However, those affected companies may avoid the 45% tariff on imports by using a Bonded Warehouse or a Foreign Trade Zone (FTZ). For example, in South Florida, numerous importers bring merchandise into the U.S. that is not intended for U.S. consumption, but rather for exportation and consumption overseas. Those importers can take advantage of either a Bonded Warehouse or FTZ to bypass the 45% duties.

What is a Bonded Warehouse?

A Bonded Warehouse “is a customs regulated warehouse which must comply with strict Custom and Border Protection requirements.” According to the CBP, any merchandise that is stored in the Bonded Warehouse “is under the joint custody and joint supervision of both CBP and the Bonded Warehouse proprietor.”

The most notable rationale to use a Bonded Warehouse is that it offers a duty exemption feature as “it is a secure location where imported goods are stored without the importer or warehouse owner having to pay any duty” before the merchandise has been withdrawn for consumption.

The major benefit is that duties are only paid to CBP “upon withdrawal of the merchandise” for consumption in the U.S.

Imported goods can be stored in the warehouse for up to five years, and those goods can be manipulated or undergo manufacturing operations. “With a Bonded Warehouse, you can store restricted items until you are able to move them elsewhere or get permission to bring them into the country,” according to the regulation.

What is a Foreign Trade Zone?

A Foreign Trade Zone (FTZ) is a secure area that is under CBP supervision, but is not considered within customs territory. The CBP explains that FTZs are “located in or near CBP ports of entry,” and are the American version of what are known in the rest of the world as free trade zones. Both domestic and foreign goods may be placed in an FTZ.

Under the FTZ procedures, there is no requirement for payment of duties on foreign goods while placed in the FTZ. Duties are strictly payable only if those foreign goods enter CBP territory and are for domestic consumption.

Similar to the Bonded Warehouse, the Port of Miami website explains that there are various advantages to choosing an FTZ. “While in the zone, merchandise is not subject to U.S. duty or excise tax” and goods can be transferred to another zone, or exported from the zone without being charged duties.

In contrast to a Bonded Warehouse, goods can be stored in an FTZ for an unlimited amount of time, and manufacturing and manipulation is also permitted within the zone.

Additionally, “[d]uty is payable on either the imported components or the finished product, whichever has the lower rate. There is no duty on waste material or on value added manufacturing such as labor, overhead and profit.”

With an ability to curtail the possible 45% import tax by opting for either a Bonded Warehouse or an FTZ, the time to apply is now.

The Border Adjustment Tax (BAT) is currently a hypothetical plan that has been presented by President Trump and the Republican Party (GOP). While there is growing speculation and uncertainty around this topic, here is what is known thus far, along with some tips for importers to curtail the BAT.

What would the BAT mean for trade?

The BAT would tax goods that are made overseas and shipped to the United States (imports), but would not tax goods that are produced in the United States (U.S.) and sold domestically or internationally (exports).  This would change how foreign and domestic companies calculate the corporate taxes they pay on profits.

As explained by The Economist, “for tax purposes, ‘profits’ would be domestic sales minus domestic costs.” The “border adjustability is all part of a plan to create a destination-based cash flow tax,” Forbes added, which would change the current corporate income tax. The destination-based cash flow tax would cause the tax rate to be lowered to 20% from the current average rate of 39%.

As a result, businesses would be able to write off their capital investments in the year those investments were purchased. They will also no longer have to pay taxes to the IRS for profits they earn overseas, and will no longer have the ability to “deduct interest as a business expense;” the Tax Foundation explained.

Based on an economic theory perspective, import taxes and export taxes would cancel each other out, therefore creating two potential avenues where BAT would not affect trade. Either the dollar might appreciate just enough that imports and exports end up costing the same as they did before the tax; or American prices and wages would rise enough to undo the competitive advantage that border-adjustment confers.

However, if the economy does not adjust to the BAT, importers would end up paying a lot more taxes in comparison to exporters, which could cause an unprecedented surge in inflation.

To prevent a negative impact on the economy, the Federal Reserve would have to provide a way to raise the value of the dollar to ensure taxes on imports and subsidies on exports would offset each other.

Is the BAT a VAT?

Some economists have compared BAT to a Value Added Tax (VAT), which is used in the European Union. In general, they consider the VAT a “broadly based consumption tax assessed on the value added to goods and services.” The Wall Street Journal added that “Businesses along the chain [of production] collect the tax and send it to the government. …it is the consumer who pays the tax, because the final price of the goods and services [consumers] buy reflect all of the taxes that have been charged up that point.”

Some economists consider the BAT, in its current state, to be very similar to the VAT in regards to retail markets, affecting the consumers who purchase personal commodities. For example, apparel stores relying heavily on imported inventory would face a tax bill that can be 3-5 times larger than their actual profits. While economists are not certain what the long-term effects will be, they do predict that in the short term there could be a 15-20% increase in prices on many household items. This could force many middle class consumers to purchase fewer goods.

Does the BAT violate GATT or GATS?

Other economists and members of the World Trade Organization (WTO) believe BAT could violate Article III of the General Agreement on Tariffs and Trade (GATT).

The broad and fundamental purpose of Article III is to avoid protectionism in the application of internal tax and regulatory measures. More specifically, the purpose of Article III, ‘is to ensure that internal measures not be applied to imported or domestic products so as to afford protection to domestic production.’

For the BAT to comply with GATT, any current or future U.S. tax measures “must be levied on imported products at a rate or amount no higher than the rate/amount levied on domestically produced ‘like’ products; and must provide a border adjustment on exports that is no greater than the amount of tax actually levied or owed on those goods.”

Currently, the GOP’s potential plan is in contravention of GATT, as it would give tax deductions for domestically produced goods, while at the same time denying deductions for those same goods that would be imported.

Another issue that could arise within the WTO is whether the BAT would violate the General Agreement on Trade in Services (GATS). The question would then arise, as suggested by PIIE, as to whether the denying a business deduction for an imported service amounts to less favorable treatment than that given to the same service purchased from a domestic supplier. If BAT does create treatment that is less favorable to imported services than to domestic services, then the BAT would also be in violation of GATS.

While there is much uncertainty, speculation of a future BAT will continue to grow. Until the Trump Administration and GOP present a comprehensive plan with congressional approval, one thing is certain: importers have to begin planning now.