BROOMFIELD — Colorful spools of thread made and imported from Germany will soon leave this Broomfield warehouse and head to Mexico, skipping any payment of U.S. tariffs.
It’s not a random loophole. Part of Amann USA’s facility is located in a Foreign Trade Zone, a property designation that allows manufacturers to defer import taxes until a product is finished or to bypass taxes completely if the facility is merely a passthrough to another country.
It’s also one way Colorado companies are adjusting to the financial hurt of an ongoing global trade war that goes beyond China, which the Trump administration targeted by increasing tariffs on Chinese imports to 25% on May 10. The negative impacts on local businesses range from the outdoor industry to aerospace firms, farmers to tech manufacturers. Some are shifting production out of China. Others pre-ordered goods before new tariffs kicked in.
Amann has used the Foreign Trade Zone to expand into the automotive industry, where its customers buy thread for seat cushions and seat belts made in their factories in Mexico.
“If we imported (to the U.S.), we would have to pay 11.4% duties on everything that came from Germany,” said Cherri Brown, a buyer at Amann. “Of course, China is more. Before it went up the first time, it was 11.4%, then it was raised 10% (in 2018) and now it’s 25%. That’s 36.4%. There’s nothing we can really do. …We’re just hoping everything levels out.”
Gear, tech, farm and agriculture updates
Outdoor gear makers already have been prepping for the impact, with many selling products to retailers earlier than usual for the fall shopping season.
Others are accelerating plans to shift production out of China, although some costs will have to be passed on to customers by as much as 15 percent, according to local outdoors manufacturers.
Large tech-component companies like Arrow Electronics in Centennial has seen a decline in business as customers delayed purchases or changed the location source of their supply to avoid tariffs.
CEO Mike Long addressed this during the company’s earnings call on May 2, “Some customers are moving manufacturing to lower-cost regions to avoid tariffs and other unnecessary economic burdens,” he said. “In the Americas, customers are moving portions of their manufacturing outside the United States to avoid tariffs, and to reduce bill-of-material and labor costs.”
The trade war with China is starting to take a toll in Colorado, especially when it comes to the state’s top Chinese imports — electric machinery, furniture and plastics. According to the state Office of Economic Development and International Trade, the U.S. saw the value of imports from China drop to its lowest level since March 2016.
The impact on Colorado was also down but not as steep. Volumes declined by 30% from October 2018 to March 2019, said Dan Salvetti, the agency’s Manager of Strategy & Analytics for Global Business Development. The last time volumes were this low was March 2013. Volumes peaked in August of 2015, and are down about 44% from there.
In September, the agency said 75 percent of Colorado’s imports from China were affected by the tariffs. Going the opposite way, 95 percent of what Colorado exports to China — top exports are rawhide and skins, medical equipment and industrial machinery — face Chinese tariffs. Approximately 7% of Colorado’s exports, with a value of about $554 million, head to China.
“The Colorado exports that we identified as vulnerable in September have all seen declines, but so have many others,” Salvetti added. “There seems to be a general dampening of trade between all states and China, regardless of the actual tariffed products.”
Top Colorado imports from China
1. Electrical machinery and equipment
2. Industrial machinery (computers)
Top Colorado exports to China
1. Rawhide and skins
2. Optics, medical and surgical equipment
3. Industrial machinery
4. Photographic and cinematographic
Source: Colorado Office of Economic Development & International Trade
Colorado farmers and cattle ranchers, however, haven’t felt as much of a direct impact from China. Higher steel prices due to tariffs may cause farmers to pay more for a new tractor, but a lot of the food produced in Colorado stays local or at least within North America, said Zach Riley, director of public policy and national affairs for the Colorado Farm Bureau. And the beef industry only recently reopened its market to China, so there wasn’t much to lose.
“It (beef) never actually got a chance to get going so we haven’t lost anything there, but we haven’t had the opportunity to let it grow,” Riley said. “It’s not just China. … We’re fortunate that most of what we trade and sell doesn’t go east or west but stays domestic. Now that said, they (farmers) do sell internationally going north and south. That’s where we’re hurting.”
Riley said the farming industry is more concerned about trade with Mexico and Canada. An agreement between the three countries to replace the North American Free Trade Agreement is on hold as the White House focuses on China relations. Riley said he’s heard from farmers who have lost contracts with feed buyers in Mexico.
He’s also heard from a wheat farmer who moved sales away from Mexico and instead, expanded to the local wheat-beer industry.
On Friday, the Trump administration did lift tariffs on steel and aluminum imports from Canada and Mexico, which could mean ratification of the U.S.-Mexico-Canada Agreement (USMCA) soon.
The trade war with China has overshadowed the agriculture industry’s issues with Mexico, Riley said.
“We’re just in a holding pattern,” he said.
Foreign Trade Zones and other alternatives
When the town of Limon set about trying to diversify its economy beyond “a lot of truck stops, hotel rooms and fast food restaurants,” it settled on becoming a Foreign Trade Zone, said Joe Kiely the town’s FTZ Director.
“Limon is a relatively small town with 2,000 people and 600 hotel rooms. To expect a manufacturer or importer or distribution center to come to town especially from outside the country probably wasn’t going to happen until we establish relationships,” Kiely said.
