Foreign Trade Zones and Why They Matter in Site Selection

A key tool that has given businesses a competitive edge is the Foreign Trade Zone (FTZ). FTZs are specialized areas within the U.S. that allow companies to import, store, or process goods without paying customs duties or taxes until those goods enter the domestic market. This feature makes FTZs particularly valuable for managing cash flow, reducing operational costs, and staying competitive in an unpredictable trade environment.

What are Foreign Trade Zones?

An FTZ is a designated area within the United States where companies can import, store, process, or assemble goods without immediately incurring customs duties or taxes. The duties only apply when goods leave the FTZ and enter the U.S. domestic market. The government established these zones to promote international trade, reduce costs for businesses, and boost local economies. Companies operating within FTZs can store, assemble or even manufacture products without triggering fees or taxes until they decide to bring the goods into the U.S. market.

According to the National Association of Foreign-Trade Zones, there are 197 active FTZs in the United States. FTZs are required to be within 60 miles of a port of entry and can range in size from a small area around a port to a multi-county region or even an entire state, as is the case for Delaware and Rhode Island. It’s important to distinguish between FTZ regions and the specific sites or parks within these regions. An FTZ region refers to a geographical area designated for special customs treatment. Within these FTZ regions, businesses operate in specific sites or parks, which are the physical locations where companies store, process, or assemble goods. These sites can include warehouses, industrial parks, or manufacturing plants. While the FTZ region provides the legal framework for duty deferral and customs flexibility, the sites/parks within the FTZ house the day-to-day operations.

The two types of FTZs

There are two types of FTZs: General-Purpose FTZs and Special-Purpose FTZs (often called subzones). General-purpose zones are the most common. These zones are utilized mostly by companies needing warehousing and storage space in both the short- and long-term. On the other hand, subzones can serve companies whose needs exceed what a general-purpose FTZ can offer, and they are typically granted to businesses operating outside of a general-purpose FTZ area. 

How do FTZs work?

When a business imports goods into an FTZ, the government treats those goods as if they are outside the U.S. customs territory. This allows companies to store or process the goods without paying duties until they move into the U.S. market. If the company re-exports the goods, it won’t incur any duties at all. The process works like this:

• Importing Goods: The company imports goods into the FTZ.
• Storage/Processing: The company stores, processes, or assembles the goods in the FTZ without incurring duties.
• Exporting: If the company exports the goods, it pays no duties.
• Entering the U.S. Market: If the company brings the goods into the domestic market, the government applies duties based on the finished product, not on individual components.

Foreign Trade Zone management

The Foreign-Trade Zones Board (FTZ Board), part of the U.S. Department of Commerce, oversees the creation and management of FTZs. Local authorities such as port authorities, economic development organizations, or private entities manage FTZs. These authorities guide businesses through the application process, ensure compliance with federal regulations, and promote the zones to potential tenants. The management of FTZs plays a crucial role in making these zones an attractive option for businesses seeking to optimize their supply chains.

Key benefits of Foreign Trade Zones

Operating in an FTZ offers a range of advantages for businesses, especially in today’s uncertain global trade environment:

• Duty Deferral: Businesses can defer paying customs duties until goods enter the U.S. market. If goods are re-exported, no duties are owed. 
• Inverted Tariff: FTZs allow manufacturers to minimize costs by giving them the option to pay duties on either the finished product or the individual components, whichever results in a lower cost. This is known as an inverted tariff. 
• Increased Efficiency: FTZs streamline operations by allowing businesses to store, process, and manufacture products without the immediate concern of customs clearance. This reduces shipping and storage costs.
• Access to Global Markets: FTZs facilitate smoother international trade by simplifying imports and exports, allowing businesses to tap into global supply chains more efficiently.
• Improved Cash Flow: By deferring duties, businesses can free up capital for reinvestment in other areas of their operations.

What companies should know when selecting an FTZ

Foreign Trade Zones are best suited for companies involved in international trade — particularly those that import raw materials or components for assembly and re-export. When selecting an FTZ, companies should carefully consider several factors to optimize their location and supply-chain strategy:

• Location is Key: Proximity to ports, airports, and other trade hubs is crucial for reducing shipping times and costs. The ease of access to global trade routes and local markets should be prioritized.
• Regulatory Compliance: Companies must work closely with local authorities to ensure compliance with the specific regulations governing customs, security, and recordkeeping within the FTZ.
• Cost Considerations: While FTZs provide many advantages, they also come with administrative fees, security expenses, and operational costs. Companies should factor these into their decision-making process.
• Choosing the Right FTZ: Not all FTZs offer the same benefits. It’s important to select a zone that aligns with a company’s needs in terms of location, industry and the type of trade operations they conduct.

Conclusion

Foreign Trade Zones are more than just a tool for managing tariffs — they’re a strategic asset for businesses seeking to enhance their competitiveness in the global marketplace. By offering duty deferral, cost savings, and greater flexibility, FTZs allow companies to streamline their operations and safeguard against trade uncertainties. For regions and companies considering expansion, a thorough understanding of FTZ benefits and considerations is essential for making informed decisions that will benefit the business long term.

In today’s ever-evolving trade environment, establishing operations in an FTZ could be the key to maintaining a competitive edge, managing risk, and optimizing global supply chains. Whether you're a startup expanding internationally or an established business exploring new opportunities, FTZs offer a pathway to cost efficiency, increased cash flow, and better access to the global market.