By leveraging a Foreign-Trade Zone, enterprises can eliminate and
reduce duties. In this QAD Precision Report, we highlight five key
benefits of FTZs.
There are many advantages to using a Foreign-Trade Zone. Perhaps the
most compelling reason is to eliminate and reduce duties. Here are
five ways leveraging an FTZ allows companies to reduce their duty obligations.
Relief From Inverted Tariffs
When a component or raw material is subject to a higher duty rate
than the end product, inverted tariffs occur. The Foreign-Trade Zone
program allows companies relief from inverted tariffs. Without the
help of an FTZ, importers of certain finished goods pay a lower duty
rate than a US-based manufacturer of the same product. This puts the
domestic manufacturer at a disadvantage to the importer.
For example, a manufacturer imports a motor that carries a 4 percent
duty rate. The manufacturer must pay those duties upfront. The
manufacturer uses the motor as a component in a vacuum cleaner.
However, vacuum cleaners are duty free.
Under such circumstances, the US based manufacturer is at a
disadvantage to a competitor that imported finished vacuum cleaners
By leveraging an FTZ, the manufacturer would not have paid any duties
on imported motors. When the finished product — vacuum cleaners —
enter US commerce, they are duty free.
By leveraging a Foreign-Trade Zone, companies can defer duty payments
on goods brought into a zone. Duties are only paid when the
merchandise enters into US commerce. As a result, duty deferral frees
up cash flow.
This is particularly advantageous to companies with high volume
imports or merchandise that is subject to high duty rates, such as
textile products. The concept of this benefit is similar to free trade
zones in other countries.
Enterprises can use a Foreign-Trade Zone to eliminate duties on
waste, scrap, and yield loss. Without the help of a zone, all material
imported into the United States is dutiable. An importer leveraging an
FTZ pays the customs duty only on the merchandise that subsequently
enters the domestic market from a zone.
Irrecoverable yield loss or merchandise that is scrapped or destroyed
in the FTZ is not subject to duty payment. Duty is only paid on the
Duty Exemption on Re-Exports
Typically, importers are required to pay custom duties on goods at
the time of entry to US commerce. However, Foreign-Trade Zones are
legally outside of US commerce. Consequently, companies importing
goods or raw materials owe no customs duty unless and until these
leave the zone for the domestic market. If the zone user exports the
foreign goods from the FTZ, no duty is ever paid.
The FTZ program enables a vendor located in one FTZ to transfer
merchandise to a company located in another zone. The vendor can move
those goods to the purchasing company’s FTZ with no payment of duties required.
Manufacturers whose final products have a lower duty rate than the
raw materials or components can receive those items from another zone
duty unpaid. This can reduce or eliminate the raw material and
component duty rates. Therefore, US suppliers can be more competitive
than they otherwise would be were they to pass their duty costs on to
their US-based customers.
How QAD Precision Can Help
The Foreign-Trade Zones program offers significant duty savings. It
also eliminates the need for more onerous duty reduction programs,
such as duty drawback. As a result, companies leveraging FTZ
operations free up cash flow and gain a competitive advantage.
Should your company be considering leveraging an FTZ, QAD
Precision’s experts can assist in a number of ways. Firstly,
we would work with you to undertake a cost-benefit analysis. This will
calculate cost savings a company would obtain by using an FTZ.
Once you have decided to proceed, QAD Precision will work with you to
ensure that your application to receive zone status is approved by the
Furthermore, we offer a best-in-class advanced Inventory Control
Recordkeeping (ICRS) solution. This was designed by FTZ practitioners
and zone users to simplify compliance and recordkeeping.
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