The ABCs of FTZs

With the increase in global commerce over the past several years, the use of foreign trade zones (FTZs) has increased among companies that import goods or materials. But while many supply chain managers know a little about FTZs, the concept is often misunderstood, with the result that these zones are not being utilized to their full potential.

By definition, a foreign trade zone is a government-sustained site where foreign and domestic materials are considered by the U.S. Bureau of Customs and Border Protection to be in international commerce. Merchandise may be held or processed in these zones without incurring customs duties, which helps companies compete on a more equal footing with their foreign rivals.

Foreign trade zones were created by the Foreign Trade Zone Act of 1934, but it was not until the early '70s that they began to be utilized to any extent. In 1970, there were eight foreign trade zones in the United States. Today, there are almost 300.

While there are a number of advantages to using a foreign zone, a couple in particular stand out. First, since the goods in the zone are considered to be in international trade, duty is deferred until they leave the FTZ and enter domestic commerce. If they are exported from the zone, no duty at all is incurred. This gives the company a financial advantage since the merchandise can be held duty free for an indefinite period. Depending on the value of the inventory, this can be significant.

Second, the FTZ offers relief from inverted tariffs. For example, there are a number of instances in which the tariff on components or raw materials is higher than that on finished product. Since no duty has been paid on the inbound materials, the company can convert them to finished products and pay the lower duty when these products are shipped. This facilitates fair competition with businesses importing similar products. A similar advantage is realized by a company manufacturing in an FTZ. Since the duty is paid on the outbound finished product, there is no cost incurred on scrap materials, damage, or other materials lost in the manufacturing process.

While the Foreign Trade Zone Act has been amended several times, the Trade and Development Act of 2000 gave FTZs a big boost by allowing what is called a "weekly entry procedure." To illustrate, companies outside an FTZ pay a 0.3464-percent entry fee on the value of each imported shipment. The minimum fee is $25, and the maximum is $485. If a company received 10 shipments per week that were valued at $140,012 each, the processing fees would total $4,850 (10 x $485). If, however, this same business was located in an FTZ, it could combine its weekly receipts and pay one fee, or $485. This would result in a savings of $4,365 per week, or $226,980 annually.

There are a number of other advantages to using an FTZ. Goods can be held indefinitely if market conditions are unfavorable for sales, and there are no quotas in the zones.

While many supply chain managers are well informed about FTZs, any supply chain manager of a company that imports goods who has not investigated the use of a foreign trade zone would be wise to do so. We have seen a number of logistics service providers (LSPs) take advantage of them, so outsourcing into an FTZ could also be an option. And, of course, LSPs that have not yet explored the concept may find it's an attractive option as well.