What is a Foreign Trade Zone?
A Foreign Trade Zone is the United States’ version of a Free Trade Zone. Essentially, a free trade zone is a geographical area which can provide cost savings for companies involved in import and export activities.
In the United States, a Foreign Trade Zone must be in or adjacent to a Port of Entry. The geographical area refers to an area where arriving goods are handled, manufactured, and re-exported without Custom Broder intervention.
Merchandise, both foreign and domestic, receives the same Customs treatment it would if it were outside the commerce of the United States. In essence, a Foreign Trade Zone provides free movement of goods and people, facilitation of administrative procedures, and the accomplishment of free trade. Effectively giving companies an incentive to set up facilities and giving the host location increased employment.
To better understand the concept, it is useful to reference the father of the U.S. Foreign Trade Zone Program Congressman Emmanuel Celler of New York. In early 1934, Celler defined a Foreign Trade Zone as “a neutral, stockaded area where a shipper can put down his load, catch his breath, and decide what to do next.”
Benefits of a Foreign Trade Zone
- Duty Deferral – Duties are paid only when merchandise enters the United States. If an item is still in a Foreign Trade Zone, duties may be deferred until such time it is released.
- Duty Elimination – duty of merchandise manufactured in foreign trade zones are calculated on the final product. Duties on individual parts and assemblies from other countries may be eliminated in most cases.
- Inverted Tariff Relief – companies may apply to the FTZ Board to obtain relief from inverted tariffs when a raw material or component item is subject to a higher duty rate than the finished product.
- Indefinite Time for Storage – companies can store merchandise as long as they need to.
- “Parking Place” until quotas open – In the case of a car manufacturer, they may leave cars in a foreign trade zone until such time a car dealer needs them for sale.
For the most part, Foreign Trade Zones give companies the ability to improve their cash flow.
Example Cases of a Foreign Trade Zone
State of Texas – In U.S. FTZ 113, cars from Germany, Korea, and Japan don’t get charge a tariff until they leave for the dealer. This saves car manufacturing companies money and creates American charge at the same time.
Port of Seattle – Tommy Bahama is based in the U.S with an FTZ program in Seattle. They bought back their licensing from Canada, and now operate their single distribution facility in Seattle instead of having two facilities. This provided cost savings, inventory control, and new jobs.
City of Palmdale – Imported headphones and speakers, when combined with other domestic and imported component parts in manufacturing a computer (in a foreign trade zone) to be trans-shipped to foreign markets, qualifies for duty elimination.
When would I want to use a Foreign Trade Zone?
The main benefit of a Foreign Trade Zone is to provide cost savings for companies. Export and Import companies benefit from trade zones because they save on taxes, avoid financing charges, reduce transportation costs, and thereby increase their business cash flow.
Companies seriously considering this must use data to decide and perform a Cost-Benefit analysis. There are initial set-up costs and a length of time to activate when setting up in a trade zone. This will entail several meetings and consultations, but when done right, may lead to long-term bottom line profits.