International Trade
Strategic Practices
Reducing Import Expenses
by using a
FOREIGN TRADE ZONE
Renza, Inc
© 2013 Renza, Inc.
TABLE OF CONTENTS:
What is a Foreign Trade Zone?
…….….…1
How Importers Use Foreign Trade Zones ..2
Benefits of Foreign Trade Zone Use …..... 3
What Firms Currently Use a FTZ ……….. 6
Distribution Cost Reduction Examples …. 7
Production Cost Reduction Examples …
9
Foreign Trade Zone Participants ………..
10
FTZ Costs ……………………………………..
11
Options for Using FTZ ………………….
12
A Foreign Trade Zone (FTZ) is a physical site
located within the U.S., but considered outside
the U.S.A. customs territory for duty purposes.
This means imported goods may be admitted or
delivered into the FTZ without formal customs
entry or the payment of duty and MPF fees.
(U.S. goods may also be brought into the FTZ.)
FTZ allow avoidance, reduced or delayed duty
payments on foreign merchandise, in addition to
other savings.
While in the FTZ, merchandise may be
assembled, exhibited, cleaned, manipulated,
manufactured, mixed, processed, relabeled,
repackaged, repaired, salvaged, sampled, stored,
tested, displayed, & destroyed.
The FTZ reflects U.S. trade policy. Its purpose is
to encourage activity and jobs within the U.S. in
competition with foreign alternatives.
Page 1
Importers Use Foreign Trade Zones to:
 Store merchandise until sold, delaying payment of
duty and MPF.
 Warehouse & distribute merchandise in the U.S.,
delaying payment of duty and reducing MPF.
 Warehouse & distribute merchandise for export,
eliminating payment of duty and MPF fees.
 Inspect for defects and avoid duty on merchandise
that is returned or destroyed.
 Manipulate imported goods by combining (possibly
with domestic goods) into kits to reduce or avoid
payment of duty.
 Manufacture imported & domestic goods, delaying
and avoiding payment of duty on parts and components
used in a finished goods with an “upside down tariff”.
Page 2
Foreign Trade Zone
What are the Benefits of A Foreign Trade Zone?
The benefits are both financial and operational.
• Duty Deferral
• Duty Elimination
• Merchandise Processing Fee (MPF) Reduction
• Simplified Procedures –
• Upon arrival at the port of entry, goods
move into the FTZ without CBP formalities.
Blanket authority to admit goods immediately
into the FTZ is available.
• Goods leaving the FTZ can be declared on a
weekly entry that summarizes all activity.
• FTZ inventory control & reporting
requirements may be automated and
integrated with ERP systems.
Page 3
Foreign Trade Zones
How a FTZ is used to Reduce Cost
1. Importer of seasonal merchandise purchases
goods in January & stores them in FTZ until April
when they are sold. Duty payment is made in
April, when goods leave the FTZ. Improves cash
flow by delaying duty payment.
2. High volume importer brings goods into FTZ
without paying duty or MPF. Daily shipments are
consolidated into one weekly entry, with one
maximum MPF fee instead of several daily MPF
fees. Reduces MPF fees, delays duty
payment, improves cash flow.
3. Importer brings various goods (some of which
are dutiable) into FTZ and packages them in a
manner that qualifies as a “kit” with a lower
duty rate. Example – Cell Phone, a case, head
set and battery.
4. Importer experiences a certain percentage of
waste, scrap or obsolete merchandise. If
destroyed in the FTZ, no duty is payable.
Reduces duty that would have been paid.
Page 4
Foreign Trade Zone
5 Importer warehouses goods in FTZ for export to other
countries. No duty is payable on exported goods.
6
Goods are returned to vendor from FTZ. No duty is
payable if goods do not enter U.S. customs territory.
7
Manufacturer imports parts & components into FTZ
and produces a finished good. Duty is payable at the
finished good rate. Duty reduction equal to difference
in duty rate for finished good and average duty rate on
parts.
8
Importer of goods with a high duty rate (apparel,
footwear, etc.) admits goods to FTZ for distribution
within the U.S. Duty payment deferred for the time
that goods remain in warehouse. Weekly entry
reduces MPF.
Page 5
Foreign Trade Zone
Companies Currently Using FTZ
Firms of all sizes and types use FTZ. Their activities include
manufacturing, warehousing and distribution. Their common
objective is the streamlining of operations and cost reduction.
