What Is a Foreign Trade Zone?

A foreign-trade zone is an area that is located within the United States, but is considered outside of the customs territory of the United States. The United States version of the "free port," foreign trade zones operate as public utilities pursuant to a grant from the Foreign Trade Zones Board. Authorized by the Foreign Trade Zones Act of 1934 (the "Act"), Foreign Trade Zones are designed to increase the use of American labor and increase capital investment in the United States by allowing activity to occur in the United States prior to the application of U.S. customs laws, thereby equalizing the customs treatment of the activity with similar activities occurring offshore or overseas. Foreign trade zone operations are governed by the Act and regulations issued by the Department of commerce and the Department of the Treasury (collectively the "Regulations").

Types of Zones

Although not specifically referenced in the Act, two distinct types of zones have developed, and have been separately noted in proposed foreign trade zone regulations:

1. General Purpose Zone; A general purpose zone is, as the name suggests, the general zone site or sites established for multiple users.
2. Special Purpose Subzone; A special purpose subzone is a site ancillary to the general purpose zone which is given foreign trade zone status for the benefit of a particular user who cannot be accommodated at the general purpose zone site. Subzone status is commonly granted to existing manufacturing facilities, and because it is ancillary to an existing general purpose zone, does not require separate state enabling legislation.

Overview of Economic Benefits

A business operating in a foreign-trade zone may receive a number of economic benefits;

Duty Deferral

One of the primary benefits is duty deferral, the ability to avoid paying duties on imported merchandise until the merchandise leaves the foreign-trade zone and enters the commerce of the United States. Merchandise imported into and re-exported from a foreign-trade zone is not subject to duty.

Lower Duty Rates

Lower duty rates are also achievable through foreign-trade zones. As more fully discussed below, a foreign-trade zone user that assembles or manufactures in a zone may elect to pay duty on imported eomponents either at the duty rate applicable to the components or at the duty rate applicable to the finished product. U.S. added value is not subject to duty at all. In an inverted tariff situation, that is, a situation in which the duty rate on the finished product is lower than that on the imported components, the foreign-trade zone results in a lower overall duty to the foreign-trade zone user.

Quota Restrictions Avoidance

Quota restrictions generally may be avoided by admitting goods into a foreign-trade zone. Over-quota merchandise may usually be held in a zone until the next quota period begins, and may often be used as a component part of a product that is not over-quota. Similarly, some marking restrictions may also be avoided by bringing goods into a foreign-trade zone.

Export Savings

Domestic goods moved into a zone for export are treated as exported when they enter the zone; consequently, exporters may accelerate drawbacks by moving goods to be exported into a zone. Similarly, imported goods that are brought into a zone to be destroyed, such as defective products, are treated as exported and subject to drawback.

Tax and Licensing Savings

Some savings are also available through the avoidance of state or local laws that are inapplicable in a foreign trade zone because of federal preemption.

For example, state and local ad valorem tax on inventory is not applicable to foreign origin or foreign destination goods in a foreign-trade zone. Similarly, some state licensing requirements are not applicable to companies operating in a foreign-trade zone. See Specific Customs treatment of goods in a foreign-trade zone or see cost savings and benefits applicable to foreign-trade zone users.
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From: Tax and Financing Incentives-A Tribal Perspective (1993)

R. Chris Wyatt is the Director of The North American Free Trade Agreement Office (NAFTA) for Price-Waterhouse in Houston, Texas.
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