Foreign-Trade Zones in a 20 Percent Tariff Environment

0:01Hi, I'm Kelly Barner and this is the Art of Supply podcast. Every business story has a supply chain angle and those stories deserve to be told. This show digs deep into news headlines and interviews thought leaders, executives, and newsmakers to capture their perspective in their own words. With no agenda to lead us in any particular direction. We'll offer you objective coverage of geopolitics, innovation, and competition. Facts will always take precedence over hype. The rest is up to you. Today on the show, I'm glad to be joined by Curtis Spencer, CEO of IMS Worldwide and an expert in foreign trade zones.

0:49He has spent more than four decades helping companies understand the economics, compliance requirements, and operational realities of FTZs. And he brings a practical perspective on how tariff pressure and shifting trade policy are changing the way companies manage imports. So Curtis, welcome and thank you so much for being here.

1:10Curtis Spencer: Thank you for having me. I appreciate it very much. Yeah. One of the benefits that you and I are talking through this is that I always struggle with the EI in foreign trade zones, but it sounds the same when you say it. So even if it's spelled wrong in my head, it's going to come out sounding right as we go through the conversation today. That's why we made it FTZ. And then there's the foreign dash trade zone. You know, that's the official spelling of it. Exactly. So going forward, we want everyone to be hearing EI and we want everybody to be hearing that dash, even if it's just implied in our statement.

1:51Tell everybody a little bit about how you built up this experience in foreign trade zones.

1:57Curtis Spencer: My dad's name was FJ Spencer. He had a 165 IQ, spoke nine languages, had four degrees, three and a half degrees, because I didn't recognize his Bombay University degree. And he was a flipping genius and found this foreign trade zone law when he was working in McAllen, Texas, for the Economic Development Authority back in the 60s. I remember because the whole family went on summer vacation and swam at the pool and dad came back and blah, blah, blah. So I leave high school, start on the road playing music, And seven years later said, dad, I'm poor. I'm broke. I need a job. Do you have anything open in the foreign trade zone business?

2:47Curtis Spencer: He said, yeah, I'm getting real busy. And I said, okay, I'll, I'd like to start. And it was, I went to the school of FJ and in 15 years I bought the company from him when he turned 65 and said, I've had enough. I don't want to deal with this anymore. So I kind of got, my dad was also a swimmer and his way of teaching us was go throw him in the deep end so we kind of got thrown in the deep end um i had three brothers and sisters we all worked for my dad at one point in time and uh it was a great growing and learning experience because the industry was in its infancy too. That Macallan zone was number 12.

3:35Curtis Spencer: They're now about to issue 302. So in the span of my FTZ experience, we've gone from number 12 all the way to 300. And these mechanisms by customs were built around the exact same fact case that we had in 1934. We had huge high tariffs. And everybody went, oh, my gosh, how do we mitigate that and not hurt domestic industry, domestic U.S. industry? And so the Foreign Trade Zone program was created. It didn't really get a lot of wind in its sails until the 50s and 60s when manufacturing was approved. Okay. And that really took off. The very first foreign auto plant that came into the U.S. was Volkswagen, 1979.

4:35Curtis Spencer: Went into it as a foreign trade zone, and every other auto plant since then has been a foreign trade zone. Then the refineries got involved when my dad started the zone in Corpus Christi. three refineries from mothballs back to existing operating, really contributing to the economy. I mean, that was a turnaround case for a city that was really going downhill. And he put those three refineries in a foreign trade zone. And Corpus Christi, if you've kept up with that little city, is one of the fastest growing industrialized cities in the Texas Gulf Coast. It's a phenomenal story. Now, you talked a little bit about the external conditions that originally gave rise to the foreign trade zone concept.

5:25You gave some examples of early adopters and how it spread. Right. But can you connect that to the current tariff environment? Because we are going through a resurgence of discussing FTZs. TZs. And it would be interesting to hear about some of the things that were happening back then that even if they look a little bit different or involve different organizations are also happening now. Yeah.

