A free trade zone (FTZ) or formerly called free port is an area within which goods may be landed, handled, warehoused, manufactured or reconfigured, and re-exported as duty-exempt finished goods without the intervention of the customs authorities, import quotas, export subsidies, and protective tariffs. In another explanation, a free trade zone is a specified federally sanctioned site within the territorial jurisdiction of a country where there is either a minimum or no customs control and without a through examination on entry or exit of goods as foreign and domestic goods are considered to be outside of the U.S. customs territory. If the final product is exported from the country which the zone is located, no custom duty is ever paid. If the final product is imported to the consumers within the country, duty and excise taxes are due at the time of transfer from the foreign trade zone and formal entry is made into the country. Duty is paid on the product itself or its imported parts, whichever is lower. (Many finished products have lower duty rates – or are duty-free – than their components).
Free Trade Zone is usually located at a sea port, international airports and national frontiers-areas with many geographic advantages for trade where the government has liberalized foreign trade terms beyond what are in force in the rest of the country. They are usually found in developing countries as the goal of a free trade zone is to promote intense economic growth in a particular area by attracting international investment and increased mercantile activity.
Free trade zones can be defined as labor intensive manufacturing centers that involve the import of raw materials or components and the export of factory products. Usually, these zones are set up in underdeveloped parts of the host country; the rationale is that the zones will attract employers and thus reduce poverty and unemployment, and stimulate the area’s economy. In the United States, foreign trade subzones are designated as single-purpose sites for businesses such as oil refineries or large manufactures because they could not feasibly be moved to a traditional location.
The number of worldwide free-trade zones proliferated in the late 20th century. In the United States free-trade zones were first authorized in 1934.
Examples include Hong Kong, Singapore, Colón (Panama), Copenhagen, Stockholm, Gdańsk (Poland), Los Angeles, and New York City. FTZ’s are a tool that companies use to increase their global competitiveness and play an important role in providing a level playing field when investment and production decisions are made. They have been proven to be a successful trade program by consistently creating and retaining jobs and capital investment in the United States.
In today’s just-in-time inventory management, Free Trade Zones have proven to be an effective strategy to minimize or even cut incerasing supply chain costs. Merchandise can be brought into an FTZ to be stored, exhibited, repackaged, assembled or used for manufacturing free of customs duty, quota and other import restrictions until the decision is made to enter the goods into the U.S. market. This also allows a company to defer Customs duties until merchandise leaves the zone instead of having substantial monies tied up in inventory Customs duties. Also spoiled or damaged goods or waste materials may be disposed of or re-exported without payment of customs duty.
Another advantage of FTZ is in many cases duties are higher for parts than for finished products. Therefore, many companies enter FTZ in order to import parts duty-free, assemble a product and then be required to only pay the duty on the final product. FTZs benefit both importers and exporters because both save on taxes, reduce transportation costs, avoid financing charges, and thereby increase their business cash flow. Exporters view FTZs as an entry into foreign markets, an opportunity to defer or avoid Customs duties, and a way to obtain income tax exemptions or reductions.
The benefits of Free Trade Zones can be summarized as below:
* FTZs are not in U.S. Customs territory, therefore, duty is paid only when imports are shipped into Customs territory.
* Customs duties are not paid on merchandise exported out of the U.S. from a FTZ.
* Duties are reduced or eliminated on materials subject to defect, damage, obsolescence, waste, scrap and quality control inspections can identify substandard goods to be destroyed without duty payment.
* Duties are not owed on labor, overhead, or profit attributed to FTZ production operations.
* FTZ users can pay the duty rate on component material or merchandise produced, whichever is lower.
* Most merchandise subject to U.S. quotas may be held in an FTZ until quota windows open.
* Delays in Customs clearances and duty drawback procedures may be eliminated.
* No country of origin labels are required on merchandise admitted to an FTZ.
* Customs supervision of procedures saves on individual security expenses and insurance and due to security, insurance rates may be lower.
* Materials consumed in FTZ processing are generally not subject to duties and spare parts may be stored, returned, or destroyed without paying duty.
* Merchandise may be held for exhibition without duty.
* Duty payable on FTZ merchandise need not be included on insurable value.
* No duty is owed on in-bond, zone to zone transfers of FTZ merchandise.
* Customer may be able to reduce merchandise processing fees, pay harbor maintenance fees quarterly and users may be able to reduce Customs brokerage fees.
A free trade zone (FTZ) or export processing zone (EPZ), also called foreign-trade zone all fall under the umbrella of being free trade zones.
Because these terms are confusingly similar, they are often used interchangeably. The distinction between each term often depends on where a particular zone is located.
* Foreign Trade Zone is the term used in the United States.
* Free Trade Zone is the term used in other developed countries, such as those included in the European Union.
* Export Processing Zone is commonly used in developing nations
While free trade has proven benefits, it also has proven costs, and therefore any true analysis of the merits of a free trade zone must take in the larger picture.
One of the disadvantage is reduction of government revenue. Businesses in free trade zones are not charged customs duty on the goods that they sell there so this means that the government loses large sums of money which could have gone to the exchequer. Because of this, many governments place strict conditions on the operation of the free trade zones. Another disadvantage is Free Trade Zones increase the chances of goods being sneaked into the free trade zones to avoid the payment of taxes. Although goods that are sold in these zones are clearly labeled, fraudsters are able to bring into the zones goods that do not qualify to be sold there. Care should be taken to prevent legal loopholes that might aid such practices.
Overall, the consumers win because they have access to better goods at a cheaper price, and the economy as a whole wins because it is freed to re-task resources to focusing on its strengths, or comparative advantages.A free trade zone can function as an economic laboratory, allowing a government to learn what will be of the most benefit to their economy over the long-term.
Free trade zones are utilized by everyone from large manufactures to small businesses to individuals. Any person or entity that intends to import or export goods and can consider taking advantage of free trade zones.
Because the principals and regulations of each free trade zone differs from country to country, you must check the governing authority of the country in which you wish to operate for specific benefits of their programs. You can visit Export.gov for free trade zone guides of specific countries.