An outpost of world trade could arise seven miles west of Hazleton.
In Hazle Twp. on the end of a road in Humboldt Industrial Park, Michaels Stores wants to make its distribution center part of a foreign trade zone.
Foreign trade zones or FTZs are like parking spaces for imported goods where companies can delay paying tariffs until they release the goods to the United States market or avoid tariffs all together if they re-export the goods, considerations that became more significant after April 2 when President Trump began raising tariffs.
Companies producing goods inside an FTZ might save on the difference between tariffs for parts versus finished products. Also firms using FTZs can wait to sell goods when prices are favorable and save on fees that they pay to customs brokers.
To take advantage of an FTZ, companies don’t have to operate near a dock or runway. They can join any of the 300 FTZs around the nation.
Michaels, which is 107 miles from the nearest port in Philadelphia, seeks to take part in an FTZ already established in Northeast Pennsylvania.
The local zone, called FTZ 24 and its grantee or operator is Eastern Distribution Center, a nonprofit corporation, started in 1976 and quartered within the Greater Pittston Chamber of Commerce.
“We try to help anybody that is interested,” said Michael Horvath, who administrates the program and has been around FTZ 24 since the start. “The program works. It’s for companies that have something to gain by it.”
Over the years, FTZ 24 has served facilities such as an RCA television factory in Mountain Top, Olivetti-Underwood Typewriter factory in Harrisburg, and a Merck Pharmaceutical site in Northumberland County as well as companies that packaged automobile brakes near Hazleton, an adidas warehouse in Hanover Twp. and Sandvik mining and tool company in Throop, Lackawanna County.
A map shows the location of the Michaels Stores distribution center, 60 Green Mountain Road, Hazle Twp. which the company has applied to place within a foreign trade zone.
(Source: Michaels application to FTZ Board)
Michaels Stores previously operated as a subzone of FTZ 24 from 2016 to 2019 and has applied to reopen a subzone at its distribution center, 60 Green Mountain Road, according to public notices in the Federal Register on June 18 and the Standard-Speaker on June 20.
In an application to the Foreign Trade Zone Board, Michaels Stores Procurement Co. said it planned to import, receive, admit, store, package, repacking, inspect, test for quality and distribute arts and crafts supplies at its distribution center. Michaels also operates art supply stores across the nation, including in the Valmont Plaza in West Hazleton.
The board can deny applications that clash with public interest, and people have until July 28 to email comments about Michaels Stores’ plans to the board’s executive secretary at ftz@trade.gov.
If awarded subzone status, Michaels Stores will have to cooperate with U.S. Customs and Border Protection, which will inspect the facility, monitor inventory and do audits to ensure that tariffs are collected. Theft and other violations that occur in an FTZ are federal crimes.
In return for meeting FTZ requirements, Michaels Stores can defer paying tariffs until goods leave the distribution center and enter the commerce of the United States. Instead of borrowing to pay upfront, the company can earn by investing money until tariff payments are due.
“This is an interest savings, but equally important makes financial payments much more predictable,” Hanns-Christian Hanebeck, who teaches about supply chain management at University of North Texas, said in an email.
Hanebeck said he wouldn’t be surprised if Michaels purchases a majority of its merchandise from China so the savings could be significant.
Since April 2, the United States has proposed tariffs as steep as 145% on Chinese goods, but the two nations have held talks since then and President Trump on June 11 posted on Truth Social that the rate was 55%.
A cargo ship sails through the Panama Canal, in Panama City, Thursday, June 13, 2024. (AP Photo/Matias Delacroix)
In an FTZ, Hanebeck said companies can declare goods weekly rather than individually, which can save on fees to customs brokers, he said, giving this example: “You can think of this as one entry for $650 per week versus 1,000 entries for $30 each.”
Michaels Stores doesn’t plan any production activity within the FTZ, according to its application.
But companies that do produce within a zone have the option of paying a tariff on the finished product if that is less than the tariffs on imported parts.
A company called Brake Parts Inc. imported items such as brake clips, bolts, brake cylinders, O-rings and brake pads into a distribution center next to Michaels, and its workers assembled parts into brake kits.