5:50Curtis Spencer: Back then it was called the Smoot-Hawley tariffs. And that was the two, the authors of the bill that raised the average tariff rates. And it was 30s and 40 percent and 50 % tariff rates. We, for then years after that, so all through 60s, 70s, 80s, 90s, 2000s, our average tariff rate was 2.5%. Certain things, apparel, footwear, electronics, some were exempted, but some electronic, plastics, different things had tariffs on them, but the average was 2.5%. Today, from Trump one, Biden one and Trump two, we now have a floor that's at 20 percent, Kelly. When you go from two and a half to 20, that's a 10x rise in the floor, in what everybody has to count on now.

6:49Curtis Spencer: Listen, I have to wake up every morning, first thing in the morning and read about eight different blogs and posts and attorney's reviews and issuances from customs and trade and blah, blah, blah, just to find out what he did last night. Yeah. Just to find out what he did last night. So I'm not going to be the guy that sits here and says, I can predict where the tariffs are going. But I can tell you that what my experience is showing, because Trump started it first, then Biden didn't reduce them. He kept all those 301 tariffs with China. And Trump's done in two years. So the thought would be, well, this is just a passing thing.

7:30Curtis Spencer: It isn't. When the government starts collecting money as a tax, they don't normally give it back. And it was proven four years ago. So I'm saying if you're a smart importer, you're going to realize that our baseline is now 20%. Well, when the FTZ was growing and growing through all these years and years and years, The program went from 12 to 300 zone programs in the U.S. That was a two and a half percent. How much faster is it going to grow with a tariff rate, which controls the money? The tariff rate controls how much you have to pay and what your tariff pain is. And that tariff pain went up 10x, which means FTZs are going to increase in value by 10x.

8:26Curtis Spencer: and they're not any more difficult to operate than they were 10 years ago. They're no more difficult. In fact, the software has been enhanced so much that the top four tier one, ICRS is what they're called, ICRS software systems, by major corporations, Thomson Reuters, Descartes Systems, QAD, All those systems are now so sophisticated that you can't be non-compliant. But if you have somewhat of a compliance background and understand that customs doesn't play, it's just like the policeman. He pulls you over. Don't be a smart aleck. You know, they don't play. Yeah. And Trump has put a larger enforcement onus on customs just with the last executive order last week.

9:21Curtis Spencer: I don't know if you saw that, but executive order said, hey, no more getting around transshipment. We're going to give customs more money for enforcement. And it's come out now that that enforcement really, really started the first of this year and now is to the point. So you can't be silly or flippant about it. But with the software there and with the training that companies like us and others provide, foreign trade zone operations is not rocket science. Otherwise, I couldn't do it. And people certainly shouldn't think you're kidding by any means about waking up every morning and checking the papers.

9:58I won't make either of us hold up a physical paper, but we found out overnight that the tariffs against Canada have been paused, right? Because talks are going well. We want to build rapport. Right. So literally, that's an example. Then to your point, the day to day.

10:15Curtis Spencer: Yes, Kelly. So it's I'll say it's August 19th, just to 15 p.m. Eastern time. This whole change is so fast. But literally, you do wake up every day. And especially if you're someone watching for these things, you know what? It's the general public. Maybe it hits. Maybe it doesn't. But if you're following these things, it is constantly changing. Well, think about this. I mean, everything having to do with Canada revolves around just a few line items. Yes. Let's talk about soft lumber. Let's talk about you're about to do a project in your home and, you know, 50 percent additional duties on that lumber.

10:56Curtis Spencer: What's that going to do the retail cost of a two by four? It's going to impact. Yeah. And so any people, it trickles down into everyday life and you go, well, you know, certain things, you know, like everybody brings up, okay, the eggs are cheaper now. Okay. Well, eggs came down, but you know, beef is up, you know? And so we're having, we're having to tie in all of this and how it affects us in inflation. And the trick with the FTZ to every company that uses it is you wake up like these companies are waking up today. Sigh of relief. OK, we didn't impose the 50 percent. If the tariff pain that's been caused on a big multinational company is an extra 20 million dollars in cost, let's just say.

