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Tariff Troubles? Consider FTZs and Bonded Warehouses · C-Suite Perspectives

• 0:00
  Alex Heil: Welcome to C-Suite Perspectives, a signature
• 0:02
  series by The Conference Board.
• 0:04
  I'm Alex Heil.
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  senior economist at The Conference Board, guest hosting today for Steve Odland,
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  our CEO here at The Conference Board and the usual host of this podcast series.
• 0:15
  Today, we have the exciting topic of foreign trade zones and
• 0:18
  bonded warehouses that we will be covering during our conversation.
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  Joining me is my colleague Erin McLaughlin, also senior economist
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  here at The Conference Board, who has written on this subject, and that
• 0:31
  includes a recent column in Barron's.
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  Welcome, Erin.
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  Erin McLaughlin: Hi, Alex.
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  Thank you for having me.
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  Exciting.
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  I'll try to deliver.
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  We'll see.
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  Alex Heil: Yeah, let's not downplay it.
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  It's an important topic.
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  But it can be technical.
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  So let's see what we do with this, and hopefully our audience is going to be up
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  for more of this later on down the road.
• 0:52
  Erin McLaughlin: Yes.
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  Alex Heil: But before we actually talk about FTZs, I have to
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  admit, my head is still spinning.
• 1:00
  We've gone through a year, and we're almost at the end of tariffs, no tariffs.
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  High tariffs, low tariffs.
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  Tariffs on coffee.
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  No tariffs on coffee.
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  It's been confusing.
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  Can you just center us and say, where do we stand with tariffs today?
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  Erin McLaughlin: Of course.
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  So right now, today, we have a patchwork of tariffs that are either
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  on specific countries or are on goods.
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  Specific commodities like steel and aluminum, lumber, automobile parts.
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  And so we have a very high tariff environment compared to previous years.
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  So our tariffs are anywhere between 10% and 50% on these goods.
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  And this is very different than last year and the years of our modern
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  economy, they've generally been an effective tariff rate of well below 5%.
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  Our effective tariff rate right now is about 17%.
• 1:57
  Alex Heil: So effective tariff rate really is the weighted
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  average tariff, essentially.
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  Erin McLaughlin: Yes.
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  Alex Heil: So that has, just order of magnitude, that has essentially quadrupled
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  since the beginning of the year, right?
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  Erin McLaughlin: Yes.
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  And this year was quite a ride, as you said, which is relevant
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  to our discussion today.
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  Obviously when the new administration came into office, we knew that tariffs
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  were going to be part of their policy.
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  And the lead up was to Liberation Day on April 2, and these tariffs were unrolled.
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  And then we saw some spikes afterwards due to some stalled negotiations
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  or even tense negotiations.
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  We went as high as 145% with China at one point, then they came back down.
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  During this, we had a 90-day pause.
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  But we've been at a pretty consistent level—there's been some further sort
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  of framework negotiations—but it's been pretty consistent only since about August
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  of our current tariff level, but it has been a bit volatile through the year.
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  Alex Heil: So if I look at just economic performance of the economy,
• 3:08
  and let's just say we use the metaphor of the US economy being a car.
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  Then, economists in the beginning of the year, essentially, were expecting
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  that car was going to crash straight into a tree, and we were going to have
• 3:22
  a recession by the end of the year.
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  But it turns out, it's more like driving the car with the hand brake pulled up.
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  At least, we have some limited data, especially recent one available, but it
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  seems like, talking to some of our macro colleagues here at The Conference Board,
• 3:41
  that growth has taken a hit, but it's not cratered, to use a technical term.
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  Erin McLaughlin: And there's really a couple reasons for that.
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  One is the volatility that I just described.
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  Because the tariff rate has been up and down, and it was on certain
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  products—again like steel and aluminum, which was one of the first, and then
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  was phased in for other products—it's not as if it was, a one-time hike
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  that immediately slowed the economy.
