Foreign Trade Zones (FTZ): How They Cut Costs and Streamline Imports

Formed under the Foreign-Trade Zones Act of 1934, Foreign-Trade Zones have since given American companies a leading edge in world competitiveness. Allowing for the duty-free handling and manufacturing of goods inside U.S. borders, FTZs have emerged as facilitators that have become very instrumental in promoting easier trade and economic development. The following tutorial will closely examine the FTZs-from structure and benefits to examples of successful operations and the steps involved in setting up a zone.

What Is a Foreign-Trade Zone?

A Foreign-Trade Zone (FTZ) is a specific area within a country, usually located near major ports or airports, where goods can be imported, stored, manufactured, or processed without being subject to the usual customs duties and trade taxes. FTZs are designed to stimulate economic growth and boost international trade by offering businesses a cost-effective place to store, modify, or assemble goods.

U.S. Representative Emmanuel Celler once described an FTZ as “a neutral, stockaded area where a shipper can put down his load, catch his breath, and decide what to do next.”

According to the Foreign-Trade Zones Board’s 2019 report, nearly 350 FTZs are active in the U.S., employing around 460,000 people and handling over $767 billion in goods each year, highlighting the critical role FTZs play in supporting the economy.

Permitted Activities in Foreign-Trade Zones

The Foreign-Trade Zones Board allows a wide range of activities within FTZs to support business operations and trade. Permissible activities include:

• Substantial transformation of a product, changing its customs classification or eligibility for U.S. consumption.
• Merchandise that can be showcased for prospective buyers or trade shows.
• Goods that can undergo various treatments like mixing, cleaning, and testing.
• Companies that can change the packaging or labels on products within an FTZ.
• Damaged goods being restored without duty charges.

Note: Retail trade is not allowed within an FTZ, and all activities must comply with applicable federal, state, and local regulations, including health and safety laws. In some cases, the FTZ Board may exclude certain goods deemed unsafe or harmful to public health.

Key Benefits of Foreign-Trade Zones

FTZs offer an array of benefits to businesses and the public, promoting economic development and international trade while creating jobs. Here are some major advantages:

1. No duties are paid on imported goods until they leave the FTZ for U.S. consumption, improving cash flow.
2. If goods are re-exported, no duties are paid at all, reducing overall costs.
3. Manufacturers can bring in raw materials duty-free, transforming them into finished products that may have a lower duty rate.
4. No merchandise processing fee (MPF) reduction. FTZs help businesses save on import processing fees.
5. Goods can be stored in an FTZ when a quota is in place, only entering the U.S. market when the quota allows.

Beyond these direct business benefits, FTZs support the U.S. economy by enhancing local economic development, helping domestic businesses remain competitive, and encouraging job retention and creation.

Successful Examples of Foreign-Trade Zones

Across the U.S., some FTZs are particularly active and contribute significantly to their state economies. Here are three notable examples:

• City of Palmdale, California

 This FTZ is known for handling electronics imports, such as headphones and speakers, which are assembled with other components to produce computers for export. This operation saves manufacturers duty costs and stimulates local employment.

• State of Texas

At FTZ 113, imported cars from countries like Germany and Japan remain duty-free until they are distributed to U.S. dealerships. This setup cuts down on tariff expenses for auto manufacturers and supports U.S. companies by creating jobs.

• Port of Seattle

Clothing manufacturer Tommy Bahama consolidated its distribution in a single FTZ facility here, benefiting from cost savings, better inventory management, and additional local job creation.

Steps to Establish a Foreign-Trade Zone

For companies seeking FTZ status, the journey involves several steps:

1. Conduct a Trade Assessment: Before applying, businesses should evaluate the demand for an FTZ in the area. The FTZ Board only approves new zones if existing zones are insufficient for local commerce needs.
2. Submit an FTZ Application: Applicants must present a detailed plan that includes security measures, inventory tracking, and potential economic benefits. This process can take up to a year, as the FTZ Board carefully evaluates all applications.
3. Meet CBP Requirements: U.S. Customs and Border Protection requires FTZs to establish rigorous security protocols and accurate inventory tracking for all merchandise entering and leaving the zone. Any goods that go unaccounted for could result in substantial fines.
4. Alternative Site Framework (ASF) Option: If establishing a new FTZ is cost-prohibitive, businesses may choose to join an existing FTZ under the ASF. This framework allows a designated FTZ to extend 2,000 virtual acres for other operators within its service area, potentially setting up within 30 days.

Transferring Merchandise from FTZs for U.S. Consumption

Goods leaving an FTZ for sale in the U.S. are classified into different statuses:

1. Privileged Foreign Status: The duty rate is determined when goods enter the FTZ, even if they’re transformed before entering U.S. commerce.
2. Zone-Restricted Status: Goods can only be exported from the FTZ and are not eligible for U.S. consumption.
3. Domestic Status: U.S.-made goods can move in and out of FTZs freely.
4. Non-Privileged Foreign Status: Goods are appraised and taxed based on their state when they leave the FTZ.

FAQs 

Where can an FTZ be located? 

FTZs are typically located near U.S. Ports of Entry but can also extend to designated sites nearby.

What kind of merchandise can be placed in an FTZ? 

Any merchandise not expressly prohibited by U.S. law may be stored or processed within an FTZ.

What are the primary types of merchandise received by FTZs?

FTZs commonly handle electronics, automotive parts, textiles, chemicals, and more.

Who is on the Foreign-Trade Zones Board? 

The FTZ Board is a regulatory body under the U.S. Department of Commerce that oversees all FTZ operations.