During the Great Depression, the US Congress passed the Foreign Trade Zone Act of 1934 in an attempt to “expedite and encourage foreign commerce” within the United States. Since then, foreign trade zones have come to play an important role in facilitating international trade within an increasingly global marketplace.
In this article, we provide a general guide to foreign trade zones (FTZs). The article begins with an overview of how FTZs work. Then it explores the benefits of using an FTZ and highlights the numerous advantages that these zones offer to US-based companies. Finally, the article discusses the locations and regulations of FTZs.
Although FTZ regulations can be complex, companies seeking to take advantage of these zones’ value should not let this be a deterrent. We aim to provide the general information and, most importantly, key resources that you need to maximize FTZ benefits and improve your bottom line.
How foreign trade zones work
An FTZ is essentially a specialized geographic area in or near a US port of entry. Although technically located within the United States, these zones operate as if they were outside of US Customs and Border Protection (CBP) territory. This means that companies are able to store, manufacture, and manipulate goods without being subject to normal tariff or duty charges when they bring said goods into an FTZ.
Foreign trade zones and free trade
In many ways, an FTZ acts as the United States’ version of a free trade zone, which people also commonly refer to as an FTZ. Free trade agreements and programs have become major drivers of international trade in the twenty-first century. They help determine where countries conduct trade operations and thus which parts of the world function as global trade and manufacturing hubs.
Countries wanting to benefit economically from such trade and manufacturing are thus motivated to support free trade. In 2019, for example, a total of fifty-four African countries signed the African Continental Free Trade Agreement. This agreement will liberalize the vast majority of intra-Africa tariffs. In doing so, it has the potential to make Africa competitive with Asia as a global manufacturing hub.
As a version of free trade zones, FTZs have helped provide US-based manufacturing and distribution operations with a competitive advantage. And such competitive advantages are crucial in today’s increasingly competitive global market. As the Foreign Trade Zone Board noted in its 2018 report to Congress, more than 3,300 companies are using the FTZ program. And this program is responsible for employing the more than 440,000 American workers who currently work in FTZs.
As valuable resources, FTZs are subject to government oversight—in terms of both their establishment and operation. Below, we focus in on these two areas of how trade zones work.
Establishing foreign trade zones
The Foreign Trade Zone Act of 1934 created the Foreign Trade Zones Board. This organization, tied to the US Department of Commerce, has the authority to establish FTZs. Generally, the creation of an FTZ proceeds as follows:
- An organization, such as a state or local agency or public corporation, develops an interest in creating a zone to boost economic development within a particular area.
- The organization submits an application to the FTZ Board for a grant to establish and operate a zone for that area.
- If the organization receives approval from the Board, the FTZ is born, and the organization becomes the FTZ “grantee.”
Within the broader category of “foreign trade zone,” there are two types of FTZs. The first is a general-purpose zone. The second is a subzone.
A general-purpose zone is typically an industrial park or port complex with facilities that are available to the general public. In other words, this type of zone generally provides leasable storage and distribution space to multiple zone users.
Each customs port of entry is entitled to at least one general-purpose zone project. But the FTZ Board may approve additional general-purpose zone applications if an organization can show that such a project would more fully serve the public interest.
FTZ grantees can also submit applications to the Board for subzones. This type of zone is generally a private plant site dedicated to a specific company for a particular activity or purpose. An FTZ subzone becomes necessary when an existing general-purpose zone cannot accommodate the operations of a specific zone user, typically a large company.
Operating within a foreign trade zone
Under zone procedures, US-based companies are allowed to move domestic and foreign merchandise into FTZs for operations such as storage, exhibition, assembly, manufacturing, and processing. FTZ sites are subject to US laws and regulations, which we will discuss later in the article. But what is most important to note is that an FTZ, as a non-CBP territory, is not subject to typical CBP entry procedures and duty payments.
This ultimately drives how companies chose to operate in FTZs. For example, imported goods are not subject to customs duties and federal excise tax upon entry to an FTZ. This duty deferral allows companies to store merchandise in the zone for extended periods of time without duty payments. And this makes warehousing and distribution important components of FTZ activity. As the FTZ Board’s 2018 report to Congress notes, warehousing and distribution centers in FTZs received $290 billion in merchandise during the previous year.
In addition to warehousing and distribution, production and manufacturing are the other primary activities that companies engage in within an FTZ. As of 2018, FTZ manufacturing and production operations received $504 billion in merchandise. This accounted for more than 60 percent of all zone activity.