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  It has been more gradual than that.
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  We've also noticed, and we think that a lot of companies are
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  absorbing some of the tariff increases within their supply chain.
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  We know, just a quick recap, that tariffs are paid at the border.
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  They're paid to Customs and Border Protection, to CBP, by US
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  importers, by US companies, so they're not paid by other countries.
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  And we do have this thing called the export-import price index, which
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  was not an index that we spent a lot of time looking at before this
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  year cause it never really changed.
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  And guess what?
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  It still hasn't really changed.
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  So that means that we are not paying lower prices as a result of other countries'
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  exporters absorbing those tariffs.
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  So basically, because that index is holding steady, we know the prices
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  are holding fairly steady, and so that is entering the US business
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  community and essentially, the consumers will eventually have to
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  shoulder the burden of these tariffs.
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  Unless they change.
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  and they could potentially change a little bit as a result of what we're
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  seeing with the Supreme Court, et cetera.
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  Alex Heil: Right.
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  So to the first point you raised, I think this is all about now the
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  much-talked-about issue of affordability and to the extent to which prices
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  are likely to increase at the rate of inflation, hovering around 3%.
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  And I think the expectation is that it'll probably stick around
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  there and that tariffs will support some upward price pressure.
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  But the Supreme Court, that's an interesting point.
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  What's the timeframe?
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  When do we know?
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  When do we expect a decision in terms of the, essentially, the
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  legality of the tariff system?
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  Erin McLaughlin: We really don't know.
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  So the Supreme Court doesn't operate on a publicly published timeline.
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  The actual hearing was in early November.
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  So we're already about five weeks out from the hearing.
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  We could hear a decision within a matter of days and weeks, or it could be months.
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  And a lot of analysts that really study the Supreme Court in their decisions
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  think that it might be a decision that does question the legality or
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  puts up for debate the legality of the tariffs, particularly the ones
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  that are done under IEEPA, that emergency act, related to fentanyl and
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  the imbalance of our trade deficits.
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  But even if they make a judgment on that, the Supreme Court,
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  what happens to the tariffs?
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  Do they immediately go away?
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  Are they restudied and put out under the guise of national security?
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  There was still a lot of questions as to what would happen and if and when
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  there could be rebates to businesses.
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  So during this whole period of uncertainty, really what we're going
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  to talk about today is there's not that many tools that businesses can
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  use to hedge against this uncertainty.
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  But we've identified a couple of them" FTZs and bonded warehouses
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  that may be useful for businesses.
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  Alex Heil: So let's start with foreign trade zones.
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  Tell us a little bit about them.
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  What are foreign trade zones?
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  How did they come to be?
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  How are they used today?
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  Just flesh that out a little bit for us.
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  Erin McLaughlin: Sure.
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  So it's really interesting, being an economist, but also I'm a history nerd.
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  I love to think about when these things started, and what is fascinating is that
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  foreign trade zones in the US actually came into being in the 1930s, and that was
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  as a result of the Smoot-Hawley tariffs.
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  And 1935 is the last time we had an effective tariff rate
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  of about 17%, where we are now.
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  Foreign trade zones were created at that time by the US government.
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  They are essentially physical warehouses or manufacturing districts within the US
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  that are treated almost like they're not part of the US, because goods can come in
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  from a port of entry and go into a foreign trade zone without having to pay a tariff.
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  And they can be stored there, some assembly and manufacturing can happen
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  in the foreign trade zones, and goods can be stored there indefinitely.
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  Which, of course, no business necessarily needs to store something indefinitely.
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  And then tariffs are paid on those goods when they leave that foreign trade zone.
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  And so this is, just to be really very basic in my explanation, this is a tool
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  that, if a company has a foreign trade zone as a warehouse or manufacturing
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  facility that it can use, it can perhaps hedge the bets on our fluctuating
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  tariff environment that could change.