11:52Curtis Spencer: And the FTZ walks in and says, I can give you back 4.5 million of that. By the savings that occur in a foreign trade zone. You jump through the roof. Wait a minute. What does it cost to manage it? I got four and a half million in savings and it costs you 400 ,000 to operate it. Wait a minute. That's 10 to one. This is how the dynamic has shifted. used to be two to one, three to one, made a good case in the ROI. Now it's 10 to one. And that's why so many companies are adopting it. Yeah. Now, are there things that would hold a company back from approaching the use of an FTZ? Maybe it's an educational curve for them or simply having an understanding.

12:42Or are there cases when, despite the potential for savings, an FTZ is still not the right answer?

12:49Curtis Spencer: This is a really great question and I'm dealing with it right now with four potential customers. So to answer your question in the main, in the big picture, it's 90 % awareness and education. In 10%, in 1 % of the cases, there has been a situation where the executive order puts a weird descriptor relative to foreign trade zones that actually makes it better to do a bonded warehouse okay this is the one percent case it has to do with tariff rate quotas and different very specific you know anti-dumping you know uh cases so there's a certain aspect where foreign trade zone doesn't make as much sense as a bonded warehouse and we've been setting up bonded warehouses all over the place for the last 10 12 years now because of trump one biden and blah, blah, blah.

13:56Curtis Spencer: So in very few cases, that's the issue. 99 % of the time, if the numbers work, there's nothing to keep you from doing a foreign trade zone. And the good news is a lot of these companies have, the bigger companies have a massive import compliance department. They've got a customs broker on staff. They've got people doing entries or whatever. Those companies perform extra well in a foreign trade zone. But you also have a CEO C-suite mentality, no more FTEs, no more full-time. This department, you can't add. So that's why 20 years ago, in the middle of this 40 years, I've been doing foreign trade zone, we set up an operating company.

14:48Curtis Spencer: So we'll provide the labor, we'll work the software. We make sure that the software is owned and leased by the company because if they ever want to get rid of us and get somebody else or bring in house, it's their data. We don't hold you. There's a lot of other competitors of ours that they own the software or they lease the software and then you can't get rid of them. And we don't play that. Our company says, no, no, no, you're free to choose how you want to operate. But that is a very good option for companies that say no more FTEs and we'll third party everything. Because really the cost of the third party versus in-house, right equal.

15:34Curtis Spencer: You know, I got to go out and I got to hire the zone manager. I got to hire the clerks or you've got to go hire the clerks. You know, it's the same thing. And when you have a professional company doing that, that teaches the compliance from day one, you have a lot better outcome. Now, you had mentioned also technology earlier, and I'm quite sure, especially if we're looking back to the 1930s, our technology is probably a little bit ahead of what those guys had back then. We started with spreadsheets, girl. It was terrible. I'm interested in sort of the data a layer of that? Because some of it is the technology that you're using, and some of it is the ability of these different systems to talk to each other and the quality and the volume of the data that's being passed between them.

16:22Has that changed as well as the systems that it's actually flowing through?

16:27Curtis Spencer: Well, your insight into this is excellent, my dear. I have to tell you that. That's a great question, and the answer is a resounding yes. The mapping, we call it onboarding. We onboard the customer into the whatever third-party software, the software as a service that they choose. And that onboarding process basically says, look, between your customs broker, freight forwarder, and your WMS system, your warehouse management system, or your ERP, all that data is sitting there. It exists. All I got to do is flag, I need these three ways of inbound. I need these two ways of outbound. And I need these ways, four ways of altering the information.

17:15Curtis Spencer: We did a cycle count. We came up short, blah, blah, blah. It's all customers want is beginning balance plus receipts minus shipments equals ending balance. Plus or minus adjustments. Right. That's all they want. That's all they care about. they they agreed to a FIFO system so it's not specific identity if you have things that are serial numbered you have specific identity even better if not it's a bucket of bolts you pull out 100 what was the oldest layer of that 100 that's what gets and that's whether it's domestic or foreign or country A or country B because now you have to have the different countries have different duty rates.

