Foreign Trade Zone Designation Saves Lehigh Valley Companies Millions
By Colin McEvoy on November 18, 2014
Three years ago, Piramal Critical Care had a major problem. One that could have forced them to move out of the country or risk shutting down altogether.
The Hanover Township, Northampton County-based manufacturer of inhalation anesthesia products was importing multiple tons of raw materials each month from overseas to make their products. But while the finished products could be shipped without tariffs, bringing the materials into the United States to make those products resulted in duty rates as high as 5.5%, costing the company hundreds of thousands of dollars each year.
As a result, its competitors making products in other countries had a significant financial advantage, and Piramal was effectively being penalized for operating within the U.S. The company had to consider perhaps relocating overseas as a result, taking more than 70 high-paying manufacturing jobs out of the Lehigh Valley along with them.
But it didn’t come to that thanks for the Foreign Trade Zone (FTZ), a program for which the Lehigh Valley Economic Development Corp. (LVEDC) operates as grantee. An FTZ is a physical location within a United States custom territory where merchandise receives the same treatment as if it were outside the commerce of the United States. Therefore, by establishing an FTZ at their facility, a business can defer, reduce or altogether eliminate their customs duties and other tariffs or taxes.
After LVEDC helped establish Piramal as an FTZ in 2012, the company was able to defer the tariff on their imported raw materials until they were brought into their Lehigh Valley facility. Once there, Piramal used the materials to make their finished product, which they could then move into customs duty-free. From there, they could ship the products to customers throughout the world without the added costs they would have sustained without the FTZ, allowing them to stay competitive in the global marketplace.
Approval of the FTZ has saved Piramal millions of dollars over the last three years, according to Mahesh Sane, the company’s director of finance: “We import a significant amount of material, so this was very advantageous to us. These financial savings boosted Piramal’s confidence in business and our situation turned around quickly. Piramal increased employee count, invested money to modernize the facility and expanded our capacity three-fold. Today Piramal is the third-fastest growing company in the Lehigh Valley region.”
LVEDC was granted an FTZ in 2007, and as grantee, it is responsible for managing the zone project and sponsoring applications from companies wishing to have an FTZ established for their business. But despite the potential for significant financial savings, only three Lehigh Valley companies have taken advantage of the FTZ so far.
The Grundfos Pumps Manufacturing Corporation, based in Hanover Township, Lehigh County, makes industrial pumps, which requires the import of multiple raw materials, component parts and motors to manufacture. Like Piramal, the company faced an un-level playing field against overseas companies who could ship their finished products duty-free. But after Grundfos established an FTZ in 2011, they were able to import their materials without the roughly 5 percent duty rates, then ship the finished products out of the zone without tariffs. These savings allowed them to reinvest resources in facilities, production equipment, employee training and create new positions.
BMW of North America was the Lehigh Valley’s first FTZ user, and it was a critical component for the relocation of its regional distribution center from Mt. Olive, N.J. to Lower Nazareth Township.
However, there are challenges associated with getting an FTZ, including initial startup costs, inventory management system improvements, software upgrades and staff training to ensure compliance with FTZ requirements. LVEDC can conduct a cost-benefit analysis to determine what kind of financial savings a company can derive from an FTZ. For more information, contact Jarrett Witt, LVEDC’s director of business development, at 610-266-0523.
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