Since Trump declared the World Trade War on April 2, American companies have been rushing to manage tariffs (assuming, this lies at the frequently repeated claim that only foreigners pay tariffs).
I have previously written about the submission of hidden costs of customs. Another hidden cost is displayed in the form of a foreign trade zone (FTZ). The FTZS occurred under the Foreign Trade Zones Act of 1934. This is an ACT design that helps businesses manage customs duties in Smootholi (typical government, eh? create problems and sell solutions to you). It’s no surprise that they’re again gaining popularity to help them manage Smoot Holi skin tariffs.
An FTZ is essentially a bonded warehouse where imports can be stored for a certain period of time (up to 5 years) and is not stored. Tariffs on goods are not paid until they are estranged from the American economy (that is, they are sold). Furthermore, the tariff rate charged is not the tariff rate for that day, but the tariff rate for the day when the FTZ was derived. If the cargo is not unresolved and there is a story of the FTZ, the entire tariff will be paid at that moment. Depending on the size of the order, it could be a tax of hundreds of thousands of dollars on American companies. Many businesses don’t have that cash on hand. Therefore, to avoid that issue, FTZ allows free fees to store (and even modify) the item. When and only then does an American company withdraw a product from its warehouse, it will pay customs duties. American companies can plan their tax payments. This allows businesses to better manage their cash. (Simply put, assuming: this analysis is held even if you claim that tariffs are paid 100% by foreigners. In the written method of tax law, American companies are still cutting checks, so cash flow is still important even if it consists of low prices from suppliers).
FTZS also provides predictions in Trump’s hurricane. The Trump administration will change tariff policies at a seemingly random. Such uncertainty makes it virtually impossible for a company to plan and extremely expensive. At least on FTZ, these seemingly mood-driven policy changes have an inspiring effect.
Let’s put numbers here and make things a little more specific.
The company says it will import goods worth $1 million and those goods will be subject to 10% tariffs. If the item is dropped off in a non-FTZ warehouse, then on that day, $100,000 in taxes are paid (10% of $1 million). Now, it’s extraordinary that the company lines up buyers for its first product and it’s unlikely they’ll sell them right away. Therefore, the company must get $100,000 in cash from the tax.
If the item is dropped off instead and there is a story in the FTZ warehouse, there will be no taxes that day. However, once each unit is sold and comes out of the warehouse, taxes are only paid afterwards. Let’s say these $1 million worth of products take 10 months to sell. That means I’m an average monthly tax bill for a company that costs $10,000. In the end, the same amount will be paid, but it is much easier for the company to manage.
So, how much does it cost here? Sub is currency: FTZS charges a fee for each freight fee (varies from zone to zone). Other costs are opportunity costs. Companies stockpile it to preempt customs duties. For each unit of space occupying by customs goods, it is one unit of space that can be used for other things. The dollars spent on stockpiling cannot be used to summarise things by the company. These costs are valuable to many companies using FTZ, but that’s true. Otherwise, companies will not use FTZ. But nonetheless, they are costs. They are an annual burden that is strongly placed on American businesses.
American businesses are increasingly heading towards FTZ to survive this storm. I’m glad they existed, but if they were getting attention in the first place, it would have been much more bitter. They were formed as a way to get a very unpopular arowna that didn’t work. It’s no surprise that FTZ is gaining popularity again in a similar situation.
