Guest Post

LOST IN TRANSLATION
How The Technicalities of One Word Undercuts U.S. FTZ’s E-Commerce Fulfillment Operations

Megan Costello,
Director of Trade Policy & Legislative Affairs,
Sorini, Samet & Associates LLC

February 5, 2019

In an ongoing series, Kaleidoscope is partnering with Sorini, Samet & Associates to explore the value that a strong brand plays in weathering storms and creating a clear vision for future product development in a politically divided landscape where hotly contested tariffs are being slapped on many products being sourced in China.

People in the trade community often joke that customs and trade compliance wonks speak a different language than everyone else. But in a world where online sales are skyrocketing, and two-day shipping is an expectation instead of a luxury, the language barrier is no longer just an inconsequential jest. 

In 2015, the United States Congress passed a law that increased the value threshold of imported shipments that can be shipped directly to a customer, duty-free, under a concept known as de minimis. The problem with this is that goods stored within U.S. foreign trade zones (FTZs) are “entered” instead of “imported” when they are sent to customers. Who knew those two words are not actually synonymous? Unfortunately, the discrepancy is undercutting U.S. companies that use FTZ to competitively fulfill ecommerce orders and instead advantaging sellers that store their product in a foreign country.  

The purpose behind exempting low-value shipments from certain administration procedures and duty payments is to balance the time and costs that would otherwise be incurred if processed as a formal customs entry. Under U.S. law, the concept of de minimis importation has existed since the 1930 Smoot-Hawley Tariff Act.  At $800, the United States has one of the highest de minimis values throughout the world.   

Custom and Border Patrol’s interpretation of the word “imported” prevents goods that are shipped to the United States and stored in an FTZ from being eligible for de minimis entry procedures. This is because the technical customs definition for “imported” refers to physically bringing a good into the United States, opposed to filing customs entry documentation so the good can legally be consumed. In many cases, importation and entry happen at the same time, but in others, these two processes occur at two distinct times. 

Unless you are in fact one of those customs wonks, you are probably wondering how this is undercutting U.S. companies. Let me explain. 

People in the trade community often joke that customs and trade compliance wonks speak a different language than everyone else. But in a world where online sales are skyrocketing, and two-day shipping is an expectation instead of a luxury, the language barrier is no longer just an inconsequential jest. 

In 2015, the United States Congress passed a law that increased the value threshold of imported shipments that can be shipped directly to a customer, duty-free, under a concept known as de minimis. The problem with this is that goods stored within U.S. foreign trade zones (FTZs) are “entered” instead of “imported” when they are sent to customers. Who knew those two words are not actually synonymous? Unfortunately, the discrepancy is undercutting U.S. companies that use FTZ to competitively fulfill ecommerce orders and instead advantaging sellers that store their product in a foreign country.  

The purpose behind exempting low-value shipments from certain administration procedures and duty payments is to balance the time and costs that would otherwise be incurred if processed as a formal customs entry. Under U.S. law, the concept of de minimis importation has existed since the 1930 Smoot-Hawley Tariff Act.  At $800, the United States has one of the highest de minimis values throughout the world.   

Custom and Border Patrol’s interpretation of the word “imported” prevents goods that are shipped to the United States and stored in an FTZ from being eligible for de minimis entry procedures. This is because the technical customs definition for “imported” refers to physically bringing a good into the United States, opposed to filing customs entry documentation so the good can legally be consumed. In many cases, importation and entry happen at the same time, but in others, these two processes occur at two distinct times. 

Unless you are in fact one of those customs wonks, you are probably wondering how this is undercutting U.S. companies. Let me explain. 

“Considering the current political environment surrounding trade policy and Congress’s historical inability to do anything quickly, the path to success is certainly not easy nor straightforward.”

FTZs are designated geographical areas CBP considers outside the customs territory of the United States, even though they are physically located within U.S. borders. Goods stored in FTZs are typically imported in bulk, stored for an undetermined amount of time, and separated into individual orders. They then are withdrawn from the FTZ and entered the U.S. customs territory for consumption.  

Whereas shipments that originate in a foreign warehouse, say just across the U.S. border in Mexico or Canada, are imported and entered at the same time, thus qualify for de minimis entry procedures, allowing duty-free shipment. 

For products with high duty-rates, such as apparel, footwear and travel good items, this duty differential quickly adds up and creates an incentive for U.S. companies to move distribution facilities overseas, thereby closing domestic operations and eliminating American jobs.

Advantaging foreign distribution operations over U.S. FTZs was not the likely intent of Congress, but the language of the law prevents any other interpretation. Unless changed, U.S. companies operating FTZs will continue to face a costly disadvantage, and pressure to move e-commerce fulfilment operations across the border will further escalate, jeopardizing the very existence and any future possibility of expansion of this industry.

Known as the 321 Coalition, U.S. companies negatively affected by this translation are working together to convince lawmakers to amend the law. Outdoor Industry Association supports this effort and is actively engaged in Coalition efforts.

Considering the current political environment surrounding trade policy and Congress’s historical inability to do anything quickly, the path to success is certainly not easy nor straightforward. But amending the law to not favor foreign distributions is the economically smart thing to do for the United States. Correcting this translating error will level the playing field for U.S. logistics and distribution for e-commerce fulfilment and prevent unnecessary job loss.

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