Foreign Trade Zones are designated property that is treated, in essence, like it’s outside the U.S. When product leaves the zone, that’s when it faces import taxes. To qualify, a city must be within 60 miles or a 90-minute drive from a U.S. Customs and Border Protection port of entry. Colorado has four (Limon is near the Denver entry port).
The nearly 100-year-old Foreign Trade Zone designation came about a few years after the Smoot-Hawley Tariff Act in 1930. The act raised import taxes on products that already had tariffs, causing retaliation worldwide, according to the Wall Street Journal. The nonprofit Tax Foundation called it “disastrous” and blamed it for a global depression. Foreign Trade Zones were created four years later to offer some relief.
Today, only about 250 general-purpose zones exist, according to the U.S. Department of Commerce International Trade Administration. There are zones in Denver and Colorado Springs. But neither are well used. Colorado Springs officials didn’t respond to an inquiry, and their zone hasn’t had much activity for years.
Denver, however, is trying to revamp its FTZ program, which in six months has doubled the number of participating companies to four, plus one distribution center, said Stephanie Garnica, Global Business Development Director.
“Especially in light of the increase in tariffs placed on many agriculture companies, we’re working on promoting the program more actively and trying to get more parameters, guidelines and best practices in place on how to leverage a Foreign Trade Zone,” Garnica said. “…I think part of the reason for the lack of companies taking advantage of it is that they’re simply not aware that this is a tool they can use.”
The city plans to host an informational event on July 25 that will include information on how an FTZ can benefit a business.
When Limon applied, it asked and received an FTZ covering all of Adams and Arapahoe counties, plus most of Elbert, Lincoln and Morgan counties in 2015, Kiely said.
“We’ve had a lot of discussions. In fact, the discussions have ramped up in the past couple of months,” he said. “We have one site that’s currently in Aurora that has been granted by the FTZ board as a user-driven site.”
The Aurora company — Laser Galicia America, a laser cutting firm from Spain — awaits activation by U.S. Customs. According to its application, Laser Galicia plans to import galvanized steel and other related components. It will produce products and ship them to the Brighton office of Vestas, a Danish wind-turbine manufacturer that operates in four Colorado FTZs. Vestas officials did not respond to requests for comment.
“This company never has to pay the tariff. It becomes the responsibility of Vestas. … They pay the lower tariff on the total instead of the individual pieces or what the tariff would have been if it had been imported to the U.S. from Denmark,” Kiely said. “It’s an incentive to bring product in. And the more they add U.S. products to it and join it together with U.S. labor, the better. It’s designed to create U.S. jobs.”
FTZs don’t work for all companies, though. System 76 considered the FTZ option because it builds its own computers in Denver. Many of its components come from China, each with a different import tax. (Ironically, if the company manufactured in China, there would be no tariff on the computer because imported finished computers are excluded from the tax.)
But alas, System 76 is a small company and buys its components through middle-men vendors so it doesn’t benefit from a direct relationship with a supplier in China and thus, an FTZ.
“Because we manufacture and construct our entire desktop here in the United States, the tariff makes it more difficult for us to be competitive with our prices,” said Louisa Bisio, vice president of marketing. “Instead, it enables other U.S. companies who manufacture their product in China to be more competitive.”
(The U.S. trade office said last week that it is considering reinstating tariffs on laptops and cellphones, according to a Reuters report.)
That brings us to exclusions and exemptions, which must be approved by the U.S. Trade Representative. Last July, the Trump administration announced the process to apply for an exclusion or exemption from the Chinese import tariffs. The imported material must be unavailable in the U.S. to qualify for an exclusion. The deadline was in October.
Thousands made requests, and nearly 1,000 were granted last year. The Office of the U.S. Trade Representative continues to announce additional product exclusions on its site, with the latest on May 14 excluding machines for “mixing beverages in single servings for direct human consumption,” according to the Federal Registry.
“The idea is that the government will provide exemptions to some businesses that they can buy some products that normally are subject to tariffs,” said Alex Padilla, an associate professor of economics at Metropolitan State University of Denver, in an email.
But as some critics have discussed, he added, “Trump’s tariffs are also riddled with exemptions and the approval rate of being granted such exemption is not inconsequential.”
A variety of options at play
Amann, the Broomfield sewing and embroidery thread company, has two ways of deferring import taxes with its FTZ. The first is the usual route.
The company sectioned off a portion of its 38,000-square-foot warehouse that is solely dedicated to FTZ. Customs officials inspect the facility annually, and the company must share its records with the city of Denver, which granted the company its FTZ status last year.
But an FTZ doesn’t fix everything since it’s limited to a property. So companies like Amann use a variety of options to keep from becoming collateral damage in the trade wars. Thread from China is shipped to Houston.
Amann uses a bonded transportation company, which is able to transport cargo duty-free within a limited time frame. That doesn’t solve taxes on foreign imports to the U.S., but it helps alleviate some of the financial downside if the U.S. is involved in a trade war with other countries.
“We have factories everywhere and just a small piece of our thread comes from China,” said Brown, Amann’s buyer. “Our Vietnam factory just came online. It’s just up and running so talks (to move China production to Vietnam) haven’t started, but we will discuss it at some point.”
This story was clarified on May 23, 2019 to reflect the rate of tariff impacts on Colorado imports. Import volumes for the state declined 30% from October to March while U.S. import volumes fell by 40%, according to the state Office of Economic Development and International Trade.