Protecting Digi-Key Customers and Suppliers from Tariff Effects with Foreign-Trade Zones

The History and Current State of Tariffs

Tariffs and foreign trade issues have been making international headlines a lot lately. Tariffs have always served an important role in the United States’ and many foreign countries’ foreign trade policy as well as providing a major source of federal income. In the early 1900s, tariffs were drastically reduced due to the addition of the federal income tax. But they have remained in use, and changed over time, as they aid with foreign trade policies and politics.

Digi-Key is establishing two Foreign-Trade Zones to minimize the impact of tariffs on Italian and other European customers

More recently, since President Trump took office, many international businesses around the world are feeling the pinch of increased tariffs. At Digi-Key, many of the components distributed come from international suppliers and therefore are taxed once the items are received in the United States. And because Digi-Key is a long-tail distributor, many orders shipped internationally are impacted as a result.

Enter the Foreign-Trade Zones (FTZs)

A United States Foreign-Trade Zone is a secure area authorized by the federal government, where commercial merchandise, both foreign and domestic, receives the same treatment by U.S. Customs as if it were outside the commerce of the United States. They are the United States’ version of what is known internationally as free-trade zones.

Establishing a Foreign-Trade Zone enables the deferment of duties and taxes, and in the case of re-export of goods, will avoid the applicable duties and taxes altogether as the merchandise was considered to have never entered the U.S. consumption area.

FTZs can be operated by both public and private entities. Either way, they operate under the oversight and supervision of U.S. Customs and Border Protection (CBP), as part of the United States Homeland Security Council. Even though FTZs are outside the Customs territory of the United States, they are on U.S. soil.

Making FTZs Work for the Electronic Components Industry

Digi-Key is currently in the process of establishing two Foreign-Trade Zones which should be running by the end of February – one in Thief River Falls, Minnesota, where Digi-Key is headquartered, and a second in Fargo, North Dakota, where additional product inventory is sometimes warehoused. This avoids the imposition of tariffs for simply transporting material back and forth between the two facilities.

Reprieves from the current tariffs are not affecting or benefitting the electronics industry, which has led Digi-Key and many other electronic components distributors to set up their own FTZs. Digi-Key and competitors are working together through the challenges of setting up FTZs and working with the major carriers to restructure their systems as well.

In many instances, carriers aren’t currently set up to handle small package FTZ. Currently, when we do export, carriers are charging fees to get out of the FTZ. So, we’re working with UPS, FedEx and DHL to restructure. They are working to reconfigure their systems as well to handle this new process.

We are also working closely with our supplier partners to figure out if they can ship directly to us. When suppliers ship directly to us, they will also avoid the tariffs, a huge benefit to them.

The process of setting up the FTZ has taken over a year, working with our more than 850 suppliers, our carriers, and CBP to set up the zones. Fully established in Q1 of 2020, Digi-Key will be one of the largest FTZs in the United States in terms of the mass amount of product shipped in and out, based on value. Digi-Key is also the first FTZ transferring between two states, Minnesota and North Dakota.

If you compare Digi-Key to other large companies doing similar business, we discovered that even retail behemoth Amazon only has one FTZ, located next to the UPS hub in Louisville, Kentucky.

Digi-Key hasn’t done it alone. It has truly been an industry-wide effort. Working in conjunction with some of our competitors, we are establishing best practices on how Foreign-Trade Zones should be set up to function properly. The benefit will truly be seen when we can get all the carriers on board together.

FTZs Benefit Customers and Suppliers

We anticipate with FTZs in place will come better pricing for Italian customers, and customers throughout Europe. And one of the biggest benefits to suppliers around the world is that they can ship directly into our FTZ from their foreign location and forgo the duties, taxes, and tariffs on the material shipped.

It’s been a bumpy road getting to where we are. Our operations and processes are unique and therefore have presented distinct challenges. We’re asking a great deal of our carriers, and we’re asking our government for several accommodations as well. It’s a political, cumbersome process, but we see the light at the end of the tunnel, and we’re looking forward to the ease and benefits this achievement will provide to our customers and suppliers.

Digi-Key’s focus has always been, and will always be, on the customer. Therefore, we’ve taken a leadership position in ensuring that FTZs work for the industry. And that’s the ultimate reason we have established the FTZs – to minimize the impact of tariffs to our customers and provide solutions and services that are second to none.

Digi-Key’s headquarters and new Product Distribution Center (which will be operational in 2021) located in Thief River Falls, Minnesota, USA, are part of the company’s Foreign-Trade Zones

About this author

Image of Teri Ivaniszyn

Teri Ivaniszyn, Vice President of Operational Excellence, has been driving quality and operational improvement initiatives at Digi-Key Electronics since November, 2013. As a University of Michigan athlete and graduate, Teri has a competitive energy for excellence. She has over 20 years of Lean Six Sigma experience with 10 of those years being spent at Ford Motor Company. Outside the office, Teri enjoys spending time walking her dogs (a black lab and a bulldog) with her husband and being a cheerleader for her three children.

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