BMW
Yamaha Music
Kia Motors
Black & Decker
Honda
Deere-Hitachi
Hyundai
Dell
Mercedes-Benz
Page 6
Matsushita
Ricoh
Makita
Yamaha Motor
Stihl
Onkyo
Sketchers
Adidas
CNH America
Foreign Trade Zone
Examples for Distribution
These examples assume an annual import value of $30M, 5
entries per week, inventory turns of 4 times/year, scrap /
waste of 2%, exports equal 5% and an average duty rate
of 24.9%. Proportional results can be expected from
different values.
Each CBP entry is subject to
the Merchandise Processing
Fee (MPF) at the rate of
0.3464% of the value of the
goods. There is a minimum
fee of $25 and a maximum fee
of $485 per entry. There is no
MPF payable for goods
entering a FTZ.
Daily withdrawals from a zone
can now be consolidated into
1 weekly entry that is subject
to one MPF with a weekly
maximum of $485.
An importer that imports
$30M/year with above
assumptions has an average
MPF of $399 per entry &
could reduce MPF fees by
$78K per year [(5 X 52 X
$399) – (52 X $485)].
Page 7
Goods that are exported
from a FTZ, either as
sales to foreign
customers or as returns
to foreign vendors are
not subject to duty.
Assuming an export /
return rate of 5%, the
cost reduction is
approximately $373K.
($30M X 5% X 24.9%).
The savings on scrap &
waste of 2% is
approximately $149K.
($30M X 2% X 24.9%)
Duty on imported finished goods brought into the FTZ is not paid until they are withdrawn from the FTZ and so
Foreign Trade Zone
These examples assume an annual import value of
$30M, 5 entries per week, inventory turns of 4
times/year, scrap / waste of 2%, exports equal 5%
and an average duty rate of 24.9%. Proportional
results can be expected from different values.
Duty on imported
goods is not paid
until they are sold to
the customer and
withdrawn from the
FTZ.
Under the above
assumptions and a
7.5% cost of money,
the cost reduction on
duty deferment is
$140K. ($30M/4 X
24.9% X 7.5%)
Page 8
The total cost reduction
under the above
assumptions for MPF
avoidance, scrap & export
duty avoidance and duty
deferral is approximately
$740K
Foreign Trade Zone
Examples for Production
Many parts of articles have a duty rate that is higher
than the finished article itself. This is called an
“inverted tariff”. A manufacturer or packager can
reduce duty expense by an approximate amount
equal to the average duty rate on the imported parts
minus the average duty rate on the finished article
times the value of the imported parts.
 Assuming an average duty rate of 6% on the
imported parts and a finished goods duty rate of 1%,
the manufacturing cost reduction is $1.5 M. ($30 M
X 6% - 1%)
 Articles that are combined and packaged in a FTZ
so as to qualify for classification as a “kit” will be
entered at the duty rate equal to the article that
determines the “essential character” of the kit.
Example – If a cellular phone (0%), battery(3.4%),
carrying case (20.0%), headset (4.9%) & a charger
(1.5%) are combined in a package for retail sale, its
essential character would be the cellular phone .
The articles combined in the “kit”, when shipped
from the FTZ, would be dutiable at the rate for the
phone or 0.0%.
Page 9
Foreign Trade Zone
FTZ PARTICIPANTS
User – An importing company whose products are
entered and located in a FTZ
Administrator – Handles FTZ transactions and
reports, ensures compliance with regulations. Can be
employee of User or third party.
Operator – Provides day-to-day operational
responsibility and oversight over zone activities. Can
be the Grantee, can be the User or can be a 3PL.
Grantee – A governmental entity or private not-forprofit organization. Usually a city government or port
authority.
Foreign Trade Zone Board – Authorized by
Department of Commerce to grant the privilege of
establishing, operating and maintaining
FTZs under the FTZ Act. Approves all applications.
Page 10
Foreign Trade Zone
FTZ IMPLEMENTING COSTS
Initial
Grantee Application Fee $7.5 to $10K
Activation Fee - None
Software License - $20K – $50K
Bond Premium - $3K - $5K
Miscellaneous - $3K
On-Going
Grantee Annual Fee - $7.5 to $10K
Administration - $35K - $75K
Page 11
Foreign Trade Zone
STRUCTURE FOR USING FTZ
General Purpose Zone –
A single warehouse or part of an industrial park for
use by the general public. Commonly operated by
a 3PL.
Features - Low or no startup costs, immediate use.
Highest cost in the long run.
Usage-driven site or Subzone –
A single purpose site for one company.
Features – Approvals require 1 to 3 months startup
time. Initial cost, but lowest long-term costs.
Page 12