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  Alex Heil: Meaning you could basically have these goods enter the
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  foreign trade zone that you are operating, and then manufacturing
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  or assembly or whatnot takes place.
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  And you can choose the timeframe when you basically move it out of the zone, right?
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  And then sell it to consumers.
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  Am I getting this at least partially right?
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  Erin McLaughlin: Yes.
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  Yes.
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  So you would still pay tariffs on it, but it could be a lower tariff on a
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  finished product versus different parts and materials that go into a product.
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  Also, if you are exporting it directly outside the US, your
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  product, then you would not have to pay tariffs on it traditionally.
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  Alex Heil: Oh.
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  So if resources come in, they are assembled within the FTZ located
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  on US soil, but then are not sold to US consumers, but leave
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  again and go elsewhere, the tariffs don't affect that process.
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  Erin McLaughlin: Yes.
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  And that's really, that was the impetus back in the 1930s
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  during the Smoot-Hawley Act.
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  America was still largely, especially in the 1930s and of
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  course later in the '40s, was really a manufacturing hub for the world.
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  And so they wanted to make sure that we were able to stay competitive globally
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  with our products that are sold globally.
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  And that was really how FTZs, foreign trade zones, were very useful.
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  Now I find it very interesting, and this is what my column in Barron's earlier
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  this year was about, is that a lot of the tariff conversation in our conversation
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  on onshoring and bringing manufacturing back in the US has been ultimately with
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  the view of selling to the US consumer.
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  But for so many companies, they also have to sell and be competitive globally.
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  And so bringing manufacturing back to the US, we have to also put that
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  lens on and try to create environments where businesses can be competitive
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  globally and not be punished for our own tariffs, essentially.
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  Alex Heil: That makes sense.
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  I presume this isn't just a situation where someone puts up a sign and
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  calls it a foreign trade zone and then starts operating that way.
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  There's a process, right?
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  Erin McLaughlin: There is a process.
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  So ultimately these things are controlled by Customs and Border Protection
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  and are instituted by the federal government, by a federal agency.
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  And companies that have FTZs or decide that they would like their warehouse or
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  their manufacturing facility to be an FTZ also, generally, need to have a sponsor.
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  And the sponsors are usually the local ports or a local
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  economic development authority.
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  There's different terms for it.
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  I'm not an attorney, so you know, companies interested in this
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  will certainly have to go through that process with an attorney
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  and a customs broker of sorts.
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  But essentially, they do go through a process that does last a couple
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  months in order to get their warehouse or their facility zoned as an FTZ.
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  We know that there are 200 FTZ programs in the US.
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  They're in every single state, and they have taken in a value of
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  shipments in 2023, which was the latest year we have data, at $ billion.
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  So there has been considerable growth in FTZs, but it's been steady
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  and methodical over the years.
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  But we've heard anecdotally over the last year that there is a 400% rise in
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  interest in FTZs and bonded warehouses, which we'll talk more about in a minute,
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  because companies are really trying to seek and optimize these tools in
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  this highly uncertain environment.
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  Alex Heil: I think that makes a lot of sense, especially in an
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  environment where there's a lot of volatility with the tariff rate, you
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  can shield yourself for the time being until you have some more clarity.
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  That makes a lot of sense.
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  So you mentioned they exist in all states, but is it fair to say that
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  they're more prevalent in border states, or does it really not matter?
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  I guess from an operations point of view, it doesn't matter.
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  You can import goods and then, as long as they go to a designated zone, that's fine.
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  But are there particular parts of the US where they are more frequently set up?
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  Erin McLaughlin: Not necessarily.
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  So they really are geographically all over.
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  Obviously they are around seaports, but in the US we have lots of inland ports,
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  we have lots of other facilities where industry trades, supply chains cross.
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  So you'll often find them in those sort of intermodal areas.
