What Are Foreign Trade Zones And Why Should Logistic Companies Consider Operating Them

What is a Foreign Trade Zone?

A Foreign-Trade Zone ("FTZ") is a designated area within the United States where foreign and domestic merchandise is considered to be outside the U.S. Customs territory. This means that goods can be imported, stored, assembled, manufactured, and re-exported without being subject to customs duties and certain taxes until they enter U.S. commerce.

What Are the Benefits of Operating in a Foreign-Trade Zone?

Operating in an FTZ offers several significant benefits for companies:

1. Duty Deferral: Customs duties on imports are deferred until the goods leave the FTZ and enter U.S. commerce.
2. Duty Exemption: Goods that are re-exported from the FTZ are exempt from customs duties.
3. Duty Reduction (Inverted Tariff): If the finished product has a lower duty rate than the imported components, companies can pay the lower duty rate on the finished product.
4. Merchandise Processing Fee (MPF) Reduction: Companies can reduce MPF costs, which are typically assessed on each shipment.
5. Quota Avoidance: Goods can be stored in an FTZ until quotas are lifted or the next quota period begins.
6. Streamlined Logistics: FTZs can simplify and expedite the logistics process, improving supply chain efficiency.
7. Improved Cash Flow: By deferring duties and taxes, companies can improve their cash flow and reinvest the savings into their operations.
8. Enhanced Inventory Control: Better inventory management and security can lead to improved compliance with CBP requirements and potentially lower insurance costs.

These benefits can help companies reduce costs, optimize their supply chains, and remain competitive in the global market.

How to Apply for Foreign-Trade Zone Status?

To apply for and operate an FTZ in the United States, a company must follow these steps:

1. Identify a Grantee: Find a local grantee, which is usually a public or quasi-public corporation, to sponsor your application. The grantee will apply on your behalf.
2. Application to the FTZ Board: The company must apply to the Foreign-Trade Zones Board, which is part of the U.S. Department of Commerce. Use the formats provided by the Foreign-Trade Zones Board. The application should detail the proposed zone's location, operations, and benefits to the public interest. The application letter should be addressed to the Executive Secretary of the FTZ Board at the U.S. Department of Commerce.
3. Approval from the FTZ Board: If the application meets the necessary criteria, the FTZ Board will grant the company the authority to establish, operate, and maintain the FTZ.
4. Activation with CBP: Once the FTZ Board approves the zone, the company must activate the zone with U.S. Customs and Border Protection ("CBP"). This involves meeting specific requirements and ensuring compliance with CBP regulations.
5. Compliance with Regulations: The company must adhere to all local, state, and federal regulations, including those from agencies like the FDA, TTB, and EPA.
6. Ongoing Supervision: The FTZ operations are subject to ongoing supervision by CBP to ensure compliance with all applicable laws and regulations.

What are the Costs of Establishing an FTZ?

Establishing a FTZ involves several costs, including:

1. Application Fees: $4,000 for applications not involving production activity or involving production activity with fewer than three products. $6,500 for applications involving production activity with three or more products.
2. Operational Costs: These include expenses for physical assets, development of operational materials, and staff training.
3. Compliance and Reporting: Ongoing costs for maintaining compliance with CBP and other regulatory requirements.
4. Feasibility Study: Conducting a feasibility study to evaluate the cost-benefit analysis and ensure the company has the proper security, inventory, and experience to manage an FTZ.
5. Activation and Maintenance: Costs associated with activating the zone with CBP and maintaining the zone's operations.

These costs can vary depending on the size and complexity of the FTZ operations.

What are the Alternative Site Framework and Traditional Site Framework of an FTZ Operation?

The Alternative Site Framework (ASF) and Traditional Site Framework (TSF) are two different approaches for managing FTZs in the United States.

Alternative Site Framework (ASF)

The ASF is designed to provide greater flexibility and efficiency in the designation and management of FTZ sites. Key features include:

• Simplified Designation: ASF allows for a quicker and less complex process to designate FTZ sites within a defined service area.
• Service Area: The grantee defines a service area, typically encompassing multiple counties, where FTZ sites can be established as needed.
• Minor Boundary Modifications (MBMs): ASF enables easier and faster MBMs, allowing for the quick addition or removal of sites based on actual usage.
• Sunset Provisions: Sites designated under ASF have sunset provisions, meaning their FTZ status will expire if not used within a specified period (usually 3 to 5 years).

Traditional Site Framework (TSF)

The TSF is the original method for managing FTZs and has been in place since the inception of the FTZ program. Key features include:

• Fixed Sites: Under TSF, FTZ sites are designated as fixed locations, often requiring more time and resources to establish.
• Complex Modifications: Changes to the boundaries or the addition of new sites under TSF can be more cumbersome and time-consuming compared to ASF.
• No Sunset Provisions: Unlike ASF, TSF sites do not have automatic expiration dates, which can lead to the existence of unused or underutilized sites.

Comparison of ASF and TSF

Choosing between the ASF and TSF for an FTZ depends on several factors. Here are some key considerations:

Flexibility and Speed

• ASF: Offers greater flexibility and a faster process for designating and modifying FTZ sites within a defined service area. This is ideal for companies that anticipate frequent changes or expansions.
• TSF: More rigid and time-consuming, with fixed sites that require a lengthy process for modifications.

Service Area

• ASF: Allows for a broader service area, typically encompassing multiple counties. This can be beneficial for companies with operations spread across a larger geographic area.
• TSF: Limited to specific, fixed locations, which might be suitable for companies with stable, long-term operations in a single location.

Cost and Resource Allocation

• ASF: This can be more cost-effective in the long run due to simplified procedures for site designation and modifications. However, there may be initial costs associated with reorganizing under ASF.
• TSF: This may involve higher costs and resource allocation for site modifications and compliance due to its more complex and time-consuming processes.

Usage and Sunset Provisions

• ASF: Includes sunset provisions, meaning sites must be used within a specified period (usually 3 to 5 years) or their FTZ status will expire. This encourages active use of the sites.
• TSF: Does not have sunset provisions, which can lead to unused or underutilized sites.

Regulatory and Compliance Considerations

• ASF: Streamlined processes can lead to more efficient compliance with U.S. Customs and Border Protection (CBP) regulations.
• TSF: This may require more extensive documentation and longer approval times, which can impact compliance efficiency.

Strategic Goals

• ASF: Better suited for companies looking for flexibility, scalability, and efficiency in their FTZ operations.
• TSF: This may be appropriate for companies with stable, long-term operations that do not require frequent changes or expansions.

Conclusion

In conclusion, FTZs offer a multitude of benefits that can significantly enhance a company's operational efficiency and competitive edge. By deferring, reducing, or eliminating customs duties, FTZs help improve cash flow and reduce costs. They also provide flexibility in managing quotas and streamlining logistics, leading to more efficient supply chain operations. Additionally, FTZs offer enhanced inventory control and compliance benefits, making them a strategic asset for businesses looking to optimize their global trade activities. Overall, FTZs are a powerful tool for companies aiming to thrive in the dynamic landscape of international commerce.