MANUFACTURING IN U.S. FOREIGN TRADE ZONES:

UNEXPLOITED PROFIT-BOOSTER

 

Any company in the world may manufacture its goods in the U.S. Foreign / Free Trade Zones (“FTZ”) for their sales or consumption in the United States or globally. FTZ physically located on the U.S. soil are legally deemed to be outside the U.S. commerce and customs territory. Manufacturers use FTZ to duty-free assemble, re-label, exhibit, mix, store, clean, re-package, examine, sample, repair, destroy rejects/waste, produce and process their goods. Foreign and domestic goods warehoused, manipulated, or processed in FTZ may be infinitely kept in FTZ bond-free and duty-free.
 

Federal law prohibits state and local ad valorem taxation of FTZ stored / processed imported goods and U.S. made goods held in FTZ for exportation in its original or processed form. The U.S. Constitution prohibits American states from levying duties on imports and exports, and federal laws preempt state laws encumbering easiness of through-FTZ goods’ legal transshipment. U.S. Foreign-Trade Board (“Board”) and U.S. Customs and Border Protection (“CBP”, which “activates'' and supervises FTZ, enforces anti-trust, intellectual property, consumer protection, and other U.S. laws) jointly govern2 FTZ establishment and operation. FTZ is a 2,000-acre industrial park with warehouses (providing leasable storage and distribution space to users) and land lots on which FTZ users can construct their own facilities. Majority of FTZ board-approved and CBP-activated sites in the nation have available space for FTZ users’ (tenants). If the existing FTZ (space limit that could be activated) cannot serve the manufacturer’s needs, then a subzone (a grantee-sponsored specific purpose private plant site, which may not be tied to a specific company) may be established as per the Board’s finding that the requested operation meets public interest test and cannot be conducted in the existing FTZ.

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U.S. government’s industry-specific federal incentives span from manufacturer’s tax credits and commercial building tax deduction to EB-5 immigrant investor visas and grants for employment and training, renewable energy, rural development, science / engineering research, etc. To attract inward investment, each state offers incentives (which could be used by manufacturers in and adjacent to FTZ areas) including loans, industrial property tax exemption, a new job tax credit, pre-employment workforce upgrade training, etc. Setting up a subsidiary company or entering into a joint venture with a U.S. company provides the FTZ-based foreign manufacturer with local skilled workforce, non-corrupt judicial / administrative system, state-of-the-art electronic, manufacturing and banking gear, reliable intrastate commercial transportation, low energy costs and other U.S. business attributes.
 

Manufacturers’ production activity and its scope must be Board authorized/ licensed. The Board may exclude from FTZ any goods or production process that it believes is harmful to the public interest, health, or safety. FTZ production activity is restricted to the foreign-status materials, components and finished products specified in applications and falling within the authorization purview. Products manufactured in FTZ with primarily U.S. made components may qualify for "Made in U.S.A." labels. U.S. quota limits do not apply to FTZ-admitted goods until these goods subsequently enter the U.S. commerce. Quota-restricted goods, except certain textiles, may be substantially transformed in FTZ to non-quota articles resulting in their subsequent quota-unrestricted entry into the customs’ territory. Quota-restricted merchandise may be placed into FTZ until the quota limit is lifted or it is exported out of FTZ.

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Materials and components cannot be used in FTZ production operation without Board’s specific prior authorization culminating the notification and subsequent application (where warranted) process, including the Federal Register notice publication and invitation for public comment. Production equipment or its parts admitted for FTZ-based manufacturing are not subject to duty until such fully assembled equipment is in fact used (after installation and testing) for in-zone manufacturing activity. Deferred duty payment becomes due upon an assembled-in-FTZ product’s exit from the FTZ. Only equipment and parts designated for in-FTZ production activity are eligible for such duty deferral, provided such activity results in a foreign article’s “substantial transformation” to a different article having a different character, name, condition, and use so to cause a change in the article’s customs classification. Materials used in the installation or assembly of production equipment, construction or modification of the plant containing the production equipment, are ineligible for such production equipment duty deferral. No excise tax or duty is levied on goods exported from FTZ. Domestic goods moved into FTZ for export are entitled to excise tax rebates and drawback (a refund of previously paid duties on imported components of exported goods). As FTZ users have the right to exclude profit and general expenses (and costs of in-FTZ processing and manufacturing) in foreign goods’ dutiable value calculations, no duties are imposed on overhead, labor and profit attributable to in-FTZ manufacturing. Duty is deferred on goods’ transportation in-bond (transiting) from FTZ-to-FTZ until the goods finally enter the U.S. territory or exported to other countries.

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Foreign goods’ trade and the manufacture of alcohol-containing beverages, products and perfumes, clock and watch movements, firearms, tobacco, and sugar are not allowed in FTZ. No residence is permitted in FTZ. Retail trade may not be conducted in FTZ. Manufacturers may obtain FTZ temporary or permanent site approval and manufacturing authorization (until the Board completes its processing of a notification) from the Board. Companies may operate FTZ by either themselves or sub-contract their FTZ operation and management. Private parties may own FTZ land and facilities. If a title to land or facilities is conveyed after a grant of authority is issued, the FTZ grantee must retain (per agreement with the subsequent owner) control necessary for carrying out grantee’s obligations. Since FTZ operates as a public utility, FTZ grantees may set their fees (to be paid by FTZ participants) to recover costs connected with the grantee’s function and a reasonable return on investment. This reasonable profit concept applies to the grantee and grantee’s contractors engaged for zone-related functions. Grantees cannot base their fees on the FTZ users’ benefits derived from the FTZ program, but may set different fee levels for FTZ participants’ categories based on the uniformly applied criteria.

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Manufacturing / warehousing facilities’ locations inside or adjacent to FTZ (within 60 miles or 90 minutes of driving time from the port-of-entry’ outer limits) minimize product-to-market time, spare or production parts’ delivery, and lower operating costs. The CBP required theft-preventing security, audit-inspection, and computerized reporting (compatible with the CBP automated system) measures result in the company’s improved efficiency and error/ inventory loss elimination. FTZ based just-in-time delivery reduces manufacturers’ transportation, production, transaction documentation and cargo-movement logistical support costs. Single “weekly entry”, “direct delivery”, and other customs’ streamlined procedures decrease long-hold times at ports-of-entry and goods’ shipment time.

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A manufacturer’s U.S. representative may streamline and centralize obtaining U.S. government agencies’ approvals for FTZ establishment, manufacturing activity, and operation; promptly taking regulation-compliance actions; facilitating local state’s enabling legislation, technology transfer, intellectual property registrations and dispute resolutions. FTZs are mutually beneficial for the U.S. (fostering foreign investment and job creation) and domestic and foreign manufacturers (by amplifying their profitability) gaining their products’ cost-effective and expeditious inculcation into the U.S. and foreign marketplaces.

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* Border crossing goods are also regulated by Food and Drug Administration (safety and security of food supply, human and veterinary drugs, medical devices, cosmetics, and radiation-emitting products); Environmental Protection Agency (the manufacture or import of chemicals); Department of Commerce (import or export of natural gas); Consumer Product Safety Commission (consumer products’ hazardous conditions); Department of Agriculture (food, natural resources, animal, and agricultural health); Federal Trade Commission (labeling of fur, textile and wool products); Fish and Wildlife Service; Alcohol & Tobacco Tax and Trade Bureau, and other federal agencies.