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  3,400 companies operate in FTZs in the US, and I think what's interesting is not
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  necessarily the geographic focus, but it's more of what industries are using or have
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  been using FTZs, leading up to this year.
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  So the most popular companies that use FTZs are pharmaceutical
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  companies that have to manufacture and blend ingredients and components
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  from all throughout the world.
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  Also, factories that assemble vehicle parts, and also energy
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  and consumer electronics.
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  So those are the most prevalent industries using these kinds of facilities.
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  If a company is importing bananas and coffee, they're not going to an FTZ.
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  It's more for goods that are going to be manipulated, manufactured, light
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  assembly, where there may be a process related to the goods that come in.
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  Alex Heil: And that speaks to the whole economic development argument here,
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  cause you're essentially utilizing, then, US labor in these kind of zones.
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  And that's the justification for the, what did you call it?
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  The host?
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  Erin McLaughlin: The grantee.
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  Alex Heil: The grantee, right.
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  Erin McLaughlin: The host.
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  Yes
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  Alex Heil: Exactly.
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  Erin McLaughlin: So a lot of states over time compete for manufacturing
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  facilities in the US, and so your economic development authorities
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  or partnerships in a given state or county would go form an FTZ.
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  They would work with CBP to try to get maybe their industrial park in
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  their county an FTZ so that they could attract manufacturing and make
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  a great case for big companies to establish and hire their local labor.
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  Alex Heil: So clearly, maybe lots of executives after listening to
• 15:22
  this podcast, they're going to call their legal departments to
• 15:24
  see how this sounds to set this up.
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  But if you had to forecast this, would you expect that into '26 and
• 15:31
  '27, next couple years, that this is going to be a tool that more
• 15:36
  companies are going to be seeking out?
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  The volume of trade that was flowing through these FTZs was already substantial
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  from the data you were quoting.
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  But this might also just be something that because of the argument
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  that you're utilizing US labor might be something that is just a
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  desirable strategy by businesses.
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  Erin McLaughlin: Yeah.
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  I think it's absolutely a desirable strategy.
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  So we know, for example, with the Supreme Court hearing, that we're
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  not done with our tariff uncertainty and volatility, most likely.
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  There's going to be some kind of change.
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  At least that's what most people think.
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  I think that, too.
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  And so if we do have further changes, are there going to be changes after
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  that With regards to instituting different kinds of tariffs that are
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  maybe against national security?
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  And then we are also looking at two of our three largest trading
• 16:26
  partners, Mexico and Canada.
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  We have our trade agreement up next summer, the
• 16:32
  US-Mexico-Canada trade agreement.
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  NAFTA 2.0 is going to be renegotiated, and that may also just lend itself
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  to using FTZs in order to insure yourself against potential issues
• 16:47
  with regards to cross-border trade between Canada and Mexico that maybe
• 16:51
  weren't a concern because your goods were covered by that trade agreement.
• 16:56
  And so I definitely think it's a tool that is going to be increasingly relevant over
• 17:02
  the next year, two years, three years.
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  And that if I was a corporate executive, I would reach out to my supply chain
• 17:12
  folks and say, do we have an FTZ?
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  Are we using these now?
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  Should we try to incorporate more of our supply chain in existing FTZs?
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  And/or should we try to add FTZs to our supply chain?
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  Alex Heil: So I mean that renegotiation next year, that's going to be a big topic.
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  And watch out everyone, we're going to have you back, Erin, certainly,
• 17:31
  talking about this because you're the resident expert on trade
• 17:34
  here at The Conference Board.
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  But let's take a short break, and we'll be right back with more of my
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  conversation with Erin McLaughlin.
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  Welcome back to C-Suite Perspectives.
• 17:46
  I am your guest host, Alex Heil, of The Conference Board.
• 17:49
  I'm joined by my colleague, Erin McLaughlin, senior economist
• 17:53
  with The Conference Board.
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  Welcome back.
• 17:56
  Erin McLaughlin: Thank you.
