Despite the efforts of governments around the world to curb inflation and stabilize economies, a recent study by the World Bank suggests that 2023 could likely see a global recession. Supply chain leaders are bracing for impact. As margins tighten, companies are looking for creative solutions to save money, and one tried and true option is emerging as a serious contender: Foreign-Trade Zones (FTZ).
For many, the potential savings of an FTZ have long been overshadowed by concerns over the setup and ongoing management requirements. Just as consumers are less prone to spend time looking for coupons when money is not a concern, when the economy is strong, many companies overlook areas of savings, especially those they perceive as time-consuming. However, companies are now putting all money-saving options back on the table, and wise leaders are looking to the past for lessons on surviving a recession.
Looking back to plan ahead
In a time when most furniture is made overseas, there remains a small but vibrant community of furniture manufacturers in a part of Mississippi better known for the birthplace of Elvis Presley than domestic manufacturing. When the recession of 2008 hit, many would not have guessed the industry would survive. Demand decreased, margins thinned, and it appeared that foreign imports would finally complete their total eclipse of American furniture manufacturing.
Then, these manufacturers turned to the FTZ program. Established in 1934, FTZs are far from a new or novel concept. They are areas of the U.S. considered outside the U.S. for duty and tariff purposes. As such, they promote domestic manufacturing by allowing companies to pay duties only on finished products entering the U.S. market rather than having to pay duties on each part they import.
These savings are precisely what the industry needed. By importing goods duty-free, bundling merchandise processing fees (MPFs), and gaining relief from inverted tariffs, the industry increased its margins and weathered the storm of the financial downturn. More than that, workers kept their jobs. The industry continues to serve as the backbone of the economy in Northeast Mississippi. Eight years after the recession, the industry that appeared ready for collapse employed nearly 50,000 people in Mississippi.
It wasn’t just the upholstered furniture industry that turned to the FTZ program during the 2008 recession. Another prime example is JVC. They manufactured VHS cassette tapes in Alabama at the time. They were familiar with the FTZ program, but during the boom years of the early 2000s, the savings didn’t seem worth the work. When the recession hit, they reconsidered.
At the time, finished cassette tapes were duty-free. However, if companies manufactured them in the U.S., they paid 5.3% duties on plastic housings, spindles, and other parts. This created inverted tariffs – a term used to describe products whose parts incur higher duties than the end product, thus discouraging domestic manufacturing. With an FTZ, JVC was able to import the parts duty-free, manufacture inshore, and distribute finished VHS cassette tapes to the U.S. market at a duty rate of zero.
Of course, as time progressed after the recession, the VHS industry became obsolete. However, Greg Jones, FTZ consultant at QAD and one of the people responsible for establishing an FTZ subzone in Alabama for JVC, reflected, “it stayed in business five years longer than it would have because of the FTZ program and its FTZ savings. As it was approaching obsolescence, the FTZ savings were greater than the overall operating margins for a couple of years and kept it going. It’s closed now, but you know what? Some folks got their kids through high school and into college or through college and into the workforce. That made it all worth it.”
Leveraging FTZs for the next recession
Since 2008, the FTZ program has become significantly easier to access. Then, it took a year to establish a subzone. Today, when companies use FTZ software, they can be up and running in as little as 150 days.
Not only has set up become more accessible, but FTZ software also streamlines FTZ management. One of the chief difficulties of managing an FTZ is inventory control. U.S. Customs and Border Protection (CBP) requires meticulous record-keeping for all products entering and exiting zones and the evolution of products within a zone. In 2008, zone managers often tracked all this by hand. Now, FTZ software automatically tracks the movement of goods, integrates with ERP systems, and populates all the necessary reports at the click of a button.
The FTZ difference
In some cases, FTZs may save an entire industry or plant from being replaced by overseas competitors. In even more cases, it’s not as binary as the difference between success and failure. Companies are significantly more globalized now than they were in 2008. Today, the competition is not necessarily between a U.S.-based manufacturer and rival brands overseas. Instead, supply chain executives are increasingly forced to decide how to allocate production between plants within their organizations. Low labor costs make ASEAN countries attractive, especially when margins are slim. However, other forces favor U.S. plants, such as nearshoring initiatives to reduce supply chain complexity.
Looking ahead to 2023, establishing existing plants as FTZ subzones could be a major factor in tipping the scales to give U.S. plants a more significant share of production vis-a-vis overseas plants. In a year likely to bring a recession, U.S. plants can and should take every advantage they can. Many need to look no further than taking their next step in reaping the benefits of an FTZ.
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