Free Trade Zones in the USA
International trade is an essential part of the US commercial landscape; however, the US also has a number of ports and transportation hubs that perform the function of intermediary points of entry. During stay in the territory of the USA, shippers and importers have to pay customs duties for the shipment of goods they transfer. However, the introduction of foreign trade zones has significantly simplified the financial burden of shippers, and has improved the conditions US customs can offer to them, thus attracting larger volumes of importers, and boosting the US economy through promoting a number of commercial activities that would otherwise be fulfilled abroad. According to Hinkelman and Putzi, foreign trade zones (FTZ) are also called free zones, free ports, and bonded warehouses, and they represent specific commercial and industrial areas located in the ports of entry or in close proximity to them; in these areas, storage and sales, as well as repackaging, assemblage, and other manipulations with goods are allowed without the need for shippers to pay the customs duties (81). However, the shippers may also choose among the option of paying the duty on the finished product without paying for its imported parts, or to pay for the imported components (Seyoum and Ramirez 14). Mainly due to the number of benefits they provide for commercial shippers, FTZs in the USA are restricted-access areas under the control of the US Customs and Border Protection (Hinkelman and Putzi 81).
The operation of FTZs in the USA is regulated by the Foreign Trade Zone Act (FTZA) of 1934; this legislative document covers the way and location of FTZs’ establishment, their administration, and the range of activities that may be performed by the shippers and manufacturers within them (Hinkelman and Putzi 81). Folsom indicated that there are two common types of FTZ in the USA: General Purpose Zones and Subzones (307). The former are usually located in the industrial park zones, large ports, or on raw land for an easy access of the general public to such places. Subzones operate under financing of an individual firm or a number of firms to serve some single purpose, and to host operations that cannot be accomplished in general zones. In August 2012, the US Department of Commerce has accepted the application of Port Miami for becoming a Foreign Trade Zone (FTZ), which now allows foreign exporters to ship their products to this port without paying the US import duty. However, the peculiarity of the FTZ is that the shippers are exempt of duties only under the condition that the products they ship are not shipped to the USA, and the Miami port is only the intermediary location on their transportation way (DC Velocity). The opening of FTZ in Port Miami has become a new positive step in the reaffirmation of this port’s competitive advantage as the major shipping location in the south of the USA, has enabled the creation of a number of duty-free warehouses at that location, and has attracted the increased attention to the need to understand the implications and role of FTZ in the USA.
As Seyoum and Ramirez stated, FTZs were initially created in the USA for the purpose of intensifying exports through release of duty-free and quota-free entry of imports to the US territory (13). Since their creation in the 1970s, FTZs have enjoyed much popularity in the USA, with their number rising from 18 to more than 250 across the USA. The licensure and governance of FTZs is performed by the US Foreign Trade Zones Board (FTZB) that includes the Secretary of Commerce and Treasury. According to the US regulations, FTZs must be located within 60 miles from the customs supervising office, while subzones have no formal territorial limitations and can be located elsewhere (Seyoum and Ramirez 14).
There are a number of advantages on which the majority of authors agree regarding FTZ existence in the USA. The list of advantages offered by Folsom (as officially delineated by the National Association of Foreign Trade Zones) is as follows:
- Duty referral
- Reduced (or absent) duties regarding defected or damaged merchandize, waste, obsolescence, and scrap
- Duty-exempt nature of labor, overhead, and profit
- Inverted customs duty savings
- International returns
- Spare parts
- US quotas
- Simplified procedures regarding export and import
- Quality control
- Cargo insurance
- Inventory control
- Consumed merchandize (duty-exempt)
- Inventory taxes
- Exhibition of market goods before the need to pay duty
- Reduced expenditures on insurance
- Country of origin marking and labeling
- Zone-to-zone transfer
- Transfer of title
Some of the mentioned advantages should be considered in detail, since they provide shippers with a strategic commercial advantage urging them to use FTZ for their business activities. The most significant advantage, as stated by Seyoum and Ramirez, is duty deferral and avoidance (15). The goods admitted into FTZ are not subject to customs duty unless (or until) they are transferred to the US customs territory. If the products are consumed and processed within the FTZ, they remain duty-exempt, as well as their transfer to any other foreign market is also duty-exempt. The present conditions in FTZ ensure more cash availability for businesses, and higher liquidity results in quicker growth of businesses (Seyoum and Ramirez 15).