• 17:57
  Alex Heil: Our second topic for this podcast, it's maybe something that
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  does not necessarily make intuitive sense when one just reads the term.
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  Unlike foreign trade zones, I think anybody can maybe
• 18:11
  envision what that looks like.
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  But bonded warehouses, what are those?
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  How are they different, how are they similar to foreign trade zones?
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  Erin McLaughlin: Right.
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  So, they're like the cousin to foreign trade zones.
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  They also have to be certified by Customs and Border Protection.
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  But bonded warehouses, there's a couple major differences, but the major
• 18:31
  difference is in bonded warehouses, manufacturing can't really happen.
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  It's more of a storage facility than a manufacturing facility.
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  Now, there's different legal definitions of things like assembly
• 18:43
  and manufacturing and storage.
• 18:46
  Again, I'm not providing legal advice here, but essentially a
• 18:49
  bonded warehouse is where some light assembly can take place, but
• 18:54
  it's not a manufacturing facility.
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  The other big difference is it's for a term of five years, versus the foreign
• 19:02
  trade zone where goods can come in and sit tariff-free indefinitely until they leave.
• 19:09
  And so five years on the bonded warehouses, indefinitely in FTZs.
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  And then the tariff is paid when the goods leave the bonded warehouse.
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  So in thinking about five years, five years from now, tariff policy could be
• 19:27
  very different than it is right now.
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  And so the attractiveness of potentially using bonded warehouses is also there.
• 19:36
  And I think that's a tool that companies would also want to explore.
• 19:40
  Alex Heil: Right.
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  There's cost, obviously, with storage.
• 19:43
  Erin McLaughlin: Yes.
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  Alex Heil: And so there's limitations on how long one can potentially use
• 19:46
  that because of the opportunity cost.
• 19:48
  But do we have any data on the volume of business that flows, the
• 19:54
  volume of trade that flows through bonded warehouses compared to FTZs?
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  Are they more prevalent, or is this sort of the small cousin
• 20:03
  that is not as much used.
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  Erin McLaughlin: There is no data on this.
• 20:06
  I really think that bonded warehouses are something that people were
• 20:11
  not talking about until this year.
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  My background is in commercial real estate and design and construction, and
• 20:19
  bonded warehouses were not something that have generally been targeted
• 20:24
  or really desired because again, before this year, we had an effective
• 20:29
  tariff rate that was well below 5%.
• 20:32
  And so the necessity to hold a good—and FTZs have always had attractiveness
• 20:39
  because again, as we said, you can export a finished product without paying tariffs.
• 20:43
  You can potentially pay a lower tariff on a finished product, and
• 20:46
  you have the ability to manufacture.
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  For bonded warehouses, they haven't been very popular because
• 20:53
  there was really no need for them to be popular before this year.
• 20:56
  But folks are definitely very interested in them now.
• 21:01
  Alex Heil: Yeah, that's interesting.
• 21:02
  It really sounds like it's an additional strategy.
• 21:04
  So if we don't have any data on the overall volume, do we have any
• 21:07
  data on type of industries, type of companies, type of products?
• 21:11
  Or is that equally a black box—or a black warehouse, I should say?
• 21:18
  Erin McLaughlin: There's a little less information on them because
• 21:21
  they're private facilities.
• 21:22
  So essentially, a foreign trade zone, because you're generally going through,
• 21:28
  like we were talking about, a grantee like a port authority or a local
• 21:31
  economic development authority, as well as CBP, to get your facility certified.
• 21:36
  Bonded warehouses, you do have to go through a certification
• 21:41
  process and track them.
• 21:43
  But these are generally just warehouses, and there is a process.
• 21:48
  It takes two or three months, is my understanding.
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  But it is a private facility.
• 21:54
  There also may be some ability for companies to lease space
• 21:59
  in existing bonded warehouses and have some flexibility.