As we noted above, FTZs admit both domestic and foreign imports. The majority of goods are of domestic origin. But many industries use FTZs to gain access to competitively priced foreign components. Top “foreign status” products in FTZs include oil and petroleum, consumer electronics, and vehicles.
Running a foreign trade zone
While robust sites of economic activity, FTZs are not easy to manage. A combination of financial and bureaucratic challenges can make running and managing FTZ facilities quite difficult.
As a result, there is an important distinction between an official zone “operator” and a zone user. An operator is a corporation, partnership, or person that has an agreement with an FTZ grantee to run a zone or subzone. A zone user, in contrast, has an agreement with a zone operator to use the FTZ. Typically, zone users own the merchandise that operators handle within an FTZ.
Fitting with its larger role as one of the world’s leading logistics companies, Agility is an FTZ operator. The company operates five FTZs in the following ports: Atlanta, Georgia; Chicago, Illinois; Miami, Florida; Los Angeles, California; and San Francisco, California.
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Benefits of using a foreign trade zone
FTZs offer US-based businesses important competitive advantages. Using an FTZ can help you reduce costs and become more efficient. With this in mind, companies interested in improving their bottom line should definitely consider using an FTZ.
In this section we cover the more well-known benefits of FTZs, including duty deferral, elimination, and reduction as well as streamlined logistics. Additionally, we touch on some lesser-known FTZ benefits, such as improved inventory management and lower insurance costs and state and local taxes.
Businesses that import goods to an FTZ can delay paying customs duties and federal excise tax. As the article suggests above, this important FTZ benefit is the reason why warehousing is a prominent FTZ activity.
Something important to note is that FTZs offer businesses additional advantages over bonded warehouses in relation to duty deferral. A bonded warehouse provides secure space for storing goods without duty payment. But there is a time limit of five years for duty deferral within a bonded warehouse. In contrast, there is no time limit on duty deferral within an FTZ.
In addition to taking advantage of duty deferral, companies using an FTZ can also benefit from certain duty exemptions. Businesses can generally import goods into a zone and then export those same goods without having to pay duty and excise taxes. In other words, there are generally no duties on reexports. This duty elimination does not apply, however, to exports to Mexico and Canada under the North American Free Trade Agreement (NAFTA).
Additionally, the FTZ program allows companies to avoid paying duties on materials that they scrap or destroy within the zone. Without an FTZ, a company would have to pay customs duties on all materials that it brings into the United States. With the benefit of the FTZ program, however, the company only has to pay duty on goods that leave the FTZ for commerce within the United States. This provides a distinct advantage to businesses that have fragile imports and to those that engage in manufacturing processes that produce a lot of scrap.
FTZs also come with duty reduction, or inverted tariff, benefits. The term “inverted tariff” describes a situation in which the tariff rate for the raw materials of a particular product is higher than the tariff rate for the assembled product. In an FTZ, companies do not have to pay the higher tariff rate for the raw materials. Instead, they only have to pay the duty rate on the finished product.
Even beyond this, businesses operating within a zone do not have to pay duty on labor, overhead, or profit for zone production operations. This provides companies with an important added incentive for locating operations within an FTZ.
Even beyond duty-related benefits, FTZs provide businesses with access to additional benefits tied to streamlined logistics. For example, businesses can file a single entry for seven consecutive days’ worth of goods that they import and export within a zone. This “weekly entry filing” is an important deviation from the normal requirement of filing one entry for each shipment.
Fewer entries mean less hassle for businesses. Fewer entries can also result in cost savings. Businesses have to pay merchandise processing fees (MPFs) on goods entering CBP territory. But there is a maximum fee per entry. This can result in significant cost savings for companies that take advantage of weekly entry filing.
While the above are some of the most prominent benefits incentivizing companies to use FTZs, this is certainly not an exhaustive list. For example, using an FTZ generally helps companies to track their inventory more closely and thus improve inventory management. Additionally, some FTZs provide companies with added benefits in the form of exemptions from state or local inventory taxes for the goods that they are holding for export. Even beyond this, the additional CBP supervision that comes with FTZ use can reduce a company’s security and insurance costs.
All in all, FTZs function as an important tool that a company can use to improve its bottom line. They certainly are not the only tool available to companies seeking to improve their cash flow and logistics, however. Outside of the United States, for example, companies can take advantage of benefits in manufacturing or logistics and distribution hubs in locations as diverse as Sweden and Bahrain. Nevertheless, for US-based companies, FTZs are certainly worth considering.
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Regulation of foreign trade zones
While providing clear value to US-based corporations, FTZs can be difficult to navigate. This is because of the regulations surrounding these zones. Two key sets of regulations determine the administration of the Foreign Trade Zones Act of 1934 and the operation of FTZs. These are the Customs Federal Regulation (CFR) Section 19 Part 146 and CFR Section 15 Part 400.
