The United States Foreign-Trade Zones program is a federal program whose goal is to make U.S.-based companies engaged in international trade more competitive with their foreign counterparts. Companies using Zone procedures enjoy relief from tariffs and other forms of inventory taxes on goods and materials while they are within their Foreign-Trade Zone facilities. U.S.-based companies use Zones as a tool to adjust to today’s changing trade environment.
There are two types Foreign Trade Zone Environments: General Purpose Zones and Subzones. Both can be used for manufacturing, processing, and distribution.
General Purpose Zones are established for use by multiple users; 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 adjacent. And many Zone projects have more than one Subzone.
A General-Purpose Zone is a Foreign-Trade Zone site that may accommodate any number of firms. The only limitation of a General-Purpose Zone is the physical space in the Zone. Both foreign and domestic goods may be admitted to the Zone for use in a variety of operations, including storage, repackaging, repair, manipulation, destruction, and with Foreign-Trade Zones Board approval, manufacturing and processing. Customs duties and excise taxes are applicable only at the time merchandise leaves the Zone and enters U.S. commerce.
A Subzone is a single firm site designated for a special purpose under Zone procedures. Manufacturing Subzone users typically use the Foreign-Trade Zones program to reduce operational costs associated with Customs duties. Subzone status may be granted if the business operation cannot be accommodated within the existing General Purpose Zone 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 depends upon the specific operations to be conducted under Zone status. The applicant must demonstrate that Subzone status for the specific business operation will result in a significant economic benefit for the U.S. economy.
Benefits to U.S. Companies
The Foreign-Trade Zones program offers a way to mitigate the costs of free trade and in doing so, 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 $8.5 trillion dollar U.S. economy operates within the rapidly changing international trade environment.
Relief from inverted tariffs—In certain instances, there are tariff (import duty) relationships that penalize companies for making their product in the United States. This occurs when a component item or raw material carries a higher duty rate than the finished product. Hence, the importer of the finished product pays a lower duty rate than a manufacturer of the same product in the United States. This gives the importer an unfair and unintended advantage over the domestic manufacturer. The Foreign-Trade Zones program levels the playing field in these circumstances.
Duty exemption on re-exports—Without a zone, if a manufacturer or processor imports a component or raw material into the United States, it is required to pay the import tax (duty) at the time the component or raw material enters the country. However, a Foreign-Trade Zone is considered to be outside the commerce of the United States and the U.S. Customs territory. So, when foreign merchandise is brought into a Foreign-Trade Zone, no Customs duty is owed until the merchandise leaves the zone and enters the commerce of the United States. Only then is the merchandise considered imported and the duty paid. If the imported merchandise is exported back out of the country, no Customs duty is ever due.
Duty elimination on waste, scrap, and yield loss—Again, without a zone, an importer pays the Customs duty owed as material is brought into the United States. This is because the material is considered imported at this point. If the processor or manufacturer is conducting its operations within a zone environment, the merchandise is not considered imported, and therefore no duty is owed until it leaves the zone for shipment into the United States.
Weekly Entry Savings—On May 18, 2000 the Trade and Development Act of 2000 was passed and signed by President Clinton. This Act had a provision in it that allowed the use of the Weekly Entry procedure for all manufacturing and distribution Foreign-Trade Zones.
Weekly Entry (allowed only to Foreign-Trade Zone users) provides economies for both Customs and Foreign-Trade Zone users. Under Weekly Entry procedures, the zone user files only one Customs Entry per week, rather than filing one Customs Entry per shipment. Customs no longer has to process an entry for each and every shipment being imported into the zone, and the Foreign-Trade Zone community no longer has to pay for the processing of each and every entry.
Companies located outside Foreign-Trade Zones pay a .21% merchandise processing for each and every formal entry processed by U.S. Customs. There is a minimum $25 processing and a maximum $485 processing fee per Entry, regardless of the duty rate on the imported merchandise. The maximum processing fee is reached for Entries (shipments) with a value over $230,952. Companies often receive many shipments over this amount.
Companies in a Foreign-Trade Zone may take advantage of the Weekly Entry procedure.
Duty Deferral—Again, since Foreign-Trade Zones are outside the Customs territory of the United States, goods are not imported until they leave the zone. Therefore, Customs duty is deferred until merchandise is imported from a Foreign-Trade Zone into the United States. So, instead of having substantial monies tied up in Customs duties on their inventory, these companies can use that money for other purposes.
The Zones program offers many other substantial benefits to manufacturers and distributors in the United States, but these are the key benefits that attract most companies to the Zones program. More and more companies look globally when deciding to locate or expand a new manufacturing or processing facility. When these companies make location and expansion decisions, they consider all costs of manufacturing in a certain country. Unfortunately, there are unintended import tax penalties for many companies located in, or considering locating in, the United States. The Foreign-Trade Zones program plays an important role in providing a level playing field when investment and production decisions are made. While the U.S. government might incur a reduction in Customs duty revenue using the Zones program, it more than makes up for it by the income tax it gains from the jobs created or retained. In addition, local governments benefit from sales and property taxes.
The Foreign-Trade Zones Act was created by the Foreign-Trade Zones Act of 1934 to "expedite and encourage foreign commerce" in the United States. This is accomplished through the designation of geographical areas, in or adjacent to Customs Ports of Entry, where commercial merchandise receives the same Customs treatment it would 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. 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.
As the FTZ program has evolved, it has experienced tremendous growth over the last 30 years. In 1970 there were 8 Foreign-Trade Zone projects (with a total of 3 Subzones) in the United States. Today there are more than 230 (with nearly 400 Subzones) in the United States. The FTZ program has become an important means by which U.S.-based companies can enhance their cost-competitiveness, and by which the United States can practice both the letter and the spirit of its trade laws.