The secret tariff-free zone

0:01NPR.

0:11Robert, you look beach ready today. I got my hat, umbrella, sunscreen, triple protection, and a little sand-colored beach reading. The beige book. What is more perfect for the beach than an obscure government document about current economic conditions? I hope it's not too depressing. In celebration of summer, I am only reading the parts that aren't all doom and gloom. So it's a brief read. Oh, excellent. Well, we can honor the more unexpected and obscure parts of the book this time. Take it away.

0:49It's the Beige Awards, our eight times a year salute to the art and science of telling stories about the economy. I'm Robert Smith. And I'm Waylon Wong. And this time we are going to use the Beige Book to transport us to a magical place where the tariffs can't touch us, the Port of Baltimore. Just one warning before we leave, don't wear your pajamas. That will make way more sense after the break.

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2:15Security is offered by Ameriprise Financial Services, LLC, member FINRA and SIPC. Always good to remind everyone how this award show works. There are 12 regional banks in the Federal Reserve System. Each one studies their local economy and brings back stories of what they see. They publish them in a document known as The Beige Book, and we give awards to the best stories. A runner-up award goes to the Minneapolis Fed, and they noticed something pretty funny about the job market. Now, we all know that a few years ago, there were tons of jobs, and businesses were desperate. Back then, people were getting hired without fixing up their resumes, or even dressing up for job interviews.

2:53Yeah, their resumes were in Comic Sans, and no one cared, but that has changed. These days, the job market is tighter and you got to clean up if you want to get hired. And so the Minneapolis Fed wrote this in the Beige Book about the new reality at job fairs. A Wisconsin contact reported very good attendance at a recent job fair, adding that, quote, there were fewer candidates wearing pajamas. Which I guess is their way of saying that people are trying a little harder these days to get hired. I call it the PJ indicator. And the PJ indicator says finding jobs isn't as easy as it once was. You have to put on pants.

3:33Okay, let's get to our main award. Robert, please pass me the envelope. And the Beigie Award goes to the Richmond Fed. Coming to the stage is Suzanne Holland, an economic outreach specialist for the Richmond Fed. We spoke last Friday. Suzanne, congratulations. Thanks so much, Robert. It's an honor. I know you've heard the Beiges before. Did you dream that someday you would be on the stage? I actually did. Once I learned about this particular award, I said that is the sexiest kind of award you can get for economic sensing. And I hoped that it would happen to me. You know, this is definitely the first time someone's described the Beiges as sexy, but I hope it's not the last.

4:22Well, the winning entry from the Richmond Fed definitely is provocative. It's about a strange world that I knew nothing about, bonded warehouses. Here, I'll read the winning entry. Contacts reported that demand for bonded warehouse space has gone, quote, through the roof across the region as shippers look for space to hold cargo near ports and wait out changes in tariffs. So Suzanne, explain to us in a very simple way. What is a bonded warehouse? At first I thought, oh, this means an insured warehouse. But no, no, no. This is a very specific thing in U.S. trade law. Yeah. So they are secure facilities.

5:05They're usually near maritime ports where imports are stored before they go through customs. So I say it's, think of it as kind of like a tariff limbo zone. You're paying the import duty when you take the goods out of storage rather than when they first come through the port. So you're saying with a bonded warehouse, if I were to ship something from China, let's say, and let's say the tariff is 145 percent, I don't actually have to pay that tariff. I can leave it in the warehouse, wait until the tariff goes down maybe, and then pull it out of the warehouse and then I can pay whatever the tariff is.

5:47Is that correct? Yep. It's like a way to wait out this volatility and the day-by-day back and forth with the tariffs. I don't know whether it's necessarily a long-term solution, but it does buy shippers some time. We were intrigued. So we called someone who specializes in helping shippers postpone tariffs for a while, Larry Smith of Beltz Logistics Services Company in Baltimore, Maryland. After the tariffs were announced, his phone started ringing off the hook. And so our customers, which some of them are beverage alcohol importers of beer and spirits all over the world, they were looking at higher tariffs.

6:29And so they flooded their supply chain. We got a lot of stock before, I guess it was April 2nd, and we filled up the warehouse. And we're talking French wine, Scottish whiskey, tequila. and Latvian vodka and Dutch beers. It's just a lot. They come from all over the world. Now, to be clear, these warehouses only delay tariffs, not get rid of them. So how much will importers end up paying? Well, that depends. Larry mainly deals with two types of magical warehouses, the bonded warehouse that Suzanne talked about and something called the foreign trade zone warehouse. Slightly different rules. Yeah.

7:10So let's say you have some fine Latvian vodka on a ship and you think the tariffs are about to go up. That's when you want a foreign trade zone warehouse that will lock in the low tariff. And even if the rates go up, you can pay the low rate for years whenever you take the stuff out of the warehouse. But let's just say you're on the ship and tariffs are already high. Then Larry can help you find the bonded warehouse. You can wait until tariff man changes his mind and tariffs go down and then pay that lower rate when you take it out. Before Liberation Day happened, we got a lot of requests for us for foreign trade zones because it preserved the lower tariffs.

7:48But now that the tariffs are higher and I'm getting a lot of requests for bonded storage where they can pay the tariff that will exist when they want to release it. You can essentially make a bet. Do you think tariffs are going up or going down? And you can pick your warehouse to see if your bet pays off. and then watch the tweets every day. Tariffs down, move it out of the warehouse, tariffs up, leave it there. This seems like it was built for the Trump era, but the bonded and foreign trade warehouses have existed for decades. It can help any business with cashflow and timing. So let's say you want to import, ah, go for it, a whole year's worth of that Latvian vodka to save on shipping costs.

8:27But you don't want to pay a whole year's worth of taxes. Larry will store it for you. You can take it out a little at a time, pay a little taxes at a time. Now, the weirdest thing that Larry stores? We have an entire 60 ,000 square foot warehouse building full of something called sodium metabisulfite. And I'd never heard of that in my life. And I get here and they say, oh yeah, it's in cookies, it's in toothpaste, and it's called a stabilizer. And we get it by the boatload from Italy. And so that's what kind of the Adam Smith's magic's hand is. You have these things you've never even heard of that are a huge part of our economy.

9:04So next time you have a cookie, thank the sodium metabisulfite that came in from Italy. Tastes like Baltimore, though. I just want to note that we've now name-checked a third Smith. We've got you, Robert Smith. We have Larry Smith, our warehouse logistics guy. Now we've got Adam Smith. Waylon Smith's run the world. Clearly. Now, as you might expect, Larry has gotten calls from people who want to open their own foreign trade zones and bonded warehouses. It's a good business, but it takes time. You need a lot of security measures and federal approvals. By the time you finish, maybe tariffs will be boring again.

9:42We can only hope. Thanks again to the Richmond Fed and Suzanne Holland for alerting us to this limbo world of American warehouses. You got to hand it to businesses. They are clever at finding ways to make a bad situation better. No, that's the name of the game. It's ingenuity. It's the ability to pivot. And it's the ability to be patient. Robert, you did manage to find a non-depressing news story in the page book. Yay! I'm changing into my pajamas to celebrate. This episode was produced by Julia Ritchie with engineering by Gilly Moon. It was fact-checked by Sierra Juarez. Kicking Cannon edits the show, and The Indicator is a production of NPR.

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