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What Foreign Trade Zones Can Do for Import-Export Businesses

By Megan Doyle

Foreign trade zones (FTZs) – internationally known as "free trade zones" – are areas in which goods can be "landed, handled, manufactured or reconfigured, and re-exported without the intervention of customs authorities."1 Designed to promote economic development and facilitate international trade,2 FTZs offer a way to lower – or even avoid – duties and tariffs and are often seen as a way to benefit import-export businesses and their supply chains.

Used by small and large businesses alike, FTZs are typically organized within major international airports, seaports, and national frontiers: Hong Kong, Stockholm, Los Angeles, and New York City are all prominent examples.3 While not new, FTZs have become of interest recently because of changing tariff rates and shifts toward trade protectionism. As a result, more zones seem to be popping up – even in small towns and rural areas that contain no major import-export businesses, let alone a major port.4

 

Reducing Supply Chain Stress

 

The main purpose of an FTZ is to reduce stress on the supply chain by eliminating potential obstacles caused by high costs and complex customs procedures.5 This reduction of formal custom regulations can lead to faster turnaround of shipping vessels, thus increasing trade efficiency.6 In the U.S., for instance, FTZs are secure areas supervised by U.S. Customs and Border Protection (CBP). Despite CBP supervision, these zones are considered outside of CBP territory, which means that customs procedures and duty payments are not required unless goods enter CBP territory for domestic consumption.7

 

FTZs can also promote the ability to "fabricate, refinish, and store goods freely," further taking some of the hassle out of supply chain management.8 For example, standard FTZs can provide leasable storage and distribution space in warehouse-type buildings, allowing access to various industrial sites and modes of transportation. This allows import-export businesses to construct temporary facilities within an FTZ and manufacture products without paying high import fees.9 Qualified corporations can operate the facilities themselves.10

 

Benefits of FTZs

 

One of the main advantages of an FTZ is that goods exported are not subject to duties or excise taxes. Similarly, certain personal property can be exempt from state and local ad valorem taxes.11 FTZs might also encourage healthy international business competition by making it more desirable for companies – import-export businesses and others – to manufacture domestically instead of overseas.12 This is why FTZs are popping up in small U.S. towns, supporters say: the traffic-free highways and inexpensive real estate help attract distribution and warehouse companies, and more.13

 

What's more, FTZs can help eliminate disincentives or imbalances that are sometimes associated with manufacturing supply chains and import-export businesses. For example, if a product is manufactured abroad and imported into the U.S., duties are calculated according to the finished product rather than on its individual components. This can leave a U.S.-based manufacturer at a disadvantage compared with a foreign competitor, who might pay a lower rate on components.14 FTZs can remedy this imbalance by treating products made within the zone as if they were manufactured abroad, reducing the ultimate cost of manufacturing.15

 

Recent Trends and the Future of FTZs

 

"In a world where trade barriers increase, foreign trade zones become more valuable," said former U.S. trade negotiator Matt Gold.16 As the realm of import-export trade changes – sometimes in favor of trade protectionism – tariffs can increase and longtime free trade agreements might become vulnerable.

 

The recent revitalization of FTZs extends beyond a response to trade protectionism, however. "Digital" free trade zones appear to be on the rise. In November 2017, Jack Ma, co-founder of Alibaba, opened a Digital Free Trade Zone (DFTZ) in Malaysia as a response to Southeast Asia's booming e-commerce sector. Rather than being a geographical location, the DFTZ is based on an electronic platform. The Intent of the DFTZ is to allow smaller businesses – even one-person online merchants – to "make use of the trade hub as easily as larger companies."17

 

Although an FTZ can be, theoretically, created anywhere, it is difficult to create a zone without large areas of undeveloped land – especially near ports.18 And if FTZs are developed near residential environments, the walls and fencing necessary for such commercial developments "potentially could make the setting-up of a FTZ disruptive for existing land owners/users."19

 

Supporters of FTZs say these zones can ease the effects of tariff increases, combat trade protectionism, and help businesses compete internationally. Critics, however, suggest that the actual impact of FTZs is unclear. According to some, "the zones hurt domestic suppliers by making it easier for companies to source components from overseas."20 However, the majority of research on the effects of FTZs, thus far, seems to be based on theoretical arguments rather than statistical evidence.21

 

The

Takeaway:

A foreign trade zone's lack of necessary formal customs procedures gives import-export businesses flexibility when trading or manufacturing in a zone, thus alleviating some pressures on the supply chain.

Megan Doyle - The Author

The Author

Megan Doyle

Megan Doyle is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.

Sources

1. “Free-trade zone,” Encyclopedia Britannica; https://www.britannica.com/topic/free-trade-zone
2. Free Trade Zones; Crow Clark Whitehill; https://www.britishports.org.uk/system/files/documents/crowe_-_free_trade_zones.pdf
3. “Free-trade zone,” Encyclopedia Britannica; https://www.britannica.com/topic/free-trade-zone
4. “Trump Erects Trade Barriers, and ‘Foreign Trade Zones’ Take Them Down,” Governing.com; http://www.governing.com/topics/mgmt/sl-trump-trade.html
5. “Free-trade zone,” Encyclopedia Britannica; https://www.britannica.com/topic/free-trade-zone
6. Ibid.
7. “About Foreign-Trade Zones and Contact Info,” U.S. Customs and Border Protection; https://www.cbp.gov/border-security/ports-entry/cargo-security/cargo-control/foreign-trade-zones/about
8. Ibid.
9. “About Foreign-Trade Zones and Contact Info,” U.S. Customs and Border Protection; https://www.cbp.gov/border-security/ports-entry/cargo-security/cargo-control/foreign-trade-zones/about
10. Ibid.
11. Ibid.
12. Ibid.
13. “Trump Erects Trade Barriers, and ‘Foreign Trade Zones’ Take Them Down,” Governing.com; http://www.governing.com/topics/mgmt/sl-trump-trade.html
14. “About Foreign-Trade Zones and Contact Info,” U.S. Customs and Border Protection; https://www.cbp.gov/border-security/ports-entry/cargo-security/cargo-control/foreign-trade-zones/about
15. Ibid.
16. “Trump Erects Trade Barriers, and ‘Foreign Trade Zones’ Take Them Down,” Governing.com; http://www.governing.com/topics/mgmt/sl-trump-trade.html
17. “Jack Ma opens Malaysia’s ‘digital free trade zone’ with an eye to Southeast Asia’s ecommerce boom,” Tech in Asia News; https://www.techinasia.com/jack-ma-opens-malaysias-digital-free-trade-zone-eye-southeast-asias-ecommerce-boom
18. Free Trade Zones; Crow Clark Whitehill; https://www.britishports.org.uk/system/files/documents/crowe_-_free_trade_zones.pdf
19. Ibid.
20. Ibid.
21. Ibid.

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