. of Labor) Zone-Specific Business Job Creation It has been estimated that for every 100 direct jobs created by zones, 167 additional jobs are created outside the zone. This means that 370,000 direct jobs in zones have created well over 600,000 additional jobs in the United States (Univ. of Georgia) Investment (New/Expanded: Plant, Equipment, Personnel) The Benefits Jobs Revenue Fees from Zone users Annual Fees from Sub-Zones

3 What is a Foreign Trade Zone? Program established in 1934 by Congress to promote trade and create jobs A Zone is a physical place (land, warehouse, factory) located within the United States but is legally considered outside U.S. Customs Territory FOREIGN TRADE ZONE (“FTZ”): A restricted-access site, in or adjacent to a Customs port of entry, operated pursuant to public utility principles under the sponsorship of a corporation granted authority by the Board and under the supervision of Customs Service. Typically, zones are located in industrial parks, marine terminals, airports or warehouses Zones provide savings and flexibility to users involved in international trade Growth in zones 1970 to 2001 Examples of zone uses and users

4 Growth in Zones DollarDirect YearZonesSubzones Volume Jobs $.1 Billion1, $491.0 Billion350,000 Expansion impacted by: New legislation Expansion of world trade Local economic development interest Corporate cost containment - form of tax planning 3,500 firms 90% U.S. based 70% small firms 61% of goods admitted to zones are domestic Exports from zones: exceed $30 billion (FY06)

5 Who Uses Zones? Wide Variety of Industries : Autos Production Equipment Pharmaceuticals Oil refineries Distribution centers TV’s and appliances Computers and components Food stuffs Chemicals Apparel and footwear Ship building and repair Medical equipment Telecommunication equipment Photographic equipment Wide Variety of Industries : Autos Production Equipment Pharmaceuticals Oil refineries Distribution centers TV’s and appliances Computers and components Food stuffs Chemicals Apparel and footwear Ship building and repair Medical equipment Telecommunication equipment Photographic equipment Household Names: Honda Abbott Labs Kodak Caterpillar General Electric IBM WalMart General Motors SONY AT&T Xerox Winnebago Intel Lexmark UPS Cincinnati Milacron US Airways BP Ford Hewlett Packard Household Names: Honda Abbott Labs Kodak Caterpillar General Electric IBM WalMart General Motors SONY AT&T Xerox Winnebago Intel Lexmark UPS Cincinnati Milacron US Airways BP Ford Hewlett Packard

6 FFlexibility  Storage  Packaging/re-packaging  Labeling/re-labeling  Repair  Testing  Assembly  Manufacturing  Destruction  Zone to Zone transfers FFlexibility  Storage  Packaging/re-packaging  Labeling/re-labeling  Repair  Testing  Assembly  Manufacturing  Destruction  Zone to Zone transfers What are the Benefits ? $ Duty Savings  Duty deferral (cost of capital not incurred)  No duty on re-exports  Duties reduced or eliminated through manufacturing (inverted tariff benefit)  Eliminated or reduced duty on scrap and waste  Goods admitted in excess of quota $ State and Local Tax exemptions in some states $ Merchandise Processing Fee (MPF) Savings

7 What are the Benefits ? FReduced Paperwork / FFaster Delivery (Special Programs)  Estimated weekly entry  Direct delivery  Blanket CF214  Estimated weekly export  Estimated weekly Zone-to-Zone transfer  Local Control System (movement of goods within port) FProduction Equipment  Production equipment and components  No Customs duties paid until completely assembled, installed, tested and used in full- scale production FAvoid Time Delays/Potential Penalties  Correct marking problems  Resolve documentation problems  Other federal regulations may not apply (FDA, USDA, etc.)

