Why Manufacturing and Processing Companies use Foreign-Trade Zones
All of the benefits the Foreign-Trade Zones program can offer manufacturers and processors located in the United States are too numerous to list here. But, there a few main benefits that account for most of the companies that use the Zones program. Those benefits are listed below:
- Relief from inverted tariffsIn 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-exportsWithout 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 lossAgain, 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.
- Duty DeferralAgain, since Foreign-Trade Zones are outside the Customs territory of the United States, goods are not imported until they leave the zone. Therefore, Customs duty is deferred until merchandise is imported from a Foreign-Trade Zone into the United States. So, instead of companies having substantial monies tied up in Customs duties on their inventory, they have use of that money for other purposes.
There are many other substantial benefits that the Zones program has to offer manufacturers in the United States, but the benefits listed are the key benefits that attract most companies to the Zones program. More and more companies look globally when deciding to locate or expand a new manufacturing or processing facility. When these companies make these location and expansion decisions, they do take into account all costs of manufacturing in a certain country. Unfortunately, there are unintended import tax penalties for many companies located in, or considering locating in, the United States. The Foreign-Trade Zones program plays an important role in providing a level playing field when investment and production decisions are made. While the U.S. government might incur a reduction in Customs duty revenue by the use of the Zones program, it more than makes up for it by the income tax it gains from the jobs created or retained. In addition, local governments benefit from sales and property taxes.
The Foreign-Trade Zones program has proven to be a successful trade program by consistently creating and retaining jobs and capital investment in the United States.