What is a Foreign Trade Zone?

The question of placing certain imports or exports into a foreign trade zone (FTZ) occasionally arises in my international trade practice. While conceptually I understand its purpose, I decided to explore the “ins and outs” of it to better understand why they exist.

An FTZ is a customs supervised zone that is considered outside the Customs territory. Therefore, requirements that would normally be applied to imports are suspended as long as the goods remain in the zone. In an FTZ duty payment is deferred on imports which are later entered and sold in the U.S. market, and for those that are re-exported, duty-free treatment is allowed.

It is also a zone for which an export may be placed in while certain legal requirements are met. An example of this would be where military jeeps are delivered to the port for exportation to the army of a foreign government, but is still in need of a verification by Customs of the requisite export licenses.

Other advantages of using an FTZ include what is known as “inverted tariff relief,” which occurs when imported parts with a higher duty rate are incorporated into a final product which has a lower duty rate than the parts themselves and is ultimately imported. Likewise, merchandise imported and held in an FTZ for repacking, assembly, storage, exhibition, sorting, grading, mixing, manufacturing, cleaning or processing can be held in a zone for exportation, either in its original state or after undergoing one of these processes and is exempt from State and local ad valorem taxes.

There are 2 types of FTZs: (1) A “General Purpose” zone whose facilities are available for use by the general public and are typically located in a port complex, raw land or an industrial park, and (2) a “Subzone,” which is a single purpose site that allows for operations that cannot be feasibly moved to, or accommodated in, a general purpose zone, such as automobile manufacturing or oil refineries.

Interestingly, despite the ability to undergo the above activities on goods placed in the zone, certain other operations may not be done in an FTZ. These include, the manufacture of watch and clock movements, as well as the manufacture of products subject to internal revenue tax including sugar, tobacco, alcoholic beverages and perfumes containing alcohol, to name a handful of them.

In order for products to be admitted into a zone, Customs Form 214, or its electronic equivalent, must be completed and a permit granting admission is issued by the Port Director. Only a person with a right to make entry of the goods is allowed to make an application for zone admission, however, with a proper power of attorney on file, a Customs broker or zone operator may prepare and/or file the application on that party's behalf.

Along with Form 214, a filer must submit evidence of a right to made entry, the commercial invoice(s), a Release Order (executed by the carrier which brought the goods to the port), an application to unlade (Customs form 317), and any other documentation required by the Port Director.

Customs approves most low-risk shipments without an examination of the cargo, however it may conduct an exam to ensure full compliance with all applicable rules and regulations or to reduce the need for further examination at the time when the goods are entered into the US Customs territory for consumption or into a warehouse.

In certain cases direct delivery of the goods into an FTZ without a prior application (Form 214) may be done provided a written application is made with the appropriate port director at least 30 days before it is to be effective, and provided a description of the merchandise and the type(s) of processing that will be undertaken in the zone are explained.

Merchandise cannot be subject to Customs examination or documentation review prior to its arrival at the zone nor be of the type that is restricted. The FTZ operator must be the owner of purchaser of the goods, and the operations to be conducted must not only be known in advance, but also should be stable and predictable over the long term.

When the merchandise is ready to leave the zone for U.S. consumption, normal entry, classification and appraisement procedures covering foreign merchandise are used. For answers to specific questions, you should contact the local Port Director where the zone is located. US Customs has more than 300 ports of entry in the US, Puerto Rico and the US Virgin Islands.

Authority for establishing an FTZ is found in the Foreign Trade Zone Act of 1934, as amended (19 USC 81a-81u). The regulations governing the Foreign Trade Zones Board are published in 15 CFR Part 400, and US Customs regulations governing zone operations may be found in 19 CFR Part 146.

Questions/comments for me? Post below or email me at clark.deanna@gmail.com