8 Warehouse/ Manufacturing Plant Without FTZ To Customer Foreign Parts File Customs Entry File Customs Entry Pay Duty

9 Export To Domestic Customer Foreign Trade Zone (Warehouse/ Distribution / Manufacturing Plant) Foreign Trade Zone (Warehouse/ Distribution / Manufacturing Plant) With FTZ Foreign Parts No Customs Entry Made No Customs Entry Made No Duty Paid No Duty Paid X No/Reduced Duty on Scrap No/Reduced Duty on Scrap X X No Duty Paid Pay Duty File Customs Entry X

10 Without FTZ Raw Materials Parts Assembly To Customer $228,000 Electrical Capacitors 4.7% x $2,000,000 $ 94,000 (Heading ) Resistors 3.0% x $2,000,000 $ 60,000 (Heading ) Switches 3.7% x $2,000,000 $ 74,000 (Heading ) Duty Due Manufacturing Example - Entry at Parts’ Rates

11 With FTZ Raw Materials Parts Assembly in FTZ Parts Assembly in FTZ Electrical Capacitors $2,000,000 Resistors $2,000,000 Switches $2,000,000 * Duty Rate 0% Electrical Capacitors 0% x $2,000,000 $0 Resistors 0% x $2,000,000 $0 Switches 0% x $2,000,000 $0 $0 Savings: $228,000 *Finished aircraft rate under the Agreement on Trade in Civil Aircraft Manufacturing Example - Entry at Assembly Rate To Customer No Duty Paid X Total Value $6,000,000 Duty Due

12 Without FTZ Auto Parts Auto Plant To Customer Car Radio 5.1% x200,000 units x$ 50/unit $510,000 Battery 3.9% x200,000 units x $ 15/unit $117,000 Switches 3.7% x200,000 units x$100/unit $740,000 $1,367,000 Manufacturing Example - Entry at Parts’ Rates Duty Due

13 With FTZ Manufacturing Example - Entry at Assembly Rate No Duty PaidX Duty Rate 2.5% Savings: $767,000 Auto Parts FTZ Subzone Auto Plant To Customer Car Radio $10,000,000 Battery $3,000,000 Switches $20,000,000 Total Value $33,000,000 Car Radio 2.5% x 200,000 units x $50/unit $25,000 Battery 2.5% x 200,000 units x $15/unit $75,000 Switches 2.5% x 200,000 units x $100/unit $500,000 $600,000 Duty Due

14 Weekly Entry MPF Savings - Distribution Supplier FTZ Distribution Center FTZ Distribution Center To Customer WITH FTZ 52 weekly entries X $485 max MPF Fee = $25,220 Savings$120,300 The max Merchandise Processing Fee (MPF) per entry is $485 [.21% multiplied by shipment value] Max fee is paid on any shipment (customs entry) valued at $230,952 or higher. WITHOUT FTZ 300 Containers/shipments per year Each container/shipment (entry) valued at $500, entries X $485 max MPF Fee =$145,500

15 Without FTZ - Production Equipment Manufacturing Plant Make entry upon receipt at Port of Entry Pay duty on parts, components, pieces, sub- assemblies, integrated units, or other constituent materials

16 With FTZ - Production Equipment Pay duty only when placed into actual service Duty assessed on final product classification; NOT parts Single consolidated entry Admit to Zone Equipment into Service No Duty at the Time of Import X

17 How to Establish a FTZ SUNSET PROVISIONS: Grant of Authority for a zone or a subzone shall lapse unless the project is activated and in operation within five (5) years of the date of a grant issued after November 1, Public Entity Grantee Prepare and File Application FTZ Board Approval Grant for Special Zone Sites Prepare Operating Agreement Select Operator Prepare & File Zone Schedule Activate Zone Apply to Customs (Identify Site, Operator, Personnel) Prepare Procedures Manual Customs Inspection & Background Check Obtain FTZ Bd Approval if Mfg Use Purchase Customs Bond Sign Operating Agreement Receive Written Authorization from Customs and Grantee

18 How to Establish a FTZ Application to FTZ Board Department of Commerce U.S. Customs Department of Army Receive Grant Activation Sunset Provision Application to FTZ Board Department of Commerce U.S. Customs Department of Army Receive Grant Activation Sunset Provision Define need, objectives and scope of proposed zone project

