Introduction to Foreign Trade Zone - FTZ Procedures

Foreign Trade Zones or FTZ's, as they are often referred to, are secure areas under U.S. Customs supervision that are generally considered outside the Customs territory upon activation. Located in or near U.S. Customs ports of entry, a foreign trade zone (FTZ) is the United States version of what are known internationally as free-trade zones.

Authority for establishing these facilities is granted by the Foreign Trade Zone Board under the Foreign Trade Zones Act of 1934, as amended (19 U.S.C. 81a-81u).  The Executive Secretariat of the Board is located within the Import Administration of the US Department of Commerce, Washington, DC.

Foreign and domestic merchandise may be moved into an FTZ for operations, not otherwise prohibited by law, including storage, exhibition, assembly, manufacturing, and processing. All FTZ activity is subject to public interest review. Foreign trade zone sites are subject to the laws and regulations of the United States as well as those of the states and communities in which they are located.

Under foreign trade zone procedures, the usual formal Customs entry procedures and payments of duties are not required on the foreign merchandise unless and until it enters Customs territory for domestic consumption, at which point the importer generally has the choice of paying duties at the rate of either the original foreign materials or the finished product. Domestic goods moved into the zone for export may be considered exported upon admission to the zone for purposes of excise tax rebates and drawback.

Foreign trade zones are sponsored by qualified public or private corporations, which may operate the facilities or contract for the operation by public or private firms. The operations are conducted on a public utility basis, with published rates. A typical general-purpose FTZ provides lease storage/distribution space to users in general warehouse-type buildings with access to various modes of transportation. Many foreign trade zone projects include an industrial park site with lots on which zone users can construct their own facilities.

Subzones are normally private plant sites authorized by the Board and sponsored by a grantee for operations that usually cannot be accommodated within an existing general-purpose zone.

The Advantages of Using a Foreign Trade Zone

Customs duty and internal revenue tax, if applicable, are paid when the merchandise is transferred from the FTZ for consumption.  While in the zone, merchandise is not subject to U.S. duty or excise tax. Certain tangible personal property is generally exempt from state and local ad valorem taxes.

  • Goods may be exported from the zone free of duty and excise tax.
  • Customs security requirements provide protection against theft.
  • Merchandise may remain in a zone indefinitely, whether or not subject to duty.

The rate of duty and tax on the merchandise admitted to a zone may change as a result of operations conducted within the zone. Therefore, the foreign trade zone user who plans to enter the merchandise for consumption to the Customs territory may normally elect to pay either the duty rate applicable on the foreign material placed in the zone or the duty rate applicable on the finished article transferred from the zone whichever is to his advantage.

Merchandise imported under bond may be admitted to a FTZ for the purpose of satisfying a legal requirement of exporting the merchandise. For instance, merchandise may be admitted into a zone to satisfy any exportation requirement of the Tariff Act of 1930, or an exportation requirement of any other Federal law (and many state laws) insofar as the agency charged with its enforcement deems it so.

Establishing a Foreign Trade Zone

The Foreign Trade Zones Act of 1934 created a Foreign Trade Zone Board to review and approve applications to establish, operate, and maintain Foreign Trade Zones. The Board may approve any zone or subzone which it deems necessary to serve adequately "the public interest".  The Board also regulates the administration of foreign trade zones and the rates charged by FTZ "grantees".

The U.S. Customs Service must approve activation of the zone before any merchandise is admitted under the FTZ Act.

It is the intent of the U.S. foreign trade zone program to stimulate economic growth and development in the United States. In an expanding global marketplace there is increased competition among nations for jobs, industry, and capital. The FTZ program was designed to promote American competitiveness by encouraging companies to maintain and expand their operations in the U.S..

The FTZ program encourages U.S.-based operations by removing certain disincentives associated with manufacturing in the United States. The duty on a product manufactured abroad and imported into the U.S. is assessed on the finished product rather than on its individual parts, materials, or components. The U.S. based manufacturer finds itself at a disadvantage compared with its foreign competitor when it must pay a higher rate on parts, materials, or components imported for use in a manufacturing process. The FTZ program corrects this imbalance by treating products made in the zone, for the purpose of tariff assessment, as if it were manufactured abroad. At the same time, this country benefits because the zone manufacturer uses U.S. labor, services, and inputs.

Role of The U.S. Customs Service Regarding An FTZ

The United States Customs Service is responsible for the transfer of merchandise into and out of the FTZ and for matters involving the collection of revenue. The Office of Regulations and Rulings at Customs Headquarters provides legal interpretations of the applicable statute, Customs Regulations and procedures.

The port director of Customs in whose port a zone is located is charged with overseeing zone activity as the local representative of the Foreign Trade Zone Board. He controls the admission of merchandise into the zone, the handling and disposition of merchandise in the zone, and the removal of merchandise from the zone. In addition to the FTZ Act, he enforces all laws normally enforced by the Customs Service that are relevant to a foreign trade zone.

Zones are supervised by U.S. Customs officers through periodic checks and visits; the security of the zone must meet certain requirements.

What may be placed in a foreign trade zone?

