I know you are wondering what foreign trade zone (FTZ) is.
Or, you would like to know what happens in the foreign trade zone.
If that is the case, then read this guide.
Let’s dive right in:
What Is Foreign Trade Zone?
foreign trade zone
This is a geographical area near or inside United States entry port.
It is where domestic and local goods receive special customs treatment.
The areas are under U.S Customs Border Protection (CBP) under the federal government.
Commercial merchandise in FTZ are exempted from taxes, tariffs re-export payments, etc. to encourage American business to engage in global business.
Even though FTZ are generally outside the U.S. customs territory, they are still on the U.S soil. Therefore, all activities and merchandise within the FTZs are under federal, state and local government.
What Is The purpose Of AForeign Trade Zone?
The main reason for foreign trade zones is to create an enabling environment for U.S. based business to trade globally fairly.
Reducing the tax burden on the FTZ activities and goods allowed foreign producers to compete with producer in the U.S.
Is Foreign Trade Zone The Same As Free Trade Zone?
China Free Trade Zone
Foreign trade zones are areas within United States where goods can land, modified, repackaged, relabeled, manufactured and re-exported without customs regulations
Free trade zones are similar to FTZ in operations except for manufacturing on some but are not within U.S.
When you need to manufacture goods and re-export then foreign trade zone would be the way to go.
For repackaging or relabeling of merchandise, then free trade zones be the best choice.
In both cases, customs duties and taxes do not apply within the zone but would be applicable once they exit zones.
What Are Foreign Trade Zone Benefits?
Some of the benefits associated with foreign trade zones include:
- Exemptions from duties, value-added taxes, tariffs and re-export duties.
- Imports into the FTZ enjoy deferred duties and federal excise taxes.
- Manufacturers can enjoy inverted tariffs on goods whose finished product has lower tariffs than its individual parts.
This occurs when the manufacturers import the component parts into the FTZ.
Additionally, they can introduce the finished product at its applicable tariff upon exiting FTZ subject to authorization.
- Since FTZ have special customs procedures, the process is streamlined end-to-end making it faster and efficient.
Instead of filing every entry, businesses can file weekly entries to and save on costs.
- It saves business money due to reduced cost of operations.
- Time is saved on goods at the port since they are not subject to customs inspections thus receive priority pier-side treatment.
- Business within FTZ are under federal, state and local laws and must meet the requirements before admission.
This improves company compliance.
- Job creation
- Promote local and state development initiatives
- Goods can stay in FTZ for a long time since they are not taxed or subject to duty.
Where Are Foreign Trade Zones Located?
Foreign trade zones are enclosed sites located within or adjacent to U.S. entry ports in the U.S. soil.
Foreign trade zones in USA
Who Regulates FTZ Operations?
The U.S. CBP operates and supervises the foreign trade zones.
Normally, it is under the jurisdiction of the federal, state and local government agencies.
A FTZ site is under the governance of the location port director who represents the local authority in the FTZ Board.
The port director’s duty is to oversee day-to-day site activities and enforce customs related regulations relevant to FTZ.
The customs officials conduct regular visits to the FTZ sites to verify the activities and share in the Annual Customs Review.
Foreign trade zones must comply with the security requirements of the U.S. customs border protection.
What Are The Two Types Of Foreign Trade Zones?
There are two types of foreign trade zone namely general-purpose zones and special purpose subzones.
General Purpose Zones
This category of FTZ serves multiple clients (companies) at the same time and usually offers warehouse services only.
It is can be located at the entry port or in industrial parks.
General purpose FTZ are public and utilized by small companies that need to benefit from the FTZ but do not own one.
These clients can hire the services on a third party logistics (3PL) to optimize their processes while saving on cost.
General-purpose zones can also apply the Alternative Site Framework (ASF), which extends the FTZ outside their zones fasters.
Provided the company is customs compliant, it can apply the FTZ advantages virtually.
Special Purpose Subzones
Unlike general-purpose zones, a single company for specific need such as distribution or manufacturing utilizes special purpose subzones.
They occupy large spaces such as large acres of land designated for manufacturing plant only.
How Do You Set Up A Foreign Trade Zone?
foreign trade zone setup
Setting up foreign trade zone is not a walk in the park as it is a lengthy process and capital intensive.
One must do a thorough cost-benefit analysis before deciding to set up on by following the below steps:
- Submit an online application to the foreign trade zone board stating why you need a new FTZ.
- Specify the type of FTZ that you are pursuing, either general or special purpose zones.
- Make the necessary payments as directed by the authorizing officer.
- Request for zone activation from the U.S. Customs Boarder Protection before stating operations in the FTZ.
