Foreign Trade Zones (FTZs) were created in 1934 in an attempt to mitigate the desultory effects of Smoot-Hawley Tariffs. The objective was to expedite and encourage foreign commerce. In 1980, legislation expanded the value of FTZs for manufacturers.
An FTZ comprises a designated area located at or close to a U.S. Port of Entry, where domestic and foreign merchandise is considered outside U.S. customs territory for tariff purposes. In an FTZ, goods may be imported, stored, manipulated, manufactured, or re-exported without being subject to customs duties or other ad valorem taxes until they enter U.S. commerce. Essentially, tariff duties on imported goods are deferred and waived if the finished product is exported.
Given the imposition of higher tariff rates, FTZs have become an increasingly more desirable option for many manufacturers. Currently there are some 260 FTZs and 400 sub-zones. A number of FTZs actually
cover one or more counties.
There are two types of FTZs: (a) General Purpose and (b) Special Purpose. The former often embraces a large warehouse or industrial park while the latter is typically focused on a single company such as a manufacturer.
In summary, an FTZ offers an array of logistics/supply chain benefits including:
1. Duty Deferral
2. Duty Elimination on Re-Exports
3. Invented Tariff Benefits (e.g., if the assembled or manufactured finished product has a lower duty
rate than its individual components, the importer pays the lower finished product tariff rate).
4. Operational Efficiency (such as streamlining customs clearance)
5. Inventory Control and Security
6. Reduced Merchandise Processing Fees
Of course, it is important to validate that a location featuring an FTZ also meets other key criteria such as proximity to customers, labor availability/cost, electric power reliability/cost, labor/management relations, and potential incentives.
Source: Basics & Benefits – National Association of Foreign Trade-Zones