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Supply Chain Disruptions Drive New Uses for Foreign Trade Zones (FTZ)

by Mary Rooney | Nov 02, 2022

Article from Logistics Management

The U.S. Foreign Trade Zone (FTZ) program, originally created during the Great Depression (1934), was established by Congress to meet tariff challenges faced by U.S. importers in order to help level the global playing field and support competitiveness of companies employing U.S. workers. Today, more and more firms are using the program to address supply chain issues and economic factors.

The foundation of the program is based on the concept that a zone is created around a facility that establishes the location to be outside of U.S. commerce. As such, goods from both domestic and foreign suppliers can be brought into a facility, and there is no duty paid on the goods sourced from non-U.S. locations until those goods are removed from the zone destined for a location within U.S. commerce.

Basis of the FTZ program
The facility must have stringent inventory controls in place to receive such benefits and ensure the proper duties are in fact paid upon removal from the FTZ.

Once approved and activated, FTZ facilities receive a variety of benefits, including deferral of duty payments and elimination of duty in certain circumstances. Lesser-known aspects of the program also make it possible to manage things like quotas, as well as improve supply chain velocity through direct delivery.

Duty deferral: Import duties on goods made or stored in an FTZ aren’t paid until the goods are shipped to a location in the United States. This means companies can defer the payment of duties until the merchandise is sold, matching expense with revenue. This is a major benefit for both manufacturing and distribution companies, especially those subject to anti-dumping, Section 301, or Section 232 additional tariffs on their imported merchandise.

Duty elimination on exports: Because the FTZ is outside U.S. commerce, finished goods brought into a warehouse operating as an FTZ can be exported to any country without paying any U.S. Customs duties or fees. Warehouses established as FTZs in the United States, employing U.S. workers, can then be used to house goods for all North America and beyond.

Imported components that are manufactured into finished goods in an FTZ can also be exported outside of North America without paying any U.S. Customs duties or fees. In fact, FTZs are the only way a U.S. factory can avoid paying anti-dumping, section 301, or section 232 additional Customs duties on their merchandise for export.

Duty elimination option for destruction: Imported goods must sometimes be destroyed, and their commercial value is never realized. Paying duty on such goods and then proving the destruction for drawback is time consuming, and the opportunity cost of those duties is potentially high.

If instead, those goods are brought into a zone in foreign status and then later destroyed inside the zone, no duties are ever paid. Also, if goods are found to be of lesser quality or can’t be sold as planned and must be sold for a scrap value rather than the original value, duty can be paid at the lower value instead of the full import value with proof of the value reduction.

Managing quotas: More recently, U.S. importers have seen an increase in the use of quotas and tariff rate quotas to limit imports of certain commodities. FTZs can help mitigate this supply chain challenge as well.

Direct delivery and speed to market: One lesser-known benefit of FTZs is about supply chain speed rather than duty mitigation, and that is something called direct delivery. Direct delivery is an FTZ privilege that may be granted by Customs and Border Protection (CBP) to allow zone operators to move goods immediately from the port of unlading directly to the zone using in-bond procedures.

Evaluating FTZs
Unlike economic zones or free zones of other countries, a U.S. foreign trade zone does not require a company to move operations to a designated facility to achieve these savings. Companies can activate their existing facility if it meets the right requirements. For any company importing goods into the United States, it is worth the time to review the benefits of the FTZ program

Read the full article from Logistics Management.

Learn more about the Greater Kansas City Foreign Trade Zone.

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