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Bonded warehousing: saves money and increases efficiency.

Bonded warehousing is a must for companies involved in international commerce. A bonded warehouse is a facility authorized by a government's customs department for the storage of dutiable goods. Payment of duties is deferred until the goods are removed from the warehouse, and under some circumstances, are not required at all. Companies which consider themselves global trading concerns, and those new to international trade, must be familiar with the operation of bonded warehouses and free-trade zones.

Bonded Warehouses in the U.S.

The predominant, if not exclusive, federal benefit of bonded warehouses is the alleviation or deferral of customs duties or federal taxes on goods imported into the customs territory of the United States. Bonded warehouses are facilities in which commodities or merchandise are stored under bond to the Treasury Department. In addition to the storage function, the bond assures the federal government that the goods will not be released from the warehouse until all the duties and taxes have been paid or the goods are exported. Goods may be exported without assessment, or they can be cleared for domestic use, at which time an assessment will be made.

The duties assessed are those in effect on the date of withdrawal from the warehouse. If an importer has knowledge of the duty rate reductions or elimination, it can hold goods until the reduction or elimination takes effect. Alternatively, duty rate increases can be avoided by withdrawing goods and officially entering them into the U. S. before the higher duties go into effect. The main advantage of bonded warehousing is not having to pay duties until the goods are ready to be used, manufactured, or sold.

The Treasury Department Regulates Warehouses in the U.S.

The Treasury Department establishes the rules and regulations for the establishment, conduct, management, and operation of bonded warehouses in the United States. The Treasury Department also regulates the entry and withdrawal of merchandise from bonded warehouses. Buildings, or parts of buildings and other enclosures, may be designated by the Treasury Department as bonded warehouses for the storage of imported merchandise entered for warehousing, the manufacture of merchandise inbond, or the repacking, sorting, or cleaning of imported merchandise. Merchandise may be manufactured in bonded warehouses if it is composed of articles manufactured of imported materials which are intended for export without being charged with duty.

The owner of the merchandise gives a bond to the Treasury Department to secure the government against any loss or expense connected with the deposit of the merchandise in the warehouse. Merchandise is then placed in charge of a customs officer who has joint custody of all merchandise stored in the warehouse. This merchandise may be withdrawn at any time within five years from the date of importation, upon the payment of customs duties and accruing charges at the rate of duty imposed at the date of withdrawal. If the goods are withdrawn for exportation to a foreign country, or to the Virgin Islands, American Samoa, Wake Island, Midway Islands, Kingman Reef, Johnston Island,or the Island of Guam, then no customs duties are due. If the merchandise is removed from the warehouse for transportation and re-warehousing at another port, or transferred to another bonded warehouse at the same port, then no duties are due.

A party establishing a bonded warehouse facility must submita written application to the district director of the customs department where the warehouse is located. The application states whether the warehouse facility is to be used only for merchandise belonging to the applicant or as a public bonded warehouse. A private bonded warehouse applicant must state the nature of the merchandise to be stored, provide an estimate of the maximum duties and taxes which will be due on all merchandise in the bonded warehouse at any one time, and submit evidence of fire insurance coverage.

When parts of buildings are used as bonded warehouses, the bonded and nonbonded portions of the building must be separated by fixed partitions rendering it impossible for unauthorized personnel to enter the bonded areas without making their entry easy to detect.

Overseas Bonded Warehouses and Duty-Free Trade Zones

In a perfect world, all economies are equally developed, and all labor and other production costs are comparable. There is no need for protective tariffs or other barriers to trade, and all goods and services compete on the same basis in all markets. One big level playing field is not what you find in the real world, where economic balances, duties, and quotas often effectively bar goods from competition.

Many modem nations stimulate trade for products produced by their competitive industries in part by establishing areas where those industries can operate without paying import duties on the materials they use in manufacturing. They do this by creating bonded warehouses and free-trade zones where no duties are assessed, and quotas are not applied to imported raw materials and unfinished goods. Imports are transformed into finished products and then are shipped--duty free--to a third country. Alternatively, the finished product is shipped into the host country, subject to a tariff, though the duty may be lower than that applied to the components of the finished product.

Take the example of Wahl Clipper Corp., Sterling, Ill., a manufacturer of professional beauty salon and consumer personal care appliances. Wahl saves time and money through its use of a bonded warehouse in Herne Bay, England. Wahl uses the warehouse to increase its efficiency by centralizing distribution and shipping in full-container loads. The warehouse has also allowed Wahl to be exempt from paying Britain's value-added tax (VAT) on products that are eventually shipped to other destinations in the European community.

