Why Companies Use Foreign Trade Zones
The benefits the Foreign Trade Zones program can offer importers, distributors, manufacturers and processors located in the United States are numerous. The primary benefits include:
- Weekly Customs entry savings
- Duty deferral until import is delivered from zone
- Duty elimination on waste, scrap, and yield loss
- Duty elimination on rejected or defective parts
- Duty elimination domestic content or value added
- Duty elimination on sales to the U.S. Military or NASA
- Duty elimination on re-exports
- Relief from local ad valorem taxes
- Relief from inverted tariffs
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 procedures for all manufacturing and distribution in foreign trade zones.
Weekly Entries (allowed only to Foreign Trade Zone users): provide 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 0.3464% merchandise processing for each and every formal entry processed by U.S. Customs. There is a minimum $25 to 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. Many companies receive shipments over this dollar amount.
Typically, with ten shipments per week, each with a value of over $230,952, the merchandise processing fee would add up to $4,850 ($485 x 10) per week, or $252,000 per year. Companies using FTZ#3 could take advantage of the Weekly Entry procedure, saving $226,980 per year. Each company’s savings could be significantly more or less depending on the number of shipments received during the year.
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.
Without a zone, an importer pays Customs duty owed as the shipment physically arrives at a U.S. Customs district and enters American commerce. This is because the material is considered imported at this point. If the processor or manufacturer is conducting its operations within a foreign trade 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. Waste and scrap identified in the zone is never imported into the United States, thus no duty. Scrap and waste can be re-exported or disposed.
It is important to remember that foreign competitors making the same product already have the benefit of not having to pay on the yield loss in the production and distribution of their exports.
Merchandise found to be defective or faulty, may be returned to the country of origin for repair or simply destroyed. Whichever choice is taken, no duty is paid. Many companies suffer from the "double duty crunch." That is, they pay duty on imported merchandise, find it to be faulty and return it to the country of origin for repair, and then pay duty again when the merchandise reenters the United States. If you are a Foreign-Trade Zone user or Subzone, the "double duty crunch" is never a problem, because your rejected merchandise never enters the commerce of the United States.
The "value added" to a product in a FTZ (including manufacture using domestic parts, cost of labor, overhead, and profit) is not included in its dutiable value when the final product leaves the Zone. Final duties are assessed on foreign content only.
No duty is charged on merchandise sold from a Foreign-Trade Zone to the U.S. Military or NASA.
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 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.
Foreign merchandise stored in Foreign-Trade Zones, or merchandise held in a zone for export, is not subject to any state or local ad valorem taxes.
Generally, if foreign merchandise is brought into a Foreign-Trade Zone or Subzone and manufactured into a product that carries a lower duty rate, then the lower rate applies. For example, when a Foreign-Trade Zone user imports a motor (which carries a 5.3% duty rate) and uses it in the manufacture of a vacuum cleaner (which has a 1.4% duty rate). When the vacuum cleaner leaves the FTZ and enters the commerce of the U.S., the duty owed on the motor drops from the 5.3% motor rate to the 1.4% vacuum cleaner rate.
For more information contact:
Brendan O'Meara, Maritime Marketing Manager
ph: 415-274-0458 • fax: 415-274-0528
Port of San Francisco | Pier 1, The Embarcadero | San Francisco, CA 94111