In this blog series, we’ll explore the advantages of Foreign Trade Zones (FTZs) and bonded warehouses, outlining their benefits and what they mean for warehouse operators. This week, we’ll focus on the fundamentals of FTZs; who they’re best suited for, and the technologies that enable their success.
Table of Contents
- Warehousing 101: How Goods Are Imported into the United States
- Foreign Trade Zones (FTZs) Help Shippers Reduce Costs
- Are FTZs Right for Your Warehouse Logistics Company?
- What Warehouse Management System Capabilities Are Needed for FTZs
- How 3PL WMS Makes It Easier for FTZ Warehousing and Distribution
- Warehouse Management System Real-Time Visibility
- WMS Flexibility is Critical for Warehouse Operators in Foreign Trade Zones
- Conclusion
- Definitions
Warehousing 101: How Goods Are Imported into the United States
To understand how FTZs and bonded warehouses can help mitigate tariff and trade challenges, it’s important to first look at how goods enter the United States.
- The exporter (seller) prepares the goods for shipment and includes the necessary documentation including the commercial invoice, packing list, bill of lading or air waybill, and, if needed, a certificate of origin.
- When the goods arrive at a United States Port of Entry (air, sea, or land), Customs and Border Protection (CBP) assumes custody of the shipment.
- The importer or customs broker files CBP Form 7501, the entry summary as well as other required documents which provide details on the goods including classification codes (HTS codes), country of origin, and declared value.
- Using this information, CBP determines the duty owed based on the Harmonized Tariff Schedule (HTSUS) code, the value of goods (typically the transaction value), and country of origin (needed for tariff or trade program eligibility).
- The importer pays the customs duties, tariffs and any other applicable fees such as harbor maintenance or merchandise processing fees and once cleared, CBP releases the shipment to the importer for domestic distribution.
How Foreign Trade Zones (FTZs) Help Shippers Reduce Costs
Improves Cash Flow
Since duties and tariffs aren’t paid until goods leave the FTZ and enter U.S. commerce, companies can improve cash flow by deferring those costs. Goods can be stored in an FTZ indefinitely without incurring duty charges, which is an advantage particularly valuable for businesses managing high volumes or extended storage periods.
Eliminates Duty on Re-Exports
Another key benefit of FTZs is duty exemption on re-exports, goods that are imported, stored, sorted, or repackaged without being sold or significantly transformed in the domestic market. For example, if goods are imported, lightly handled, and then shipped to another country, no U.S. duties apply. This makes FTZs ideal for goods that never enter the U.S. market, as well as for transshipment and regional distribution hubs, offering significant savings for global distribution centers.
Reduce Duties and Take Advantage of Inverted Tariff Benefits
Components tend to be less expensive to import than kits or finished goods. Shipping components into FTZs can help to reduce or eliminate certain duties.
- For goods that are assembled or manufactured into lower duty products in the FTZ, companies may pay the lower duty rate.
- For warehouses in FTZs, having a warehouse management system that can track inventory status and duty liability can be critical in securing these savings.
Shield from Tariff Volatility
Companies operating within FTZs can delay or avoid paying duties until products are distributed domestically after new tariffs are announced. This provides them with the opportunity to adapt pricing and sourcing strategies by bypassing formal customs entry procedures.
The importer can choose to pay duties based on the original materials or finished products once the foreign merchandise enters customs territory for domestic consumption.
Location, Location, Location
In many cases, using FTZs means that value-added services have been moved closer to customers so that higher value goods are not imported and sitting in locations waiting for orders.
Storing goods in a duty-free environment allows companies to wait for market demand, improved trade terms, or regulatory clarity before moving products into commerce. This flexibility is especially valuable during periods of uncertainty in global trade.
Enhance Supply Chain Resilience
During supply chain disruptions like port congestion or labor strikes, FTZs offer a buffer by allowing goods to be stored without triggering immediate duty or tariff payments. If an export is delayed, products can remain in FTZ status without penalty, providing valuable scheduling flexibility without incurring additional costs.
While still in FTZ status, goods can be redirected to a different country, effectively exporting the goods without having to pay U.S. duties entirely.
Are FTZs Right for Your Warehouse Logistics Company?
If your company qualifies for FTZ designation, you may benefit from strategic cost savings and greater operational flexibility, especially if you:
- Import large volumes of raw materials or finished goods
- Export finished goods globally
- Assemble or repackage goods in America
- Are trying to offset the impact of tariffs
Your company will need to
- Implement and maintain robust inventory and compliance systems to meet regulatory requirements
- Be prepared and ready for CBP audits
- Handle the necessary administrative and operational overhead
- Understand and accept that not all products or industries may benefit equally
What Warehouse Management System Capabilities Are Needed for FTZs
Using a warehouse management system with specialized capabilities can be especially useful in maintaining documentation, tracking inventory, and validating inventory status to reduce costs.
