Breakbulk Veteran John Vogt Presents the Latest in his Series on Incoterms
John Vogt, former Halliburton vice president of global logistics, presents the latest in his series of articles on Incoterms, a set rules that define the responsibilities of buyers and sellers in international and domestic trade contracts. New instalments are published each month in BreakbulkONE.
We have looked at the movement of freight and have investigated the customs requirements and documentation to move goods into and out of a country. There is one other area that has great advantage to the shipper and trader and that is the ability to move goods into a special storage area monitored by the customs authority, but where customs duty is not paid until the goods leave the storage facility. There are two primary methods to achieve this: the Bonded Warehouse and the Free Trade Zone (FTZ).
The reasons to utilize such a process are sixfold. Firstly, goods that are imported into the country only pay duty when they are released into the commerce of that country. Goods held in stock that are sent to other countries do not incur duty payments, thereby precluding duty drawbacks and the administrative expense of these. Secondly, the matching of duty payment with a sale into the commerce of the receiving country matches streams of payment for the sale with expenses.
Thirdly, it brings goods closer to the customer, allowing faster response. The control of the inventory levels becomes critical with this scenario, so that the working capital tied up does not mitigate against it. The fourth reason is where the goods are brought into the special storage area and then moved out of the country, and no customs duties are paid (but administrative fees are), and the owner of the goods does not have to reclaim the duties on export (duty drawback).
The fifth reason is where a transformation takes place and the goods brought in are altered in some way within the special area. A simple example is where the goods are brought into the special area and the transformation alters the goods to a new Customs Harmonized Tariff Schedule (HTS or HS) number, which attracts a lower duty. This allows the work to be done and a lower duty paid, making the goods more attractive. The sixth reason is a case specific one but works most frequently when a raw material is brought into the area, and then the intermediate product or finished product is different in the HTS classification and advantageous to import into the country. This is not common, and only occurs where a country wants to promote this type of product being produced locally.
The bonded warehouse is a facility where the customs believe that goods can be stored safely and securely, and the processes and record keeping ensure that the records of the goods as well as the movement into the commerce of the country takes place only after duties are paid. The warehouse operating company lodges a bond with customs, hence its name of bonded warehouse, for adherence to customs rules and regulations. The customs authority will oversee and approve of such a facility and will undertake continual inspections to ensure all processes are being adhered to and all duties are paid.
The FTZ is similar in concept but is often associated with a zone promulgated by the authorities, not one warehouse, and with the ability to do manufacturing or transformation processes which produce new products. The customs processes are set up for the zone, and it allows many companies to work in the zone, often feeding goods to and from each other’s facilities. It also brings larger amounts of skilled workers into the transformation process and therefore is a larger value add to the country. The zone is therefore a microcosm of an industry which takes place in the zone, and only the goods leaving the zone become subject to customs duties.
Which of these should you choose? By far the simplest is the bonded warehouse with its focus on storing goods until they are needed in the commerce of the country, and then paying the duties to release these goods from the bonded warehouse. The bonded warehouse can be located in any part of the country and does not require a zone to be promulgated. It is an agreement with the Customs Authority and the acceptance of a bond to guarantee the performance and adherence to the Customs Authority’s requirements and procedures.
The FTZ is a zone, which is promulgated as such, and the zone has transformation as well as storage processes within the borders. The zone itself will have specific customs procedures and adherence. Due to the zone being given specific advantages it often has a much more onerous administrative burden; these fees are significantly higher than the cost of a bonded warehouse.
The value of these facilities or zones is spelt out in the six major reasons earlier. But, as a company designs its network to service its customers, which is its ultimate aim, the use of these facilities becomes advantageous when goods are brought in from non-domestic sources. Of course, if there is a HTS shift and this allows a reduced duty, that is an obvious advantage. But these facilities can be planned to service a domestic market to link a foreign supplier to the market. In addition, careful planning of the location of these facilities and linking them with a Free Trade Agreement (FTA), which allows free movement of goods between the members of the FTA, is even more advantageous.
The bonded warehouse or the FTZ is therefore a great way to allow goods to be close to the customer and released quickly to the consumer but also allows the goods to be delivered to the member countries of the FTA in bond, with duties paid as required in the FTA. We will look at FTAs in the next article and refer to these bonded warehouses and FTZs in linking the end customer with them.
About the author:
John Vogt has his own consulting company and, at the end of his 42 years in industry around the world, was the Vice President of Global Logistics for Halliburton. Thereafter he spent five years as a Professor of Record for the University of Houston-Downtown MBA for International and Supply Chain courses. He has experience as a Board Director and has travelled the world to improve trade. In his career, he has driven the correct use of Incoterms as part of the trade improvements he has implemented to drive efficiency and effectiveness.
In his role as a professor of record, he taught multiple courses on the use of Incoterms and trade-related agreements. He has published with colleague Dr. Jonathan Davis (Associate Professor, Supply Chain Management Chair GMSC Department, Marilyn Davies College of Business, University of Houston-Downtown), three formal research papers on Incoterms with two more in consideration, making him the most published Incoterms researcher. He has also published numerous articles, presented papers at multiple international conferences around the world on logistics, trade and compliance including Incoterms. He has served as track chair for multiple conferences as well.
Vogt has a Ph.D. (Logistics), an MBA, and a B.Sc. (Engineering), holds the title of European Engineer (Eur. Ing), is a Chartered Engineer (UK) and has been elected as a Fellow of the Institute of Engineering and Technology (UK). You can reach him at [email protected].