17:59Curtis Spencer: So, you know, all that, it's all mapped and done by the software. So as long as you know, all the inputs and you know, all the outputs and the, all the adjustments, you're golden. You are absolutely golden. The thing that, that pushes non-compliant efforts is people moving so fast that they forget to do the procedure. Okay. As long as you do the procedure and you also know how to fix the problems when they occur one of the things i i i really loved about being part of the association of foreign trade zones member and a board member was i got to help write a lot of regulations and be on task force our president trey boring is an ex-president of the association of foreign trade zones in aftz he is still involved in helping to rewrite regulations.

18:58The reason that's so important is, for example, the liquidated damages.

19:05Curtis Spencer: I helped write the liquidated damages

19:11Curtis Spencer: issuance from customs. And that was, hey, if there's no loss of revenue and there's, we brought it to your attention, customs, pay the$50 liquidated damages in it. all good. Yeah. Super easy to protect then against problems that occur. And listen, they're going to occur. You got to know how to manage it. So that was one thing. The other thing we were able to do is get the background checks. They used to take six to eight months. They now take weeks, just three to four weeks to get background checks. So we were able to harmonize that. I was on the COAC committee, which helped greatly elevate our company to the point where we had access and good access to senior customs officials, which we still do.

20:01Curtis Spencer: And, you know, it was excellent in furthering the FTZ. FTZ status, for example, is now a best practices for CT Pat tier three. If you're in a zone, you're in the best practice. And if that association, I will call this out. If the National Association for Foreign Trade Zones is ringing a bell with people, you and I share a mutual friend, Melissa Ehrman. She's been on the show. So shout out and hello to Melissa. So yes, all different areas where education is being done, regulations are being advanced. Yes. One of the other things that's, you know, it's interesting so often in supply chain, when you're talking to someone outside the field, you get the sort of where is my stuff, right?

20:48Where's my stuff? Well, how long do you have? I think another example of that is where did this thing come from, which said more officially is country of origin? And that is a concept that is getting a lot more complicated that can be managed through foreign trade zones. What is it that executives and even compliance teams need to know about how the rules around country of origin are changing? So the rules of country of origin used to be much simpler than they are today.

21:27Curtis Spencer: And it all revolves around substantial transformation. And substantial transformation is a theory or a policy that says if I take a product and I change its essential character, this pen, if I change the essential character, sometimes, you know, if I just screw on the tip. Yeah. I have not changed the essential character. because the tip can't be used for anything else other than a pen tip. And that's, I think, one of the tests that customs. The other thing is substantial transformation by category of merchandise has different rules. OK. And automobile has a different set of rules than apparel.

22:24Curtis Spencer: Apparel substantial transformation has a whole set of its own rules. So when I say it was more simple, it was more simple because it was established facts around categories of goods. Today, the transshipment problem because of the money can be saved is much broader. Yeah. And I mean, I remember when the first under Obama, the first solar panel anti-dumping case extended to not only the company selling the solar panel to the U .S. or the solar cell, but also to other countries that would take the solar cell and advance it to a certain degree. First time ever that customs went through the supply chain to secondary and tertiary manufacturing.

23:26And all of that was subject to the anti-dumping.

23:30Curtis Spencer: That was really, really the first foray into extending that. And that's what I think Trump and his executive order is going to, is we've got substantial transformation concepts that are being whipsawed. You know, and most people who are smart will go get a customs ruling and say, this is where my product starts. This is where it goes. And this is how it comes to me. What is the ruling from you customs on where is this substantially transformed? They get that ruling, they hold on to it, and they know that that pin is from XYZ. Yeah. And I think solar panels are a great example because anybody following supply chain will know the vast majority of them were coming from the Xinjiang province in China.

