Latest news with #FTZs
CNBC
4 days ago
- Automotive
- CNBC
Inside the trade war's tariff hideouts, 'foreign' zones and bonded warehouses
To offset the rising costs of tariffs and trade war uncertainty, companies are using U.S. Customs-sanctioned foreign trade zones (FTZs) and bonded warehouses to delay or reduce product taxes. FTZs have a long history dating back to a previous period of trade conflict, created during the Great Depression by Congress to encourage international trade and boost exports at time when the Smoot-Hawley tariffs were as high as 53%. Companies importing raw materials, semi-finished, or components from foreign countries to an FTZ or bonded warehouse are essentially in a tariff bubble, meaning when they enter the U.S. they are stored duty-free. Once inside an FTZ, a product can be assembled or modified. Duties are only collected after a product leaves the zone and enters U.S. commerce. Products can be stored in an FTZ indefinitely. Bonded warehouses have a limit of up to five years. There are FTZs in all 50 states and there are approximately 2,240 FTZs in all across the nation, according to U.S. Customs. For companies caught in the crossfire of Trump's trade war, preserving cash is king. By delaying duty payments, "FTZs and bonded warehouses essentially frees up a company's cash flow," said Jason Strickland, director of sales at logistics firm Givens. "There is also the added benefit that if a product is manufactured in an FTZ and is re-exported abroad, no duty payments are incurred at all." Before the 2025 global trade war, companies that manufactured products in an FTZ had what is known as an "inverted tariff" benefit. That means the company had the option of paying a lower duty rate on the finished product versus paying the higher duties on the individual components brought into the manufacturing process. Companies that have operated inside FTZs include automakers Ford, GM and Chrysler, as well as General Electric, Intel and Sony. According to the World Free Zones Organization, FTZs were also used by Pfizer while it was developing the Covid vaccine. The program enabled Pfizer to produce shots without incurring additional duties on the drugs' components and store the vaccine until it received FDA approval. But President Trump ended that rule by way of recent executive orders, and for companies like Regent Tek Industries, which manufactures liquid road markings used by road crews to make the lines on the nation's roads, byways, and highways, that's become a big problem, resulting in millions of dollars in extra tariffs. "Our product is basically like baking a cake," said Helen Torkos, president of Regent Tek. "If you're missing one ingredient, you can't make that cake. We cannot source all of our components here. We are paying around 7% more now because the inverted tariff option is no longer available to us." Without the benefit of the FTZ inverted tariff, many companies quickly shifted to bonded warehouses. Strickland described the demand to CNBC as being through the roof. Companies can import products in a bubble under a higher tariff rate, and store without paying duties. But unlike the locking in of tariff rates on FTZs, if the tariff drops while a product is in a bonded warehouse, the company can release their product and pay the lower tariff rate. "At the end of the day, the goal is to protect your cash flow," Strickland said. "You don't want to bring in all your goods and spend your cash flow against tariffs that may not be here in, you know, six weeks, six months, if you can defer until the market is ready to consume those goods. I think that's a win-win."
Forbes
14-04-2025
- Business
- Forbes
Do Tariffs Mean Raising Prices? The Question For Small Businesses
The tariffs imposed by President Trump have introduced significant challenges for U.S. importers, necessitating strategic adjustments to mitigate financial impacts and maintain operational stability. Trump's Liberation Day announcement on April 3 included 10% tariffs on all imports into the U.S. The tariffs were then delayed for 90 days as the president negotiates with other countries. Meanwhile, he continues to engage in a tit-for-tat with China and imposed 145% tariffs on Chinese-made goods, which now exclude smart phones and electronics. With global supply chains already under strain from geopolitical tensions and logistical bottlenecks, the ever-changing tariff policies have increased uncertainty and operational costs for businesses across industries. Related: Liberation Day: What Trump's Tariffs Will Mean For Small Businesses According to FedEx's 2024 Small Business Trade Index, over two-thirds of small- and medium-sized businesses in the U.S. rely on imports to use for production or as merchandise for domestic distribution. Also, roughly 9 in 10 of these companies identify the UK, Japan, and China as countries that are important to maintain trade relations with. Tariffs can have severe impacts on many of the nation's small businesses who may not have the capital or financial flexibility of larger firms. Small business owners have two choices; they can either pass the cost of the tariffs to their customers or they can eat the costs, which would cut into their margins. Neither option is attractive. Raising prices can be a psychological hit, as well as a financial hit, for consumers who have seen some prices (eggs, gasoline, etc.) decline since Trump took office. More price hikes provide a psychological blow that shakes consumer confidence. The risk in upping prices is related to the elasticity of business offerings. Commuters will use the same amount of gas to get to and from work each day and won't be able to stop buying it. However, restaurants may see a reduction of how often people go out to eat. Restauranteurs will see their profits drop if people decide to bring their lunch to work in order to save money. In response, importers should consider strategic measures they can take now to preserve margins, secure supply chains, and minimize exposure to ongoing trade turbulence. 1. Utilize Bonded Warehouses and Foreign Trade Zones (FTZs) Storing goods in bonded warehouses or FTZs allows importers to defer duties until products are released into the U.S. market. This strategy enables companies to manage inventory and improve cash flow flexibility. 2. Explore Alternative Sourcing and Supply Chain Diversification Relying on a single region or country for core components or finished products is now riskier than ever. Diversifying supply chains by sourcing from countries that are less impacted by Trump's tariffs can reduce dependency on high-tariff regions. Businesses looking for alternatives to Chinese goods can look for suppliers in places like Vietnam, Latin America, or Eastern Europe. However, it's essential to conduct thorough due diligence to ensure new suppliers can provide the volume of goods needed in a timely manner and comply with quality standards and ethical sourcing practices. 