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  • Business Law Section Blog
    February
    05
    2020

    Improving Global Competitiveness with Foreign Trade Zone Programs

    Ngosong Fonkem

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    Many U.S. companies may be unaware of the cost savings and other benefits from taking advantage of foreign trade zone programs. Ngosong Fonkem discusses how the programs can be an effective strategy for companies seeking to adapt to ever-changing trade environment.

    Many companies, especially small and medium size businesses, may be unaware of the sizable cost savings and other benefits they can gain from by taking advantage of U.S. foreign trade zone (FTZ) programs.

    What are Foreign Trade Zones?

    FTZs and subzones are dedicated areas where goods can land, be repackaged, modified, manipulated, relabeled, manufactured further, and re-exported without paying U.S. custom duties. In short, goods imported into FTZs or subzones are treated as being offshores – or in other words, outside the United States. Even though the goods are technically imported into the U.S., they are treated as though they were never brought into the United States’ jurisdiction.

    Ngosong Fonkem com ngosongf addison-clifton Ngosong Fonkem, West Virginia University 2011 (JD, MBA) and Tulane 2012 (LLM), is an international trade attorney with Page Fura PC, Chicago. He assists U.S. and foreign companies in compliance with U.S. trade laws.

    According to the United States Department of Commerce (DOC) International Trade Administration (ITA), “an FTZ helps encourage U.S. activity and value added – in competition with foreign alternatives – by allowing delayed or reduced duty payments on foreign merchandise, as well as other savings.”1

    It is especially useful to companies that import components to manufacture finished products for export where components can be substantially transformed through manufacturing or assembly operations into a new or finished product with a new HTS code – and in some cases, reduce the duty impact of the product.

    According to a 2017 report by the DOC’s Foreign Trade Zones Board (FTZB), approximately $669 billion worth of both foreign and domestic material entered into FTZ, and about $87 billion was exported from them.2

    Benefits of Using Foreign Trade Zones

    Not only are reduced duties an added benefit of an FTZ, using these zones can also significantly reduce costs from customs duties, and tariffs, and minimize bureaucratic regulations. Thus, an FTZ program can improve a company’s global market competitiveness.

    Since an FTZ is considered outside the commerce of the U.S., it can also be used to take advantage of crossdocking and transferring goods from one FTZ to another without paying customs duties. Many U.S. companies now employ this strategy.

    To take advantage of an FTZ, companies need to track their inventory, trace manufacturing and production orders, determine whether materials came from domestic or international sources, and classify goods for duty deferrals or reductions.

    Implications of Sections 301 and 232 Tariffs

    Although FTZs can significantly reduce costs, due to recent U.S. trade action against China, certain provisions in the Section 301 tariff3 may require payment on the value of the Chinese components, whether or not the product was transformed into a finished good in an FTZ.4

    Thus, even if products are shipped from the zone directly to Mexico or Canada, the China tariffs may still apply due to NAFTA rule (USMCA), unless the products are exempted.

    Similarly, with regard to Section 232 tariffs, all products previously admitted as privileged foreign status5 in an FTZ – that remains in the FTZ and is not withdrawn for consumption until after the tariffs go into effect – are subject to additional duties.6

    Regardless of these narrow exceptions brought by Section 301 retaliation and Section 232 tariffs, an FTZ remains a legal means to mitigate and reduce business costs.

    How Obtain an FTZ Designation

    Obtaining an FTZ or subzone designation in the U.S. is a four-step process:

    1) The interested corporation (also known as the “operator” when granted an FTZ) must submit a written statement of need of services to the FTZ Grantee (an FTZ Grantee is the corporate recipient of a grant of authority for a zone project).
    2) Upon the FTZ Grantee’s affirmation of the need for an FTZ, the FTZ Grantee shall apply for an FTZ with the FTZ Board (FTZB) at the U.S. Department of Commerce International Trade Administration.7
    3) If the proposed FTZ involves production8 activities, the FTZB shall require that the interested company provide additional information by submitting a production application.9
    4) Upon approval of FTZ designation by the FTZB, the operator must then request FTZ Activation10 from its local U.S. Custom and Border Protection (CBP). FTZ procedures cannot begin at the facility until it is activated by CBP.

    Conclusion: Benefits Can Be Significant

    The benefits to U.S. companies implementing an FTZ program are significant. It is not only a solution to companies losing additional money to tariffs, but also a strategy to adapt to ever-changing trade environment.

    Endnotes

    1 See enforcement.trade.gov.

    2 79th Annual Report of the Foreign-Trade Zones Board to the Congress of the United States (2017).

    3 See Federal Register 83 FR 28710.

    4 See Section 301 Trade Remedies Frequently Asked Questions, and “Foreign Trade Zones” in the U.S. Customs and Border Protection Update: Sec. 301 Trade Remedies to be Assessed on Certain Products from China 7/6/18.

    5 See definition of “Privileged Foreign (PF) Status” in the U.S. FTZB Enforcement and Compliance Glossary of FTZ Terms.

    6 See Proclamation on Adjusting Imports of Derivative Aluminum Articles and Derivative Steel Articles into the United States.

    7 See Video: Fundamentals of Using a Foreign-Trade Zone.

    8 See definition of “Production” in the U.S. FTZB Enforcement and Compliance Glossary of FTZ Terms (15 CFR 400.2(o)).

    9 See The ABCs of Production in FTZs.

    10 See definition of “Activation” in the U.S. FTZB Enforcement and Compliance Glossary of FTZ Terms.





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