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Foreign Trade Zones

Foreign Trade Zones


The Transportation Newsletter
(July 1, 2011)

Benefits for Manufacturers and Distributors

The Foreign Trade Zone program was created to promote American competitiveness by encouraging companies to maintain and expand their operations in the United States. Upon activation, the U.S. Foreign Trade Zones (FTZs) are considered to be outside of U.S. Customs Territory for the purpose of customs and duty payment. The special customs treatment available in the FTZ’s helps offset customs advantages available to overseas producers. Currently there are 250 communities in the United States which have FTZs.

There are several misconceptions associated with FTZs. They are considered a new creature associated with globalized trade and are considered to be entity useful only for large multinational manufacturers.
The U.S. FTZ program was created by the Foreign-Trade Zones Act* in 1934. Although, admittedly, most FTZ’s are created by large petroleum refining industries, the automotive, electronic, and pharmaceutical sectors, they can also be beneficial for distribution companies and businesses which require more extensive warehousing.

Different Types Of FTZs

There are different types of FTZs – general purpose zones and subzones. The general zones are typically sponsored by port authorities and local governments and are an excellent resource for small and medium sized businesses which can enter in an agreement with the general FTZ for the purposes of warehousing, distribution, and some limited processing. In this case, the application is filed with the grantor of the general-purpose zone and does not require complex administrative approval, as is necessary for the creation of the subzones.
The subzones are sponsored by the general FTZ and are special purpose sites used by one company for a limited purpose. Although the subzones are typically are created for manufacturing purposes, there are special application guidelines available for Distribution Subzones. The application fee for a non-manufacturing subzone or manufacturing subzone with less than three products is $4,000.
Usually, but not exclusively, large companies are grantees of subzones. For example, in Kentucky at the general FTZ No.29 in Louisville, companies like, for example, Ford, GE, Lexmark, Toyota, and Hitachi have created their FTZ subzone. However, the decision to create the subzone should be made based on the cost analysis. It is generally believed in the industry that estimated duty savings must be at least $100,000 per year for the subzone to be worth the company’s efforts.

Some Advantages Of Using The FTZ

Generally, the benefits associated with the FTZ include :

  • Merchandise may remain in a zone indefinitely, whether or not subject to duty.
    CBP duty and federal excise tax, if applicable, are paid when the merchandise is transferred from the zone for consumption.
  • Goods may be exported from the zone Foreign of duty and excise tax.
  • The rate of duty and tax on the merchandise admitted to a zone may change as a result of operations conducted within the zone. Therefore, the zone user who plans to enter the merchandise for consumption to CBP territory may normally elect to pay either the duty rate applicable on the foreign material placed in the zone or the duty rate applicable on the finished article transferred from the zone whichever is to its advantage.
  • Merchandise imported under bond may be admitted to a FTZ for the purpose of satisfying a legal requirement of exporting the merchandise. For instance, merchandise may be admitted into a zone to satisfy any exportation requirement of the Tariff Act of 1930, or an exportation requirement of any other Federal law (and many state laws) insofar as the agency charged with its enforcement deems it so.

The Application Process

The application process for the subzone may be lengthy and typical estimates are 10-12 months before the decision is rendered by the Foreign Trade Zone Board. The application can be put on the fast track review but even then 6-8 months may be an optimistic estimate. The applications are reviewed faster if meticulously prepared and there no case issues arise. For example, a protest by the applicant’s competitors after the application is published in a local newspaper describing the proposal may substantially delay or impede the application.

As such, the FTZ Board recommends submitting a draft of the application first. As such, the steps in the procedure as outlined on the FTZ Board website are:

Draft. We recommend that you submit a draft of an application first. The FTZ staff will review the draft and let you know if any information is missing. This can speed up the filing and processing of the application later.

Filing. When an application is filed by the FTZ staff, it is assigned a “docket number” and notice is published in the Federal Register for public comment on the proposal. The public comment period usually lasts 60 days (30 days for temporary/interim manufacturing cases).

Review. During this period the application is being reviewed by an analyst on the FTZ staff, the CBP Port Director and by industry experts (for subzone and manufacturing applications).
Interagency Clearance. Once the analyst completes their review and recommendation, the application is sent to CBP headquarters and the Department of the Treasury for review. If there is concurrence with the recommendation, the application will be returned to the Department of Commerce for final review by the Board member or designee who has the authority to sign the Board Order. The Board Order is then published in the Federal Register.

The Distribution Zone Application

The Application for Distribution Subzone is filed with the Grantee of the General FTZ which is then transmitted to the FTZ Board. The application, which is typically prepared by the trade law attorney in cooperation with the applicant and the financial specialist, consists of forty-seven questions that address issues such as economic justification for the FTZ, FTZ related savings, site(s) description, operation and financing of the sites and the legal authority given to the grantee to sign the application letter. The burden of the proof is on the applicant, so it is recommended to provide as much information as possible. For example, in order to describe the type of products which will be distributed, it is necessary to provide projected four-digit HTSUS headings and duty rates and describe the activity which you see to conduct under FTZ procedures, including any value added activities, such as testing, repackaging or repair. The application also requires information on the employment creation of the FTZ and the impact on competitors.

In conclusion, given the complexities of the subzones, trucking companies that need warehousing and distribution facilities, and would benefit from the special customs procedures and duty-free treatment accorded to the items at the FTZ, should first consider whether to rent and enter into an agreement with the grantor of the particular FTZ. They should consult with a financial advisor, whether or not the creation of the distribution subzone would be cost effective. Lastly, trucking companies that serve clients in the FTZ should keep in mind that they will need to apply for customs bonds to be able to serve these customers in the FTZ.

*19. U.S.C.81a-81u). The Foreign-Trade Zones Act is administered through two sets of regulations, the FTZ Regulations (15 CFR Part 400) and CBP Regulations (19 CFR Part 146).

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