C. F. Lynch & Associates

The Goods Without a Country

By Clifford F. Lynch

DC Velocity, September 2005

There may not be one in your neighborhood quite yet, but Foreign Trade Zones (FTZs) are definitely on the rise. From a scant eight in 1970, the number of FTZs has now soared to 263. And thatís good news for importers. Why? Because depending on the nature of your business, making use of a Foreign Trade Zone could save you a lot of money.

By definition, a Foreign Trade Zone is a government-sanctioned site where foreign and domestic materials remain in a kind of international commerce limbo. While they remain in the zone, the materials may be stored, manipulated, mixed with domestic and/or foreign materials, used in assembly or manufacturing processes, or exhibited for sale without triggering the payment of U.S. Customs duties and excise taxes. Though the FTZ may technically lie within the Untied Statesí boundaries, the goods residing there are essentially considered to be goods without a country Ė and so, remain outside U.S. Customsí clutches.

FTZs were created in 1934 to "expedite and encourage foreign commerce." From a customs perspective, goods in a North Mississippi foreign trade zone are treated the same way as those located in, say, China. Imports may flow directly into the zone and be held there indefinitely duty free. Duty is assessed only when those goods are shipped out of the zone into the United States.

FTZs can offer a number of benefits, including:

Eliminating delays in customs clearance. This is particularly important in this time of unprecedented port congestion.

Eliminating duty drawback. Goods that are imported and stored in an FTZ may be re-exported without ever incurring duties. This eliminates the need to file for duty drawback refunds, a lengthy procedure that ties up funds.

Avoiding duty on waste or scrap. If for some reason goods in the zone must be destroyed or returned, no duties will be charges.

Providing relief from inverted tariffs. There are instances where companies are actually penalized for manufacturing at home. When the duty on raw materials is higher than that on the finished product, an importer of finished goods has an advantage over the U.S. producer. If the manufacturing takes place in an FTZ, however, the owner pays duty on his end products as they are shipped, thus leveling the playing field. For example, an FTZ-located company can import parts and components and ship assembled motorcycle and jet ski engines at a duty rate of 0 to 4 percent, depending on type. If, however, the same company operated outside the FTZ, the import duty on the parts and components would range from 0.2 to 11 percent.

Big savings in processing fees. The 2000 Trade and Development Act contained a provision that provided for "weekly entry" procedures in all FTZs. This may not seem like a big deal, but companies located outside the zones pay a 0.21 percent (value of merchandise) fee for every shipment processed by U.S. Customs. The minimum fee is $25, and maximum (which applies to any shipment valued at $230,952 or above) is $485, regardless of the amount of duty paid.

Suppose a company located in an FTZ received 10 shipments, each with a value of $250,000, every week. At $485 each, the processing fees outside the zone would be $4,850 weekly, or $252,200 annually. Within the zone, however, these same 10 receipts would be processed as a single shipment of $2,500,000 for a total fee of $485 per week.

The advantages to be gained from doing business in a foreign trade zone vary by industry and company, but U.S. companies involved in importing would do well to examine this option carefully. For more information on Foreign Trade Zones, visit the National Association of Foreign Trade Zonesí website at www.naftz.org.



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