What is a foreign trade zone?

Foreign-Trade Zones (FTZ) are secure areas under U.S. Customs and Border Protection (CBP) supervision that are generally considered outside CBP territory upon activation. Located in or near CBP ports of entry, they are the United States’ version of what are known internationally as free-trade zones.

Foreign and domestic merchandise may be moved into zones for operations, not otherwise prohibited by law, including storage, exhibition, assembly, manufacturing, and processing. The usual formal CBP entry procedures and payments of duties are not required on the foreign merchandise unless and until it enters CBP territory for domestic consumption, at which point the importer generally has the choice of paying duties at the rate of either the original foreign materials or the finished product. Domestic goods moved into the zone for export may be considered exported upon admission to the zone for purposes of excise tax rebates and drawback.

Qualified public or private corporations that may operate the facilities themselves or contract for the operation sponsors foreign-trade zones. The operations are conducted on a public utility basis, with published rates. A typical general-purpose zone provides leasable storage/distribution space to users in general warehouse-type buildings with access to various modes of transportation. Many zone projects include an industrial park site with lots on which zone users can construct their own facilities.

Subzones are normally private plant sites authorized by the Board and sponsored by a grantee for operations that usually cannot be accommodated within an existing general-purpose zone.

The Advantages of Using a Foreign-Trade Zone
CBP duty and federal excise tax, if applicable, are paid when the merchandise is transferred from the zone for consumption.

While in the zone, merchandise is not subject to U.S. duty or excise tax. Certain tangible personal property is generally exempt from state and local ad valorem taxes.

Goods may be exported from the zone free of duty and excise tax.

CBP security requirements provide protection against theft.

Merchandise may remain in a zone indefinitely, whether or not subject to duty.

The rate of duty and tax on the merchandise admitted to a zone may change as a result of operations conducted within the zone. Therefore, the zone user who plans to enter the merchandise for consumption to CBP territory may normally elect to pay either the duty rate applicable on the foreign material placed in the zone or the duty rate applicable on the finished article transferred from the zone whichever is to his advantage.

Merchandise imported under bond may be admitted to a FTZ for the purpose of satisfying a legal requirement of exporting the merchandise. For instance, merchandise may be admitted into a zone to satisfy any exportation requirement of the Tariff Act of 1930, or an exportation requirement of any other Federal law (and many state laws) insofar as the agency charged with its enforcement deems it so.

The duty on a product manufactured abroad and imported into the U.S. is assessed on the finished product rather than on its individual parts, materials, or components. The U.S. based manufacturer finds itself at a disadvantage compared with its foreign competitor when it must pay a higher rate on parts, materials, or components imported for use in a manufacturing process. The FTZ program corrects this imbalance by treating products made in the zone, for the purpose of tariff assessment, as if it were manufactured abroad. At the same time, this country benefits because the zone manufacturer uses U.S. labor, services, and inputs.

What may be placed in zones
Any foreign or domestic merchandise not prohibited by law or other exception listed below, whether dutiable or not, may be taken into a foreign-trade zone.

Merchandise, which lawfully cannot be imported into the United States, is prohibited without exception. Furthermore, placing merchandise subject to a quota into a zone cannot circumvent quota on the imported merchandise.

On the other hand, merchandise for which a quota is filled or for which a quota on entry is established, may be placed into a zone until the quota opens or is removed since foreign-trade zones are considered outside CBP territory for entry purposes. Such products, with the exception of certain textiles may be manipulated or manufactured while in the zone into a product not subject to quota.

Some Federal agencies regulate storage and handling in the United States of certain types of merchandise, such as explosives. Depending on the nature of the requirements and the particular characteristics of the zone facility, such merchandise may be excluded. Moreover, agencies, which license importers or issue importation permits may block admissions to a zone, which are not properly licensed or permitted.

The Foreign-Trade Zones Board may exclude from a zone any merchandise that is in its judgment detrimental to the public interest, health, or safety. The Board may place restrictions on certain types of merchandise, which would limit the zone status allowed, the kind of operation on the merchandise in a zone, the entry of the merchandise into the commerce, or similar transactions or activities.

What may be done in zones
The Foreign-Trade Zones Board may exclude from a zone any merchandise that is in its judgment detrimental to the public interest, health, or safety. The Board may place restrictions on certain types of merchandise, which would limit the zone status allowed, the kind of operation on the merchandise in a zone, the entry of the merchandise into the commerce, or similar transactions or activities.

Many products subject to an internal revenue tax may not be manufactured in a zone. These products include alcoholic beverages, products containing alcoholic beverages except domestic denatures distilled spirits, perfumes containing alcohol, tobacco products, firearms, and sugar. In addition, the manufacture of clock and watch movements is not permitted in a zone.

No retail trade of foreign merchandise may be conducted in a FTZ. However, foreign and domestic merchandise may be stored, examined, sampled, and exhibited in a zone.