Another major advantage is the inverted tariffs eligibility and local tax relief for users of FTZs. The major FTZ function is to encourage exports by duty-free imports’ entry facilitation, but they are also used as platforms for products’ import into the US customs territory (Seyoum and Ramirez 16). Under the US customs legislation, firms can import products subject to higher duty rates to the FTZ, and manufacture it further into a final product subject to a lower duty rate, with further importing thereof to the US customs territory, thus economizing a significant portion of costs on duty payments. As Sayoum and Ramirez also noted, “the inverted tariff allows a manufacturer to select the lower rate of duty between the component and finished product” (16). One of the industries benefitting profoundly from FTZs in terms of inverted tariffs is the auto-manufacturing sector; assembly operations being located in FTZs, the companies reduce costs for spare parts by not importing them, but by assembling finished vehicles subject to lower duties at the customs.
Usa also admitted this benefit for automobile producers and assemblers and noted that “by bringing the component parts into the Foreign-Trade Zone on a non-privileged basis, and manufacturing or assembling the finished article in the Zone, the foreign components will be subject to duty at the lower, finished product rate” (266). The inverted tariff benefits are vastly used by manufacturers across the USA; for instance, in the Port of New Orleans, a subzone for steel barges’ manufacturing was established by Equitable Equipment Company, Inc. (Usa 266). Teifenbrun also agreed that in spite of a large amount of criticism directed at the propriety of FTZ functioning in the USA, they are still regarded as beneficial territories for US manufacturers maintaining automotive subzones in FTZs to help American manufacturers keep up with the imports (33). Manufacturing in FTZs is at present considered the only effective way to reduce costs for US auto-manufacturing, taking into account the tariffs from 6% to 8% on imported spare parts as compared to 2.5% duties for the final product imports (Teifenbrun 33).
Sayoum and Ramirez noted the specific advantage of FTZs in the exhibition advantages and quota leveraging. The authors indicated that importers can ship products into American FTZ for display to wholesalers, and can organize the full exhibition of foreign merchandize for an unlimited period without the need to pay bond or duty payments. Exhibitions mat be arranged at the storage facilities, or in the firm-owned showrooms; the present advantage is highly beneficial for new importers or new products’ presenters who have to create demand for the product before spending sufficient amounts of money for shipping it to the USA (Sayoum and Ramirez 16).
Usa spoke extensively about the benefit of non-applicability of quota restrictions in FTZs (266). The author indicated that import quotas are not applicable to goods stored within FTZs, and in cases when the shipper of some product has merchandize exceeding the allowed quotas, he or she may choose to store it in the FTZ without the need to re-export the products. After the next quota period comes, the shipper may import the produce to the US territory not from the country of origin, but from the FTZ in which it was stored, which significantly reduces the shipment costs and procedures (Usa 266).
Finally, a notable advantage noted by both Usa, and Sayoum and Ramirez is that the merchandize shipped to the US FTZs can be remarked and reconditioned to conform to US product requirements against which products are checked in the US customs. According to Usa, products shipped to the US FTZs lose their identity as foreign merchandize, and in case the product is assembled in FTZs, it receives the tag of the US product, which is particularly beneficial and convenient for producers wishing to market US products (266). Sayoum and Ramirez added that the products subject to re-shipping from the US FTZs to other countries of destination are nevertheless not subject to the US country-of-origin taxes and duties, which proves to be an additional advantage of having the official label of a US-made product, but not needing to pay excessive duties and taxes.
Summing the analysis up, one has to note that FTZs are obviously a beneficial creation for international shippers who ship spare parts and then manufacture products (such as barges, automobiles, equipment, etc.) in FTZs. FTZs are highly cost-effective and economically reasonable, since they provide both international and domestic businesses to save costs on duties and tariffs. However, the fact that products shipped from other countries and manufactured in FTZs acquire the label of a US-made product may distort the understanding of the authentic US product, since in fact, these products may have any country of origin.
DC Velocity. ‘Port Miami wins approval to operate as foreign-trade zone’. DC Velocity. 2012. Web. 29 April 2013.
Folsom, Davis. Encyclopedia of American Business. New York, NY: Infobase Publishing. 2009. Print.
Hinkelman, G. Edward, and Sibylla Putzi. Dictionary of International Trade: Handbook of the Global Trade Community. 6th ed. Novato, CA: World Trade Press. 2005. Print.
Seyoum, Belay, and Juan Ramirez. ‘Foreign Trade Zones in the United States’. Journal of Economic Studies 39.1 (2012): 13-30.
Tiefenbrun, Susan. Tax Free Trade Zones of the World and in the United States. Northamptom, MA: Edward Elgar Publishing. 2010. Print.
Usa, Ibp. Starting and Operation Business in the United States for Foreigners. Washington, DC: International Business Publications. 2009. Print.