FOREIGN TRADE ZONES

Definition, Benefits and Facts

 

DEFINITION

A Foreign Trade Zone (FTZ) is a parcel of land deemed to be outside the United States for purposes of duty assessment. Companies located in a foreign trade zone are able to defer, reduce and/or eliminate import duties. It is only when goods are withdrawn from the FTZ and entered into the commerce of the United States that the appropriate duty is levied upon the goods, if applicable. When legislation implementing the FTZ concept was enacted by Congress in 1934, the purpose was to increase foreign investment and business in the United States, creating economic development through jobs and investment.

BENEFITS (Foreign Trade Zone Advantages)

Ø CASH FLOW - U.S. Customs duties are paid only if and when imported merchandise is shipped into the U.S. Customs territory and is subject to duty. Merchandise transferred to another zone, exported, or destroyed may avoid U.S. Customs duties. Inventory is held in the FTZ without duty payment.

Ø EXPORTS - No U.S. Customs duties are paid on merchandise exported from an FTZ. Normally while the drawback law allows the recovery of U.S. Customs duties previously paid after the merchandise is exported, rarely are all exports subject to drawback. Exports to NAFTA countries of unused merchandise are rarely recovered. In an FTZ, the duties are simply never paid.

Ø WASTE/SCRAP/DEFECTS/DAMAGE/OBSOLESCENCE - U.S. Customs duties are significantly reduced or eliminated on merchandise subject to these accountable losses.

Ø INVERTED U.S. CUSTOMS DUTY SAVINGS - In an FTZ, uniquely, the FTZ user may elect to pay the duty rate applicable to either component materials or the finished product manufactured from the component material, depending upon which is lower. In some cases, the rate may be zero or “duty free”. The reduction or elimination of U.S. Customs duties is significant.

Ø NONDUTIABILITY OF LABOR, OVERHEAD, AND PROFIT - U.S. Customs duties are not owed on labor, overhead and profit attributed to production operations in an FTZ. If the same production operation were done overseas, the value of the labor, overhead and profit would be subject to U.S. Customs duty.

Ø REDUCED CYCLE TIME - Delays relating to U.S. Customs clearances are eliminated. Special direct delivery procedures expedite the receipt of merchandise in company facilities, reducing inventory cycle time.

Ø DIRECT DELIVERY - Users may obtain permission from US Customs to move merchandise directly from the port of arrival to their FTZ, bypassing certain random commercial slectivity exams. Users may also obtain permission from US Customs to ship an unrestricted weekly amount of goods from their facility based on an estimate approved by Customs before the start of the business week. Goods move in and out of the facility on an expedited basis, permitting a seamless supply chain form vendor to customer and reducing the amount of inventory needed to operate.

Ø WEEKLY ENTRY - Under Weekly Entry/Export procedures, users file only one entry summary per week, significantly lowering broker fees and merchandise processing fees paid to Customs. Large distributors may make in excess of 1,000 entries per year. Use of the Weekly Entry procedure may reduce entries and associated costs to 52 entries per year. Entry-related expenses alone may be reduced by several hundred thousand dollars or more per year. Weekly entry may also offer expedited cargo release to companies subject to Food and Drug Administration (FDA) restrictions.

Ø HARBOR MAINTENANCE FEE - Fees are paid quarterly on merchandise admitted in the FTZ, not on the U.S. Customs entry, creating a cash flow advantage.

Ø PRODUCTION MACHINERY - Machinery for use in a zone may be assembled and installed before duties are owed on either the parts or finished product rate.

Ø INTERNATIONAL RETURNS - A number of firms that export have a percentage of the exports returned to the United States. U.S. Customs duties are owed each time merchandise of foreign origin that has not been registered with U.S. Customs is returned. American Goods Returned merchandise can be verified. By being returned and admitted to an FTZ, no U.S. Customs duties are paid upon return.

Ø COUNTRY-OF-ORIGIN MARKING/LABELING - No country-of-origin labels are required on merchandise admitted to the FTZ. Merchandise shipped into U.S. Customs territory must have appropriate origin labeling which will vary depending on the circumstances.

