A tool that companies can use to increase their global competitiveness

A foreign-trade zone is a designated site licensed by the United States government through the Foreign-Trade Zones (FTZ) Board. In an FTZ special customs procedures may be used that reduce expense and increase profits. These procedures allow domestic activity involving foreign items to take place as if the site were outside of the United States. Duty-free treatment is accorded items that are re-exported and duty payment is deferred on items sold in the U.S. market, thus offsetting customs advantages available to overseas producers who compete with producers located in the United States. General purpose Foreign Trade Zones can have multiple users while Subzones are special-purpose zones, usually at manufacturing plants.

Grantee and Operator

The City of Flint serves as the formal grantee of Foreign Trade Zone #140, which services the Saginaw/Bay City/Flint region. The City of Flint, as a part of its strategy to engage the global economy, recently re-activated a portion of its General Purpose Zone within the City of Flint. The zone is located at 2214 Lapeer Road and is operated by Global Link Network.

Through the Foreign Trade Zone status, Flint and Genesee County can offer cost-competitive sites to companies seeking a Midwest location with the benefits of a Foreign Trade Zone. Other General Purpose Zones and Subzones could be established within the 60 mile Foreign Trade Zone #140 area. Additionally, other operators could be selected to manage those zones.

A site which has been granted zone status may not be used for zone activity until the site has been separately approved for FTZ activation by local U.S. Customs and Border Protection (CBP) officials, and the zone activity remains under the supervision of CBP. FTZ sites and facilities remain within the jurisdiction of local, state or federal governments or agencies.

Statistics

• Over 2,500 firms use FTZs
  
• Almost 340,000 people are employed at facilities operating under FTZ status
  
• Approximately 62% of merchandise received in FTZs is domestic. Domestic status merchandise is mainly merchandise of domestic origin but includes some foreign-origin goods on which Customs entry and duty payments have been made prior to zone administration
  
• The total value of merchandise moving through FTZs amounts to more than $410 billion annually
  
• Exports from FTZs exceed $23 billion annually and are growing fast
  
• All 50 states plus Puerto Rico have established Foreign-Trade Zones
  
• There are more than 270 approved general-purpose zones and over 587 approved subzones in the United States

What Can You Do In A Foreign Trade Zone?

Foreign or domestic merchandise may enter this enclave without a formal Customs entry or the payment of Custom duties or government excise taxes. Therefore merchandise entering a zone may be:

If the final product is exported from the United States, no U.S. Customs duty or excise tax is levied. If, however, the final product is imported into the United States, customs duty and excise taxes are due only at the time of transfer from the foreign-trade zone and formal entry in the U.S. The duty paid is the lower of that applicable to the product itself or its component parts.

Benefits for users

All of the benefits the Foreign-Trade Zones program can offer manufacturers and processors located in the United States are too numerous to list here. There are several benefits that are the principal reasons most of the companies use the Zone’s program. Those benefits are listed below.

Relief from inverted tariffs

In certain instances, there are tariff (import duty) relationships that actually penalize companies for making their product in the United States. This occurs when a component item or raw material carries a higher duty rate than the finished product. Hence, the importer of the finished product pays a lower duty rate than a manufacturer of the same product in the United States. This gives the importer an unfair and unintended advantage over the domestic manufacturer. The Foreign-Trade Zones program levels the playing field in these circumstances.

FOR EXAMPLE: A Foreign-Trade Zone user imports a motor (which carries a 4% duty rate) and uses it in the manufacture of a vacuum cleaner (which is free of duty). When the vacuum cleaner leaves the FTZ and enters the commerce of the U.S., the duty rate on the motor drops from the 4% motor rate to the free vacuum cleaner rate. By participating in the Zones program, the vacuum cleaner manufacturer has virtually eliminated duty on this component, and therefore reduced the component cost by 4%.

