Foreign Trade Zone (FTZ)

How Foreign-Trade Zones Work

Foreign-Trade Zones (FTZs) provide special customs procedures that help companies that conduct international business-related operations better compete with foreign plants. An FTZ also facilitates and attracts offshore activity and encourages retention of domestic activity, helping to create employment opportunities.

When you operate under FTZ procedures, your company is treated like it is located outside the United States for purposes of customs duties. That means that U.S. import duties don’t have to be paid on imported components entering your factory.

If your finished product is ultimately shipped to the U.S. market, you may have the option to pay the finished-product duty rate rather than the component duty rate — and many finished products have lower duty rates than their components or are duty-free. And if you re-export the finished product, you don’t pay duties on the component materials.

Other potential savings include avoiding duties on imported materials that become scrap as well as possible administrative savings and efficiencies.

Streamlining Supply Chain Solutions

Merchandise that is shipped to foreign countries from FTZs is exempt from duty payments. This provision is especially useful to firms that import components used to manufacture finished products for export.

Certain foreign and domestic merchandise held in FTZs may be exempt from state and local taxes. This allows firms to minimize costs while their products are waiting to be shipped, as there is no time limit on goods stored inside an FTZ.

In some cases, quota restrictions are waived for items entering an FTZ; however, the restrictions do apply if the items later enter the U.S. market. 

How to Use a Foreign-Trade Zone

Activities that can be conducted in an FTZ include assembling, packaging, destroying, storing, cleaning, exhibiting, repacking, distributing, sorting, grading, testing, labeling, repairing, processing, and combining foreign and domestic content.

Summary of FTZ Financial Benefits

FTZs are outside U.S. Customs territory, and merchandise is not subject to customs tariffs until the goods leave the zone and formally enter U.S. Customs territory. This provides the following benefits:

Reduction in Merchandise Processing Fees (MPF). Moving from one customs entry per individual shipment to a weekly entry eliminates processing for individual entries.

Additional Tax and Fee Relief. This is accomplished by paying the maximum Merchandise Processing Fee (MPF) and tendering the Harbor Maintenance Fee (HMF) on a quarterly basis.

Duty Deferral. All tariffs are deferred until material is processed for consumption and it enters U.S. commerce, which allows you to repurpose those funds and improve cash flow.

Duty Elimination/Inverted Tariffs. Tariffs can be reduced within the FTZ by manufacturing finished products of a lower tariff/duty-free from a material with a higher tariff that is subject to substantial transformation during the manufacturing process and not subject to duty on FTZ costs (labor, overhead, profit, etc.).

Other Advantages. These include indefinite storage and exemptions on waste and scrap.