A quick glance at these two sets of regulations offers evidence of the complexity of these regulations. They are hardly casual reading material!
Despite their complexity, these regulations play an important role in how FTZs work and how companies benefit from them. As such, it is valuable for companies interested in using an FTZ to have a general overview of some of the basics.
Taxes and duties in foreign trade zones
As the “duty deferral” section noted above, merchandise within an FTZ is not subject to US duty or excise tax. Companies only need to pay applicable duty and excise tax when they transfer merchandise out of the zone for consumption.
To dig a little deeper into how taxes and duties work in an FTZ, we can look at key status designations of FTZ merchandise. These status designations are as follows:
- Privileged foreign status: When importers bring merchandise into a zone, they can submit an application to the port director, requesting a privileged foreign status for the merchandise. With this status for their merchandise, importers can lock in the duty and tax rate at the time of import. When they are ready to export the merchandise, they will pay the duty and tax rate from the time of import, rather than the current duty rate at the time of export. Since these rates historically increase over time, privileged foreign status can provide a distinct financial benefit to importers.
- Nonprivileged foreign status: In contrast to merchandise with privileged foreign status, merchandise with nonprivileged foreign status does not come with the benefit of locking in a duty and tax rate at the time of entry. Instead, companies pay duty and tax rates for merchandise of this status at the time the merchandise leaves the FTZ for consumption in CBP territory. In certain cases, this status is more financially appealing to companies. For example, it brings value to businesses that manufacture new products with a lower duty rate than the merchandise that they originally brought into the zone.
- Zone restricted status: Companies can apply for this status for merchandise that they are transferring into an FTZ to export or destroy. When merchandise has a zone restricted status, you cannot change it (other than to destroy it) or bring it into CBP territory without the permission of the FTZ Board. While it places a limitation on merchandise use, this status can also come with a financial incentive. The law considers zone restricted status merchandise as equivalent to exported merchandise for the purposes of federal excise tax rebates and drawback.
- Domestic status: This final type of zone status applies to merchandise that (1) a company has produced in the United States and not exported or (2) a company has imported into the United States and paid any applicable duty tax at the time of entry. This status comes with the value of admittance to an FTZ without a CBP permit. Additionally, a company can move merchandise with a domestic status out of an FTZ without a CBP permit if it has not combined the merchandise with merchandise of any other status.
Regulation oversight in a foreign trade zone
As the above information has suggested, FTZs operate under the authority of the FTZ Board and the supervision of the CBP. The FTZ Board has the authority to establish FTZs, and it regulates the administration of FTZs and the rates that zone grantees charge.
The CBP, in contrast, oversees the transfer of merchandise into and out of the FTZ. The port director of CBP acts as the local representative of the FTZ Board for a particular zone and is responsible for overseeing zone activity. This individual enforces all laws relevant to FTZs that the CBP normally enforces outside of the zone.
Various FTZ coordinators, including CBP officers, import specialists, and agricultural specialists, also help supervise FTZs. They do so through compliance reviews and visits, ensuring that zone security meets certain requirements.
Resources for navigating foreign trade zones
In order to fully maximize the value of FTZ use, companies need to have a firm grasp of the inner workings of FTZs as well as their regulations. A detailed review of such information is certainly beyond the scope of this article. But in this final section, we point you to three key resources that you can use to gain all of the information and assistance that you need.
US Customs and Border Protection
The first resource that you can turn to is the US CBP. The CBP website offers a wealth of information on FTZs. For example, this CBP web page provides an overview of FTZs as well as contact information for the FTZ Board and CBP. It also includes links to useful resources such as the Foreign Trade Zones Manual and a guide to getting started with CBP automation.
National Association of Foreign-Trade Zones
The National Association of Foreign-Trade Zones (NAFTZ) is another great resource for companies looking for more information on FTZs. This organization connects global businesses with local communities through the FTZ program. And it works to foster business growth, economic development, and employment within the United States. Consider checking out this NAFTZ web page, which includes numerous FTZ links and industry resources.
Lastly, we recommend that you consider partnering with Agility for help with all of your FTZ needs. While an abundance of information on FTZs is available online, sifting through relevant information and understanding how rules and regulations apply to the specific situation and needs of your business can be exceedingly complex.
As an industry expert, Agility can help take the headache and guesswork out of navigating FTZs. Consider checking out our trade compliance services page and contacting us about our FTZ services today. With this critical first step, you can help ensure that you are on the right track to maximize the value of FTZs for your business.
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