Free Trade Zone
Free Trade Zone A designated geographic area where goods may be landed, stored, handled, manufactured, or reconfigured without being subject to import duties. Duties are only paid when goods leave the zone for domestic consumption.
Latest Update (February 2025)
The U.S. Foreign-Trade Zones Board has simplified reporting requirements for certain manufacturing operations, reducing administrative burden for zone users while maintaining oversight.
Read FTZ Board NoticeWhat It Means
A Free Trade Zone is like a tax holiday resort for your goods. It's a specially designated area—usually near ports or airports—where you can store, process, or even manufacture products without paying import duties or taxes. Think of it as a bubble where your merchandise isn't technically "in the country" yet for customs purposes, even though it's physically present. You only pay duties when (and if) you move goods from the zone into the domestic market.
Key Benefits
Duty Deferral
Postpone or eliminate duties by storing goods or re-exporting them without paying import taxes
Manufacturing Benefits
Use duty-free foreign components with domestic materials to create finished products
Reduced Time to Market
Store inventory closer to your customers without importing it until needed
Common FTZ Activities
Storage & Distribution
Storing imported inventory without duty payment until needed for domestic market or re-export
Assembly & Manufacturing
Combining domestic and foreign components into finished products with duty savings
Processing & Repackaging
Modifying, relabeling, or repackaging goods to meet local market requirements
Destruction & Waste Disposal
Eliminating defective merchandise without paying import duties on the scrapped goods
Did You Know: In the United States, there are approximately 250 FTZ projects with nearly 500 active operating locations, supporting over 460,000 American jobs.
Historical Timeline
FTZ Act Passed
U.S. Foreign-Trade Zones Act established during the Great Depression
First U.S. Zone
New York City established as the first authorized FTZ in the United States
Manufacturing Authorized
Boggs Amendment allowed manufacturing activities within zones
FTZ Board Regulations
Major overhaul of regulations to streamline zone establishment
Inverted Tariff Relief
Treasury Decision allowed duty reduction for finished goods vs. components
Customs Modernization
Enhanced automation and zone-to-zone transfers authorized
Alternative Site Framework
New framework made it faster and easier to designate FTZ sites
Production Reorganization
Streamlined process for manufacturing approvals introduced
Real-World Example
Case Study: Electronics Manufacturer Using an FTZ
Company Profile
TechAssembly Inc. manufactures electronic devices using a mix of imported components and domestic materials. The company established operations in a Foreign Trade Zone to optimize its international supply chain and reduce duty payments.
The Challenge: High Duty Costs
Before utilizing an FTZ, TechAssembly faced several challenges:
| Component | Annual Import Value | Duty Rate | Annual Duties Paid |
|---|---|---|---|
| Display Components | $15,000,000 | 4.5% | $675,000 |
| Semiconductor Chips | $25,000,000 | 25% (Section 301) | $6,250,000 |
| Circuit Boards | $10,000,000 | 2.6% | $260,000 |
| Total | $50,000,000 | - | $7,185,000 |
Cash Flow Impact
Duties had to be paid upon import, tying up cash before products were sold
Waste Factor
Duties paid on components that were later scrapped due to defects
Tariff Inversion
Finished products had a lower duty rate (2.1%) than some components (up to 25%)
FTZ Implementation
TechAssembly established operations in a nearby Foreign Trade Zone:
Subzone Application
- Applied for and received subzone status for manufacturing facility
- Obtained production authority for electronic devices
- Implemented inventory control system to track zone merchandise
- Trained staff on FTZ procedures and compliance requirements
Operational Changes
- Imported components entered directly into the FTZ without duty payment
- Combined imported components with domestic materials in the zone
- Weekly entry filing replaced individual shipment entries
- Elected to pay duty on finished products instead of components
- Established procedures for direct delivery to streamline receipts
Results & Benefits
Duty Savings: $4.2 million annually through inverted tariff relief (paying the lower 2.1% duty on finished goods vs. component rates)
Cash Flow Benefit: $1.7 million in improved cash flow from duty deferral, with duties only paid when products entered domestic market
Scrap Savings: $385,000 saved annually on duties for defective components that were scrapped in the zone
Operational Efficiency: 85% reduction in customs entries through weekly entry filing, reducing administrative costs by $120,000 annually
Export Growth: 22% increase in exports due to improved cost position in international markets, with no duties paid on components used in exported products
Total Annual Benefit: $6.4 million in direct savings and improved cash flow, offset by $250,000 in annual FTZ operational costs
Implementation Challenges
- Initial Setup Costs: $180,000 investment in application fees, consulting services, and inventory system upgrades
- Compliance Learning Curve: Staff required extensive training on FTZ procedures and record-keeping requirements
- System Integration: Needed to modify ERP system to track zone status of inventory
- Audit Preparation: Established more rigorous internal controls to ensure compliance during customs audits
- Production Authority: Production authorization process took 10 months to complete
Key Lessons
Cost-Benefit Analysis
FTZ benefits vary significantly by industry and import profile. Companies should conduct thorough cost-benefit analysis before proceeding.
Long-Term Commitment
FTZ implementation requires significant initial investment in time and resources, but can provide substantial ongoing benefits that accumulate over time.
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