With the ongoing woes of an international trade war and now a global pandemic brewing, Dino Dardano, president of Hestra Gloves, is ready to try a new tool available to him as a business in Jefferson County: foreign trade zones.
The county became the latest Colorado community awarded the special designation, which lets businesses postpone U.S. tariff payments or skip them altogether. Hestra, known for its ski and work gloves, already paid tariffs on gloves sitting at its warehouse that won’t be shipped to customers until the fall. But in a free-trade zone, Dardano said he could have waited to pay the tax until the fall, when there was a chance tariff prices would be lower. At minimum, the business could have held on to the cash longer.
“It would definitely help our cash flow, especially since we’re (affected by) the new penalty tariffs, which is 25%,” said Dardano, whose company was unable to get its gloves excluded from tariffs or be part of the recent “Phase 1” deal with China to delay a tariff hike. “Last year (Hestra paid) over a million dollars in duties and tariffs.”
The trade war continues to put a financial strain on businesses that import or export goods to China and other international countries. And now, trade is aggravated by the coronavirus, or COVID-19, which essentially slowed Chinese exports as factories closed temporarily to contain the outbreak. The uncertainty will continue to impact international trade, but companies like Hestra now have at least one more tool for the long term.
Hestra is now in talks with Jefferson County to turn part of its Arvada warehouse into a foreign-trade zone, Dardano said.
“Yep,” he said, “there’s a huge upside for us to designating our facility as a free trade zone.”
What’s an FTZ?
The new Jefferson County foreign trade zone — No. 298 in the U.S. — is nearly two years in the making and was pursued because of the rising tariffs, said Kristi Pollard, president and CEO of Jefferson County’s Economic Development Corporation.
“It is a tool that we know that we need as an economic development entity,” said Pollard, who made FTZs a priority after joining the county in October 2017 because at her last gig in Grand Junction, she said, the region lost a prospective company because it didn’t have a FTZ. “Our mission is to create jobs and encourage capital investment, and in this global universe that we’re living in right now, businesses are importing and exporting every single day and particularly in Jefferson County, where we have a lot of manufacturing companies, a lot of those folks are importing some, if not all, of their goods.”
Jefferson County’s zone was approved by the U.S. Department of Commerce in late February and became official in the federal register this month. It’s using the Rocky Mountain Metropolitan Airport as its port of entry where the U.S. Customs officer is based. Zones can expand beyond county borders to include land within a 90-minute drive or 60 miles from the port of entry. That allowed Jefferson County’s zone to include the counties of Boulder, Clear Creek and Gilpin.
A zone doesn’t have to be located at the airport. A developer could build a distribution facility near the airport and rent out space to tenants. Or a company could create a subzone, which requires sectioning off a portion within a company’s building as a tariff-free zone.
There are regulations and compliance involved, such as keeping track of all items going in or out of the zone. Signage is required. And U.S. Customs officials regularly come by and check the facility. But in this subzone, companies can avoid paying tariffs on products stored there until the product is sold, or avoid tariffs if the items are directly exported out to another country.
They can also bring in components or parts from other zones, finish making a product and then pay tariffs on the final product, which could have a lower tariff.
Hestra’s Arvada headquarters, for example, is also its North American distribution center. Imported gloves arrive from overseas and then are sent back out to Canada. Typically a company must pay the tariffs first, export the goods, and then ask for a refund on the paid tariff. The FTZ eliminates that back and forth.
“It’s really going to help give us some advantage to servicing the Canadian market,” Dardano said.
Not a sure thing
Colorado already has three other foreign trade zones, in Denver, Limon and Colorado Springs. But there’s been very little activity. Colorado Springs, approved since 1984, is essentially inactive. Limon is newer but hasn’t reported any big deals.
Denver, approved in 1985, began revamping its program in 2018. It saw activity pick up last year when Lexmark International was approved to have a subzone housed at its Longmont facility. While the city hasn’t been flooded with inquiries — only five came in during the last six months of last year and one, so far, starting the process this year — the economic benefit spreads throughout the community, said Leesly Leon, a spokeswoman for Denver Economic Development & Opportunity.
“The program continues to be valuable for our participating companies as their imported goods are not generally subject to customs duty, which in turn can be very lucrative for a business. Equally important is the program’s impact on our local economy. FTZs can create jobs locally as participants may need to hire more personnel to prepare and execute project(s),” Leon said in an email. “…All of this activity can greatly benefit Denver and the region’s economic ecosystem, thus furthering the prosperity of our residents, businesses, and neighborhoods.”
According to the Foreign-Trade Zones Board 2018 annual report to Congress in November, 3,300 companies used the 195 zones in 2018. The value of shipments into zones reached $793 billion in 2018, growing 18.5% from the $669 billion in 2017. The top imports? Vehicles, consumer products, consumer electronics and electrical machinery. Texas had the most imports and exports.
Colorado’s activity was pretty low with no activity outside of Denver, according to the report. In the Denver FTZ, only two companies were listed as active: Vestas Nacelles America, the wind turbine manufacturer in Brighton, and Amann Group, the Broomfield company that imports spools of thread from Germany.
“We woefully under use the foreign trade zone tool in Colorado. Other states are certainly using them more than we are,” said Karen Gerwitz, president of the World Trade Center Denver. “I know they’ve picked up in the last year or two certainly because of the increased tariffs. They do make a difference.”
A 2019 report by trade consulting firm The Trade Partnership, found that communities with a new FTZ saw wages and jobs increase in the first five years before declining. The added value to the economy, however, increased through year six and then continued to hold steady. The Trade Partnership calculated 118,287 jobs were added because of FTZs.
“We find that the formation of an FTZ has a small but positive impact on employment, wages and value added in the broader community of the FTZ. They are particularly important to local communities after the businesses that use the benefits have matured,” the report concluded.
Colorado’s exports declined in 2019 because of the China trade war and also the delay in getting a new trade agreement with Mexico and Canada. According to the state’s Office of Economic Development and International Trade, exports declined 2.7% to $8.1 billion last year compared to 2018. The greatest declines were Mexico, Japan and China.
Likewise, imports declined 2.9% to $13.1 billion with the most affected countries being the Republic of Korea, China and Canada.
And 2020 is looking to be another rough year, even as the U.S. finds resolution with some of its trade partners, like the new deal with Mexico and Canada. Hestra has been moving production out of China and into Vietnam, where the company has since expanded by 30%. But that’s still in the region hardest hit by the coronavirus.
“I thought the tariffs were tough enough and now we’re dealing with this coronavirus and the implications from that, which has not been super impactful for Hestra as of today,” said Dardano, who has put visits to Hestra’s global headquarters in Sweden on hold. “But if this virus continues to spread and there’s more impacts, the (Asian) market could be very detrimental to the business long term.”
Gerwitz with the World Trade Center reminded that FTZs are just one of the tools that the organization provides expertise on to help companies figure out global trade.
“What we’re doing to help companies is to help them think of tariff-mitigation strategies, like maybe rerouting their supply chain or reengineering their product,” she said. “Each product gets down to the product level of how much tariff is assigned so you could reengineer your product with different features that would bring the tariff down. We’re helping companies every day to look at those things.”