• 22:04
  But there is some added cost for bonded warehouses because things need to be
• 22:09
  tracked and reported on in a different way than your typical warehouse.
• 22:15
  Alex Heil: Interesting.
• 22:15
  This is a real niche, essentially, when it comes to trade and operations thereof,
• 22:21
  but you certainly covered the main ground of tariffs and trade throughout this year.
• 22:27
  Can you give our listeners just a little bit of a sense of the
• 22:30
  resources that you have established and that we have available here at The
• 22:34
  Conference Board, if anyone wanted to learn more about tariffs and trades.
• 22:38
  Erin McLaughlin: Absolutely.
• 22:39
  So firstly, and it's one of our most visited pages this year, we do have a
• 22:43
  Tariff Tracker on our website that lists the tariff rate on our major trading
• 22:50
  partners, our top 17 trading partners, as well as on the big commodities like steel
• 22:57
  and aluminum, lumber, automobile parts, things that are experiencing tariffs.
• 23:03
  And yeah, most folks don't want to have to comb through the executive orders
• 23:07
  and parse this stuff out week by week.
• 23:09
  So we've been doing that for you.
• 23:11
  And we have a tracker that lists that.
• 23:13
  Then we also have different articles and stories, a lot of them are in our
• 23:18
  Navigating Washington hub on our website, that discuss and offer some insights
• 23:24
  for businesses on what a lot of these policies, including the tariff and trade
• 23:29
  policies, may mean, and strategies such as FTZs and bonded warehouses that perhaps
• 23:36
  companies can undertake to try to create some certainty in this environment.
• 23:40
  And what this really comes down to when you think about it, both
• 23:44
  with FTZs and bonded warehouses, is it goes back to that conversation
• 23:50
  about preserving cash and preserving cash flow during the supply chain.
• 23:56
  And it is related to that conversation about how we know that the tariff
• 24:01
  burden is presenting itself on American importers, and they're
• 24:05
  the ones paying the tariffs.
• 24:07
  And so, in order to protect their cash flow and in order to hedge against future
• 24:13
  changes, that's really where the FTZs and the bonded warehouses can be used.
• 24:17
  Alex Heil: Interesting.
• 24:18
  Just to wrap things up here, so while our audience is going to read up on
• 24:22
  tariff and trade on our website, what are you watching going into 2026?
• 24:27
  If you had to just say, when it comes to these topics, this is the
• 24:31
  number one thing that I'm paying attention to going into 2026.
• 24:35
  Do you have a sense?
• 24:36
  Erin McLaughlin: I do.
• 24:37
  So the number one thing that I'm paying attention to is the activity with
• 24:41
  our three largest trading partners.
• 24:43
  So our three largest trading partners are: one, Mexico;
• 24:46
  two, China; and three, Canada.
• 24:49
  And what we've seen in 2025 is a significant decline in trade, both imports
• 24:56
  and exports, between China and Canada.
• 24:59
  We have not seen a significant decline, really, in Mexico, but all three of
• 25:04
  those countries are basically the three countries for which we do not have
• 25:08
  e stablished trade agreements with.
• 25:11
  We kicked that China one for 12 months, so that's now November of next year.
• 25:16
  And we know with Canada and Mexico, there's going to be a renegotiation of the
• 25:20
  US-Mexico-Canada Agreement, aka NAFTA 2.0.
• 25:24
  And so there's just a lot of uncertainty ahead.
• 25:27
  Those are by far our three largest training partners.
• 25:31
  Alex Heil: Stay tuned.
• 25:32
  There's lots more to come.
• 25:33
  And I think this is actually a very fascinating topic.
• 25:36
  Thank you so much for joining us today, Erin.
• 25:39
  Erin McLaughlin: Thank you for having me.
• 25:41
  Alex Heil: And thanks to all of you for listening to C-Suite Perspectives.
• 25:44
  I'm Alex Heil, and this series has been brought to you by The Conference Board.