- Prevent co-mingling of FTZ and non-FTZ goods and ensure compliance using a modern WMS
- Track each SKU by location, status (such as in-zone and pending entry)
- Provide transaction history
- Generate audit trails and necessary reports required by CBP
- Maintain detailed records including audit trails and electronic records
- Secure inventory in compliance with CBP regulations
- Maintain physical separation of FTZ and non-FTZ inventory, such as on different shelves
- Track both FTZ and non-FTZ inventory in the WMS with different identifiers or tags, status codes, or stock locations
- Use system to establish transaction rules that restrict or require approval for moving goods between FTZ and non-FTZ inventory for the purposes of compliance maintenance and auditability
- Generate reports that separate FTZ and non-FTZ inventory movements as well as balances for Customs compliance
Using a modern WMS that can track inventory status and duty liability can make it easier for companies to take advantage of duty deferrals and reductions automatically. By identifying and segregating inventory that is marked for re-export, the WMS can help ensure all unnecessary costs are eliminated and compliance is maintained.
Duty reporting and payment timelines can be synchronized with inventory movement and financial planning if using a WMS designed for use in FTZs. This helps to preserve working capital and enhance cash flow. Integrations are essential to make work effortless. Integrating a WMS with customs systems and ERP can ensure that the required documentation is prepared with minimal effort.
Using a modern, low-code WMS can enable warehouse operators to make changes more quickly and cost-effectively. In addition, warehouse operators should take advantage of warehouse management systems that enable users to build their own integrations using open APIs or pre-built integrations. Modern cloud-based WMS are ideal for larger-scale operations that are positioned globally or in multiple countries.
How a 3PL WMS Makes It Easier for FTZ Warehousing and Distribution
Third-party logistics companies often are situated within Foreign Trade Zones. 3PLs typically offer a wide array of value-added services and can be used within FTZs to reduce costs.
- A 3PL can perform kitting or manufacturing tasks on parts until the finished product leaves the zone.
- Using a 3PL WMS will ensure that the inventory is segregated by owner and that the requirements regarding labeling, reporting, billing, processes, compliance, and value-added services are honored.
- Making sure that the 3PL WMS has a robust, highly configurable automated billing engine can make the difference between profitability and leaving money on the table.
- In Foreign Trade Zones, 3PLs often offer kitting, light assembly, labeling, return processing, re-packaging for retail readiness, testing, and other options as valued-added warehousing services.
- Export handling, managing documentation and compliance for re-exports, customs compliance, specialized cold chain, and pharma handling are also common value-added services in FTZs.
Each value-added warehouse service should be captured as it happens with the scan of a mobile device so that charges can be added to the WMS in real-time for timely, accurate billing. For 3PLs operating in FTZs, using a modern WMS that is flexible and scalable is essential as demand, tariffs, and market conditions are subject to significant change. Having the ability to adapt a WMS without waiting for software developers to make changes, provides considerable competitive advantage and can notably enhance customer satisfaction.
Optimally, the 3PL warehouse management system should include a customer portal to enable customers to view and make changes to inventory, operations and more. This reduces the cost of customer service and ensures that customers can act independently, critically important in times of supply chain disruption.
Warehouse Management System Real-Time Visibility
Having a WMS that enables real-time tracking can help prevent goods from inadvertently moving into U.S. commerce paying duties and filing the necessary customs entry documentation. Errors are costly. Being able to maintain the physical and digital separation of FTZ from non-FTZ goods can ensure smoother audits without time consuming, costly errors.
Because CBP mandates on-demand accurate reporting, warehouse operators in Foreign Trade Zones need to be able to provide fast, transparent responses using real-time data in case of inquiries and/or audits.
With changing supply chain dynamics, warehouse operators must have a WMS that can use real-time data regarding downstream demand, product expiration, or customs costs to prioritize the goods that need to be withdrawn from the FTZ. Sophisticated inventory management, inventory control, and other functions of warehousing need to be flexible, and adaptable to meet changing dynamics of trade policies and tariffs.
WMS Flexibility is Critical for Warehouse Operators in Foreign Trade Zones
Using a modern flexible WMS can enable FTZ warehouse operators to adapt workflows, compliance rules, inventory handling and other warehouse processes to keep pace with demand and requirements.
- Manage multiple inventory statuses including customs statuses, such as FTZ, domestic, and export within each facility.
- Provide documentation and other support for direct export, weekly entry, zone-to-zone transfers depending on current business needs.
- Adapt rapidly to changing tariffs and trade rules without manual reconfiguration.
- Manage bonded, domestic, and FTZ goods simultaneously, critical for 3PLs.