3. Renegotiate Contracts Assessing current supply and sales contracts is critical. Importers must understand how tariff costs are currently absorbed—whether by the supplier, the buyer, or shared between both parties. Renegotiating terms on tariff costs can help importers manage their costs and maintain profitability. Additionally, incorporating tariff contingency clauses in future contracts may help protect against trade volatility. 4. Stay Informed and Comply Staying abreast of policy changes can provide timely information that can save money and improve operations. Be sure that goods are correctly classified, valued, and labeled can prevent costly delays or fines. Robust customs compliance is more important than ever. Investing in digital compliance tools can provide added assurance and reduce risk of shipment detainment. Countries impose tariffs to protect domestic industries by raising prices on foreign-made products. In the process these duties generate government revenue via a tax on imports, and provide leverage in negotiations on the trade imbalance. However, there are risk factors. Firstly, since tariffs are essentially a tax that gets passed along to consumers, it results in higher prices – at a time when the administration is working to reduce inflation. Secondly, as we have recently seen, countries may respond with tariffs of their own. The Chinese, who shipped nearly $439 billion worth of goods to the U.S. in 2024, are retaliating with their own tariffs on the $144 billion worth of American products they buy. Lastly, tariffs increase logistics costs, which can cause delays in shipping and creates that market uncertainty that has been on display for the past few weeks. The effectiveness of tariffs isn't easy to predict, as historical examples show both successes and failures. According to the Fordham Journal of Corporate & Financial Law, The Tariff Act of 1789 raised revenue to run the federal government at a time when the money was desperately needed. It worked; tariffs provided as much as 95% of federal revenues in the early 1800s. Treasury Secretary Alexander Hamilton supported the Tariff Act because it protected the burgeoning American manufacturing sector from foreign competition while promoting overall industrial growth, in addition to funding the government. After the Stock Market Crash of 1929, Congress passed and President Herbert Hoover signed the Smoot-Hawley Tariff Act, which raised import duties by an average of 20% to protect American farmers from the post-Crash economic downturn. The plan backfired as European countries retaliated with tariffs of their own, leading to a steep decline in trade between the continent and the U.S. While the exact economic impact is hard to quantify, some experts believe the tariffs contributed to European bank failures and intensified the Great Depression. After, WWII, the U.S. rolled back the tariffs. Despite the historical mixed reviews of the positivity or raising tariffs, it seems that they are inevitable – especially with regards to China – during the President Trump's second term. Savvy small business owners are planning ahead. Here are some smart ways to do to prepare for higher tariffs imposed on goods made in China and elsewhere: 1. Source different suppliers. Naturally, finding vendors who sell American-made goods are one way to avoid paying the tariffs (and higher prices) of imports. The challenge will be whether finding domestic suppliers whose goods are cheaper than imported goods even after the tariffs. Another consideration is whether or not the U.S.-produced materials are of the same quality as foreign-produced materials. For instance, a restaurant that boasts superior international cuisine might not be able to easily replace imported ingredients, and must carefully consider whether tweaking their recipes and ingredients might ruin the quality of its meals. Restaurant owners concerned about lower quality and domestic availability might not have excess cash on hand to stock up on important products. In this case, restaurateurs might consider securing financing to make it through tough economic times. 2. Raise prices. At this point, a majority of American consumers are expecting price increases on imported items. This is helpful psychologically, but it remains to be seen what the real economic costs will be. Car dealers could feel the pinch more than others. For instance, a car that costs them $40,000 might soon cost $44,000; the $4,000 increase could mean the difference between keeping or losing the sale. According to the University of Michigan's Consumer Confidence Survey released on Friday, April 11, 2025, consumer confidence fell for the fourth straight month and is at its lowest level since June 2022. Respondents expressed multiple concerns, including expectations for business conditions, personal finances, incomes, and inflation. Under these circumstances, raising prices could be a riskier proposition. 3. Absorb the hit. Small business owners that are concerned their customers might begin to feel price-raising fatigue will be reluctant to increase their prices again. With the news of waning consumer confidence, this could be a wise strategy for small business owners who are able to withstand the cost pressures. Small business owners have many things to consider before responding to rising prices related to tariffs. A main concern would be a possible drop in demand. If the cost increase is significant, customers will notice and might determine the increase is too high. That could cause loyal customers to look at the prices of competitors or scale back their purchasing overall. The last thing a business owner wants during a time of rising costs is a drop in demand. If that's the case, small business earnings might suffer. Related: Nine Ways To Boost Small Business Earnings If you have other choice but to raise prices, do it smartly. Communicate the reason why prices are going up. In recent months, restaurants announced a surcharge on breakfast items containing eggs when egg prices began to soar. Customers could understand why prices went up. Another way to ease the pain of price increases is to include extras that might ease the pain for consumers, such as a BOGO coupon for their next visit. Remember that you might not have to increase prices across-the-board. Strategically target the products that are the least price sensitive (inelastic items). That would reduce the risk of customers scaling back on purchases of those products. If you still wind up being unsustainably behind, then you might have to announce an overall price increase. Check and see how competitors are handling their pricing. If they increase prices, there will be less risk in losing loyal customers to them. There is no one-size-fits-all solution for small businesses whose success is impacted directly or indirectly by the tariffs and foreign supply chains. Financial success depends on a carefully considered, well-rounded approach to cost increases and sourcing issues related to current events happening in Washington.
