THE FOREIGN-TRADE ZONES PROGRAM
By
Greg Jones
with FTZ Corporation
[email protected]
About the Foreign-Trade Zones Program
The U.S. Foreign-Trades Zones program is a federal trade program aimed at enhancing the
competitiveness of U.S.-based companies engaged in international trade. Companies that use
Zone procedures enjoy the benefits of relief from tariffs and other forms of inventory taxes
on goods and materials during the time that such goods are within their Foreign-Trade Zone
facilities. U.S.-based companies use the FTZ program as a tool to adjust to today’s changing
trade environment.
The U.S. Foreign-Trade Zones program was created by the Foreign-Trade Zones Act of
1934. The Foreign-Trade Zones Act was one of two key pieces of legislation passed in 1934
in an attempt to mitigate some of the destructive effects of the Smoot-Hawley Tariffs, which
had been imposed in 1930. The Foreign-Trade Zones Act was created to "expedite and
encourage foreign commerce" in the United States. The means by which this is accomplished
is through the designation of geographical areas, in or adjacent to Customs Ports of Entry, in
which commercial merchandise receives the same Customs treatment as if it were outside the
commerce of the United States. Merchandise of every description may be held in the Zone
without being subject to Customs duties and other ad valorem taxes. While in a Zone,
merchandise may be stored, repackaged, repaired, manipulated, used in manufacturing or
processing, or even destroyed, free of tariffs and ad valorem taxes as long as the merchandise
is in the Zone. This tariff and tax relief is designed to lower the costs of U.S.-based
operations engaged in international trade, and thereby create and retain the employment and
capital investment opportunities that result from those operations. These special geographic
areas, Foreign-Trade Zones, are established "in or adjacent to" U.S. Ports of Entry and are
under the supervision of the U.S. Customs Service. Since 1986, U.S. Customs' oversight of
FTZ operations has been conducted on an audit-inspection basis, whereby Customs personnel
assure compliance through audits and spot checks under a performance bond, rather than
through on-site supervision.
Today, the trade policy of the United States is based on a free trade model. This theoretical
model recognizes only the economic beneficiaries of free trade; it acknowledges that the
costs (or losers) resulting from free trade are negligible. In reality, however, free trade has
benefits and costs. No doubt, the benefits far outweigh the costs; however, the costs are very
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real. The Foreign-Trade Zones program offers a way to mitigate the costs of free trade. In
doing so, the program allows the United States economy to enjoy relatively greater benefits
from its free trade initiatives. The various benefits offered by the Foreign-Trade Zones
program make it an effective response to the problems that arise when the $10 trillion dollar
U.S. economy operates within the rapidly changing international trade environment.
Benefits Offered by the Foreign-Trade Zone Program
The Zones program offers substantial benefits to manufacturers and distributors in the United
States. There are a few key benefits that attract most companies to the Zones program.
Relief from “Inverted Tariffs”
In certain instances, imported components used to produce a finished product are dutiable at
higher tariff rates than the tariff rate that applies to the finished product itself. These
“inverted tariff” relationships actually penalize companies that manufacture their products in
the United States. They provide a lower effective duty rate for finished products
manufactured overseas and imported into the U.S. market. The Foreign-Trade Zones program
levels the playing field in these circumstances by allowing the Zone user to pay the lower
finished product rate on foreign components incorporated into a product manufactured for
domestic consumption.
FOR EXAMPLE: A Foreign-Trade Zone user imports a motor (which carries a 4%
duty rate) and uses it in the manufacture of a vacuum cleaner (which is duty-free).
When the vacuum cleaner leaves the FTZ and enters the commerce of the U.S., the
duty rate on the motor drops from the 4% motor rate to the free vacuum cleaner rate.
By participating in the Zones program, the vacuum cleaner manufacturer has
eliminated duty on this component, thereby reducing the component cost by 4%.
Duty exemption on re-exports
When not utilizing a Zone, an importer is required to pay Custom duties at the time the
imported merchandise enters U.S. commerce. Merchandise in a Foreign-Trade Zone is
considered to be outside the commerce of the United States and the U.S. Customs territory.
