Five Winning Cost-Saving Strategies for Apparel Importers and Exporters
[Editor’s note: This story was previously published in the June 2013 edition of Apparel magazine, available here.]
By Tom Travis
In the highly competitive apparel marketplace, it makes sense for companies involved in global trade to regularly review import/export operations and consider implementing cost-saving strategies whenever feasible. What might not have made sense for your operations a few years ago could turn out to be a perfect opportunity today, given a constantly evolving global trade environment. Chances are your competitors are taking advantage of at least one of the following five strategies. Maybe it’s time you gave them another look.
Take advantage of free trade agreements. Free trade agreements offer the potential for astounding savings, especially for the apparel trade. Taking a double-digit duty rate and reducing it to zero is about as good as it gets. If you are prepared to follow the rules and keep the kind of records needed to pass government scrutiny, taking advantage of these programs is something to consider.
To date, the United States has implemented 14 FTAs: the North American Free Trade Agreement, which promotes trade among the United States, Canada and Mexico; the U.S.-Dominican Republic-Central America Free Trade Agreement, 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. The United States is also in negotiations for a regional, Asia-Pacific trade agreement, known as the Trans-Pacific Partnership, with the objective of shaping a high-standard, broad-based regional pact, and FTA negotiations between the United States and the European Union are slated to start this summer.
Why go through the headaches of rethinking sourcing strategies and setting up stringent recordkeeping systems? Because the savings are enormous. For example, men’s trousers imported from China come with a duty rate of 16.6 percent, but that same pair of trousers imported from Nicaragua under DR-CAFTA would be duty-free. For a shipment valued at $10 million, that’s more than $1.6 million saved. That same pair of trousers imported from the Dominican Republic would not only be duty-free, but if made of U.S. materials would “earn” you the right to import $5 million worth of trousers duty-free from the DR using fabric of any origin. It is easy to see that undertaking an assessment of how trade programs could affect your bottom line is worth the trouble and initial expense.
Explore tariff engineering to reduce your tax bill. Tariff engineering is a technique used to minimize the duty of an imported item by tweaking its design. Often, this can be done without substantially changing the appearance or performance of the product. For example, a woman’s shirt made of 51 percent polyester and 49 percent silk would have a duty rate of close to 27 percent. Tweaking the fiber ratio so the garment is made of 51 percent silk and 49 percent polyester would result in that duty rate dropping to below 7 percent. For an order valued at $1 million, tariff engineering the shirts would save the importer $200,000 in duty. Use a coarser gauge fabric in your polo shirt and you may lower the duty rate by more than 3 percent.
While familiarity with the item’s manufacturing process and the Harmonized Tariff Schedule — the tome used by customs authorities to ascertain duty rates — is essential, it is clear that undertaking a tariff engineering analysis, regardless of the product being imported, has enormous savings potential.
Consider taking advantage of foreign-trade zones. Under the right circumstances, an investment in a foreign-trade zone has vast cost savings potential for textile and apparel importers.
FTZs are designated geographical areas where commercial merchandise receives the same customs treatment it would if it were outside the commerce 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 being deferred until the merchandise enters U.S. commerce. What this means is that goods can be warehoused and cash flow can be preserved until the imported goods are shipped to the customer. For the apparel industry, where the average duty rate is so high, this can result in a tremendous cash flow savings opportunity.
With the elimination of quotas in 2008, apparel and textile importers are eligible to take advantage of consolidated weekly entries. Rather than filing one entry per import, FTZ users file one entry per week for all goods shipped from the FTZ into the U.S. commerce. Each entry has a merchandise processing fee payable at .3464 percent of the value of the goods, capped at $485 per entry. This means that FTZs pay only $25,220 per year in MPF. Submitting one entry per week also provides an opportunity to save on brokerage fees.
FTZs are particularly attractive to importers whose goods are destined for export. Goods that are exported directly or destroyed in an FTZ can avoid duty payment altogether. 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. Merchandise can also be temporarily deposited in an FTZ for evaluation or inspection to properly determine the classification. Because parts used in the manufacture of goods often carry higher duty rates than the finished products, importers and manufacturers may be able to bring goods into the zone, produce the finished product, and then only pay duty at the rate for the finished product. Depending on the location of the facility, some states offer tax incentives for FTZs such as inventory and/or property tax reductions.
Chances are good that you can establish a zone without having to relocate your operations. 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 to reduce your import tax bill. Incorporating the First Sale Rule, also known as middleman pricing, into multi-tiered import transactions can significantly reduce import costs. Since the case establishing the FSR was litigated in the federal courts by Sandler, Travis & Rosenberg in 1988, the FSR has been recognized in the United States as a viable and legal method to reduce duty. Simply stated, the FSR allows for duty assessment on the factory invoice amount, regardless of whether subsequent sales occurred prior to importation, as long as program requirements are met.
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. If there is a series of sales involved — from the foreign factory to a middleman and then to the 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. This means that importing companies can lawfully minimize import duties by basing the customs import value on the factory’s sale price to an intermediary rather than the intermediary’s sale price to the U.S. importing company.
Take advantage of duty drawback opportunities. Exports are good for the U.S. economy and good for a company’s pocketbook. Customs laws and regulations allow for the refund of duties paid on imported merchandise that is linked to the exportation (or destruction) of an article. This refund is called drawback and, if recordkeeping and other eligibility requirements are met, allows exporters to recover 99 percent of the duties paid on the merchandise when imported, even if the exporter was not the original importer and even in circumstances where the imported goods were consumed in the manufacture of the exported goods. There are also provisions allowing 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.