Foreign Trade Zone (FTZ) Frequently Asked Questions (FAQs)

Since Congress signed the concept into legislation in the Foreign Trade Zones Act of 1934, FTZs have been used to empower American companies to compete more effectively in an increasingly globalized economy. Located in or near Customs and Border Patrol (CBP) ports of entry, they are the United States’ version of what are known internationally as free-trade zones.

A FTZ is a secure area authorized by the federal government in which commercial domestic and foreign merchandise receives the same treatment by U.S. Customs as if it were outside the commerce of the United States. Many organizations use FTZs to defer the payment of duties and taxes, and in the case of re-export of cargo, avoid the applicable duties and taxes all together as the merchandise was considered to have never entered the US consumption area.

There are two types of FTZs: 1) General Purpose Zones and 2) Special Purpose Subzones. General Purpose Zones operate as public utilities providing a variety of services to many users. Special Purpose Subzones are single-use facilities which cannot be accommodated within the General Purpose Zone.

Global firms use FTZ to maintain the cost competitiveness of their U.S. based operations in relation to their foreign-based competitors. Zone status provides an opportunity to reduce certain operating costs associated with a U.S. location that are avoided when operating from a foreign site. 

Furthermore, importers, manufacturers, and distributors can realize cost-savings benefits because normally when foreign cargo lands on US soil, it is subject to clearance through Customs and requires immediate payment of US Customs duties. This tariff and tax relief is designed to lower the costs of US-based businesses engaged in international trade and thereby create and retain the employment and capital investment opportunities that result from those operations. 

Foreign Trade Zones operate under the oversight of the Foreign Trade Zones Board, which allows for any merchandise that is not expressly prohibited from U.S. entry to be admitted into an FTZ. Activities allowed in an FTZ include assembly, exhibition, cleaning, mixing, processing, relabeling, repackaging, salvage, repair, sampling, testing, storage, and display of merchandise. The FTZ Board must specifically authorize production activity, which is defined as the substantial transformation of a foreign article or an activity that changes the condition of an article to such an extent that its customs classification or eligibility for entry into the U.S. for consumption is also changed. Retail trade is not permitted in Foreign-Trade Zones. 

While FTZs are designated as international commerce sites, they remain within the authority of all applicable local, state, and federal agencies, which may still require import licenses or permits for activities within the FTZ. If a product is determined to be harmful to public safety or health, or if FTZ facilities do not meet storage and handling requirements, the FTZ Board may exclude it from entry. 

The FTZ Board reviews and approves applications to establish, operate and maintain Foreign Trade Zones. The FTZ Board may approve a zone or subzone that it deems necessary to serve adequately “the convenience of commerce.” U.S. Customs and Border Protection must approve activation of the zone before any merchandise is admitted under the Foreign-Trade Zones Act. 

For Logistic Service Providers (LSPs) operating an FTZ, there are detailed chain of custody, access, shipment release, and recordkeeping requirements in place. The good news is that these standards are clearly defined and can easily be formalized as rules, which makes them an excellent target for automation through technology. Since most LSPs that operate an FTZ also perform other work and services for their customer base including shipment management, customs clearance, classification, or warehousing, technology that can automate a broad range of LSP tasks is required to be successful.