Nothing ever seems free when it comes to trade laws, but free trade zones — a sparingly used provision that gives companies a temporary pass on U.S. duties — at least have the potential to live up to their name.

This story first appeared in the August 24, 2010 issue of WWD. Subscribe Today.

When Brad Campbell, director of transportation and logistics at The Apparel Group Ltd., considered the process of designating the firm’s Dallas distribution center as a free trade zone, the benefits looked too good to be true.

 

“What jumped off the paper was a million dollars of duty deferral,” Campbell said at a recent seminar put together by the National Association of Foreign-Trade Zones and the American Apparel & Footwear Association. “A million dollars in cash flow can help any company no matter if you’re making money or losing money. We activated in February and we’ve seen the million hit the books. You only see that million once, but it’s a nice shot in the arm.”

By going through the 10- to 15-month process to have the facility recognized as a trade zone, the company was able to bring goods into the country and wait until they leave the distribution center before paying duties. That time lag allowed the company to keep more money on its books longer, boosting cash flow.

Companies using a trade zone can also reduce their paperwork through a consolidated entry process that allows them to officially enter a week’s worth of goods into U.S. commerce at a time. The Apparel Group went from over 1,000 entries a year to about 52, Campbell said, noting the company expects to recoup its investment in the zone in two years. The company did have to overcome several administrative hurdles to make the switch to a free trade zone, including getting the local school district to sign off on the change, a necessary step in Texas. Ultimately, The Apparel Group didn’t have to hire any new employees to make the switch, but some had their responsibilities shifted around.

“After four months of being live, to most everybody it’s just part of the job now,” Campbell said.

Companies using the trade zones don’t have to pay duties at all on goods they send back out of the country or on scrapes or rejects that are returned. Free trade zones can also be set up to allow manufacturing or processing of goods.

“The FTZ program will be huge, but it won’t happen overnight,” said David Spooner, a former trade official in the Bush administration and now an attorney at Squire Sanders.

Abercrombie & Fitch Co. has also gotten into the game and recently set up a zone.

Until 2005, apparel importers couldn’t use free trade zones because of the quota system that regulated trade in the sector. Janet Labuda, director of U.S. Customs & Border Protection’s textile and apparel policy and programs division, said some of the rules governing free trade zones still reflected the old quota system and needed to be updated.

“You’ll be seeing a change in the regulation,” said Labuda, who is retiring at the end of this year.

Clarifying the rules helps clear the way for broader acceptance of the zones. The National Association of Foreign-Trade Zones said there are fewer than 200 active zones.

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