DigiKey is one of largest foreign trade zones in country, mitigating some of its tariff costs

DigiKey runs Minnesota’s largest distribution center in Thief River Falls, about two hours from Hector International Airport in Fargo, three hours from the Canadian border facility in International Falls and four hours from the port of Duluth.

You wouldn’t expect a landlocked northwestern Minnesota operation to be one of the largest foreign trade zones (FTZ) in the country.

Yet since it became an FTZ in 2020, DigiKey has become the largest FTZ by volume, and the designation has helped the company absorb higher tariffs set by President Donald Trump.

DigiKey makes about 25,000 shipments of electronic components and automation products daily from around the world, so any increases in the tariffs can have a big impact.

“In 2024, for example, about 24% of the products that we brought in were of China origin,” said Andy Zbacnik, import trade compliance manager for DigiKey. “So it was a major, major impact for us at the time and continues to be a major, major impact for us.”

The FTZ program is perfectly suited for a company like DigiKey, which is a quick-turn distributor. The company imports big orders — usually electronic parts, computer chips, sensors and the like — and then ships smaller portions of that order to customers in the U.S.

The Foreign Trade Zone Act was created by Congress in 1934 to help companies compete globally and encourage domestic employment. Today there are 260 foreign trade zones (FTZs) in the United States, and each zone can have multiple sites or subzones.

Minnesota has three FTZs: International Falls; the Port of Duluth and at the Minneapolis-St. Paul International Airport.

“Contracting with import brokers or working with foreign trade zones can help some with the cost shock that’s going to come with tariff and policy uncertainty,” said Paul Vaaler, a professor at the University of Minnesota Law School and the Carlson School of Business.

David Heyer, the Minneapolis-St. Paul area foreign trade zone administrator, said a webinar held on April 22 — three weeks after the first major tariff deadline — drew an audience of more than 250. That was three times the number of attendees at a similar webinar four years ago.

“We knew this was going to be a hot topic at the time, and we wanted to be prepared for it,” Heyer said.

DigiKey is an FTZ through the Koochiching Economic Development Authority, the Grand Forks Airport and the Fargo airport in what is known as an alternative site format. So 10 acres of DigiKey’s 147.5-acre zone falls in Fargo.

As a small-parcel FTZ, DigiKey can spread payments of tariffs charged by U.S. Customs and Border Protection over weeks or months. And if any of the parts are shipped to another FTZ or outside the U.S., they aren’t subject to tariffs.

Not every shipment it gets goes through the FTZ program, but just savings on processing fees through its FTZ add up to substantial savings. The maximum fee is $634, but they can add up quickly. The FTZ allows DigiKey to batch the shipments and pay one merchandise processing fee for several shipments each week.

DigiKey has to qualify its suppliers to include them in the FTZ program.

“I think we’ve onboarded close to 100 suppliers this year, which is a pretty significant increase,” Zbacnik said. ”Typically we’re averaging anywhere from 20 to 50 in a really good year."

FTZs are secure areas often near ports of entry where companies can store, process and manufacture goods. In an FTZ, tariffs and duties are not applied immediately as they would be at a regular port of entry.

Instead, goods are subject to tariffs only when the goods leave the FTZ and are considered to have entered the U.S. marketplace.

Some new executive orders, depending on who wrote them and when, may minimize some benefits of FTZs, but local officials maintain that FTZs can help companies delay, reduce or eliminate duties and tariffs.

The application and approval process is not difficult or lengthy, but trade officials in Minneapolis and Duluth both highly recommend that companies first do a cost/benefit analysis and work with a consultant who specializes in the FTZ program.

“We recommend using a very FTZ-specific base of consultants so that they can get very timely, very up-to-date, very specific help with their project,” said Kate Ferguson, director of trade and business development at the Duluth Seaway Port Authority.

As a grantee of the program, Ferguson helps companies with applications for the program. But the companies need to work with the Foreign Trade Zone board and Customs and Border Protection before the site can be activated.

Each of the Minnesota FTZs has plenty of acres in its program to be granted and activated.

Duluth has just one company that is active in the program: the Lake Superior Warehousing Co., which has a 30-acre site.

Initially, an FTZ had to be within a 60-mile radius of the port. However, amendments to the act over the years mean that companies outside that circle can still benefit from the FTZ program.

This provision is how DigiKey was able to qualify.

DigiKey is one of northwestern Minnesota’s largest economic drivers, and it has grown tremendously in the last decade. In 2022, it added a $400 million expansion at its Thief River Falls operations, and it employs over 3,600 workers.

The FTZ is one tool DigiKey uses to help manage the ups and downs of business costs, in this case import or supply chain disruptions.

“Our goal at DigiKey is just to be made whole, not to make money off of tariffs,” said Teri Ivaniszyn, vice president of operational excellence.