Did you know that there are sections of the US where foreign goods are considered outside the US for the purposes of collecting duties and taxes? It’s true, and the role of Foreign Trade Zones in global supply chains is significant and a valuable addition to the international trade toolbox. These zones lend themselves to several creative uses that can provide options and cost savings for the businesses that put them to work. 

If you are intrigued by this idea and curious as to whether or not these foreign trade zones (FTZ) can be used effectively by your business, then you are invited to read on. 

What is a Foreign Trade Zone?

Foreign Trade Zones (FTZs) are zones that function as tax and duty-free stop gaps within the US. Importers can move goods into these zones and have their duties and taxes deferred indefinitely for so long as the goods remain in the zone.

As one might expect, all owed tariffs and duties will need to be paid upon exiting from the FTZ, just like you were importing into the US, but the key difference is that this tactic offers:

1. Unique opportunities that can only arise from operating in duty and tax-free zones within the US. 
2. Additional time and duty deferment as goods can be stored for extended periods. 

To be clear, these zones are still within the US for every other purpose. Standard laws, controls, and regulations are still in effect; it’s simply a place where goods can exist in a kind of duty and tax purgatory until they are ultimately released - potentially in a more favorable duty environment. 

Generally, these zones come in two varieties - general purpose and special purpose. 

General Purpose

These are essentially large industrial parks or warehouses that have space to store goods for an indefinite period. Most often, they store non-perishable finished goods, equipment, or products. This space is leased and monitored by the company for specific storage needs. If your purpose is the long-term storage of goods with the intention of exporting them at a later date, this is the version of an FTZ that your business will most likely be using. 

Special Purpose

Special purpose FTZs are essentially sub-zones of operation awarded to specific companies for functions that cannot happen in general purpose FTZs - typically, factories, refineries, or other facilities owned by the company. Notably, the rules regarding duties and taxes are the same - once the goods leave the zone, they are subject to duties and taxes. 

However, these zones differ sharply from general purpose FTZs in that they are entirely owned, operated, and maintained by the company to which they are awarded. In most cases, this is reserved for larger companies that can afford to maintain such a facility, but any company can apply to have their facility marked as a special purpose FTZ.

How Do You Use a Foreign Trade Zone?

The great benefit of an FTZ is that broadly speaking, the only thing you can’t do inside is retail trade. No buying or selling of any kind can happen within an FTZ primarily because the items within the zone are technically not part of US commerce. However, beyond that, there are very few limits on what is possible with the goods you have there. From repackaging and sorting goods to destroying them entirely, if it is legal within the US to do so, and you have been granted FTZ status, it can be done to your goods in these zones, often with cost savings for your business as a result. 

Importers using an FTZ to try and hold or manipulate goods to achieve a more favorable duty or tax when they are ultimately released can do so in a few different ways: 

• There are no duties owed on goods that are ultimately reexported. 

Since the goods are being sent back, an FTZ essentially operates as a large-scale bonded warehouse. Goods that never enter US commerce are not subject to duty and tax, and as a result, an FTZ provides keen opportunities for those businesses whose goods are set to return to their originating country. 

• Duty and tax may be deferred indefinitely for so long as the goods remain in the FTZ. 

In the case of temporary tariffs, regulations that are not meant to last, or other issues where your business needs time before it can pay the relevant duty and tax, an FTZ can provide a safe harbor and a staging ground for as long as necessary. 

• FTZs can help reduce the duty and tax owed in very specific circumstances. 

There are a host of different ways that an FTZ can help an importer pay less in duties and taxes on their imports. One of the most popular is what is referred to as an ‘inverted tariff.’ 

In simple terms, the duties and taxes that would have been owed on the material parts of a manufactured good could be significantly more than what the duties and taxes will be on the completed good. Therefore, if the component goods are imported duty-free into an FTZ and the manufactured good is entirely built in that same FTZ, it can enter the US with a lower tariff or with no tariff at all if the good is then exported out of the US. 

In a similar vein, there are no duties paid on scrap, waste, and other defective or destroyed parts, and some fees and taxes (such as merchandising processing fees) become much more manageable when goods are consolidated and exported through an FTZ. 

Does an FTZ Work for Everyone?

Yes and no. While FTZs offer a wide range of benefits for importers, there are barriers to entry for their use. Importing into an FTZ is a far more complicated and potentially more costly process than simply importing through the usual channels. The reporting process is, by necessity, more involved, and there are many associated fees, such as leasing and application fees, involved throughout the process. 

Additionally, while special purpose FTZs can be designated at an existing site, general purpose FTZs are highly space and location-dependent. General purpose sites must be within 60 miles of a Port of Entry, and often, that space is already at a premium.

Finally, the maintenance and fees associated with keeping/managing goods in an FTZ can be an extremely costly affair, sometimes overshadowing whatever you would have paid had you just imported normally and stored in a standard facility. Typically, these sites are most effectively used by large operations where the increase in cost and administration are worth it in contrast to the money saved in the process.  

Does an FTZ Work for My Business?

The only way for us to know that is if we get to know your business. For bespoke advice and industry expertise that can help guide you towards importing solutions like Foreign Trade Zones, get in touch with PCB’s Trade Advisory Services team today. Our team can not only help you determine if your business could benefit from an FTZ but can also assist with the application and maintenance of your goods at that site.

Get in touch with our team today to get started!