What is a Foreign Trade Zone?
A Foreign Trade Zone (FTZ) is a secure geographical area “in or adjacent” to a U.S. Port of Entry. However, this FTZ exists be outside of CBP territory.
For example, merchandise avoids CBP procedures and duty payments until the goods leave the FTZ and enter the U.S.
Note, the US built the Foreign Trade Zone Act of 1934 to allow local manufacturers to compete with foreign enterprises.
What Are Some Benefits of Using a Zone?
Companies can import components or partially finished goods and assemble them into one product that has a lower duty rate. This allows U.S. manufacturers to compete with foreign manufacturers who are importing finished products.
You can export goods in-bond without ever having to pay duty to the United States. A duty drawback does note apply for merchandize brought in and out of an FTZ. Why? Because import duties did not receive payment. Importers may declare customs on a weekly basis instead of a per shipment basis. This allows shippers to maximize their MPF payment at $485 on all shipments imported during the zone week.
How Do I Convert My Facility?
Companies who are looking to convert their facilities will need to apply with the FTZ board. After the board reviews your application a 9-12 month process will follow before your FTZ is up and running. Customs requires tight security and robust inventory software to ensure real-time accountability. Accountability for what? For of any goods moving in and out of the zone. The “Operator” of the FTZ is liable for any goods that leave the zone unaccounted for. Therefore, customs needs to ensure payment of any item leaving the zone for consumption into the United States. In fact, CBP issues heavy fines against any unaccounted for inventory.
How to Apply to Become an FTZ
Here is the application process for setting up a trade zone.
In the application a company will need to request the FTZ designation under the following conditions:
- Expansion or Reorganization
- Subzone / Usage Driven Site
- The FTZ will be used for the storage of product for either the deferment or avoidance of duty payments.
- Production Site
- The FTZ will be an assembly or manufacturing site used for duty inversion.
FTZ security dominates the prerequisites for the application process. For example, CPB wants a space where companies cannot leave with merchandise without payment of duties. Essentially this means the FTZ needs to be enclosed in fencing, with a single entrance.
A foreign trade zone requires users to keep good records of the product moving in and out. This ensures payment of duties when the product exports out of the FTZ.
Thereafter, a CBP agent audits the site. They either allow or deny FTZ authorization.
An operator has 30 days to make corrections upon denial.
Foreign trade zones are audited at least once a year by the US Customs and Border Protection Agency. Audits can either be announced or unannounced.