19 Who Can Apply? A public corporation, supported by enabling state registration authorizing the corporation to apply Port authority State agency Economic Development Agency City County Group of cities/counties/ports A non-profit corporation supported by enabling state registration authorizing the corporation to apply Economic development entity Airport operator A private, for-profit corporation may apply if it is supported by a special act of the state legislature naming the corporation and giving it a charter to establish a zone. GRANTEE: A corporation granted the privilege of establishing, operating and maintaining a Foreign Trade Zone by the Foreign Trade Zone Board. The grantee may be:

20 Where can Zones be Established? PORT OF ENTRY: In or adjacent to a PORT OF ENTRY in the United States as defined by part 101 of the regulations of the Customs Service (19 CFR part 101). USER FEE AIRPORT: In or adjacent to a user fee airport authorized under 19 U.S.C. 58b and listed in part 122 of the regulations of the Customs Service (19 CFR part 122). DEFINITION OF “ADJACENCY” General Purpose Zone must be located within 60 statute miles or 90 minutes driving time from the outer limits of a port of entry A subzone must meet the following criteria related to Customs supervision: Proper Customs oversight can be accomplished with physical and electronic means All electronically produced records are maintained in a format compatible with the requirements of U.S. Customs for the duration of the record period The Grantee/Operator agrees to present merchandise for examination at a Customs site selected by Customs when requested, and further agrees to present all necessary documents directly to the Customs oversight office

21 Comparisons with Other Programs BONDED WAREHOUSE Within U.S. Customs territory Manufacturing for export only Goods dutiable at rate in effect on withdrawal (no inverted tariff benefit) Limited time for storage (5 years) Bond required for each entry, in addition to proprietor’s bond No domestic goods may be stored in a bonded warehouse As a rule, only dutiable goods may be stored in a bonded warehouse, unless quota items File CF 7501 on entry into bonded warehouse TEMPORARY IMPORTATION BOND Free movement of goods in U.S. Customs territory Bond posted equal to double estimated duties Time limit of one year, extendible to a total of three years May use to repair, alter or process goods Goods must be exported or destroyed DRAWBACK Allows for refund of 99% of duty paid on imported goods used to produce goods for export Free movement of goods in U.S. Customs territory Duty paid at time of entry Must file paperwork within three years of export including import documents and evidence that goods were exported Paperwork more complex

22 Foreign Trade Zone Plan GRANTEE Subzone Designated Zone Project Industrial Park II General Purpose Operator Manufacturer Distributor General Purpose Zone Industrial Park I General Purpose Operator Manufacturer Distributor

23 Key Players / Terms Foreign-Trade Zones Board Secretary of Commerce Secretary of Treasury Secretary of Army Foreign Trade Zones Board Administration U.S. Customs Service - Port Director Grant (Grant of Authority) - Sunset Provisions Grantee Zone Project Zone Site General Purpose Zone Subzone Operator User Customs Brokers / Trade Consultants Activation Zone Schedule Foreign-Trade Zones Board Secretary of Commerce Secretary of Treasury Secretary of Army Foreign Trade Zones Board Administration U.S. Customs Service - Port Director Grant (Grant of Authority) - Sunset Provisions Grantee Zone Project Zone Site General Purpose Zone Subzone Operator User Customs Brokers / Trade Consultants Activation Zone Schedule

24 Key Players / Terms continued  FOREIGN TRADE ZONE A restricted-access site, in or adjacent to a Customs port of entry, operated pursuant to public utility principles under the sponsorship of a corporation granted authority by the Board and under the supervision of Customs Service. Typically, zones are located in industrial parks, marine terminals, airports or warehouses  FOREIGN-TRADE ZONES BOARD Established by Congress to carry out the provisions of the Foreign Trade Zones Act of June 19, 1934, as amended (48 Stat , 19 U.S.C. 81 a-u). Board is made up of the Secretary of Commerce, Secretary of Treasury, and the Secretary of the Army. Executive Secretary of the Board and staff are part of the U.S. Department of Commerce.  U.S. CUSTOMS SERVICE Carries out most of the duties and responsibilities of the Secretary of the Treasury, under the Foreign Trade Zone Act, including the preparation and implementation of rules and regulations and the assignment of Customs officers to perform zone-related work. Customs is the key player in day- to-day operations of the zone, supervising and approving zone activation and on-going operations. Customs principal interest in FTZs is the control of merchandise moving to and from the zone, to see that all revenues are collected properly, and that there is no evasion of U.S. laws and regulations governing the merchandise. Customs also has the responsibility and authority to audit zone operations. Customs regulations relating to FTZs are contained in 19 CFR part 146. Customs has also developed a FTZ Customs Manual to assist zone grantees, operators and users.

