How Foreign-Trade Zones can Benefit You
Posted on January 6, 2021
There is at least one Foreign-Trade Zone (FTZ) in every US state, and they can be a powerhouse for streamlining many processes and saving money in businesses that are importing and exporting. FTZs are geographic locations designed to sit outside of US Customs and Border Protection (CBP) territory. Benefits of FTZs can include reduced, delayed, or maybe even no duty costs, streamlined logistics, and supply chains, decreased Customs filings, and potentially inverted or reduced tariffs.
North Dakota is home to two FTZs, Grand Forks (#103) and Fargo (#267). Both qualify as general-purpose FTZs, operating as public utilities that can have several services to multiple users.
FTZs essentially operate as if they are on foreign soil. They are specifically designated geographic areas that operate outside of the US. Goods within the Zones have not cleared by US Customs procedures for import into the US. FTZs can house several types of approved operations to handle and manipulate these goods for end users without officially entering US markets. A few examples of allowed activities within an FTZ are warehousing, manufacturing, assembly, processing, labeling, repairing, salvaging, and even testing goods. Companies may hold products in the FTZ until they are re-exported to another country or make their way into US markets.
Therefore, products can be imported without clearing US Customs or paying taxes/duties and re-exported to another country. If the products' end market is the US, Customs duties are then paid upon entry into the US market. Keep in mind, however, the FTZs are still subject to federal, state, and local laws. The Zones are typically adjacent to Customs Ports of Entry but remain outside of the US's commerce activity. According to US Foreign-Trade Zone Board, in 2019, more than 200 communities have an FTZ that employs more than 420,000 people across the US.
In 1934, The Foreign Trade Zones Act in the Roosevelt administration was passed to "expedite and encourage foreign commerce" in the US. Merchandise of all descriptions can be held in the Zone without being subject to Customs duties and other such taxes. By the 1950s, the FTZ Act was updated to include manufacturing activities within the Zones, which vastly increased their popularity and cost-effectiveness. Additional updates were needed to make FTZs more competitive. In the 1980s, the National Association of Foreign-Trade Zones (NAFTZ) had convinced the US Customs Service that manufactured goods in the FTZ should not be assessed by the value-added in the US (domestic parts, labor, overhead, and materials). With this update, FTZs would encourage reinvestment in the Zones' activities in the US, making a more even playing field for global trade.
Benefits of an FTZ:
The benefits of an FTZ can vary based on the activities and authority of the FTZ itself. FTZs may provide the following benefits.
- Exemption or deferral of duties can apply in and FTZs. Tax or duties are applied by the end market, not within the FTZ itself.
- Re-exporting a product without paying duties.
- There can be a reduction in Merchandise Processing Fees (MPF), which are based on an item's value and often outside of the fees from duties/taxes incurred on import.
- Inverted tariffs are possible depending on the operation and the manipulation of the product within the FTZ. If the products were coming into the US market, the manufacturer would pay the end-product tariff, which is often lower than each individual component.
- Logistics and reporting can be streamlined with consistent and potentially fewer reporting obligations.
- Transportation costs can also be reduced by not moving goods as far or as much with a designated FTZ.
- Security requirements and CBP supervision may reduce companies' overall insurance costs due to increased security.
There may already be an FTZ near you; here is a list of all the FTZs in the US. Existing FTZs can be a great resource to better understand how your company can benefit.
How do you apply and establish an FTZ?
Establishing an FTZ has been a lengthy process in the past. More recently, the FTZ Board has streamlined its process for a quicker, more user-friendly approach. The FTZ Board processes applications and approves the FTZ for operations. Once approved, the CBP office will need to be contacted for official activation. CBP will conduct background investigations of key personnel, review the site's inventory control systems and security procedure to assess the site for full activation. Applications types, processing, and summary documents can be found on the International Trade Administration's FTZ website.
Overlooking opportunities an FTZ could provide a company that frequently exports may be costly over time. By maximizing the potential of an FTZ, companies can see a variety of benefits and harness the power of their surroundings and the movement of goods. If you have more exporting questions, feel free to reach out to the team at the North Dakota Trade Office.
CBP Foreign-Trade Zone Website (includes links to FAQ, FTZ Manual, and more)