Duty exemption on re-exports

Without a zone, if a manufacturer or processor imports a component or raw material into the United States, it is required to pay the import tax (duty) at the time the component or raw material enters the country. However, a Foreign-Trade Zone is considered to be outside the commerce of the United States and the U.S. Customs territory. So, when foreign merchandise is brought into a Foreign-Trade Zone, no Customs duty is owed until the merchandise leaves the zone and enters the commerce of the United States. Only then is the merchandise considered imported and the duty paid. If the imported merchandise is exported back out of the country, no Customs duty is ever due.

Duty elimination on waste, scrap, and yield loss

Again, without a zone, an importer pays the Customs duty owed as material is brought into the United States. This is because the material is considered imported at this point. If the processor or manufacturer is conducting its operations within a zone environment, the merchandise is not considered imported, and therefore no duty is owed until it leaves the zone for shipment into the United States.

Weekly Entry Savings

On May 18, 2000 the Trade and Development Act of 2000 was passed and signed by President Clinton. This Act had a provision in it that allowed the use of the Weekly Entry procedure for all manufacturing and distribution Foreign Trade Zones.

Weekly Entry (allowed only to Foreign-Trade Zone users) provides economies for both Customs and Foreign-Trade Zone users. Under Weekly Entry procedures, the zone user files only one Customs Entry per week, rather than filing one Customs Entry per shipment. Customs no longer has to process an entry for each and every shipment being imported into the zone, and the Foreign-Trade Zone community no longer has to pay for the processing of each and every entry.

Companies located outside Foreign Trade Zones pay a 21% merchandise processing fee for each and every formal entry processed by U.S. Customs. There is a minimum $25 processing and a maximum $485 processing fee per entry, regardless of the duty rate on the imported merchandise. The maximum processing fee is reached for entries (shipments) with a value over $230,952. Companies often receive many shipments over this amount.

FOR EXAMPLE: 10 shipments per week, each with a value of over $230,952, would amount to a merchandise processing fee of $4,850 ($485 x 10) per week. If this number is annualized the amount is $252,200 (52 x $4,850) per year.

Companies in a Foreign Trade Zone may take advantage of the Weekly Entry procedure. In the case of the above example, Weekly Entry would provide for one Entry per week. For example: the 10 ($230,952) shipments per week would be filed as a single shipment of $2,309,520 each week. The merchandise processing fee would amount to the maximum of $485 total for the week. If this fee is annualized utilizing Weekly Entry it is a total of only $25,220 yearly. In this example Weekly Entry provides a savings of $226,980 per year. Each company’s savings could be significantly more or less depending on the number of shipments received during the year. A graphic example of Weekly Entry savings is shown below.

Duty Deferral

Since Foreign Trade Zones are outside the Customs territory of the United States, goods are not imported until they leave the zone. Therefore, Customs duty is deferred until merchandise is imported from a Foreign-Trade Zone into the United States. So, instead of companies having substantial monies tied up in Customs duties on their inventory, they have use of that money for other purposes.

There are many other substantial benefits that the Zones program has to offer manufacturers and distributors in the United States, but the benefits listed are the key benefits that attract most companies to the Zones program. More and more companies look globally when deciding to locate or expand a new manufacturing or processing facility. When these companies make these location and expansion decisions, they do take into account all costs of manufacturing in a certain country. Unfortunately, there are unintended import tax penalties for many companies located in, or considering locating in, the United States. The Foreign Trade Zones program plays an important role in providing a level playing field when investment and production decisions are made. While the U.S. government might incur a reduction in Customs duty revenue by the use of the Zones program, it more than makes up for it by the income tax it gains from the jobs created or retained. In addition, local governments benefit from sales and property taxes.

The Foreign Trade Zones program has proven to be a successful trade program by consistently creating and retaining jobs and capital investment in the United States.

For further information contact:

Greg Nicholas
Vice President Economic Development Public Policy
810.600.1431 direct
810.869.2879 cell
gnicholas@thegrcc.org