25 Key Players / Terms continued  PORT DIRECTOR U.S. Customs officer with jurisdiction over a port containing a zone. The Port Director is in local charge of the zone and the resident representative of the Foreign Trade Zone Board. The Port Director approves all zone applications, activation's and special requests, in addition to overseeing the operations of the zone  U.S. CUSTOMS TERRITORY The territory of the U.S. in which the general tariff laws of the U.S. apply. Includes the States, District of Columbia and Puerto Rico  PORT OF ENTRY A port of entry in the United States as defined by part 101 of the regulations of the Customs Service (19 CFR part 101), or a user fee airport authorized under 19 U.S.C. 58b and listed in part 122 of the regulations of the Customs Service (19 CFR part 122).  GRANTEE A corporation granted the privilege of establishing, operating and maintaining a Foreign Trade Zone by the Foreign-Trade Zone Board. The grantee may be a public or a non-profit corporation, supported by enabling state registration authorizing the corporation to apply. A private, for-profit corporation may apply if it is supported by a special act of the state legislature naming the corporation and giving it a charter to establish a zone.  GRANT OF AUTHORITY A document issued by the FTZ Board authorizing grantee to establish, operate and maintain a zone project or a subzone, subject to limitations of the grant and the regulations (15 CFR part 400 and 19 CFR part 146).

26 Key Players / Terms continued  GENERAL PURPOSE ZONE Specifically designated and secured area within an approved Foreign Trade Zone Project that is open to the public and may have many different companies operating within its boundaries at any given time. Examples would include an industrial park or a public warehouse operation. The operator publishes and files a zone schedule of rates, charges and rules that apply to users of the general purpose zone.  SUBZONE Special purpose zone established as an adjunct to a zone project for a specific use and a specific user. Typically, subzones are manufacturing or assembly plants, but may include distribution warehouses, bulk storage facilities or other types of facilities. Must demonstrate that the use cannot be accommodated in the general purpose zone and there is a benefit to the public (e.g. create or increase exports, job creation or retention, displacement of finished imported goods, stimulate investment etc.). Additional criteria are described in the Foreign Trade Zone regulations (15 CFR part 400).  ZONE OPERATOR A corporation, partnership or person that operates a zone or subzone under the terms of an agreement with the grantee. A grantee may act as its own operator.  ZONE USER A person or firm using a zone under agreement with the grantee or operator. A user may also be an operator, as in the case of a subzone.

27 Key Players / Terms continued  SUNSET PROVISIONS Grant of Authority for a zone or a subzone shall lapse unless the project is activated and in operation within five (5) years of the date of a grant issued after November 1,  ZONE SITE Physical location of the zone or subzone  ZONE PROJECT Zone plan, including all zone and subzone sites that the Board authorizes a single grantee to establish.  ZONE SCHEDULE Grantee must submit to the Executive Secretary and Port Director (U.S. Customs) prior to commencement of operations in the zone project. Includes: Internal rules and regulations for zone Statement of rates and charges applicable to zone users Site description Grantee must also file subsequent amendments to the schedule.  ACTIVATION Steps required prior to starting zone or subzone operations. Includes: Written application to Customs Port Director with drawing and description of area to be activated Inspection and background check by Customs Written approval of U.S. Customs Port Director and posting of Customs Bond Filing and review of a procedures manual with Customs describing the inventory control and record keeping systems to be used in the zone Written concurrence of grantee

28 Key Players / Terms continued  LOCAL CONTROL SYSTEM (movement of goods within port) Allows operator to transfer goods within boundaries of its Customs District from the point of arrival to zone, for zone-to- zone transfers and from the zone to the port for export without the need to obtain a cartman license. Goods are transferred using the CF 214.  HARBOR MAINTENANCE FEE When imported cargo is unloaded from a commercial vessel at certain U.S. ports of entry, the goods are subject to payment of a Harbor Maintenance Fee (HMF). This fee also applies to goods admitted to a zone, however, it may be paid in quarterly payments, thus producing a potential cash flow savings to the zone user. The fee is charged to the applicant admitting the goods to the zone (e.g. users). Users may also be subject to a fee for vessel cargo movements from the zone for domestic shipment.

