Why Companies use Foreign-Trade Zones
- 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.