According to the National Association of Foreign Trade Zones (NAFTZ), Foreign Trade Zones (FTZs) “are secured, designated locations around the United States in or near a U.S. Customs Port of Entry where foreign and domestic merchandise is generally considered to be in international commerce and outside of U.S. Customs territory. As a result, activated businesses in an FTZ can reduce or eliminate duty on imports and take advantage of other benefits to encourage foreign commerce within the United States.”
Most companies use FTZs for duty exemption and deferral on products that come into the U.S. that have tariffs. Other advantages include quota avoidance, where there is a quota in place, and merchandise processing fee (MPF) reductions.
Let’s say I am importing $1 million dollars of steel from Vietnam and that steel has a 30% tariff to bring it into the U.S. In a normal import transaction, I would take possession of the steel and have a limited time to pay the $300,000 in duties. However, if I establish an FTZ-approved facility that is considered outside of U.S. Customs territory, I can store the steel in this facility duty-free. If I sell $100,000 of this steel to a buyer in the U.S., a 30% duty, or $30,000, would be paid at the time I enter this product into formal U.S. Customs territory. If the steel is exported to another country, in most cases it is exempt from paying U.S. duties. In this sense, I am improving my cash flow by not having to pay 100% of the duty on the steel when it enters the U.S.
Products can also be assembled and manufactured within an FTZ. In the above example, I can slit the steel, punch holes in it, and make stamped steel products. In certain cases, transforming the FTZ product into another product that has a different classification for duty purposes could result in lower tariffs, once the product is entered into U.S. Customs territory. In other words, stamped steel products could have a tariff of 15% as opposed to 30%, thus saving the company 15% in duties.
FTZs are especially popular in areas where manufacturing is taking place and materials/components from all over the world are incorporated into the manufacturing process. Such is the case at the U.S.-Mexico border where cross-border manufacturing is occurring in the billions of dollars. The El Paso-Juárez-southern New Mexico borderplex boasts one of the largest production and supply chain bases in all of North America, and the use of FTZs in this region is a reflection of this.
According to the 2020 Foreign Trades Zones Board Report to Congress, this region has three FTZs in the top 20. FTZ 150, which is on El Paso’s west side, ranks fifth for overall value of movements in and out of the zone. This is followed by Doña Ana FTZ 197 (Santa Teresa), which ranks 10th on the list. Finally, El Paso FTZ 68, which serves El Paso County, ranks 17th. If their volume was pooled together as a region, the borderplex would rank near the very top of the FTZ list. This is a testament to the volume of manufacturing and distribution that is occurring in the El Paso-Juárez-southern New Mexico region.
According to David Panko, manager of El Paso FTZ 68, “FTZ 68 alone accounts for approximately 8% of the $81 billion moving back and forth across our borders in this region. Our FTZs are directly responsible for helping companies optimize their global supply chains, adding money to the bottom line, and creating jobs.”
Active, well-managed FTZs are not only an important tool in growing local business, but they are also a key element in recruiting global businesses to a region. The borderplex region boasts companies from Asia, Europe, and Latin America, whose operations depend on bringing in materials and components from other countries. Many have been responsible for locating suppliers in their supply chain to the region. As the push to move production companies from Asia to North America strengthens, FTZs will become even more critical in attracting new industry and foreign direct investment.
To view the FTZ Board report and to learn more about FTZ, visit https://www.trade.gov/foreign-trade-zones-board.
Jerry Pacheco is the executive director of the International Business Accelerator, a nonprofit trade counseling program of the New Mexico Small Business Development Centers Network. He can be reached at 575-589-2200 or at email@example.com.