An Overview of the United States Foreign-Trade Zones Program

Part I.  The U.S. Foreign-Trade Zones Program Today

Purpose of Foreign-Trade Zones program

The Foreign-Trade Zones Act of 1934 created the U.S. Foreign-Trade Zones program. 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 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 $7 trillion dollar U.S. economy operates within the rapidly changing international trade environment.

Participants in the Foreign-Trade Zones program

Participants in the Foreign-Trade Zones program include:

§  Foreign-Trade Zones Board -- The Board consists of the Secretary of Commerce, and the Secretary of the Treasury. The Board's responsibilities include oversight of the Zones program and the issuance of Zone grants of authority

§  Grantee -- A Grantee is the corporation (almost always a public entity) to whom the privilege of establishing, operating, and maintaining a Foreign-Trade Zone project has been granted by the FTZ Board.

§  Operator -- A corporation, partnership, or individual who operates a Zone or Zone site under an agreement with the Grantee and under a performance bond with the U.S. Customs Service.

§  User -- A person or firm that uses the Zone for the storage, handling, processing, or manufacture of merchandise.

§  U.S. Customs Service -- The Customs Service, a division of the Treasury Department, is responsible for oversight of Zone activities. The Port Director of Customs is considered to be the local representative of the Foreign-Trade Zones Board. Customs' oversight includes oversight of admission and transfer of merchandise to and from Zones, as well as compliance with Customs regulations pertaining to Zone use.    

For the sake of clarification, several points should be made:

§  Each Port of Entry is entitled to one Zone project.

§  If the needs of commerce cannot be adequately served by one Zone project, a second (or third) Zone project may be granted within the same Port of Entry. (The burden of proof to demonstrate such inadequacy lies with the applicant for the additional project.)

§  Foreign-Trade Zone grants are grants of authority as opposed to monetary grants. Authority to establish either a General purpose Zone or a Subzone is always issued to the appropriate Grantee as opposed to the private firm which uses or operates the Zone or Subzone site. While the Zone or Subzone Operator assumes the direct Customs liability for its operation, the U.S. Customs Service considers the Grantee ultimately liable for any outstanding Customs fines, penalties, or liquidated damages left by a Zone Operator. A Foreign-Trade Zone grant of authority confers the ultimate right to maintain and operate within the Zone project, as well as the ultimate  responsibility for Customs compliance of Zone operations.

Structure of Foreign-Trade Zone projects

Each active FTZ project has a Grantee, one or more Operators, and one or more users. Each Zone project has a General Purpose Zone, which may consist of one or more sites, in which any number of users may conduct operations constrained only by the physical limitations of the site or sites. A special purpose Subzone is a single-firm site, usually involved in manufacturing, operating independently from the General Purpose Zone. Each Subzone operates under the auspices of the Grantee. The Foreign-Trade Zones Board authorizes the establishment of Subzones in instances where the activity cannot be accommodated within a General Purpose Zone and where Zone status for a particular business operation will result in a significant public benefit, such as the creation or retention of domestic economic activity. Typically, the nearest Grantee within a given State establishes each Subzone. Some Zone projects have no Subzones, others have several Subzones.