What Are The Considerations When Pursuing A Foreign Trade Zone Status?
Companies pursue foreign trade zone status in order to enjoy the benefits that come with them.
However, the cost of putting up a new FTZ is not cheap coupled with a long thorough application process.
You should therefore consider the following factors before pursuing a FTZ status;
Relevance Of FTZ Choice For Your Company
Most companies set up FTZ zones in order to enjoy the duty free and tax free importation into the zones.
This is beneficial as it allows them to compete with other alternatives products fairly in the market.
Certain goods such as steel and aluminum have to pay customs related duties and taxes even in FTZ.
Subsequently, there are other costs associated with putting up a FTZ such as security, system fee, legal, CBP compliance record maintenance, etc.
These costs when calculated may outdo the need of having your ow FTZ.
Therefore, you must consider doing cost analysis against benefits before going the FTZ route.
While FTZ businesses enjoy tax exemptions and tariff free environment, not all are applicable everywhere.
There is federal related and state related tax benefit and they operate independently.
Federal tariffs include delayed duty payment.
Inverse tariffs, duty exemption on re-exported goods.
This ensures increased cash flows to the businesses and is controlled by federal government.
State tax benefits like reduced property tax vary from one state to another.
You need to understand how various state laws operate before venturing into FTZ status.
In some states, local tax bodies must authorize applicant’s use of FTZ, water district, fire district, etc. This process can be tedious and long where various tax bodies are involved.
Type Of Foreign Trade Zone
There are two kinds of FTZ sites a company can pursue.
They include; general purpose and special purpose subzones.
General-purpose zones are multiple use public FTZ that can accommodate several clients at any given time.
Special purpose subzones are single use sites that are designated for a special need outside the general-purpose zones.
Beside these two, there is also Alternative Site Framework which can either be a magnet site or usage-driven site.
Magnate sites are used by different clients who perform different independent activities and usage-driven is a single use site.
A single-driven user can operate within or outside the site.
ASF are used by applicants as they await their FTZ status approval process which takes a long time. Usage-drive sites are mostly preferred because of their short approval time of 30 days and its allocation is unlimited.
Usage-driven sites can be self-operated because they involve single user.
Conversely, magnate site allocation is limited to six sites only and it requires FTZ compliance commitment by companies.
For instance, magnet site automatically loses its FTZ status after five years on non-usage.
Secondly, it requires its operator which is highly unlikely due to many different users forcing a third party operator services.
Knowing which type of FTZ best suits your needs is key before making the decision.
Paperwork must be accurate to make the process smooth all through.
This is because you need approval and activation of the FTZ before it becomes operational.
FTZ site can be approved but not activated meaning you are not eligible for tax or tariffs benefits that come with it.
Magnet sites can remain inactive for up to five years while usage-driven for three years, beyond which approval lapses.
Activation of FTZ is made through Customs Border Protection who are in charge of activation process. This must be accompanied by satisfactory reason for wanting a FTZ status and patience for the long winding paper work involved.
Activation process may take up to 15 months before a site is activated, is investment intensive and requires compliance commitment.
Businesses that wish to acquire FTZ status must carry out proper research before venturing into the process.
They risk losing time, resources and money if their application is denied after a long wait.
Who Can Use FTZ?
Small or large companies for various needs including manufacturing, distributions, packaging, assembly, exporter/importers, etc. can use Foreign Trade Zones.
It is important to perform cost-benefits analysis in order to ascertain if the FTZ will be right for you.
The type of product and volume also play a significant role when opting to use FTZ.
Some of the industries that use FTZ include:
- Automobile manufacturers who import different car parts and assemble them in FTZ site before exporting a finished car.
- Garments and textile distributors can use FTZ sites as their distribution sites.
Therefore, they can ship-in in bulk and redistribute gradually for longer hence optimizing on consolidated shipment and duty benefits.
- Other industries that use FTZ include, oil refineries, footwear, pharmaceuticals, electronics, consumer products, etc.
- Companies using bonded warehouse or temporary importation bond may consider FTZ to reduce paperwork, save cost, increase flexibility and efficiency.
How Do I Know The Potential Savings To My Business If I implement FTZ?
Foreign trade zone
Businesses incur costs from taxes, customs duties, customs fees and other related charges.
Foreign trade zones offer exemptions to such costs provided the company meets CBP compliance and is activated.
In order to enjoy such benefits a company must operate from an activated FTZ and acquiring one comes at a cost.
The costs include; application process, approval and activation fee, CBP fee, personal training cost, etc.
Analyzing the cost difference between the two will give you an estimate of the amount you are likely to save.
What Can You Put In A Foreign Trade Zone?