24:22That's where the Uyghurs are. So that was probably in advance, I'm thinking timeline wise, of us having the UFLPA that basically forced companies to prove they had a full supply chain whitelist and could prove definitively, right? None of the products, none of the transformation happened there. And we're seeing it now with semiconductors because there's all of this concern about did the vast majority of the work and even the IP come from China? And then to your point, I do know semiconductor chips don't have pen tips on them, but I'm going to stick with your example. You send it to some intermediate country, put the little sticker or the little tip on whatever it is.

25:02You have not materially changed it. You've just masked in a way the actual country of origin as a way of voiding some of these rules. For 40 years, well, since they started making wafers, the wafer is sliced, embedded, and then

25:22Curtis Spencer: it went to Malaysia, Singapore, China to have the feet put on and it comes in the long coil and it goes to Dell or HP and they turn it into a computer, right? That process has always been wafer made and then sent over to the Far East. And then it comes back as a chip. Then now people are saying, well, isn't the chip on the wafer? Well, it's, it starts out as etched. I mean, it's, it's really an intermediary product. Yeah. So it's very complicated how you take that. Now, is that usable on the wafer? Absolutely not. That's the key thing. It's not usable on the wafer. It has to go and have the feet put on it.

26:13Curtis Spencer: Stamped out. So each little wafer has to be stamped out, and then the feet are put on, and then it's packaged and comes back. which is it's a very interesting concept because today at TSMC in Phoenix, North Phoenix, they're bringing the packaging part back to the U.S. First time in 40 years. Interesting. First time in 40 years. There's other packaging companies that are looking to move close to the TSMC and the whole that whole North Phoenix. Well, greater Phoenix area. We got Intel and Chandler. You've got other chip wafer manufacturers moving there. And obviously, TSMC's$265 billion investment is the biggest deal out there.

27:03So we'll see.

27:05Curtis Spencer: It'll be a lot. What is the goal of all this tariff garbage? Is to bring more manufacturing and more jobs to the United States. ultimately and it takes time it's working i mean from a big picture policy perspective it's working the bodies fall off left and right on the process of getting there yeah and that's it's unfortunate but as a policy over the whole for the u.s it's actually working Yeah. The way to make it work to your advantage is to use the FTZ and reduce that tariff paint. Yeah. Now we've gone through some examples. You mentioned lumber earlier. We've now talked about semiconductors.

27:53We talked a little bit about solar panels. Are there any other specific product categories or even sourcing patterns that a company might use that you think it makes sense to apply extra caution around simply because there is now more scrutiny being placed on those specific products or potentially the locations they would come from? Yeah.

28:16Curtis Spencer: Anybody who's in the business and is importing and is subject to or is about to be subject to some kind of Department of Commerce action, some kind of action from, you know, the administration, they know that they are in that. What's coming up most recently is the tariff rate quota on slabs from the courts slabs from a variety of countries, a variety of entities within those countries. If you're in that business, you know that that's coming up. So is a foreign trade zone usable? Yes. Is a bonded warehouse is also usable. And you just got to be aware of that. If your industry that you're in has as those anti dumping tariff rate quota, some trade action is coming on you.

29:27Curtis Spencer: You need to know about it. I think part of your question was, how does the FTZ impact that? Only positively. And I will explain this. MID, manufacturer's ID, and country of origin are required documented data elements in every admission to a foreign trade zone. You have to have that. and it can't be find it out later. And it's right there right now documented and you're in customs control. How much better for you to feel a confident nature about your compliance, you're within customs control. So I think that that elevates, that's why FTZs are a best practice for CTPAT because of that level of control.

30:24Curtis Spencer: other than you're just an importer and five days before the vessel arrives, you make an entry and you're done. Or your broker makes the entry, you never even see it. The sophistication of the freight forwarder and broker world has allowed some importers to not be as diligent as they should be. Yeah. No. When the importer compliance rules in 1993, were implemented along with NAFTA. It was part of the Customs Modernization Act. I went to customs headquarters and I said, I want to write the first importer compliance manual. They said, go for it. And I did. And I worked it through as a, not as being an importer, but as a consultant showing that, yes, you can set up an importer compliance procedure, policy and manual for any company.

