The Basics and Benefits of a Foreign Trade Zone

The Basics and Benefits of a Foreign Trade Zone

The global economy is changing the production of goods. Today, you will find goods that are produced in one country being assembled in another to be sold to consumers in a third country. Thanks to the increase in international trade, there importance of foreign trade zone has shot up.

What is a Foreign Trade Zone?

FTZs were created by the Foreign Trade Zone Act of 1934 during the Great Depression. The purpose was to reduce the cost of international trade for US businesses.

An FTZ is an area in or close to a US port of entry where both domestic and foreign commercial goods receive the same customs treatment as those that are outside the US commerce zone.

Such zones help your business to be more competitive by having reduced tariff rates for imported inputs and exported finished products. Whether you are a manufacturer, distributor, or importer, you can use the FTZ option to reduce, defer, or avoid the cost of imported goods.

The US Customs and Border Protection (CBP) Supervises FTZs.

These zones, however, remain within local governments so permits may be required when importing into the jurisdiction of other governments.

An FTZ is also an enclosed and guarded space where goods are loaded, unloaded, stored, or manipulated in other ways. You can hold any certain forms of merchandise in an FTZ without paying any form of taxes, and you only pay custom duty when you are moving the goods into the US for consumption.

What Can You Do In An FTZ?

As long as your merchandise is not among those that are prohibited from entering the US, you can use the Zone. Products that are disallowed are those that negatively interfere with public safety, health, or interest.

Any activity such as manufacturing and processing activity that results in the change of a tariff classification must occur with the approval of the FTZ board. The zone may restrict particular merchandise operations. Retail trade, for example, is disallowed.

At times, the FTZ board may also exclude goods if the storage and handling capacity is inadequate.

The Benefits of an FTZ

FTZs have multiple benefits for businesses. These are:

  • Increased competitiveness

As a business, you either enjoy lower or no tariff costs which makes your business more competitive. For example, you can take advantage of duty exemption by storing, sorting, repackaging, handling goods, and exporting goods in an FTZ before they set foot in the US market.

You will also receive duty exemptions for re-exports and goods damaged within the FTZ.

  • Duty reduction or inversion

Sometimes, the manufacture of a good to a good to a finished product happens in the zone region. In such cases, when the end product has a lower tariff rate than that of foreign inputs, you end up paying the lower rate when you are moving the good into the US territory.

  • Reduced paperwork

If you are importing goods into a non-zone, you will pay a merchandise processing fee (MPF) for every container coming out of a ship. With an FTZ, you only file one customs entry per week as per the Weekly Entry Procedures which reduces your cost significantly.

  • Lower insurance costs

Since the CBP supervises the FTZ, you do not have to spend much on insurance and security.

  • Improved cash flow

The option to defer payments gives you better control of your cash.  You can also keep your goods for as long as you like in the Zone without paying taxes. If you enter your goods into the US market, you pay a duty that is only due once.

  • Avoidance of quotas

If you import a good that is subject to a quota, you can retain it in the FTZ until the beginning of a new quota year. In some instances, you can also manufacture the goods into a product that is not restricted by a quota.

Types of FTZ

There are two types of FTZs. Special-purpose sub-zones and general-purpose zones. A special-purpose FTZ is specific to a particular company.

General-purpose zones are rented by more than one company for warehousing. They are best for small companies that do not continually need an FTZ because they can save infrastructural costs.

If you run an international business and you want to store your goods in an FTZ, you can employ the services of a 3PL warehouse that operates a public FTZ.

When you partner with a 3PL warehouse to manage your FTZ, you gain access to additional services which can help you to save costs further. These include kitting, assembly, space-efficient repackaging, and distribution of goods.

Final Words

FTZs continue to thrive as they serve the needs of companies operating in the global economy. You can save costs by using a public FTZ. To take advantage of the full benefits that come with storing goods in an FTZ including reduced rates on finished goods and optimal repackaging, you can partner with a 3PL company.

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