What is a foreign-trade zone?

A foreign-trade zone (FTZ) is a defined physical area within the United States that, for customs entry purposes, is treated as if it is outside U.S. borders. Companies may use FTZs for both storage/distribution activities or, after specific authorization by the U.S. FTZ Board, for production. In FTZs, “production” is considered to be anything that results in a substantial transformation of an article or that changes its Harmonized Tariff Schedule of the US classification (6-digit) or eligibility for entry.

How is a foreign-trade zone established?

The Foreign-Trade Zones Act of 1934 created a Foreign-Trade Zones Board to review and approve applications to establish, operate and maintain Foreign-Trade Zones. The Board may approve any zone or subzone that it deems necessary to serve adequately “the convenience of commerce.” U.S. Customs and Border Protection must approve activation of the zone before any merchandise is admitted under the Foreign-Trade Zones Act.

Why would I want to consider operating in a FTZ?

When you operate under FTZ procedures, your company is treated (for purposes of customs duties) like it’s located outside the United States. That can mean that U.S. import duties don’t have to be paid on imported components coming to your factory. If your finished product is ultimately shipped to the U.S. market, you may have the option of paying the finished product duty rate rather than the component duty rate. (Many finished products have lower duty rates – or are duty-free – than their components.) And if you re-export the finished product, you don’t ever pay duties on the component materials. There are other potential savings, too, like avoiding duties on imported materials that become scrap, and possible administrative savings and efficiencies.

Why do global firms use Foreign-Trade Zones?

To maintain the cost competitiveness of their U.S. based operations in relation to their foreign-based competitors. For a firm, zone status provides an opportunity to reduce certain operating costs associated with a U.S. location that are avoided when operating from a foreign site.

What may be placed in a Foreign-Trade Zone?

Any foreign or domestic merchandise not prohibited by law, whether dutiable or not, may be taken into a Foreign-Trade Zone.

Merchandise that lawfully cannot be imported into the United States is prohibited without exception. Merchandise that lawfully cannot be entered into the customs territory may be placed in a Foreign-Trade Zone because zones are considered outside customs territory. For instance, merchandise may be stored, repackaged or manipulated in a Foreign-Trade Zone and exported.

Some Federal agencies regulate storage and handling in the United States of certain types of merchandise, such as explosives. Depending on the nature of the requirement and the particular characteristics of the zone facility, such merchandise may be excluded. Moreover, agencies that license importers or issue importation permits may block entries into a zone that are not licensed or permitted.

The Foreign-Trade Zone Board may exclude from a zone any merchandise that in its judgment is detrimental to public interest, health or safety. The Board ensures that Foreign-Trade Zones are not used to bypass other trade laws of the United States.

What can occur within a Foreign-Trade Zone?

Foreign and domestic merchandise permitted in a zone may be stored, sold, exhibited, broken up, repacked, assembled, distributed, sorted, graded, cleaned, mixed with foreign or domestic merchandise, otherwise manipulated, destroyed or be manufactured without being subject to U.S. Customs laws. This exemption does not apply to machinery and equipment that is imported for manufacturing use or the like within a zone.

In specific cases, the Foreign-Trade Zones Board may deny permission to manipulate, manufacture or exhibit merchandise in a zone in order to protect public interest, health or safety. Many products subject to an internal revenue tax may not be manufactured in a zone. These products include alcoholic beverages, products containing alcoholic beverages except domestic denatured distilled spirits, perfumes containing alcohol, tobacco products, firearms and sugar. In addition, the manufacture of clocks and watch movements is not permitted in a zone.

No retail trade of foreign merchandise may be conducted in a Foreign-Trade Zone. However, foreign and domestic merchandise may be stored, examined, sampled and exhibited.

How is U.S. Customs and Border Protection involved?

U.S. Customs and Border Protection is responsible for the transfer of merchandise into and out of a zone and for matters involving the collection of revenue. The Office of Regulations and Rulings at Customs headquarters provides legal interpretations of the applicable statue, Customs regulations and procedures.

The Port Director of Customs in whose district a zone is located is in charge of the zone as the local representative of the Foreign-Trade Zones Board. He or she controls the admission of merchandise into the zone, the handling and disposition of merchandise in the zone and the removal of merchandise from the zone. In addition to the Foreign-Trade Zones Act, he or she enforces all laws normally enforced by Customs that are relevant to Foreign-Trade Zones.

Zones are supervised by U.S. Customs and Border Protection officers through periodic checks and visits; the security of the zone must meet U.S. Customs and Border Protection requirements.

Is a Foreign-Trade Zone right for your Operations?

If you are concerned about Foreign-Trade Zone operational issues or regulations, or you think zones are only suited to a particular industry, consider this:
• Car manufacturing plants, oil refineries and distributors, electronics, footwear, pharmaceuticals and textiles are all utilizing FTZs. So are companies with as few as 15 employees.
• If you are already using another Customs tariff-reduction program, such as Duty Drawback, Temporary Importation Bond or a Bonded Warehouse, you need to consider an FTZ as a way to streamline operations, cut down on paperwork, increase flexibility and save additional money. Many companies are discovering that FTZs more efficiently meet their needs than other Customs programs.

How do I get more information about the FTZ Program in general?

The Port of Greater Cincinnati Development Authority manages the Greater Cincinnati / Northern Kentucky foreign-trade zone program, and helps advise companies on application and compliance issues. The Port Authority’s alliance with REDI Cincinnati offers businesses direct access to expertise, funding and connections to available resources to help with a number of location and expansion issues, including determining the cost/benefit of the foreign-trade zone savings & supply chain efficiencies.

Contact: Melissa Johnson / mjohnson@cincinnatiport.org / (513) 632-3833

works collaboratively with REDI Cincinnati, the region’s business-attraction agency, and Southwest Ohio JobsOhio Network Partner, offering businesses direct access to expertise, funding and connections to available resources to help your business expand and locate in the region.