Only goods that are allowed entry into the U.S. can be allowed admission into a foreign trade zone.
This is because; they are still under the law of local, state or federal laws even in the FTZ sites.
The FTZ Board approves the activities that go on in a zone such as manufacturing, distribution, processing, repackaging, except retail trade.
Documentation like import permit and license may be needed to admit merchandise into the zones.
Admission of merchandise into FTZ may be restricted by government agencies if they feel that the site is inadequate.
Similarly, they may prohibit goods on public health and safety grounds, or handling capabilities.
They may also restrict the zone’s activity performed on particular products since they control and oversee FTZ operations.
What Types Of Activities Are permitted In FTZ Zone?
Foreign Trade Zones activities and goods are controlled by the FTZ Board.
The zones are considered outside U.S. CBP but under the jurisdiction of the local, state or federal governance.
Activities permitted in FTZ include; storing, manufacturing, mixing, processing, exhibition, repair, salvage, assembly, relabeling, repackaging, sampling, testing and manipulation of products.
Retail trade is not allowed in Foreign Trade Zones.
The FTZ Board may restrict an activity in a zone if they determine that the site cannot handle the activity it.
Restriction may also be imposed on goods that are considered harmful to the public.
How Does FTZ Work In International Trade?
Foreign Trade Zones were established in 1934 during the Great Depression Era as a way of encouraging commerce in the U.S.
They are a special area within the U.S. that are considered non-CBP territory.
FTZ allow businesses to process, manufacture, repackage and re-export merchandise without paying the normal duties when brining in merchandise into FTZ.
An equivalent of FTZ outside of U.S. is Free Trade Zone and they offer the same benefits and much more.
Many countries have embraced the free trade zones to promote international trade and enjoy the economic benefits that come with them.
For instance, fifty-four African nations signed the African Continental Free Trade Agreement in 2019 to free themselves from intra-Africa tariffs.
This made them compete favorably with other global manufacturing hubs such as Asia.
In U.S., the FTZ zones offer the American businesses same competitive advantage by allowing re-export of finished products at inverted duties.
As a result, there has been an increase in FTZ companies in the U.S. and more employment opportunities.
Besides, FTZ operated businesses can access “foreign status” commodities such as petroleum and oil, consumers, electronics and vehicles at competitive price.
What Is The Difference Between Foreign Trade Zone And Bonded Warehouse?
Foreign Trade Zone is enclosed locations near or within entry ports in U.S. that are outside the Customs Border Protection territory.
The goods brought into FTZ are not subject to customs procedures and tariffs.
Bonded Warehouses are secure government storage facilities for dutiable goods before actual duty payment.
Duty is once goods are moved from the bonded warehouse and are subjected to the normal customs processes.
A Foreign Trade Zone offers unlimited duty deferral period while a Bonded Warehouse offers a five-year duty deferral period.
Goods in bonded warehouses are for storage or distribution only while in FTZ goods, can be manufactured, distributed, stored, manipulated etc.
Customs filing is done when goods exit FTZ while upon entry in bonded warehouses.
FTZ admit both domestic and foreign merchandise, bonded warehouses only permit foreign cargo.
Movement of goods is relatively unrestricted in and out of FTZ while in bonded warehouse, movement of goods is limited.
Why Do Businesses Use FTZs?
There are various reasons as to why companies opt for FTZ sites rather than normal operations. some of the reasons include:
Weekly Entry Procedures
This was implemented in 2000 by the U.S. President Clinton under the Trade and Development Act of 2000.
It allowed FTZ users to file one customs entry per week as opposed to filing one customs entry per shipment.
Companies used to spend between USD 25 to 485 merchandise procession fee for every entry regardless of the duty cost.
This led to increased operational cost to businesses thus making it expensive to operate.
Weekly entry processes lessened the number of customs entries, significantly reducing the cost on business owners.
Duty Deferral On Imports
Duty is deferred on goods within the FTZ and is only applied when they leave the zones.
This increases cash flow for businesses operating within FTZ.
- Duty is eliminated on scrap and yield loss within FTZ, merchandise sold to U.S. military or NASA.
- Ad Valorem tax relief on products stored in foreign trade zones.
- Duty exemption on defective parts that need to be returned to country of origin.
What Is FTZ Identifier?
This is a unique label that is used to trace the Foreign Trade Zone that goods originated from.
It is for accountability purposes.
Goods that are no longer in FTZ export list should have their identifier reported to relevant agencies.
What Are The Challenges Of Using A Foreign Trade Zone?
Challenges associated with Foreign Trade Zones can be associated with the type of FTZ.
Compliance and paperwork is one of the challenges that applicants face when pursuing FTZ status.
