Introduction into US Foreign-Trade Zones
Good international trade policy maintains a difficult balance. On the one hand, it’s imperative to protect and maintain domestic industries from external pressure and competition. On the other, it’s vital to ensure that domestic participants have access to efficient materials and can grow by exporting their goods and services overseas. An increase in autarkic policy reduces the capacity of domestic firms to compete globally. A lack of protection can leave domestic firms gutted. The creativity of methods to appease both competing drives never ceases to amaze. One such example in the US is Foreign-Trade Zones.
Foreign-Trade Zones (FTZ) are areas within the United States where goods imported are not subject to tariffs, as though the goods weren’t yet imported onto US soil. Import tariffs are instead imposed when goods are finally sold within the domestic market. They were initially created with the purpose of boosting exports during the Great Depression in 1934 and have gone through several changes and iterations. The most notable change was in 1973 — consolidating under the authority of the Foreign-Trade Zones Board as part of the Department of Commerce, along with other general expansions.
These FTZs broadly include an area within 60 miles or more of a port of entry, given certain permissions. There are currently 261 active FTZs. Businesses can import any merchandise within these FTZs with minor exceptions, such as alcohol, watch-making components, and substances illegal in the US. Except for retail sales, businesses can do any activity with the imports. Examples include manufacturing, storage, and inspection.
A summary of the benefits is outlined below:
- Deferral of tariffs to be paid on imports.
- Businesses can accept materials that exceed a quota and hold them in the FTZ until the next quota period.
- Businesses can inspect imported materials in a foreign trade zone and avoid paying tariffs on materials that are rejected or damaged.
- Consolidated merchandise processing fee on items received within seven days in the FTZ, potentially reducing compliance and administrative costs.
- No tariffs on goods re-exported. Exporters who take advantage can act duty-free on intermediary goods.
- Tariff elimination using inverted tariffs by conducting manufacturing activities in these zones. Inverted tariffs occur when finished goods have a lower tariff rate than their materials, such as tariffs of some automobiles (as low as 2.5%) being lower than steel (as high as 25%). This process requires special approval by the Foreign Trade Zone board.
Many Companies utilize the benefits of FTZs. BMW operates in an FTZ in South Carolina. It manufactures, assembles, and then exports vehicles to leverage US labor without paying tariffs on raw material imports. Apple uses FTZs to defer taxes when finished goods are sold instead of their components. Logistics companies use FTZs to manage their supply chain efficiently. To utilize these, apply to the related authority over the specific target FTZ outlining your business, proposed activities, projected imports and exports, and other information.
If you have any questions about international policy, please contact our Global Business Services team.
Charlie Petelka, is a Tax Consultant in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services, including preparing client calculations, international forms, IC-DISC tax returns, and transfer pricing documentation.