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Why
Companies use Foreign-Trade Zones
All of the benefits the Foreign-Trade Zones program can offer
manufacturers and processors located in the United States are
too numerous to list here. But, there a few main benefits that
account for most of the companies that use the Zones program.
Those benefits are listed below:
- Relief
from inverted tariffs—In certain instances, there are
tariff (import duty) relationships that actually penalize companies
for making their product in the United States. This occurs when
a component item or raw material carries a higher duty rate
than the finished product. Hence, the importer of the finished
product pays a lower duty rate than a manufacturer of the same
product in the United States. This gives the importer an unfair
and unintended advantage over the domestic manufacturer. The
Foreign-Trade Zones program levels the playing field in these
circumstances.
FOR EXAMPLE: A Foreign-Trade Zone user imports a motor (which
carries a 4% duty rate) and uses it in the manufacture of a
vacuum cleaner (which is free of duty). When the vacuum cleaner
leaves the FTZ and enters the commerce of the U.S., the duty
rate on the motor drops from the 4% motor rate to the free vacuum
cleaner rate. By participating in the Zones program, the vacuum
cleaner manufacturer has virtually eliminated duty on this component,
and therefore reduced the component cost by 4%.
- Duty
exemption on re-exports—Without a zone, if a manufacturer
or processor imports a component or raw material into the United
States, it is required to pay the import tax (duty) at the time
the component or raw material enters the country. However, a
Foreign-Trade Zone is considered to be outside the commerce
of the United States and the U.S. Customs territory. So, when
foreign merchandise is brought into a Foreign-Trade Zone, no
Customs duty is owed until the merchandise leaves the zone and
enters the commerce of the United States. Only then is the merchandise
considered imported and the duty paid. If the imported merchandise
is exported back out of the country, no Customs duty is ever
due.
- Duty
elimination on waste, scrap, and yield loss—Again,
without a zone, an importer pays the Customs duty owed as material
is brought into the United States. This is because the material
is considered imported at this point. If the processor or manufacturer
is conducting its operations within a zone environment, the
merchandise is not considered imported, and therefore no duty
is owed until it leaves the zone for shipment into the United
States. To demonstrate how this would benefit a company that
has scrap, waste, or yield loss from an imported component,
lets look at a chemical processing plant.
FOR EXAMPLE: A chemical plant manufacturing hydroxywidgitpropolyne,
which carries a 15% duty rate, uses the raw material oxyovertaxophene,
which also carries a 15% duty rate, for one of its raw materials.
Part of the production process consists of bringing the imported
oxyovertaxophene to extreme temperatures. During this process
30% of the oxyovertaxophene is lost as heat. If a processing
company not in the Zones program imports $10,000,000 per year
of oxyovertaxophene, it will pay $1,500,000 in duty as the raw
material enters the United States.
If the same company utilizes the zones program, it does not
pay duty on the oxyovertaxophene until it leaves the zone and
is imported into the United States. The zone user brings the
oxyovertaxophene into the zone with no duty owed. It then processes
the oxyovertaxophene into hydroxywidgitpropolyne. Remember,
during this process 30% of the raw material is lost due to waste
factors, so the $10,000,000 in oxyovertaxophene is now worth
only $7,000,000. Assuming all of the end product is sold into
the United States, the 15% Customs duty totals only $1,050,000.
This represents a savings of $450,000.
While at first glance it might look like the Zones program is
simply benefiting an importer, it is important to remember that
its competitors making the same product overseas already have
the benefit of not having to pay on the yield loss in the production
of their hydroxywidgitpropolyne.
- Weekly
Entry Savings—On May 18, 2000 the Trade and Development
Act of 2000 was passed and signed by President Clinton. This
Act had a provision in it that allowed the use of the Weekly
Entry procedure for all manufacturing and distribution Foreign-Trade
Zones.
Weekly Entry (allowed only to Foreign-Trade Zone users) provides
economies for both Customs and Foreign-Trade Zone users. Under
Weekly Entry procedures, the zone user files only one Customs
Entry per week, rather than filing one Customs Entry per shipment.
Customs no longer has to process an entry for each and every
shipment being imported into the zone, and the Foreign-Trade
Zone community no longer has to pay for the processing of each
and every entry.
Companies located outside Foreign-Trade Zones pay a .21% merchandise
processing for each and every formal entry processed by U.S.
Customs. There is a minimum $25 processing and a maximum $485
processing fee per Entry, regardless of the duty rate on the
imported merchandise. The maximum processing fee is reached
for Entries (shipments) with a value over $230,952. Companies
often receive many shipments over this amount.
FOR EXAMPLE: 10 shipments per week, each with a value of over
$230,952, would amount to a merchandise processing fee of $4,850
($485 x 10) per week. If this number is annualized the amount
is $252,200 (52 x $4,850) per year.
Companies in a Foreign-Trade Zone may take advantage of the
Weekly Entry procedure. In the case of the above example, Weekly
Entry would provide for one Entry per week. For example: the
10 ($230,952) shipments per week would be filed as a single
shipment of $2,309,520 each week. The merchandise processing
fee would amount to the maximum of $485 total for the week.
If this fee is annualized utilizing Weekly Entry it is a total
of only $25,220 yearly. In this example Weekly Entry provides
a savings of $226,980 per year. Each company’s savings
could be significantly more or less depending on the number
of shipments received during the year. A graphic example of
Weekly Entry savings is shown below.
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- Duty
Deferral—Again, since Foreign-Trade Zones are outside
the Customs territory of the United States, goods are not imported
until they leave the zone. Therefore, Customs duty is deferred
until merchandise is imported from a Foreign-Trade Zone into
the United States. So, instead of companies having substantial
monies tied up in Customs duties on their inventory, they have
use of that money for other purposes.
There
are many other substantial benefits that the Zones program has
to offer manufacturers and distributors in the United States,
but the benefits listed are the key benefits that attract most
companies to the Zones program. More and more companies look globally
when deciding to locate or expand a new manufacturing or processing
facility. When these companies make these location and expansion
decisions, they do take into account all costs of manufacturing
in a certain country. Unfortunately, there are unintended import
tax penalties for many companies located in, or considering locating
in, the United States. The Foreign-Trade Zones program plays an
important role in providing a level playing field when investment
and production decisions are made. While the U.S. government might
incur a reduction in Customs duty revenue by the use of the Zones
program, it more than makes up for it by the income tax it gains
from the jobs created or retained. In addition, local governments
benefit from sales and property taxes.
The Foreign-Trade Zones program has proven to be a successful
trade program by consistently creating and retaining jobs and
capital investment in the United States.
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