Foreign Trade Zones (Encyclopedia of Business)
Free trade zones are known in the United States as foreign trade zones. A foreign trade zone (FTZ) is a location within the United States where goods from foreign countries, either parts or assembled pieces, are considered to be in international commerce. As such, customs regulations on these items are suspended as long as they remain within the site. Merchandise, be it foreign or domestic, may enter an FTZ without paying government duties or excise taxes. Foreign trade zones are meant to encourage international trade and commerce and are located in or near a U.S. Customs port of entry.
Free trade zones have existed in Europe since the 1800s, the most notable being the free port of Hamburg, Germany. In the United States, however, the concept was long opposed by owners of bonded warehouses and protectionists who felt the establishment of a free port would be a precursor to lower tariffs and detrimental liberal trade laws. All of this changed in early 1937 when a 92-acre parcel of land and water on Staten Island, New York, was formally opened as U.S. Foreign Trade Zone No. 1. By 1956 other FTZs had been established in New Orleans, Los Angeles, San Francisco, and Seattle. These FTZs were established pursuant to the Foreign Trade Zone Act of 1934. This act was amended in 1950 to allow manufacturing and exhibition of merchandise within these zones. Under today's law, merchandise entering a foreign trade zone may be stored, displayed, assembled, tested, repaired, manufactured, sampled, manipulated, salvaged, relabeled, mixed, destroyed, repackaged, cleaned, or processed. All health and safety laws must be adhered to and retail sales are not allowed. There are also restrictions on the manufacture of goods subject to internal revenue taxes such as alcoholic beverages. Merchandise that cannot be legally imported into the United States is prohibited but certain merchandise may be stored until such time as it becomes legal to import it into the country. This situation is often applied to merchandise subject to quotas. When the quota is lifted or reopened the stored merchandise may then be released.
Authority for granting a site FTZ status falls under the purview of the of the Foreign Trade Zones Board of the U.S. Department of Commerce. The board is made up of the secretary of commerce and the secretary of the treasury. Day-to-day administration of relevant activities is handled by the board's executive secretary. Application for FTZ status is presented to the boardsually by state or local government entities, port or airport authorities, economic development organizations, or not-for-profit groups. Zones are operated as public utilities and may consist of a single or multiple sites. All FTZs are under the legal authority of the Foreign Trade Zones Board and the U.S. Customs Service.
There are many advantages for an exporter or importer to move goods through an FIZ. Customs duties are paid only when the merchandise is moved out of the zone, not when it enters the country, and while goods are being stored they are not subject to U.S. excise taxes. FTZs are established to help U.S. companies in a variety of ways. For instance, the duty paid on an imported assembled piece of merchandise is often less than the duty paid on the various unassembled parts of the item. Imported machine parts, for example, may carry with them an 8 percent duty rate while the finished machine, including the part, may carry a duty rate of only 3 percent. This makes it economically advantageous for the item to be assembled by workers in a foreign country. Under a foreign trade zone policy, however, an American company can import the necessary parts, assemble them into a finished product using American labor and then when it leaves the zone pay a duty rate based on an assembled product. FTZs are also inexpensive to establish and maintain as much of their cost of operation is reimbursed from merchandise processing fees and application fees.
According to the National Association of Foreign Trade Zones (an umbrella group for private and public organizations championing U.S. foreign trade zones), in 1997 there were 225 general-purpose U.S. foreign trade zones and 359 subzones. A general-purpose zone is typically a warehouse or other storage facility that may include a single large importing operation or multiple unrelated smaller operations. A subzone is an auxiliary site close to a general-purpose zone unable to accommodate the particular user assigned to the subzone. More than 2,800 companies make use of these various FTZs which employ more than 300,000 people. Exports from FTZs exceed $17 billion and this figure is expected to increase.
SEE ALSO: Exporting; Importing
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