“BPI would be able to choose the duty rates during customs entry procedures that apply to ..;. kits,” the company said in its application to become a subzone of FTZ 24 in 2016.
Brake Parts operated as a subzone until the company was purchased and operations moved to the Chicago area.
Merck, the pharmaceutical company, imports a long list of components such as drug capsules and chemicals into its campus in Riverside, Northumberland County where workers manufacture medicines and veterinary medicines.
Tariffs on the imported items were as high as 20%; but by making products in a subzone of FTZ 24, Merck paid nothing because there is generally no duty on pharmaceuticals, the company said in 2001 when applying to expand the subzone, where it had 620 employees, to 118 buildings covering on 364 acres.
Nationwide, Merck employed 10,000 to 11,000 workers in FTZs and ranked first in production, according to the FTZ Board’s annual report to Congress for 2023.
Congress created FTZs in 1934 to encourage foreign commerce and help companies maintain or expand operations in the United States.
By 2023, FTZs received merchandise worth $949 billion and were havens for 550,000 workers, the report to Congress said. About 83% of those workers were involved in production, while 17% worked in warehouse and distribution.
Oil companies, which refine crude in FTZs, and automakers are among the biggest users of the zones.
Pennsylvania ranks 12th for merchandise received into FTZs and 17 for exports from them.
Consumer electronics account for 82% of merchandise received into the zones in Pennsylvania, with textiles and footwear, pharmaceuticals and machinery each representing 3% of imports.
FTZ 24 received merchandise of between $250 million and $500 million, had exports of $50 million to $75 million and had between 1,000 and 1,250 workers, the report said.
“Almost every industry sector has some activity in a zone,” Horvath said.
The zone he administers began on 42 acres in Grimes Industrial Park and expanded to 934 acres at business parks in Pittston and Jenkins townships but currently all participating businesses are in subzones.
Horvath said there has been an uptick in interest in FTZ 24 since the tariffs increased.
On June 26, eight days after Michaels Stores applied, another company sought to form a subzone.
PTubes Inc. which does business as Feinrohren TP, wants to import, store, process, distribute and export copper and insulated pipes for heating, ventilation and air conditioning from it 22-acre site in Waymart, Wayne County where the company is considering expanding a 56,000-square foot factory.
“The FTZ designation is sought to enhance operational efficiency and competitiveness by allowing us to defer customs duties on imports of copper tubes from Italy for goods sold domestically, avoid U.S. import duties entirely on goods exported to Canada (where they may also qualify for duty-free entry …), and streamline logistics,” the company said in its application.
Advice for companies at foreign trade zones
Companies that operate in a foreign trade zone gain advantages such as the ability to defer paying tariffs, but also assume responsibilities to keep secure, accurate inventory records.
“It’s not for everyone,” said Michael Horvath, administrator of Eastern Distribution Center, a nonprofit corporation in Pittston that is the grantee for Foreign Trade Zone 24 in Northeast Pennsylvania.
Companies that apply to use the zone have to wait for a decision of the Foreign Trade Zone Board, which can take a year. If approved the companies must comply with the directions of U.S. Customs and Border Protection. Customs and Border Protection’s manual for Foreign Trade Zones is 245 pages long and simplifies laws and regulations for understandability.
“…. Readers are urged to study the actual text of the cited laws and/or regulations before making any costly investment decisions,” the forward said.
So how do companies interested learn if joining a zone will help them?
“You should educate yourself as much as possible before going ahead,” said Hanns-Christian Hanebeck who teaches supply chain management at University of North Texas.
Hanebeck suggests hiring his graduates, who have visited companies that do business in the zone for the Fort Worth area, and working with the local grantees, like Horvath. “They are fountain of knowledge,” Hanebeck said.
Specialized consultants can speed up the process and help companies compute costs for facilities, security, technology and other requirements for participating in a zone, Hanebeck said.
Companies that become part of a zone might have added costs for software compatible with Customs, training workers, security and posting a bond set by Customs.
Customs could require background checks for employees and agents inspecting facilities might instruct companies to keep doors locked, improve check-in procedures, upgrade fencing and post signs.
“They might be deterrent factors,” Horvath said.