Businesses that import goods from around the world face a wide range of trade challenges, from navigating pandemic disruptions and capacity constraints to dealing with uncertainties about foreign policy and tariffs. When looking to keep goods moving across borders while staying compliant, it’s worth considering the benefits of a Foreign Trade Zone (FTZ).
A Foreign Trade Zone, or FTZ, is a physical, secure area within the US, often located in or adjacent to a Port of Entry. An FTZ is considered outside of the Customs territory of the United States, and thus items stored within one are not subject to customs duties while they remain there.
FTZs have been around since 1934, when they were originally conceived as a way to expand international trade and boost our economy. Importers do not immediately have to pay customs duties on items imported into an FTZ, and within an FTZ businesses are permitted to perform selected activities, including assembling, consolidating, testing, processing, repackaging, and more.
Importers that use an FTZ can gain a measure of control during market instability, address shifting consumer demand and buying patterns and roll with changes in trade policies. FTZs can help shippers improve margins, lower inventory carrying costs, and simplify and streamline customs procedures. In addition, with fewer or deferred customs duties and related import fees and taxes, your business may also save money.
Within an FTZ, shipments can be grouped into weekly “consolidated” customs entries, enabling an importer to avoid multiple processing fees for shipments imported into the zone, then ultimately entered into US Commerce, during a one-week period. That can mean less paperwork and cost for your business.
Deferred or Reduced Customs Duties
Upon arrival in the US, importers can arrange for their goods to be brought directly to their designated FTZ, where they may assemble, test, or even destroy the items without paying customs duties. Importers are not obligated to pay duties until their items are sold or leave the FTZ to enter the country.
In addition, companies can store imported items in FTZ warehouses indefinitely, allowing them to defer customs duties and/or spread them out over a time period while still keeping merchandise close and accessible. For example, a clothing company may import several containers’ worth of product, but only bring in as much as they need to stock shelves for a month or less. Rather than paying the full duties on all of the items upon arrival, which could be a big hit to their budget, the company only has to pay duties on the items when they are removed from the zone and brought into the US.
FTZs can be helpful for healthcare companies in particular, as items stored within them do not have to have FDA approval upon entering the Zone. Therefore, companies with not-yet-approved products can store them in anticipation of approval to ensure that they’re ready to quickly go to market once the FDA gives them the go ahead.
Reclassification for Reduced Duties
In some instances, items that are assembled or kitted within a Zone after arrival may result in a new tariff classification with a lower duty rate upon entering the country. For example, a tech company may import hundreds of parts used to make a computer. Rather than paying duty on each individual part, the manufacturer can have them imported to an FTZ first, where workers can assemble the computer, which is then imported into the US as a single item with its own, often lower, duty rate.
And in addition, items bound for other countries can be stored and transported via FTZs without the shipper having to pay US duties on them. An example of this is car manufacturers, who often import parts from different countries and then export them to yet another country, for example, Mexico, for assembly. While the parts are collected and consolidated in the FTZ, the manufacturers are not obligated to pay import duties on them, as they are not technically on “US soil”.
So how do you know if establishing and running an FTZ is the best strategy for your company? Conducting a feasibility study will provide a cost benefit analysis. Doing so also evaluates if a company has the proper security and inventory, as well as the experience to manage and administer its own FTZ.
The process of setting up an FTZ within an organization can take six months or more when factoring in system integration. The project touches IT systems, inventory, compliance and of course, requires approval from U.S. Customs and Border Protection. A third-party logistics (3PL) company with FTZ experience can help guide your business through this comprehensive process.
The trade landscape and global markets are always changing, and no one can say for sure exactly when and how global trade might shift. An FTZ can help create consistencies in an era of constant change. So if you’re an importer, don’t overlook an FTZ program as a key component of your strategy.
UPS offers a variety of FTZ consulting and management services to help your business get started with an FTZ. With UPS Zone Solutions, companies can leverage a solution that is designed to integrate with other offerings, including freight, warehousing, and brokerage services. Tap into our network of UPS gateways, nationwide warehouses, and knowledgeable staff to support your FTZ operations.