With the increase in global commerce over the past several years, the use of foreign trade zones (FTZs) has become more prevalent with firms importing goods from competitive nations such as China, India, and the European countries. But while many supply chain managers know a little about FTZs, the concept is often misunderstood; and they 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 United States Customs Service to be in international commerce. Merchandise may be held or processed in these zones without incurring customs duties, assisting companies in obtaining a level playing field with their foreign competitors.
Foreign trade zones were created by the Foreign Trade Zone Act of 1934; but it was not until the early seventies that they began to be utilized to any extent. In 1970, there were eight foreign trade zones in the country. The numbers have continued to grow with the increase in international trade, and today there are over 300. According to the U.S. Foreign Trade Zones Board and Patrick Burnson of Logistics Management, last year FTZs shipped $87 billion worth of product and received almost $670 billion.
There are several advantages to utilizing a foreign zone. Some of the more important ones are as follows. First of all, 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 firm 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.
Secondly, the FTZ offers relief from inverted tariffs. For example, there are a number of instances whereby 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 firm can convert them to finished products and pay the lower duty on those when they are shipped. This facilitates fair competition with those firms importing similar products. A similar advantage is realized by a firm 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. The processing of any number of products can result in a yield loss for which the FTZ operator would not be penalized.
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, firms outside an FTZ pay a .3464% entry fee on the value of each imported shipment. The minimum fee is $25 and the maximum is $485. If a firm received 10 shipments per week that were valued at $140,012 each, the processing fees would total $4850 (10 X $485). If, however, this same firm was located in an FTZ, it could combine its weekly receipts and pay one fee, or $485. This would result in a savings of $4365 per week, or $226,980 annually
There are a number of other advantages to using an FTZ. Security is enhanced and goods can be held indefinitely if market conditions are unfavorable for sales. There are no quotas in the zones, and usually no inventory taxes.
While many supply chain managers are well informed on FTZs, any supply chain manager of a firm that imports or exports goods that 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 take advantage of them, so outsourcing into an FTZ could be possible, as well. Again, those LSPs that have not explored the concept may find it an attractive option, as well. As the tariff battles continue, many firms may find a foreign trade zone an effective tool in minimizing costs.