Exporters interested in reducing costs and minimizing customs duties can take advantage of specially designated areas called Foreign Trade Zones (FTZs), which are located inside the United States but treated as though they are outside of the country for customs purposes. Similar duty-free areas in other countries are often referred to as “free" trade zones.
For many U.S. exporters, their ability to compete in international markets is bolstered by avoiding duty payments on imported components that are subsequently used in products that are exported. “By staging their merchandise for international distribution from U.S. locations, these companies can keep their U.S.-based distribution operations open and pursue international sales at the same time," says Shane M. Williams, FTZ and economic development manager at the Port of Houston.
$78 Billion in Exports
According to the Foreign Trade Zones Board, part of the U.S. Dept. of Commerce, as of 2016, there are 195 active zones in the United States, which are used for everything from warehousing and re-packaging to assembly and manufacturing. The total value of merchandise handled within U.S. zones tops $600 billion a year, and exports from American FTZs totaled nearly $76 billion in 2016. Foreign trade zones also account for about 420,000 jobs in the United States.
"The FTZ system is a remarkably-effective tool for supporting American exporters," says Erik Autor, president of the National Association of Foreign Trade Zones (NAFTZ). “Companies in many key American industries gain significant global competitive advantage by locating their production and distribution operations in U.S.-based FTZs, thereby boosting U.S. exports, manufacturing, investment and jobs."
FTZs fall under the jurisdiction of the U.S. Customs and Border Protection (CBP) agency. For customs entry purposes, each zone is considered outside of U.S. borders. Companies can use FTZs for storage, distribution and manufacturing activities. Many American exporters use foreign trade zones for manufacturing products that are ultimately re-exported. Major industries that benefit from the FTZ program include automotive, electronics, food processing, pharmaceutical production and petroleum refining.
Economic Benefits for Exporters
While FTZs are especially popular with large companies, such as oil producers and car manufacturers, Williams says that smaller exporters can improve their margins by leveraging duty deferral provisions and centralizing production for exporting value-added products from inside an FTZ. Moreover, he says, working within an FTZ can reduce the time and paperwork involved in bringing imported materials into the U.S. for use in products that will be exported.
—Erik Autor, president, National Association of Foreign Trade Zones
Within a Foreign Trade Zone, "production" is considered to be anything that results in a substantial transformation of a product, or that changes its classification under the Harmonized Tariff Schedule of the United States, which is used to classify merchandise imported into the country.
Foreign trade zones can be spread over multiple, separate “zone sites" ranging from designated locations at a port of entry to defined space inside of a company's warehouse or production facility. Magnet sites, which are usually located at ports or industrial parks, typically have multiple FTZ users. Usage-driven sites, also known as subzones, enable companies to designate their own new or existing facilities for FTZ use. New FTZ sites and users must be approved by the FTZ Board and CBP in order to benefit from the program.
Exemption From Import Duties and Lower Fees
For U.S. exporters, there are no import duties on material used for manufacturing inside an FTZ, unless the product is ultimately sold in the domestic market. Companies that re-export the finished product don't have to pay duties on the imported components. According to Williams, three key benefits for exporters include: exemption from import duties on materials used for exports; streamlined customs procedures that reduce fees paid on imported materials; and exemption from state and local inventory taxes.
Williams says that by consolidating imports into weekly batches, known as “weekly entry," companies in an FTZ only pay one aggregated merchandise processing fee (MPF) to the government for material brought into the zone. MPFs of up to $485 per entry are paid on goods entering U.S. Customs territory, based on the total estimated value of the goods. Companies outside of an FTZ must pay that fee for every shipment. But companies operating inside an FTZ can file a single entry for all goods shipped from a zone in a consecutive seven-day period, instead of separate entries for each shipment.
Using what are known as streamlined customs procedures, companies operating inside an FTZ can consolidate all of their shipments in a week. So, for example, rather than incurring 10 separate fees for reporting 10 individual shipments on a daily basis, a company can consolidate on a weekly basis, and only pay one fee to the federal government.
“Aggregating inbound shipments can be a huge benefit," says Williams. “Companies in some zones save millions of dollars in fees by utilizing streamlined weekly reporting. And fewer entry filings can also reduce customs brokerage fees."
Getting Started in a Foreign Trade Zone
For exporters interested in operating in an FTZ, the first step is to work with a zone manager to submit a request to CBP for production authority. Authorization from the FTZ Board, which oversees Foreign Trade Zones in the U.S., can take up to four months. If an issue arises during the initial review process, the board may request additional information.
While there is no fee to apply for production authority, Williams says each individual FTZ is authorized to charge annual user fees, which are typically determined based on the size of a company's operation within the zone. The amount and frequency of user fees varies by zone.
FTZ production can range from traditional manufacturing and warehousing activities to knitting or assembly operations. It is important to consider any imported materials, including packaging, to ensure the proper designation of foreign status components. “For any imported item that will be changed from one product classification to another, production authority from the FTZ Board is required," says Williams.
“Exporters get the biggest benefit from FTZs," adds Williams. “Products can be assembled or modified inside an FTZ, and then re-exported with complete elimination of import tariffs. What's not to like about that?"