How a Foreign Trade Zone Reduces the Cost of Tariffs?
Foreign Trade Zone Reduces the Cost of Tariffs
In today’s interconnected global economy, managing high tariffs and import duties is a critical concern, particularly for manufacturers in industries such as automotive, military, aerospace, defense, and information technology. These sectors often rely on intricate supply chains and source components, such as hard-to-find electronic components, from international suppliers. One powerful strategy to reduce these costs lies in utilizing a foreign trade zone (FTZ).
A foreign trade zone offers substantial tariff relief and operational advantages by providing a designated geographic area where commercial merchandise receives the same Customs status as if it were outside the United States. These zones create opportunities for cost savings, increased inventory control, and greater supply chain efficiency.
What Is a Foreign Trade Zone?
A foreign trade zone (FTZ) is a secure area under U.S. Customs and Border Protection (CBP) supervision that is considered outside of U.S. Customs territory for the purposes of customs duty payment. This means that products, equipment, or electronic components brought into an FTZ are not subject to duties or federal excise taxes. They only become subject to the taxes when they enter the US market. If goods are exported directly from the FTZ, duties on imported goods may be entirely avoided.
These zones are often strategically located near ports of entry or logistics hubs, ensuring greater convenience and accessibility for international trade activities. Established under the Foreign Trade Zones Board, FTZs exist to support domestic manufacturers by making them more globally competitive.
Key Foreign Trade Zone Benefits
The foreign trade zones program offers significant monetary and operational advantages. Here are the top foreign trade zone benefits that drastically reduce the cost of tariffs for manufacturers:
1. Duty Deferral and Elimination
Goods in an FTZ are not subject to U.S. customs duties or federal excise taxes until they leave the zone to enter the U.S. market. This deferral frees up cash flow that would otherwise be tied up by tariff payments.
If the goods are exported directly from the zone—say, manufactured finished products made with imported raw materials—then no duties are paid at all. This process is often termed “duty free export.”
2. Inverted Tariff Relief
One of the core features of an FTZ is the “inverted tariff” rule. An inverted tariff situation occurs when the duty rates of finished products are lower than the rate applied to their individual components.
For example, assembling electronic components in an FTZ to create a finished product with a lower duty rate would allow the manufacturer to pay the duty based on the product, not the individual parts. This can significantly reduce total tariffs owed—a compelling incentive for electronic component distributors and manufacturers who need to find electronic components from abroad.
3. Enhanced Logistics and Inventory Control
Manufacturers operating within an FTZ benefit from streamlined processes and centralized inventory control. Since the FTZ is considered outside of U.S. customs territory, businesses can inspect, repair, assemble, or store imported goods without formal CBP entry procedures.
This enables companies to maintain better visibility into their supply chains, avoid paying merchandise processing fees on each shipment, and minimize administrative overhead.
4. Reduced Merchandise Processing Fees and Broker Fees
All goods imported into the U.S. normally incur merchandise processing fees (MPF), based on their value. An FTZ reduces these costs in two ways:
- MPFs are calculated based on weekly rather than daily entries.
- Fewer CBP entries means lower customs broker fees and operational savings.
This fee reduction may appear incremental per transaction, but it adds up to substantial savings annually—especially for companies importing high volumes of small electronic components.
Types of Sites Within the FTZ Program
Under the foreign trade zones program, there are two main types of sites:
1. Designated Sites
These are permanent areas specifically designated by the Foreign Trade Zones Board to conduct FTZ operations. These zones are often tied to ports of entry, creating logistic advantages.
2. Usage-Driven Sites (Alternative Site Framework – ASF)
The alternative site framework (ASF) allows companies to designate FTZ status on-demand in existing commercial spaces, such as warehouses or manufacturing plants. This enables greater flexibility for businesses to integrate FTZ benefits into current operations without relocating.
The Role of Customs and Border Protection (CBP)
Customs and Border Protection (CBP) plays a crucial role in monitoring and maintaining the integrity of foreign trade zones (FTZs). All merchandise movements in and out of an FTZ require specific documentation and approval from CBP, ensuring compliance with all applicable customs duties, federal excise taxes, and trade regulations.
CBP also performs spot checks, audits, and enforces controls to prevent illegal or prohibited goods from entering the U.S. under the guise of FTZ activity. Despite its extra oversight, CBP enables FTZ operators to benefit from accelerated processing, which translates into faster time-to-market for critical electronic components and finished products.
How Goods Enter and Leave the Zone
Once companies receive FTZ status for their facility or warehouse, they can start to enter goods into the zone without paying tariffs or taxes. Common activities within the FTZ include:
- Assembly: Combining raw materials or electronic components into finished products
- Storage: Holding inventory until it’s needed in the market
- Testing / Repackaging: Ensuring quality or redirecting products for export
When these goods enter the domestic U.S. market (leave the zone), the appropriate duty rates are applied based on the final form of the product (again, often benefitting from inverted tariffs). However, if the goods are exported, no duties on imported goods are paid—offering a major cost savings advantage.
Foreign Trade Zones and International Trade Strategy
In a time of escalating global tariff rates and uncertain trade policies, FTZs give manufacturers more control over costs and compliance. By integrating FTZ operations into their international trade strategies, businesses ensure:
- Tax deferred on imports
- Protection from federal excise tax spikes
- Consistent access to hard-to-find electronic components
- Resilient supply chains less susceptible to border delays
This makes FTZs a strategic necessity for modern manufacturers aiming to maintain global competitiveness and respond quickly to fluctuating duty rates and regulations.
Real-world FTZ Use Case: Electronic Components
Imagine a supply chain manager in the aerospace industry who needs to find electronic components from suppliers in Asia for a new aircraft navigation system. Importing these components directly into the U.S. means immediate payment of customs duties, merchandise processing fees, and potential federal excise taxes.
Instead, by using a foreign trade zone, the distributor can bring the electronic parts into a designated site, assemble them into the finished navigation system, and then export or distribute them in the U.S.
If exported, no duties are paid—zero cost for U.S. customs. If sold domestically, the company benefits from inverted tariff classification. All the while, inventory is tightly controlled and customs processes minimized, saving both time and money.
How to Get Started with a Foreign Trade Zone
To begin operating in a foreign trade zone, manufacturers must:
- Apply through the Foreign Trade Zone Board
- Determine if they want a designated site or usage-driven site under ASF
- Receive approval and operational instructions from Border Protection CBP
- Implement software and procedures for inventory control and reporting
Once operational, businesses can start to realize the many savings FTZs offer while enhancing their international trade posture.
Maximize Cost Savings with a Foreign Trade Zone
A foreign trade zone (FTZ) empowers manufacturers to cut costs, improve compliance, and operate with greater agility in a complex international trade environment. Whether you’re sourcing electronic components, managing complex supply chains, or looking to control inventory more effectively, an FTZ creates real, quantifiable value.
By simply changing the entry point of your goods and optimizing through an FTZ, you can transform your tariff costs. You an also minimize duty rates, and gain a critical competitive edge—especially in sectors like aerospace, military, automotive, and IT.
Want help integrating FTZ strategies into your component sourcing and procurement cycle? Get in touch with Broadline Components. Connect with our team today!