Ø SECURITY - The FTZ is subject to U.S. Customs Service supervision and security requirements. Unauthorized withdrawal of merchandise, such as employee pilferage or stealing, is a violation of 18 U.S.C. 549, 3571, carrying a penalty up to two (2) years in a federal penitentiary, fines not more than $250,000, or both per offense.

Ø ANTIDUMPING/COUNTERVAILING DUTIES - Use of an FTZ defers the payment of these duties until merchandise enters the U.S. Customs territory. Exported merchandise is never subject to these duties. Note that recovery of these duties is not available under the drawback law.

Ø SPARE PARTS - To service many products, spare parts must be on hand in the United States for prompt shipment. However, it is impossible for most firms to know the requirements for spare parts, especially with new products. Spare parts may be held in the FTZ without U.S. Customs duty payment, generating cash flow savings. Obsolete parts may be destroyed without duty payment.

Ø U.S. QUOTA - Most merchandise may be held in an FTZ, even it is subject to U.S. quota restriction. When the quota opens, the merchandise may be immediately shipped into U.S. Customs territory. Voluntary restraint and orderly marketing agreements are not impacted by FTZ use.

Ø QUALITY CONTROL - The FTZ may be used for quality control inspections to ensure that only merchandise that meets specifications is imported and duty paid. All other materials may be repaired, returned to the foreign vendor, or destroyed.

Ø INVENTORY CONTROL - Operations in an FTZ require careful accounting of receipt, processing, manufacturing, and shipment of merchandise. Firms have found that the increased accountability reduces inventory error, receiving and shipping concerns, and waste and scrap.

Ø EXHIBITION - Merchandise may be held for exhibition in the zone without U.S. Customs duty payment. At a later date the merchandise may be imported or exported.

Ø INSURANCE COSTS - The insurable value of merchandise held in an FTZ need not include the U.S. Customs duty payment. At a later date the merchandise may be imported or exported.

Ø ZONE-TO-ZONE TRANSFER - Significant benefits accrue to the in-bond transfer of merchandise from one zone or subzone to another for distribution or manufacture without U.S. Customs duty payment. A network of zone projects provides opportunities to reduce or eliminate duties.

Ø TEMPORARY REMOVAL PROCEDURE - Merchandise may be removed from an FTZ into the U.S. Customs territory for certain activities and returned to the FTZ without U.S. Customs duty payment.

Ø COMPLIANCE WITH FEDERAL LAWS - Merchandise may be admitted into an FTZ without being subject to a wide array of Federal laws that would otherwise prohibit the importation. Upon shipment into the U.S. Customs territory, the merchandise must meet all applicable requirements.

Ø ENTERPRISE ZONE COORDINATION - Foreign -trade zone advantages may be combined with those of enterprise zones for enhanced financial gain.

 

FACTS

Ø The FTZ Act of 1934 was introduced to expedite and encourage U.S. participation in international trade and commerce.

Ø The purpose of a FTZ is to facilitate trade and increase the global competitiveness of U.S. based companies.

Ø The FTZ program has been, is and will continue to be an important part of our U.S. Trade Program.

Ø Over 2,800 firms use FTZs.

Ø Over 350,000 people are employed in U.S. FTZs.

Ø All 50 states plus Puerto Rico have established FTZs

Ø A Foreign Trade Zone must be operated pursuant to public utility principles under the sponsorship of a corporation granted authority by the Board and under supervision of the U.S. Customs Service.

Ø A general purpose FTZ must be located within 60 statute miles (or) 90 minutes driving time from the outer limits of a port of entry (or) a user fee airport.

Ø A FTZ is not for everyone (or) every community. It takes time and money to get an FTZ and there must be a demonstrated need for one.

Ø A FTZ can be an asset, only if you import something.

Ø A FTZ is a “Cash Flow” type of economic development tool.

 

 

For additional information on Foreign Trade Zones, check out the following web-sites:

National Association of Foreign Trade Zones - www.naftz.org

Foreign Trade Zones Board - www.ia.ita.doc.gov/ftzpage

U.S. Customs and Border Protection - www.customs.ustreas.gov