Foreign-Trade Zones: Helping Companies Compete Globally

CDFS-1579
Community Development
Date: 
05/06/2021
Gwynn Stewart, MS, Educator, Community Development, Ohio State University Extension, Noble County
Godwin Apaliyah, PhD, Educator, Community Development, Ohio State University Extension, Fayette County

Foreign-trade zones (FTZs) are sites within the United States that are legally considered outside of United States Customs and Border Protection (CBP) territory for the purpose of duties. They were created by Congress in 1934, as a part of New Deal legislation, to expedite and encourage foreign commerce. Under the 1934 law, companies can apply to designate their domestic facilities as zones, wherever they are located (Hwang 2019). FTZs allow goods to be brought into the site duty-free and without formal customs entry (Atwood 2020). According to the U.S. International Trade Administration, the United States has established foreign-trade zones in all 50 states and in Puerto Rico. During 2019, there were 262 approved FTZs and 193 active FTZs in the U.S. (NAFTZ 2020 Annual Report, 2021).

While FTZs may not fit every business model, they can strengthen a company’s competitiveness in a global marketplace. They can enable companies to maintain facilities in the U.S., as opposed to moving them offshore. They also facilitate economic development by assisting businesses with job creation and retention and by encouraging capital investments in the U.S. As such, FTZs are an important tool for community and business leaders who want to compete in a global marketplace—and for the community and economic development educators who advise them.

Economic Benefits

FTZs are available to any company located in the U.S. They provide substantial economic benefit through job creation and retention, with over 460,000 Americans directly working in FTZ activities in 2019. They also contribute significantly to the U.S. economy by facilitating imports and exports. In 2019, the value of U.S. FTZ exports was estimated at $111 billion, which is 6.7% of total U.S. exports. In addition, U.S. FTZs received over $767 billion worth of foreign and domestic merchandise, or 11.2% of total U.S. imports (NAFTZ 2020 Annual Report, 2021).

Other Benefits

According to the National Association of Foreign-Trade Zones, FTZs offer a wide variety of benefits. They can help companies lower their costs and enhance their profits. An FTZ allows users to:

  • Reduce or defer customs duties. Customs duties are paid only if and when goods are transferred out of an FTZ and into a U.S. Customs territory.
  • Eliminate customs duties. No duties are paid on foreign merchandise that is then exported from a zone.
  • Expedite trade by reducing transit times for the receipt of merchandise.

Other benefits include the ability to avoid a “duty drawback” on re-exported or scrapped merchandise; the option to move merchandise directly to the factory or warehouse with no clearance delay; and the ability to file customs entry paperwork weekly rather than on each container (Atwood 2020).

FTZs can also be used to inspect, repair, repack, or remove damaged or defective products. Such products can then be destroyed within the FTZ, thereby avoiding the imposition of import duties and taxes provided the process is pre-approved by CBP (Legacy Supply Chain Services, n.d.).

Ohio FTZs

The Columbus Region Foreign-Trade Zone 138 was ranked sixth out of 193 active U.S. zones in the category of warehousing and distribution in 2019 (McQuaid 2020; Ross and Mnuchin 2020). According to the FTZ Board’s Annual Report to Congress, $11.3 billion worth of goods moved through warehousing and distribution operations within FTZ 138 in 2019, an 8.9 percent increase over the previous year (McQuaid 2020).

Manufacturers as big as Whirlpool have applied for FTZ status in the U.S. Smaller manufacturing sites like International Converter in Noble County, Ohio, that “fuses ultrathin aluminum to packaging paper for the likes of Pringles cans and Arby’s wrappers” (Gaitten 2020) also benefit from being located in an Ohio FTZ.

Top Industries Benefitting from FTZs

From a community and economic development perspective, FTZ status is sometimes a deciding factor in site selection. That is, some manufacturers and other companies do not consider sites that lack FTZ status. For instance, “Volkswagen did not consider sites without an FTZ for the facility that it eventually located in Chattanooga, Tennessee.” The company saves an estimated $1.9 million annually in custom charges through its operation in the Chattanooga FTZ (Grey 2018). Interest in FTZs also increased 37 percent during the trade actions imposed against China under the Trump administration (Hwang 2019).

The National Association of Foreign-Trade Zones (NAFTZ U.S. Foreign-Trade Zones, 2021) identifies these Top 10 Industries for FTZ use:

  • Consumer Electronics
  • Oil / Petroleum
  • Pharmaceuticals
  • Vehicles
  • Vehicle Parts
  • Electrical Machinery
  • Consumer Products
  • Other Electronics
  • Machinery Equipment
  • Textiles / Footwear

How to Establish an FTZ

If a company is interested in establishing an FTZ, it would apply to the U.S. FTZ Board through the local “grantee.”  Local grantees are organizations such as a chamber of commerce or port authority approved in a geographical area to administer FTZs. The grantee staff are trained to assist with details of determining if an FTZ is right for a business, with the application process, and in coordinating with CBP, which must approve activation of the zone with proper security before any merchandise is admitted. CPB also coordinates periodic checks and visits to FTZs on an ongoing basis.

Summary

Due in part to a law enacted during the Great Depression, U.S. companies can apply to designate their stateside locations as foreign trade zones, without the need to re-locate near a port of entry. By establishing an FTZ, companies can benefit from more efficient customs procedures and reduced duty liabilities. In addition, FTZs can help companies avoid tariffs in connection with the import of parts and materials that are manufactured into goods for export. Interested companies should contact their local grantee to determine if an FTZ is right for their business.

Resources

Web Sites

Ohio Foreign-Trade Zone #138, ftz138.com

National Association of Foreign-Trade Zones, naftz.org

International Trade Administration, trade.gov/foreign-trade-zones-board

Video

International Trade Administration (2020) Introduction to Foreign Trade Zones. youtu.be/F9HNfhO6S9U

References

Atwood, Angie. 2020. Foreign-Trade Zone #138 (fact sheet). Columbus Regional Airport Authority. ftz138.com/doing-business-with-us/about-ftz138

Gaitten, Chris. 2020. “What’s Coming Through Rickenbacker’s Multibillion-Dollar Zone?” Columbus Monthly, April 27, 2020. columbusmonthly.com/business/20200427/whats-coming-through-rickenbackers-multibillion-dollar-zone

Grey, Tim. 2018. “Foreign Trade Zones Are No Silver Bullet, But Can Pay Off Big.” Economic Development Now (blog). International Economic Development Council (IEDC). iedconline.org/blog

Hwang, Melanie. 2019. “Companies Creating Foreign Trade Zones to Skirt Tariffs.” Economic Development Now (blog). International Economic Development Council (IEDC). iedconline.org/blog

Legacy Supply Chain Services. n.d. “5 Benefits of Using a Foreign Trade Zone (FTZ).” legacyscs.com/5-benefits-using-foreign-trade-zone-ftz/

McQuaid, Sarah. 2020. “Foreign-Trade Zone 138 Named Among Top 10 in the U.S.” Columbus Regional Airport Authority.  newshub.columbusairports.com/storage/production/20201202164109-ftz-138-
ranks-in-top-10.pdf

NAFTZ. 2021. 2020 Annual Report. National Association of Foreign-Trade Zones. naftz.org

NAFTZ. 2021. U.S. Foreign-Trade Zones: Expanding U.S. Exports, Jobs, and Economic Development (fact sheet). National Association of Foreign-Trade Zones. naftz.org

Ross, Wilbur and Steven Mnuchin. 2020. 81st Annual Report of the Foreign-Trade Board to the Congress of the United States. Foreign-Trade Zones Board. trade.gov/sites/default/files/2020-11/AR-2019.pdf

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