31:23Curtis Spencer: And they used it and that they, they maintain, customs maintains that you have to have a import compliance process. Yeah. And the broker forwarders have gotten so good at what they do. Certain companies don't have as much diligence in that area that they should. Not a good idea. Got to have it. Got to have that compliance mentality. Now, one other piece of advice I want to get from you, we sort of touched on this very quickly earlier and then moved on, but you had referenced the fact that enforcement has been stepped up and also the responsibility or the accountability on the part of corporations has been stepped up.

32:07In that spirit, what advice would you share about engaging productively or forging good relationships with customs officers as all this is happening? And I think we talked earlier about the, yes, we are not flip with customs officers. This is not a good idea. But in terms of truly productive engagement, what advice would you share on that front? And anything having to do with customs, know the rules, know the regulations,

32:38Curtis Spencer: know what you're supposed to do as good or better than they do. It's not rocket science. And remember, a customs officer is responsible for the regulations of 2 ,400 pages. Yeah. Right? FTZ is only responsible for about 50 to 60 pages. So we know it 15 miles deep versus backwards and forwards. Yes, ma 'am. And having helped write a lot of it, if not twice through on part 146. So within that 40 years, we've been on enough of that regulation creation to public comments and those kinds of things. So to anybody in the importing world, know your regulations. The second thing is reasonable care has been used over and over and over again in customs regulations and policy since the 2000s started.

33:42Curtis Spencer: Reasonable care is when you add working with a customs attorney, working with your broker, having education, doing a best practice on your CTPAT, having a foreign trade zone. All of these are mitigating circumstances because you demonstrated reasonable care. Yeah. Don't ever forget that term. It's the best term out there because it also goes into thinking about how secure do you have to be using reasonable care and a risk analysis of your merchandise? You know, if I'm importing tequila, I have a higher reasonable care than if I'm importing sweaters. Yes. If I'm importing diamonds, I have a higher reasonable care than if I'm importing shoes, flip flops.

34:39Curtis Spencer: So it's important and incumbent upon the importer to understand where they are in that risk profile and demonstrating reasonable care. It's not hard. It's not. Yeah. And yet we still get that every day. I'm going to be thinking about this from now on, Curtis. Every day when I get up and I check to see what's different, I'm going to call Curtis. This has been an absolutely fascinating conversation. I love all of these real world examples and the advice that we've pulled in. If people are meeting you or truthfully, potentially even learning about foreign trade zones for the first time through this conversation, what is the best way for them to reach out and get in touch with you, start a conversation and learn more?

35:25Curtis Spencer: Well, we have a real simple website, imsw.com. You can Google my name, Curtis Spencer, and you'll, you'll find it. The, the key, I think, in any of this investigation of you're just starting out, should we, should we not? Find out what the money looks like first. And here's a great example. You're a smaller importer. You're just a mom and pop. You're a medium-sized importer. You only import$10 million a year, $5 million a year. Well, your tariff bill on$10 million went to$2 million. Wait a minute. two million if i can mitigate half a million a quarter million of that that's direct profit enhancement to a company who just got hit with a great big bill and listen you know you talk about the all the other enhancements to to um to your life in in in the world that's changing every freaking day, you've got to stay up on top of this stuff.

36:41Curtis Spencer: FTZ saves you money. Get somebody to help you figure out what the numbers are. We don't charge anything for finding out what the value prop is. You want to know what the value prop is? Go to the website. There's even a little button, I think, on our website. It says, click here for free cost benefit analysis. Well, you input seven or eight data elements, and we'll come back the next day. And so you can save$400 ,000,$500 ,000 in a zone or you're bigger and you can say 40 million in a zone, whatever that number is. And that's how you start. That's exactly how you start. Well, Curtis, thank you for sharing your expertise.

37:19We're going to make sure people can connect to all those resources. We're also reminding people one more time, EI, don't forget the dash. Curtis, thank you so much for being here. I thoroughly enjoyed the conversation.

37:31Curtis Spencer: Kelly, you were great. I appreciate it. Kept us right on track.

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