Another challenge is that the process can take up to a year to get an approval from the board.
This delay may be costly to the company in times of resources and costs.
General purpose FTZ are hard to manage due to different clientele needs at the same time using same resources.
This is easier for special FTZ subzones since it is one client for a particular operation.
One of the requirements for FTZ is software integration into to the CBP system for oversight purposes. This still is a challenge to implement in a timely manner.
First time companies are likely to face serious delays due to frequent flagging by CBP for inspection purposes.
This can lead to major stock shortage if the company did not plan well.
What Is A Foreign Trade Zone Manual?
Foreign Trade Zone manual is a guiding document that stakeholders can use to get information on FTZ.
It is however not a binding document unless incorporated into a contract.
How Does Foreign Trade Zone Promote International Trade?
Some of the ways that FTZ promote international trade include:
- Allow favorable global competition between U.S, manufacturers and foreign companies.
- Promote exports business.
- Create employment for locals and foreigners.
- Encourage domestic business.
How Does Foreign Trade Zone Program Compare With Other Customs Tariff-Reduction Programs Such As Duty Drawback?
Duty draw back
In FTZ program no duty is paid for imported merchandise meant for FTZ.
In duty draw-back a refund is paid in whole or part on imports whose duty were paid when coming into U.S.
What Are Foreign Trade Zone Regulations?
There are two key regulations that provide guidance on the administration and operation of FTZ.
- Customs Federal Regulation (CFR) Section 19 Part 146
- CFT Part Section 15 Part 400
These two regulations provide a guide on how FTZ work and how businesses stand to benefit from them.
They are complex therefore, businesses should have a basic understanding of these regulations before they venture into FTZ.
What Is The Cost Of Using A Foreign Trade Zone?
The cost of using a FTZ site by companies vary as per their operations and merchandise and many other factors.
There are standard requirements such as security, administrative fee, activation fees, operation costs which apply across the different FTZ types.
These costs can be determined by carrying out a cost-benefit analysis before pursuing a FTZ status acquisition process.
How Do You Transfer Merchandise From A Foreign Trade Zone?
Transfer of merchandise from FTZ can be for consumption in the U.S market under the following categories;
Privilege Foreign Zone Status
Here, importers apply to lock duty and tax rate at the time of import of merchandise to avoid paying current rates.
The reason behind this is that the rates keep fluctuating and are likely to be hire for the manufactured or processed product.
Non-privilege Foreign Status
Unlike privileged foreign status, there is no locking of duty or tax rate at the time of import.
Business pay for merchandise duty at the time the goods leave FTZ.
Goods can acquire ‘domestic status’ when;
- They are grown or manufactured within U.S. and have their taxes updated
- They are imported into U.S. and have paid all the necessary duty upon entry or
- Goods that were allowed into FTZ without duty.
Domestic status merchandise can be moved out of FTZ without CBP permit provided it has not mixed with other status.
Zone Restricted Status
The FTZ user must apply for ‘zone restricted status’ at the beginning of the process for merchandise meant for export or destruction.
Such goods cannot be moved to U.S. CBP territory unless authorized by FTZ Board.
What Paperwork Will I Need For FTZ Activities?
Paperwork is compulsory when operating in FTZ to verify the activities going on in the site. Some of the paperwork needed include:
- Commercial invoice
- Bill of lading
- Packing list
- Harmonized tariff codes (HS) for every item
- Import permit and license
- Arrival notification
U.S. CBP oversee the FTZ and may restrict activity if they verify that the user in non-compliant.
Do I Need Customs Broker When Admitting Goods Into A Foreign Trade Zone?
Foreign Trade Zones are considered non-CBP areas therefore, customs procedures are not necessary to admit goods into FTZ.
When these merchandise leave FTZ for export, still customs roles do not apply.
Customs brokers can be beneficial when introducing the goods in U.S. market place for consumption then custom entry process is required.
What Are The Recent Trends And Future Of FTZs?
There has been a rise in the number of FTZ sites in the U.S. particularly in Nebraska.
Two subzones have been opened in the past five years with several more inquiries from companies.
They continued growth will help open up many countries’ free trade zones for international trade.
In Africa, fifty-four countries signed an agreement that will liberate them from intra-Africa tariffs thus making them compete globally against other trade hubs.
U.S. and European union are in talks that could see a Trans-Atlantic free trade agreement signed.
This will open up the two continents for international trade.
In 2007, Alibaba founder Jack Ma opened a digital free trade zone (DFTZ) in Malaysia to promote Asia e-commerce growth.
This platform allows small traders to enjoy same benefits as large companies operating in FTZ sites.
Overall, there is an increased uptake of the FTZ both in developed and in developing countries.
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