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Why
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 tariffs —In 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-exports —Without 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
loss —Again, 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.
Weekly Entry Savings —On May 18, 2000 the Trade and Development
Act of
2000 was passed and signed by President Clinton. This Act had a provision
in it
that allowed the use of the Weekly Entry procedure for all manufacturing
and
distribution Foreign-Trade Zones.
Weekly Entry (allowed only to Foreign-Trade Zone users) provides
economies
for both Customs and Foreign-Trade Zone users. Under Weekly Entry
procedures, the zone user files only one Customs Entry per week,
rather than
filing one Customs Entry per shipment. Customs no longer has to process
an
entry for each and every shipment being imported into the zone, and
the
Foreign-Trade Zone community no longer has to pay for the processing
of each
and every entry.
Companies located outside Foreign-Trade Zones pay a .21% merchandise
processing for each and every formal entry processed by U.S. Customs.
There
is a minimum $25 processing and a maximum $485 processing fee per
Entry,
regardless of the duty rate on the imported merchandise. The maximum
processing fee is reached for Entries (shipments) with a value over
$230,952.
Companies often receive many shipments over this amount.
would amount to a merchandise processing fee of $4,850 ($485 x 10)
per
week. If this number is annualized the amount is $252,200 (52 x $4,850)
per
year.
Companies in a Foreign-Trade Zone may take advantage of the Weekly
Entry
procedure. In the case of the above example, Weekly Entry would provide
for
one Entry per week. For example: the 10 ($230,952) shipments per
week
would be filed as a single shipment of $2,309,520 each week. The
merchandise processing fee would amount to the maximum of $485 total
for
the week. If this fee is annualized utilizing Weekly Entry it is
a total of only
$25,220 yearly. In this example Weekly Entry provides a savings of
$226,980
per year. Each company’s savings could be significantly more
or less
depending on the number of shipments received during the year. A
graphic
example of Weekly Entry savings is shown below.
Duty Deferral —Again, 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 and distributors 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.
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