In today’s highly competitive and quickly changing international marketplace, companies engaged in import/export operations must constantly assess efficiencies while seeking cost-saving opportunities. And due to evolving conditions, strategies that were not relevant years ago may be appropriate today. That’s why it’s important to consider the following five essential strategies for the years ahead.
Benefit from Free Trade Agreements
Free trade agreements offer the potential for astounding savings. Most U.S. import tariffs are already low, but in sensitive industries, like apparel and agriculture where duty rates remain in the double digits, FTAs can have a significant impact on landed costs. And by eliminating tariffs in partner countries, FTAs can make U.S. exports more attractive and thus open new markets for your business. If you are prepared to follow the rules and maintain the records required to pass government scrutiny, taking advantage of these programs is something to consider.
To date, the United States has implemented 14 FTAs. These include the North American Free Trade Agreement (NAFTA), which promotes trade among the United States, Canada and Mexico; the U.S.-Dominican Republic-Central America Free Trade Agreement (DR-CAFTA), which encompasses the United States, El Salvador, Nicaragua, Honduras, Guatemala, the Dominican Republic and Costa Rica; and bilateral trade agreements between the United States and Israel, Jordan, Chile, Australia, Singapore, Morocco, Oman, Peru, Colombia, Panama, Bahrain and South Korea, respectively.
The United States also is in negotiations with 11 other countries on a regional trade pact known as the Trans-Pacific Partnership (TPP). Plus, FTA negotiations between the United States and the European Union were launched last summer.
Under these FTAs, most tariffs are eliminated immediately upon the agreements' entry into force, offering businesses an immediate and often substantial benefit. For example, men’s cotton trousers imported from China enter with a duty rate of 16.6 percent. However, that same pair of trousers meeting the specific origin requirements of the CAFTA-DR would be imported duty free.
These examples make it easy to understand that an assessment of these duty-saving programs could significantly affect your bottom line and be well worth the initial time and expense.
Explore Tariff Engineering
Tariff engineering is a technique used to minimize the duty of an imported item by tweaking its design or modifying the ratio of its components. This often can be achieved without substantially changing the appearance or performance of the product.
Familiarity with the item’s manufacturing process and the Harmonized Tariff Schedule — the tome used by customs authorities to ascertain duty rates — is essential to making this work, and often well worth the assistance of experts. Tariff engineering is a proven and widely used legal method to lower costs while keeping customers satisfied.
Consider Foreign-Trade Zones
Under the appropriate circumstances, an investment in a foreign-trade zone (FTZ) has significant cost-saving potential for importers. FTZs are designated geographical areas where commercial merchandise receives the same customs treatment as if it were outside the commerce territory of the United States. There are several advantages to operating in an FTZ environment, including duty deferral, reduction and elimination.
Foreign and domestic merchandise can be stored, manufactured, processed or assembled with duty payment deferred until the merchandise legally enters U.S. commerce. In other words, goods can be warehoused and cash flow can be preserved until the imported goods are shipped to the customer. For industries where imported goods — whether consumer-ready products or inputs used in the manufacture other items — are subject to high duty rates, this can result in a tremendous beneficial cash flow opportunity.
Consolidated weekly entries are another benefit of FTZs. Rather than filing one entry per import, FTZ users may file one entry per week for all goods shipped from the FTZ into U.S. commerce. Why is this important?
This can provide the importer with savings on both the Merchandise Processing Fee and customs brokerage fees.Â
This can provide the importer with savings on both the Merchandise Processing Fee and customs brokerage fees.Â
FTZs also are particularly attractive to importers whose goods are destined for export. Thus, goods that are exported directly or destroyed in an FTZ can avoid duty payment altogether. Plus, any product admitted to an FTZ can be brought into compliance with U.S. requirements, such as marking or labeling, prior to the entry being filed with U.S. Customs and Border Protection (CBP).
Merchandise also can be temporarily deposited in an FTZ for evaluation or inspection to properly determine its classification. Because parts used in the manufacture of goods often carry higher duty rates than finished products, importers and manufacturers may bring goods into the zone, produce the finished product, and then pay duty only at the finished product rate. In addition, some states offer tax incentives for FTZs, such as inventory and/or property tax reductions.
Recent modifications to the program, including simplified applications, reduced timeframes for approval, and the introduction of the alternative site framework, have made it easier than ever for importers to activate their existing distribution centers as FTZs.
Adopt the First Sale Rule
U.S. law states that import duties are generally based on the value of the transaction (i.e., the price actually paid or payable for goods when sold for exportation to the United States). Under the First Sale rule, if there are a series of sales involved — from the foreign factory to a middleman and then to a U.S. buyer, for example — the duty is based on the value of the first sale as long as all the requirements of the First Sale program are met.
What is the significance? Importing companies can lawfully minimize import duties by basing the customs import value on the factory sale price to an intermediary, rather than the intermediary’s sale price to the U.S. importing company.
Seize Duty Drawbacks
Customs laws and regulations allow for the refund of duties paid on imported merchandise linked to the exportation or destruction of an article. Known as a duty drawback, exporters may recover 99 percent of the duties paid on the merchandise when imported assuming record keeping and other eligibility requirements are satisfied. This is the case even if the exporter was not the original importer, as well as in circumstances where the imported goods were consumed in the manufacture of the exported goods. Provisions also allow for a duty refund on substitute or replacement goods.
Any business involved in exporting goods should investigate whether duties can be recovered. Since an eligible exporter can file for drawback benefits up to three years following exportation, recouping duties through drawback could be a substantial way of lowering overall costs.
Visit Tom Travis at Sandler, Travis & Rosenberg, P.A.
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