Conclusion
Across the world, from South Africa to the United States and Hong Kong, supply chains and international markets are grappling with global trade issues and tariffs. In examining warehousing data, there has been:
- A surge in bonded warehousing demand
- Strategic transition from Just-in-Time to Just-in-Case Inventory
- A shift in strategic positioning of warehousing
- Movement towards onshoring
- Disruption of supply chain forecasting
- An uptick in operational costs and labor adjustments
- Increased adoption of warehousing and supply chain technologies
Outcries about higher prices due to tariffs and global trade issues are pervasive across social media. Supply chain management experts are struggling to keep pace with changing predictions over various periods of time, as well as logistics challenges.
Warehousing logistics experts are looking at all options to control costs and get goods to consumers including cross-docking, technology investments in warehouse management systems, smart warehousing technologies such as IoT, robotics, machine learning and AI, as well as other technologies.
Customer expectations are high, anticipating same day or next day delivery service. This means stringent inventory control and warehousing processes are needed to minimize waste and ensure inventory availability and visibility. Finished goods need to be positioned close to the customers that will order them. It’s challenging. Tariffs are impacting warehousing and distribution already, and shortages are anticipated in both raw materials and finished goods.
In warehousing logistics, distribution centers and warehouses strategically located in FTZs can significantly reduce overall supply chain costs. As customer expectations reshape global trade and warehouse operations, it’s clear that operators must leverage every available tool, FTZs included. To control costs, enable fast delivery, and stay agile in a shifting market, a modern, flexible WMS is essential.
Warehouse management systems used in FTZs need to be able to ensure compliance. The WMS must enable warehouse operators to segregate and store inventory for FTZs and non-FTZs. This may mean that they may have to physically move products to different racks or aisles to prevent co-mingling and errors when storing and shipping goods.
Today, supply chain companies are focused intently on reducing operating costs to offset the imposition of tariffs. This may mean implementing cross-docking to automating pick and pack, hiring less costly logistics provider partners, streamlining supply chain management efforts, and changing how they store inventory and move products.
The Ecommerce business is booming. As the geopolitical situation impacts global trade, warehouses, distribution centers, and fulfillment centers are investing more in technologies including modern low code warehouse management systems, AI, and robotics to improve performance and control operating costs. As an example, warehousing industry businesses are using warehousing data with AI and machine learning to optimize labor productivity and warehousing functions and cut costs.
Another strategy that has captured interest is using Foreign Trade Zones and Customs Bonded Warehouses to mitigate tariffs. Logistics providers in FTZ report increased interest and questions about warehousing in these zones as compared to traditional warehousing.
Warehousing in FTZs means that compliance is an everyday issue, not simply for periodic periods of time. It is not only about ensuring the required temperature and humidity environment conditions in cold storage warehouses to safeguard food and pharma goods but also about maintaining stringent inventory control.
Definitions
Tariff: Tariffs are a specific type of duty, often imposed as part of a trade policy. Tariffs may be either General (MFN), the standard rate for WTO countries; Special, a decreased or zero duty due to trade agreements between nations; or Punitive, additional tariffs imposed in trade disputes between nations.
Entering U.S. Commerce (Legal/Customs Term): Once goods clear U.S. Customs and Border Protection (CBP), they have entered U.S. commerce and are formally released into the domestic economy. This is the point at which time import duties and tariffs are due. Goods that are in an FTZ have not yet entered U.S. commerce so no duties must be paid.
Entering the U.S. Market (Business/Commercial Term): Once goods are offered for sale, distributed, or used within the United States, they are considered to have entered the U.S. market. This term indicates the economic availability of the goods rather than their customs status. When goods enter the U.S. market, marketing, regulatory compliance, and distribution rules are then applicable. For example, goods regulated under the FDA may clear customs and enter U.S. commerce but lack the proper labeling, so they have not technically entered the U.S. market as they do not comply with a government regulation.
Foreign Trade Zone (FTZ): Foreign Trade Zones (FTZ) are designated areas within the United States that are legally considered to be outside U.S. customs territory for the purposes of importing and exporting. This means that goods can be brought into foreign trade zones without formal customs entry, requiring the payment of duties until they leave the zone and formally enter U.S. commerce.
Inverted tariff savings can occur if companies bring components into an FTZ and assemble them within the zone. Some finished goods may have a lower duty rate than that of their components. There is no duty charged on waste, scrap, or damaged goods within an FTZ.
FTZs are especially beneficial for
- Life sciences and pharmaceuticals
- Food and beverage manufacturing
- Consumer electronics
- Textiles and apparel
- Automotive
- 3PLs and logistics providers
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Mitigating Tariff Impacts with Bonded Warehouses and Foreign Trade Zones (FTZs)
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