When foreign merchandise is brought into a Foreign-Trade Zone, no Customs duty is owed
while the merchandise remains in the Zone. If the foreign merchandise is exported from the
U.S., no Customs duty is ever due.
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Improved Logistics
Two Zone procedures can be used in concert to improve an operation’s logistics.
The Direct Delivery procedure allows foreign merchandise to be transported in-bond directly
to the Zone user’s facility without clearing Customs at the first port of unlading, and without
the necessity of the in-bond carrier reporting to the local Customs office prior to the delivery
of the merchandise to the Zone site. Direct delivery procedures often save one to two days in
delivery of foreign merchandise to the Zone user. This shortens the Zone user’s international
pipeline, thereby eliminating inventory within that pipeline.
Since the formal Customs entry takes place when merchandise leaves the Zone for domestic
commerce, Zone users often use the so-called Weekly Entry procedure to streamline
shipments and Customs paperwork. Under the Weekly Entry procedure the Zone user files
one Customs Entry per week, rather than filing one Customs Entry per shipment. This allows
the Zone user to serve the domestic market without paperwork delays. Pursuant to the
provisions of the Trade Development Act of 2000, the Weekly Entry procedure has been
made available to all kinds of FTZ operations, including manufacturing and distribution
operations.
The FTZ Weekly Entry procedure often provides significant benefits to both the Zone user
and the U.S. government. For Zone users operating in today’s Just-In-Time environment, use
of the FTZ Weekly Entry procedure means that hundreds, or even thousands, of import
receipts over the course of a year are entered into the domestic commerce on only 52
Customs entries per year. In addition to saving the Zone user lots of paperwork, the company
can reduce its payments of so-called “Merchandise Processing Fees’ that are associated with
the filing of a Customs Entry1. The U.S. government saves by the corresponding reduction in
the number of entry filings and the reduction of the costs associated with processing each
Customs Entry.
1
The Merchandise Processing Fee is a user fee that is associated with the filing of a formal Customs entry. The
Merchandise Processing Fee (MPF) is based on .21% of the value of the merchandise covered by a single entry,
with a minimum of $25 and a maximum of $485 per Customs entry. As an example of MPF savings afforded
by the FTZ Weekly Entry procedure, an importer who does not use the FTZ program and who receives 20
imported shipments (and files 20 Customs entries) per week, might pay as much as $9,700 each week in MPF.
The same importer using the FTZ Weekly Entry procedure would pay $485 per week as shipments leave its
FTZ facility, resulting in weekly savings of $9,215 and annual savings of $479,180.
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Cash Flow (Duty Deferral)
No duty payment is required on merchandise brought into a Foreign-Trade Zone unless and
until the goods are imported (entered) into the United States. This allows these funds to be
used as working capital to earn interest or be invested.
No Duty on Value Added
No duty is assessed on domestic parts or materials, OR on domestic labor, overhead, or
profit.
Quota Items
No quota is applied to foreign goods in a Foreign-Trade Zone. Therefore, Zone users may
take advantage of bulk shipments and store quota items in a Zone until the next quota period
opens. This allows the Zone user to defer duty payment until the goods are actually imported,
and gives the Zone user the advantage of being one of the first in the market when the quota
opens.
Zone-To-Zone Transfers
A vendor located at one Foreign-Trade Zone may sell goods to a company in another Zone or
Subzone anywhere in the U.S. and transfer those goods to the purchasing company’s FTZ
with no duty paid on the goods.
Damaged or Nonconforming Items
No duty payment is required if merchandise is not entered into the United States. If
merchandise is defective or damaged, no duty payment is owed while it is being tested,
repaired, or stored in the FTZ. (The actual importation does not occur until merchandise
leaves the Zone and enters the commerce of the United States). Merchandise may be altered,
repackaged, and/or relabeled to meet various U.S. requirements. Zones are often used for the
purpose of properly marking the Country of Origin on goods prior to their entry into the
United States.
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Government and Military Sales
In many cases sales of foreign merchandise may be entered into the United States duty-free if
the vendor has a government contract in place.
