With the new regulations on tariffs, there are some cost-saving measures on foreign merchandise that is re-exported as finished goods. By optimizing entry procedures, businesses can leverage the supply chain to decrease cost while boosting agility, stability, and resiliency.

Over 90 years after the Foreign Trade Zone ("FTZ") Act of 1934 was first established and subsequently introduced the nation's first FTZ in Staten Island, New York, in 1936, a robust network of activity continues to flourish.

In August 2024, the 85th Annual Report of the Foreign Trade Zones Board to Congress of the United States was released, showing that Texas, Louisiana, California, South Carolina and Tennessee remained firm in their respective top five ranks for overall FTZ economic impact since 2022. The United States government operates around 293 free trade zones throughout the 50 states, known as "Foreign Trade Zones."

The FTZ program encourages U.S.-based operations by removing certain disincentives associated with manufacturing in the United States. The duty on a product manufactured abroad and imported into the U.S. is assessed on the finished product rather than on its individual parts, materials, or components. The U.S. based manufacturer finds itself at a disadvantage compared with its foreign competitor when it must pay a higher rate on parts, materials, or components imported for use in a manufacturing process. The FTZ program corrects this imbalance by treating products made in the zone, for the purpose of tariff assessment, as if it were manufactured abroad. At the same time, the country benefits because the zone manufacturer uses U.S. labor, services, and inputs.

In a nutshell, FTZ is a designated location in the United States where companies can use special procedures that help encourage US production activity and value added, in competition with foreign alternatives, by allowing delayed or reduced duty payments on foreign merchandise, as well as other savings. An FTZ is an area within the United States, where foreign and domestic merchandise is considered to be outside U.S. Customs territory.

The recent tariff changes implemented by President Trump makes FTZs more attractive to many companies to find savings, provide strategic guidance, and navigate new regulatory hurdles.

Benefits offered by Foreign Trade Zones:

  • Most merchandise can be imported into FTZ without going through formal Customs entry procedure or paying import duties.
  • Customs duties are due only at the time of transfer from the FTZ for US consumption.
  • If the merchandise never enters the U.S. commerce (exported, destroyed, repaired obsolescence, waste, scrap), then no duties or taxes are paid.
  • International Returns Merchandise may be exported and returned to an FTZ without duty payment. It can be repaired and re-exported without duty payment.
  • Quality Control - The FTZ may be used for quality-control inspections to ensure that only products that meet specifications are imported. Substandard goods can be destroyed before duty is paid.
  • If applicable, import licenses or permits from other government agencies may still be required to bring the merchandise into the zone
  • Inverted tariffs are permitted, meaning that goods processed in the zone benefit from lower import taxes if the finished product has lower applicable taxes than their imported constituent parts
  • 100% import duty exemption on raw materials brought by companies with government or military contracts
  • No time constraints on the storage of merchandise in the FTZ.
  • Duty payable on FTZ merchandise does not need to be included in the calculation of insurable value, again lowering insurance costs. Reduced transportation costs may also result from streamlined logistics.
  • The FTZ is subject to Customs supervision and security procedures, saving you, the FTZ users, expenses for security and insurance.
  • Inventory Taxes By federal statute, tangible personal property imported from outside the U.S., and tangible personal property produced in the U.S. held in a zone for export are not subject to state and local ad valorem taxes. Most state and county tax authorities exempt all merchandise in the FTZ from inventory tax.
  • Harbor Maintenance Fee is paid quarterly instead of at the time imports arrive. Merchandise Processing Fees are paid at the time goods leave the zone.
  • Any merchandise that is not prohibited from entry into the U.S. may generally be admitted into a Zone. Manufacturing, processing and any activity that results in a change of the tariff classification can occur in a Zone but must be specifically approved by the FTZ Board.
  • Retail trade is prohibited in FTZ Zones.

There are several FTZs created to encourage foreign investment or export /import processing:

  • Special economic zones - are industrial parks that offer substantial tax breaks, reduced customs duties and streamlined regulatory processes incentives, for a single industry. Detailed analysis of the SEZ's location required to ensure that the SEZ aligns with your supply chain and operational needs to capitalize on logistical efficiencies.
  • Export processing zones -are designated areas with specific institutions, buildings, and services created to attract foreign businesses for export production. It offers more favorable regulations and incentives, such as tax benefits and relaxed labor regulations, compared to other parts of the country
  • Economic revitalization zone - improves the economy of a distress area mostly via tax incentives.
  • Charter city - is a large zone with substantial incentives for both commercial and residential districts.

Identifying opportunities, making projections and risk assessment is a must at this point. If you need help on discussing opportunities of FTZ and improve your supply chain cost please reach out to your HLBGC representative.