Foreign Trade Zone (FTZ)—A tool that companies can use to increase their global competitiveness

A foreign trade zone is a designated site licensed by the U.S. government through the Foreign-Trade Zones (FTZ) Board. In an FTZ, special U.S. Customs procedures that reduce expenses and increase profits can be used. These procedures allow domestic activities that involve foreign items to occur as if the site were outside the United States. Duty-free treatment is provided for items that are re-exported, and duty payment is deferred on items sold in the U.S. market. This helps offset advantages available to overseas producers who compete with those who are located in the United States. General purpose foreign trade zones can have multiple users while subzones are special-purpose zones--usually at manufacturing plants.

Grantee and Operator

The City of Flint serves as the formal grantee of Foreign Trade Zone #140, which serves the Saginaw/Bay City/Flint region. As part of its strategy to engage the global economy, the City of Flint has taken steps to reactivateits foreign trade zone. FTZ operations now are underway at Modas, 6285 Taylor Drive, Flint, Michigan.

Flint and Genesee County can offer cost-competitive sites to companies seeking a Midwest location with the benefits of a foreign trade zone. Other general purpose zones and subzones can be established within the 60-mile Foreign Trade Zone #140 area. Additionally, other operators can be selected to manage those zones.

A site that is granted foreign trade zone status may not be used for zone activity until the site has been separately approved for FTZ activation by local U.S. Customs and Border Protection (CBP) officials. The foreign trade zone activity also must remain under the supervision of CBP FTZ sites, and facilities, and must remain within the jurisdiction of local, state, or federal governments or agencies.

Statistics

• More than 250 U.S. communities have foreign trade zones  
• Fifty states, including Puerto Rico, have established FTZs
• Nearly 350,000 people are employed at facilities operating in FTZ zones
• More than 60percent of merchandise received in FTZs is domestic. Domestic-status merchandise is primarily merchandise that is domestic in origin but that includes some foreign-origin goods that have been subject to U.S. Customs entry and duty payments
• The total value of merchandise moving through FTZs totals more than $500 billion annually
• Exports from FTZs exceed $31 billion annually and continue to grow

What Can You Do In A Foreign Trade Zone?

Foreign or domestic merchandise can enter a foreign trade zone without a formal U.S. Customs entry or payment of U.S. Customs duties or government excise taxes. Merchandise entering a zone may be:

If the final product is exported from the United States, no U.S. Customs duty or excise taxes are levied. If, however, the final product is imported into the United States, U.S. Customs duty and excise taxes are due only at the time of transfer from the foreign trade zone and formal entry into the United States. The duty paid is the lower amount of what is applied to the product itself or its component parts.

Benefits for users

All the benefits of foreign trade zone programs for U.S.-based manufacturers and processors are too numerous to list. However, most companies use a foreign trade zone program for the benefits listed below.

Relief from inverted tariffs

There are some tariff (import duty) relationships that penalize companies for making product(s) in the United States. This occurs when a component item or raw material carries a higher duty rate than the finished product. As a result, the importer of the finished product pays a lower duty rate than a U.S. manufacturer of the same product. This gives the importer an unfair and unintended advantage over the domestic manufacturer. Foreign trade zones level the playing field in these circumstances.

Duty exemption on re-exports

If a manufacturer or processor imports a component or raw material into the United States without the benefit of a foreign trade zone, it is required to pay the import tax (duty) at the time that the component or raw material enters the country. However, a foreign trade zone is considered to be outside U.S. commerce and U.S. Customs territory. So when foreign merchandise is brought into a foreign trade zone, no U.S. Customs duty is owed until the merchandise leaves the zone and enters U.S. commerce. At that time, the merchandise is considered imported and the duty must be paid. If the imported merchandise is exported, however,, no U.S. Customs duty is due.

Duty elimination on waste, scrap, and yield loss

Without a foreign trade zone, an importer pays the U.S. Customs duty owed as material is brought into the country. This is because the material is considered imported at that point. If the processor or manufacturer is conducting its operations within a foreign trade zone, the merchandise is not considered imported, and therefore, no duty is owed until it leaves the foreign trade zone for shipment into the United States.

Weekly Entry Savings

The Trade and Development Act of 2000 allows use of the weekly entry procedure for all manufacturing and distribution foreign trade zones.

Weekly entry (only available to foreign trade zone users) provides economies for both U.S. Customs and foreign trade zone users. Under weekly entry procedures, the zone user files only one U.S. Customs entry per week, rather than filing one U.S. Customs entry per shipment. Under the act, U.S. Customs does not have to process an entry for every shipment that is imported into the zone, and the foreign trade zone community no longer has to pay for the processing of each entry.

FOR EXAMPLE: 10 shipments per week, each with a value of more than $230,952, would amount to a merchandise processing fee of $4,850 ($485 x 10) per week. If this number is annualized, the amount is $252,200 (52 x $4,850) per year.

Companies in a foreign trade zone may take advantage of the weekly entry procedure. In the case of the above example, weekly entry would provide for one entry per week. For example, the 10 ($230,952) shipments per week would be filed as a single shipment of $2,309,520 each week. The merchandise processing fee would amount to the maximum of $485 total for the week. If this fee is annualized utilizing weekly entry, it amounts to only $25,220 yearly. In this example, weekly entry provides a savings of $226,980 per year. Each company’s savings could be significantly more or less depending on the number of shipments received throughout the year. A graphic example of weekly entry savings is shown below.

Duty Deferral

Since foreign trade zones are considered to be outside the U.S. Customs territory of the United States, goods are not imported until they leave the zone. Therefore, U.S. Customs duty is deferred until merchandise is imported from a foreign trade zone into the United States. So, instead of companies having substantial money tied up in U.S. Customs duties on inventory, companies are able to use that money for other purposes.

There are many other benefits that the foreign trade zone program offers manufacturers and distributors located in the United States. Increasingly, companies look for global opportunities when deciding to locate or expand a new manufacturing or processing facility. When companies make these location and expansion decisions, they usually take all manufacturing costs of a certain country into account. Unfortunately, there are unintended import tax penalties for many companies located in, or considering locating in, the United States. The foreign trade zone program plays an important role in providing a level playing field when companies are making investment and production decisions. While the U.S. government might incur a reduction in U.S. Customs duty revenue due to companies’use of the foreign trade zone program, the government makes up for the loss in duty revenue through the income tax it gains from the jobs created or retained. In addition, local governments benefit from sales and property taxes.

The foreign trade zone program has proven to be a successful program by consistently creating and retaining jobs and capital investment in the United States.

For further information contact:

Genesee Regional Chamber of Commerce
Phone: 810.600.1404
Fax: 810.600.1461
econdev@thegrcc.org