Foreign Trade Zone Environments
There are two types of Foreign-Trade Zone environments, General Purpose Zones and
Subzones. Both Zone environments can be used for manufacturing, processing and
distribution. General Purpose Zones are established for use by multiple users, while
Subzones are established for one user when its activity cannot be supported within the
existing General Purpose Zone. A Zone project may have more than one General Purpose
Zone site, even if the sites are not contiguous. Many Zone projects have more than one
Subzone.
General Purpose Zones
A General Purpose Zone is a Foreign-Trade Zone site that may accommodate the operation
of any number of firms, confined only by the physical limitations of the space in the Zone.
Foreign and domestic goods may be admitted to the Zone for use in a variety of operations.
These include storage, repackaging, repair, manipulation, destruction, and with ForeignTrade Zones Board approval, manufacturing and processing. Customs duties and excise
taxes are applicable only at the time goods leave the Zone for U.S. consumption.
Subzones
A Subzone is a single firm site designated for a special purpose under Zone procedures,
typically manufacturing. Subzone users utilize the Foreign-Trade Zones program to reduce
their operational costs associated with Customs duty. Subzone status may be granted if the
business operation cannot be accommodated within the existing General Purpose Zone of the
Zone project serving the area and if Zone status for the firm will result in a significant public
benefit. An application to establish a Subzone must be submitted to the Foreign-Trade Zones
Board in the same manner as a General Purpose Zone application. Approval of Subzone
status is dependent upon the specific operations to be conducted under Zone status. The
applicant must demonstrate that the Subzone status for the specific business operation will
result in a significant economic benefit for the U.S. economy.
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Growth and Use of the U.S. Foreign-Trade Zones program
The U.S. Foreign-Trade Zones program has grown phenomenally over the last 25 years. In
the early 1970’s there were fewer than 20 General Purpose Zones and Subzones in the United
States. Today, there are more than 250 Zone projects, each with its own General Purpose
Zone, and approximately 400 Subzones in the United States. Major industries that use the
Foreign-Trade Zones program include the automotive, chemical, electronic, oil refining,
shipbuilding, and pharmaceutical industries.
Given that U.S. tariff rates have fallen significantly over the past 25 years, this tremendous
growth might at first glance seem puzzling. However, falling U.S. tariff rates have actually
spurred the need for Foreign-Trade Zone use. As round after round of multilateral trade
agreements have lowered U.S. tariffs, U.S.-based manufacturers have often found themselves
competing with overseas counterparts who enjoy low duty rates when their finished products
enter the U.S. commerce. On occasion, as cited above, the U.S-based manufacturer must pay
a higher duty rate on its imported components than the rate that applies to its finished
product; that is, the duty rate relationship between its finished product and the components
incorporated into the finished product are “inverted.” These inverted tariff rates are
sometimes characteristic of across-the-board tariff cuts that result from multilateral trade
agreements. There are only two means of obtaining relief from inverted tariffs: move the
manufacturing operation offshore, or, alternatively, use the U.S. Foreign-Trade Zones
program.
Another outcome of falling tariff rates is the expansion of international trade. This too, has
spurred the growth of the Foreign-Trade Zones program. As trade expands, the number of
companies engaged in trade increases. Along with these increases there is an increase in the
number of instances where the problems and challenges associated with a changing and
expanding trade environment become apparent. For an increasing number of U.S.-based
manufacturing and distribution operations, the most logical and efficient tool to fix the
problems they encounter in today’s competitive trade environment is the U.S. Foreign-Trade
Zones program.
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Another factor in the growth of the Foreign-Trade Zones program is community
involvement. Each Zone project, including all of its Subzones, is sponsored by a local
organization that has received a grant of authority to establish and operate a Zone project.
Zone Grantees, usually local public entities, recognize the importance of the Foreign-Trade
Zones program in helping existing industry remain competitive, and in the recruitment of
new industry. Local Zones Grantees, by helping existing and prospective businesses
understand and utilize the U.S. Foreign-Trade Zones program, have helped their communities
and the nation enjoy the benefits of the U.S.-based economic activity that the program is
designed to encourage.
Copyright © 2002 by Greg Jones
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