Jack Wahl, president and chief executive, says the four-year-old 20,000 square foot facility has given the company a competitive edge. "The warehouse lets us ship into England and pay no VAT and duty until such time as it goes out of the warehouse. If it goes to (continental) Europe, there is no U. K. VAT."

Bonded Warehouses Provide Security

Tony Emmenagger, president of Global Junction Trade &Consultants, Inc., a Pittsburgh based international trade firm, explains that many foreign countries make it very easy to operate bonded warehouse facilities within their borders. According to Emmenagger, many countries allow companies to have a bonded area within their own overseas warehouse. Under such circumstances, the bonded merchandise is simply separated from the non-bonded merchandise. Bonded warehouses provided an additional benefit in less developed regions of the world. In such regions, companies often use bonded warehouses for the increased security the facility provides to the company's goods.

Costs Are Drastically Reduced

Use of duty-free facilities can be a highly effective cost-reduction tool for U. S. businesses whose products require imported parts or are labor intensive. Many U. S. companies work with service companies that manage foreign bonded warehouses, or that are located in foreign duty-free zones, that will pick up their unfinished merchandise, finish the goods, then ship the goods to the U. S. company's customers anywhere in the world.

American Tool Companies, Inc., Lincoln, Neb., did just this in Europe. American Tool produces a wide range of items for hardware stores and other retail outlets around the world. Its biggest seller is its pliers, accounting for some 75 percent of the company's business. Other products include snips, precision drills, and clamps. Rather than set up its own network in Europe, American Tools relies on a 400,000 square foot bonded warehouse in Rotterdam, Holland, run by Vitesse B.V. Vitesse distributes products throughout the European continent on behalf of numerous companies including American Tool. Everything American Tool ships to Europe first passes through the Vitesse warehouse.

Transportation Savings

American Tool keeps its transportation costs low by shipping full 20 and 40 foot containers into Rotterdam. The company gets the most out of its equipment packaging by topping the containers off with several layers of plastic toolboxes, since the tools themselves are too heavy to fill up the space. Vitesse clears the boxes through Dutch customs and moves them into the nearby bonded warehouse. Shipments are granted duty-free status while they remain in the facility and no Dutch VAT must be paid. The boxes are emptied and their contents are redistributed from Rotterdam to the rest of Europe. Vitesse fills individual purchase orders from a single order of pliers to truckload lots for big retail chains. By having the goods on hand in Europe, American Tool can react much faster to customer inquiries. Vitesse also helps American Tool manage inventory levels and maintain readily available stock.

Warehouses Position Product Near Customers

Malden Mills, a textile manufacturer based in Lawrence, Mass., had a similar arrangement. Malden Mills wanted to establish a reliable European supply chain while keeping investment to a minimum. The challenge for Malden Mill's distribution team was to develop a distribution network whereby the company could position inventory close to its prospective customers. Malden Mills expected the majority of its business to come from manufacturers based in Germany. The goal was to accommodate, in a timely manner, small orders and requests for product samples.

Malden Mills needed a combination of custom-free warehousing with the option of container-load shipping. The solution was TNT Contract Logistics in Arnhem, Holland. TNT had a large bonded warehouse capability, sophisticated computer systems, and was located on the German border. Malden Mills saw TNT as a way to get started with its new business in Europe with minimal upfront expenditures.

Faced with fierce competition from Japan, Germany, and other nations, U. S. companies are under severe pressure to become global competitors themselves by rapidly increasing exports, foreign sourcing, and overseas manufacturing. U. S. companies must incorporate the use of bonded warehouses facilities in their international distribution operations. These facilities save money and add to efficiency by centralizing distribution, enabling shipments in full-container loads, and allowing more regulated shipments.

Choosing a Bonded Warehouse or Free-Trade Zone

Just like the real estate market, perhaps the most important factor in selecting bonded warehouses or free-trade zone is location. Most firms want to choose a site close to their own or their largest customer's headquarters.

But many other criteria come into play.

* Restrictions on duty-free imports of raw materials and unfinished goods needed in the production process.

* Wage levels, sophistication, and size of the local labor force.

* Production facilities in the area, including water and electricity, warehousing, and room for expansion.

* Transportation facilities.

* Availability of suppliers and contractors.

* Tax policies of the host country, including whether there are duties on production equipment and other machinery that may have to be imported.

* Financial incentives provided by the host country including grants, subsidies, loans, and tax deferrals.

* Economic and political stability of the host country.

Mark A. Goldstein, a partner in the law firm Nagel & Goldstein, Pittsburgh, Pa., practices exclusively in the area of international business transactions.
COPYRIGHT 1992 National Association of Credit Management
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related article
Author:Goldstein, Mark A.
Publication:Business Credit
Date:Oct 1, 1992
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