International Logistics: Tariffs
What is a Foreign Trade Zone (FTZ)?
A FTZ, also referred to as a "free zone", ''free port'' or ''bonded warehouse”, is an area located near a Customs port of entry that is considered outside Customs territory. Merchandise can enter an FTZ for storage, exhibition, assembly, manufacture, and processing, while bypassing duties and customs procedures. However, if the merchandise later enters a Customs territory for consumer use, the importer will be liable for any duties and taxes.
FTZs are the U.S. form of free trade zones. In America a foreign-trade zone is a designated site or area located in the U.S., licensed by the Foreign Trade Zones Board under the Secretary of Commerce, but legally recognized as outside of the customs territory of the United States. The public purpose is to increase the use of American labor and increase capital investment in the U.S., by allowing various commercial and industrial activities to be carried out on goods and products in the country prior to applying U.S. customs laws as is done in many other countries.
In practice, there is a General Purpose Zone where activities can be carried on by multiple users, and a Special Purpose Subzone which is established for a particular user frequently a manufacturing plant.
A business operating in a foreign trade zone may benefit from duty deferral by avoiding payment of duties, and federal excise tax, on imported merchandise until it is moved outside the zone only into regular commerce of the U.S. Lower duty rates may apply to certain kinds of finished products made in the zone from imported components that carry higher duty rates. Import quota restrictions that are based on certain time periods and limited import volume may be avoided by holding merchandise in a zone until restrictions are periodically lifted. Domestic goods moved into a zone may be considered exported although still held there, and this could be advantageous for exporters. Federal jurisdiction over foreign trade zones may help traders avoid various state and local taxes on merchandise inventory and licensing requirements.
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