29 Grantee Responsibilities Determine need for zone Define goals Develop plan Apply for and obtain grant Prepare and file zone schedule with the FTZ Board and Customs Prepare operating agreement(s) Select general purpose zone operator(s) File/Champion subzone applications (May assist in preparation) Assist operator(s)/users/subzones with approvals, activation, on-going issues Prepare and File : Manufacturing requests Zone expansions Major and minor boundary modifications Find and select new general purpose zone operators Prepare, collect and file Annual Report to FTZ Board Serve as Interface with Customs, FTZ Board and other government agencies Regularly communicate with general purpose zone operators, users and subzones

30 Grantee Responsibilities continued Market zone Understand your product (zone benefits/advantages your zone offers) Prepare promotional materials Hold seminars Network with customs brokers, economic development agencies and groups, international trade community and the general business community Actively participate in on-going education NAFTZ International trade seminars Classes in customs procedures and practices

31 General Purpose Zone Operator Responsibilities Obtain customs bond Prepare and file zone schedule Prepare and file procedures manual with Customs Sign operating agreement with grantee Obtain Customs approval to activate Regularly communicate with grantee and users Offer services to public Market zone Prepare and submit Annual Report to grantee for FTZ Board Prepare Annual Reconciliation Report available for Custom’s review Actively participate in on-going education NAFTZ International trade seminars Classes in customs procedures and practices

32 Subzone Responsibilities Obtain customs bond Prepare and file procedures manual with Customs Sign operating agreement with grantee Obtain customs approval to activate Regularly communicate with grantee Prepare and submit Annual Report to grantee for FTZ Board Prepare Annual Reconciliation Report available for Custom’s review Actively participate in on-going education NAFTZ International trade seminars Classes in customs procedures and practices customs bond

33 Special Terms - Status PRIVILEGED Locks in duty rate and product classification at time of admission to zone. Once established cannot be changed. Goods are classified and appraised and duties and taxes are determined as of the date of admission to the zone, even though duties are not payable until the goods are transferred from the zone into U.S. Customs territory. NON-PRIVILEGED Goods are classified and appraised in their character, condition and quantity at the time of transfer from the zone into U.S. Customer territory. Goods may be transformed in the zone to a new tariff classification and may be entered under this new classification. DOMESTIC Domestic merchandise (either produced in the U.S. or imported and duty paid or imported and duty free) may be entered into an FTZ. Domestic goods may be combined with foreign goods and then transferred from the zone into U.S. Customs territory. No duty is applied to domestic goods. ZONE RESTRICTED Goods are admitted to the zone for the sole purpose of exportation, storage or destruction.

34 Special Programs ESTIMATED WEEKLY ENTRY Allows for the filing of weekly entries of goods shipped from the zone to domestic customers rather than the filing of entries with each shipment. In a FTZ, the zone operator files an estimated weekly entry on CF 3461 and reconciles this with actual transfers at the end of the week with the filing of CF A CF 3461 is filed at the end of the week for actual shipments. A CF 7501 is filed in a timely manner thereafter. DIRECT DELIVERY Allows for delivery of goods to a zone without prior application and approval on Customs Form 214 by Customs. Designed for low-risk, repetitive shipments whose ordering and timing are under the control of the zone operator. BLANKET 214 Permits use of one CF 214 to admit multiple shipments of goods to a zone within a single business day. ESTIMATED WEEKLY EXPORT/ZONE-TO-ZONE TRANSFER Similar to the weekly entry, the weekly export allows operator to file a weekly permit to enter and release goods during a calendar week for exportation, transportation or transportation and exportation. Applicant files a CF 7512 along with a pro forma invoice or schedule. All programs require separate approval by the Port Director

Thank You Steve Story (859)