Alleviating Tariffs With Foreign-Trade Zone and Trade Program Strategies

Escalating tariffs mandated by the Trump administration have prompted many middle-market companies to reevaluate their pricing models, supplier contracts, and overall business strategies. While some industries will be more affected than others, tariffs and retaliatory measures by the United States’ trading partners call for a careful evaluation of available options, such as utilizing free trade zones and specific trade programs.

As we discussed in our recent article, Turning Tariffs into Opportunity: Industry Insights for Middle Market Businesses, mitigation tactics include supplier diversification, exploring duty drawback programs, and identifying alternative suppliers in non-tariffed regions. The following information provides a closer look at how your company may utilize foreign trade zones and trade programs to find opportunities to offset tariff challenges.

Exploring Foreign-Trade Zones

Foreign-trade zones (FTZs) are the U.S. equivalent of internationally recognized free trade zones. Supervised by the U.S. Customs and Border Protection (CBP), these zones permit the movement of foreign and domestic merchandise into designated areas for indefinite operations, storage, assembly, manufacturing, and processing. They enable businesses to defer or eliminate customs duties and federal excise tax, if applicable, until they enter the domestic market for consumption, thereby freeing up cash flow. FTZs operate under different trade laws than the rest of the country. They can also streamline the customs process, which can help accelerate production speed. Free trade zones are often situated near international borders, ports, and other areas of high trade activity.

Advantages include:

• Inverted Tariffs: Manufacturers can pay duties on either raw materials and components or the finished product, whichever is lower, thereby offering cost savings.
• Tariff Deferrals: As mentioned above, you won’t pay tariffs until the goods leave the FTZ and enter U.S. commerce, which enables your company to manage its cash flow more effectively.
• Inventory Efficiencies: Since your company can store goods without incurring tariffs, you can better manage your inventory levels and adjust to market demand.
• Export Savings: Goods manufactured in an FTZ are exempt from tariffs when they are exported, which is beneficial for companies producing goods for the global market.

Considering the Advantages of Trade Programs

Businesses have the opportunity to reduce tariff liabilities by strategically applying specific trade programs. They include duty drawback programs, free trade agreements (FTAs), and tariff exclusion requests.

Advantages include:

Refunds Via Duty Drawback Programs: If your business pays duties, taxes and fees on imported goods that are subsequently exported, you may have the opportunity to receive refunds, which can offset tariff costs on the materials and components used in the production of your exported products.

Favorable Trade Terms Through Free Trade Agreements: Despite the current climate among our trading partners, you may be able to take advantage of FTAs between countries that offer reduced or eliminated tariffs for specific products or goods. Think in terms of sourcing products from countries that offer more favorable trade terms, which can reduce the costs of imported goods. FTAs offer businesses expanded market access, increased efficiencies, and a competitive edge.

Full Tariff Exclusions: If your company can demonstrate that tariffs will cause substantial economic harm or that products are not readily available from any other source, you may apply for tariff exclusions for specific imported products. Companies can typically apply via a formal request to the relevant government agency, such as the U.S. Trade Representative or the Department of Commerce. Governments use specific criteria such as sufficient quantities or quality and products critical to national security. In addition to cost saving, benefits include supply chain stability and economic competitiveness.

Duty-free Products: Another path for tariff exclusion is the Generalized System of Preferences (GSP). This trade program allows for duty-free entry for thousands of products from “designated beneficiary countries,” which is intended to help them stimulate economic growth. In other words, importers in the granting countries have a wider selection of goods at lower prices due to the duty-free treatment.

CBIZ will work with your business to examine how these trade programs and FTZs might offset the financial consequences of tariffs while creating greater cash flow and promoting business growth. Our international tax experts are available to assist you with planning. Connect with us today.

Please note that the nature of tariffs is evolving, and the information above is subject to changes. CBIZ will continue to provide updates as more information becomes available.