Any foreign or domestic merchandise not prohibited by law or other exception listed below, whether dutiable or not, may be taken into a foreign trade zone.

Merchandise which lawfully cannot be imported into the United States is prohibited without exception. Furthermore, a quota on importation cannot be circumvented by placing merchandise subject to such quota into a zone.

On the other hand, merchandise for which a quota is filled or for which a quota on entry is established, may be placed into a zone until the quota opens or is removed since foreign trade zones are considered outside the Customs territory for entry purposes. Such products, with the exception of certain textiles (19 CFR 146.63(d)), may be manipulated or manufactured while in the zone into a product not subject to quota.

Some Federal agencies regulate storage and handling in the United States of certain types of merchandise, such as explosives. Depending on the nature of the requirements and the particular characteristics of the zone facility, such merchandise may be excluded. Moreover, agencies which license importers or issue importation permits may block admissions to a zone which are not properly licensed or permitted.

The Foreign Trade Zone Board may exclude from a zone any merchandise that is in its judgment detrimental to the public interest, health, or safety. The Board may place restrictions on certain types of merchandise which would limit the zone status allowed, the kind of operation on the merchandise in a zone, the entry of the merchandise into the commerce, or similar transactions or activities.

What may be done in an FTZ?

Foreign and domestic merchandise permitted in an FTZ may be stored, sold, exhibited, broken up, repackaged, assembled, distributed, sorted, graded, cleaned, mixed with foreign or domestic merchandise, otherwise manipulated, destroyed, or manufactured, without being subject to U.S. Customs laws for entry and other purposes. All manufacturing is reviewed by the Board in terms of trade policy and net economic effect.

Many products subject to an internal revenue tax may not be manufactured in a zone. These products include alcoholic beverages, products containing alcoholic beverages except domestic denatures distilled spirits, perfumes containing alcohol, tobacco products, firearms, and sugar. In addition, the manufacture of clock and watch movements is not permitted in a zone.

No retail trade of foreign merchandise may be conducted in a FTZ. However, foreign and domestic merchandise may be stored, examined, sampled, and exhibited.

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Entering merchandise from a foreign trade zone
into the United States for consumption

The entry, classification, and appraisement of merchandise transferred from a foreign trade zone is affected by the "status" of the merchandise.

Privileged foreign status

Prior to any manipulation or manufacture which would change its tariff classification, an importer may apply to the port director to have imported merchandise in the zone given privileged foreign status. The merchandise is classified and appraised and duties and taxes are determined as of the date the application is filed. When such merchandise is transferred from the zone for U.S. consumption, either in its original state or after manipulation or manufacture the applicable duties and taxes would be paid based on the rate established when foreign privileged status was granted.

Zone restricted status

Merchandise transferred to a zone from the Customs territory for storage or for the purpose of satisfying a legal requirement for exportation or destruction is considered exported and cannot be returned to the customs territory for consumption unless the Foreign Trade Zones Board rules that it's return is in the public interest. The Status of merchandise transferred to a zone under these circumstances is "zone restricted." Zone restricted merchandise may not be manipulated, except to destroy it, or manufactured in a zone. As in the case of privileged status, the zone user must apply for zone restricted status on the appropriate Customs form.

Non-privileged foreign status

Non-privileged foreign status is a residual category for merchandise which does not have privileged or zone restricted status. Articles composed entirely of or derived entirely of non-privileged merchandise are classified and appraised in their condition at the time of transfer into the Customs territory for consumption or for Customs bonded warehousing.

Domestic status

Domestic status, which may be approved upon application to the port director, is available for merchandise which is (a) the growth, product, or manufacture of the United States on which all internal revenue taxes, if applicable , have been paid, (b) previously imported merchandise on which all internal revenue taxes have been paid, or (c) merchandise previously admitted free of duty. Domestic merchandise may be admitted to a zone without a Custom permit, and also removed from a zone without a Customs permit if it has not been combined with any other merchandise of any other status.

Articles of mixed status

Since manipulation and manufacture generally are permitted in a zone, articles transferred to the Customs territory may be composed in part of, or derived in part from, merchandise that is privileged and non-privileged, whether foreign and/or domestic. The articles are appraised according to the status of the merchandise of which they are composed or from which they were derived as explained above. Additionally, foreign merchandise, subject to specified custom controls and conditions, may be temporarily removed from a zone without formal entry for the performance of certain limited operations and thereafter returned in the same zone status to the zone from which it is removed. This procedure is designed to remove unnecessary burdens on zone inventory and accounting procedures where, in doing so, there is no danger to the revenue.

Additional information is available from The Executive Secretariat of the Board is located in the:
U.S. Department of Commerce
Washington, D.C. 20230
Phone: (202) 482-2862.
The Customs Regulations, 19 CFR Part 146, govern the transfer of merchandise to and from foreign-trade zones. For answers to specific questions contact the port director of the Customs port where the zone is located or the headquarters at:
U.S. Customs Service
Office of Trade Compliance & Facilitation
Ronald Reagan Building
1300 Pennsylvania Avenue, NW Room 5.2B
Washington, D.C. 20229

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