In recent years, many pharmaceutical companies in the United
States have turned to the US Foreign-Trade Zones Program to lower
production costs. In this QAD Precision Report we look at the
benefits of foreign-trade zones (FTZ) for pharmaceutical companies.
Pharmaceutical companies and their contract manufacturers are
flocking to Foreign-Trade Zones to lower costs, speed delivery, and
improve regulatory compliance.
Foreign-Trade Zones were first established in 1934, but were not
significantly utilized by US-based manufacturers until the 1980s.
In 1995, the US-tariff structure was changed. These changes created
an “inverted” tariff-rate relationship between imported raw materials
and finished pharmaceutical products. Many raw materials used to
produce pharmaceutical products carry a higher duty rate than the
finished products. As a result, US-based pharmaceutical manufacturers
not using an FTZ are inadvertently penalized by this inverted tariff structure.
In order to eliminate duty costs associated with producing
pharmaceutical products in the US, companies had two choices: move
production overseas or utilize a Foreign-Trade Zone.
Many pharmaceutical companies chose to utilize an FTZ rather than
move production offshore. This allows companies to retain jobs and
manufacturing in the US. Furthermore, a FTZ helps companies in three
Increase delivery speed
Improve regulatory compliance
Pharmaceutical companies designated as a Foreign-Trade Zone can
obtain relief from the inverted tariff structure. Companies are able
to continue using their existing processes and procedures. No
significant changes are needed to be made in a zone.
Companies choosing to manufacture pharmaceutical products in an FTZ
are able to pay the duty of the finished product. This allows US-based
pharma producers to be free from all duties on imported materials
processed through their FTZ operations. This enhances global
competitiveness for existing US-based manufacturing facilities.
Another FTZ benefit is savings on scrap and yield loss.
Pharmaceutical manufacturing inevitably produces scrap and yield loss.
Companies located in an FTZ are not required to pay duties on losses
incurred during the manufacturing process.
This not only provides cost savings, but encourages job creation and
manufacturing in the US.
Another benefit for pharmaceutical companies becoming an FTZ is
increased delivery speed. Production and warehouse facilities
designated as an FTZ are able to utilize direct delivery for imports.
Direct delivery procedures allow for quick movement to the FTZ
facility from US ports. Pharma zone operators do not need Food and
Drug Administration (FDA) preclearance.
Not only does being located in an FTZ save money, it can also save
time. Leveraging an FTZ allows for quicker delivery of pharmaceutical
products to the domestic and global markets.
Designation as a zone not only saves companies money and time, but it
can also improve their regulatory compliance.
Companies can save in an FTZ by only submitting one customs’ entry
fee per week with Weekly Entry procedures. This allows for quicker
releases by both Customs and Border Protection (CBP) and the FDA.
Additionally, while in an FTZ, pharmaceutical companies can both
produce and store pharmaceutical products that have not yet received
FDA approval. Product can be held in a zone until FDA approval, then
it can be shipped into domestic markets and/or exported. This allows
companies to both add delivery speed while increasing regulatory compliance.
Pharmaceutical companies becoming FTZs has been a growing trend for a
while. However, in recent years this has been expanding. There is a
new industry trend of pharmaceutical companies requiring their
contract manufacturers to become FTZs.
According to the 2020
Annual Report of the Foreign-Trade Zones Board, FTZ
warehouse/distribution operations received over $283 billion in
merchandise. FTZ production operations received $341 billion in
merchandise. Pharmaceuticals are among some of the top industries
utilizing zone production activity according to the report.
Pharmaceutical warehouse and distribution operators brought in $8.469
million of foreign-status products into an FTZ. Additionally,
pharmaceutical production operators brought in $16.568 million worth
Not only can pharmaceutical companies and their contract
manufacturers become an FTZ to meet current needs, they can utilize an
FTZ to meet future needs as well.
Although many pharmaceutical companies have long been using
Foreign-Trade Zones, there are still many that have not yet taken
advantage of this unique program. FTZ designation can save companies
both money and time while increasing delivery speeds and regulatory
compliance. Foreign-Trade Zones for pharmaceutical manufacturers and
their contract manufacturers is a prescription for success. Now all
that's left to do is fill it.
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IS A FOREIGN-TRADE ZONE (FTZ)?
AND REDUCING DUTIES WITH FTZS
ZONES: Q&A WITH FTZ EXPERT GREG JONES