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Southwest California expected to be approved as foreign trade zone

Southwest California is taking steps to relieve congestion at Los Angeles and Long Beach harbors and make it easier for local companies to conduct international trade and compete in the global marketplace.

Within the next two years, more than 160 acres in Lake Elsinore, Murrieta and Temecula are expected to be approved as a foreign trade zone (FTZ), a special designation that encourages and simplifies American participation in international trade. If approved, the new foreign trade zone in Southwest California will be an expansion of an existing foreign trade zone at March Air Reserve Base, just east of Riverside.

"This is just another reason why it makes sense to do business in Southwest California," said Gregory Lee, manager of business development for the Southwest California Economic Alliance, a regional business and job attraction group that includes the cities of Lake Elsinore, Murrieta and Temecula and Riverside County. "Companies are attracted to the region by business opportunities, affordable land and housing, innovative financing, special business zones such as FTZs and easy access to other key Southern California markets."

The benefits for companies involved in international trade are significant.

Foreign trade zone status accelerates the trade process, adds greater flexibility and increases the tax incentive to the distributor. It reduces production and distribution costs and helps U.S. firms offer more competitive pricing to domestic and foreign customers, according to David Harlow, president of ITC-Diligence, a Brea, Calif.-based firm that helps set up and maintain foreign trade zones.

Simply put, goods imported and held within a foreign trade zone are considered legally outside U.S. customs territory and are not subject to custom duties. Ultimately, an FTZ can save a business a considerable amount if customs duties are a significant part of their import/export operations.

Harlow estimates that the typical importer/exporter can save $50,000 to $100,000 a year in customs fees. Recently, foreign trade zone participation resulted in an annual savings of more than $800,000. Sometimes tariffs actually penalize companies that make their product in the United States. This happens if a component or raw material carries a higher duty rate than the finished product. In that instance, the importer of the finished product pays a lower duty rate than a manufacturer of the same product in the United States. This gives the importer an unfair and unintended advantage over the domestic manufacturer. The foreign trade zones program helps to level the playing field.

If a manufacturer or processor imports a component or raw material into the United States, it is required to pay the import tax (duty) at the time the component or raw material enters the country.

However, a foreign trade zone is considered to be outside the commerce of the United States and the U.S. customs territory. So when foreign merchandise is brought into a foreign trade zone, no customs duty is owed until the merchandise leaves the zone and enters the commerce of the United States. Only then is the merchandise considered imported and the duty paid. If the imported merchandise is exported back out of the country, no customs duty is ever due.

Because of these benefits, both large and small companies take advantage of foreign trade zones. In fact, 70 percent of foreign trade zone users are small businesses. These companies defer, reduce or eliminate U.S. customs duties, fees and certain taxes. Such companies include importers, manufacturers, distributors, assemblers of products, and exporters of imported merchandise and/or products containing imported merchandise.

Foreign trade zones have been around since 1934. They began to get noticed in the 1970s, but their popularity in Southern California has grown dramatically as the region's ports and harbors have become more congested.

Shipping activity in Long Beach and Los Angeles harbors this year is projected to increase more than 36 percent as containerized volume is expected to reach 15 million, 20-foot equivalents, or TEUs, a standard measure used in ocean shipping. By 2020, TEU volume in the harbor is expected to reach 30 million containers.

With most coastal communities out of land, the only place to go is to inland areas such as Southwest California.

"We want to pre-position ourselves to be ready for this," Harlow said. "There's no other place to go."

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