Foreign Trade Zone FAQs
Why do companies use foreign trade zones?
To maintain the cost competitiveness of their U.S.-based operations vis-a-vis their foreign-based competitors. For a company, zone status provides an opportunity to reduce certain operating costs associated with a U.S. location that are avoided when operating from a foreign site.
How does the zones program fit within the economic development efforts of the various states?
The zones program is a federal program. The underlying authority to approve the creation of a foreign trade zone resides with the federal government. However, every state has enabling legislating providing statutory authority for the establishment of foreign trade zones in each state. The creation and development of individual zone projects typically results from a combination of interests generated by both the private and public sectors. The Foreign Trade Zone Board staff members advise zone organizers to integrate the zone project into the state or local area's overall economic development strategy rather than segmenting the zone as an individual development effort. This way, foreign trade zones complement other state and local incentives that are incorporated into the overall efforts of a community to maintain their attractiveness as a business location.
Is zone status more beneficial to foreign-owned companies as compared to American-owned companies?
The benefit of zone use is determined by the location of the company's operations in the United States, not by its ownership. If an American-owned company and a foreign-owned company have identical trade operations, the potential benefit of the U.S. Foreign Trade Zones program for each of tem will be identical. The U.S. foreign trade zone program encourages investment and production in the United States that might otherwise take place in another country.
Does the cost reduction feature of zone status translate into an import subsidy or a cause of imports?
No. Zones do not cause imports. In fact, the reverse is true. The increasing importance of international trade in the U.S. economy has caused an increase in the use of zones. Periodically, oversight agencies including the International Trade Commission and the General Accounting Office examine the impact of the U.S. Foreign Trade Zones program. Congress has also held hearings on the subject. These periodic studies and reviews have not produced any information leading the conclusion that zones cause imports. The decision to import precedes the decision to use zones.
Decisions about where to source various products and inputs is motivated by one or a combination of factors including: price, quality, and product availability. The "cost reduction feature" of zones relates to the cost of conducting business operations in the United States (distribution, manufacturing, and other non-manufacturing activities) that otherwise would be avoided by conducting these operations at a foreign site.
How do zones "expedite and encourage" direct foreign investment in the United States?
The United States welcomes foreign investment but does nothing to overtly attract or discourage it. Through the policy of "National Treatment," foreign investors are offered the same conditions, rights and benefits associated with investing in the United States as an American investor can expect to receive. In keeping with this policy, zones encourage foreign and domestic investment by removing a tariff bias that unintentionally discourages investment in the U.S. and encourages supplying the U.S. market from off-shore.
Are there any practical or economic limits to the number and uses of zones?
For the foreseeable future, there are no economic limits to the use of zones. As the U.S. economy becomes even more internationalized and as markets become more globally homogenous, the operational flexibility and other benefits for which zones are used will motivate a commensurate increase in zone use.
Is the maintenance of the foreign trade zone program costly to the U.S.?
The establishment and maintenance of foreign trade zones require a minimal expenditure of federal tax dollars. The cost of processing applications by the Foreign Trade Zones Board is offset by application fees and the cost of processing foreign trade zone merchandise by the Bureau of Customs and Border Protection is offset by merchandise processing fees. Therefore, foreign trade zones area self-sustaining tool of international commerce offering significant benefits to U.S. industry and aiding the U.S. balance of trade.
How long does it take for an application to be processed by the board after it has been submitted?
Generally, it takes nine months to a year for an application to be approved.
What are the differences between free zones, export processing zones, enterprise zones, duty-free shops and U.S. foreign trade zones?
Free Zones - Allow merchandise to enter an area for storage and to be exported or entered into the host country.
Export Processing Zone (EZP) - EZPs are duty-free zones dedicated to manufacturing for export. No customs duties are charged for entry of raw materials, components, machinery, equipment and supplies used to produce manufactured goods provided these are then exported.
Enterprise Zones - Encourage new industrial and commercial activity in economically depressed areas by removing most zoning, taxation, and federal and local business regulations from carefully defined districts.
Duty-Free Shops - Retail shops, usually at airport or border locations, where an importer has brought in certain items for resale to travelers, who then take these goods out of the country, without either being required by the host country to pay taxes and duties, or paying less tax and duty than importers selling the merchandise domestically.
U.S. Foreign Trade Zones - Are treated, for the purpose of the tariff laws and Customs entry procedures, as being outside the Customs Territory of the United States. Under foreign trade zone procedures, foreign and domestic merchandise may be admitted into zones for operations such as storage, exhibition, assembly, manufacture and processing, without being subject to formal Customs entry procedures, the payment of Customs duties or the payment of federal excise taxes. When merchandise is removed from a foreign trade zone, Customs duties may be eliminated if the goods are then exported from the United States. If the merchandise is formally entered into U.S. Commerce, Customs duties and excise taxes are due at the time of transfer from the foreign trade zone.