Operational Advantages of Foreign Trade Zones (FTZ)

A Foreign Trade Zone (FTZ) is an area that is considered outside the customs jurisdiction of a country. It makes possible to import specific categories of goods without going through custom procedures as long as the goods remain within the FTZ. In the FTZ, the goods can be transformed (e.g. assembled, tested, packaged) into other goods and then "exported" out under a different custom category. The main advantages of FTZ are thus regulatory and financial:

• Custom clearance. Since the FTZ is a bounded facility, the custom clearance can be done inland instead of at the port of entry and the consignment can stay in the bounded area for an unlimited amount of time. It is likely that this can be done faster inland because the facility is less congested than a large gateway port. The consignee thus gets a better notice about the availability of his shipment and can plan his supply chain management accordingly.
• Duties. In spite of decades of trade liberalization, duties are still levied on international trade. With a FTZ duties are not paid until the consignment is shipped out and can be deferred further if moved to another FTZ. If a transformation (e.g. assembly, labeling, testing) is performed within the FTZ, this added value activity is not subject to duties and can change the duty class of a product to a more preferential level. Commonly, duties are not levied if a product is damaged, defective or obsolete since its commercial value is considerably reduced. Thus, by inspecting products in a FTZ, the duty will be waived for any defective products. This is particularly useful for products that have a higher propensity to be damaged or defective.
• Settlement. For most transactions, particularly through letters of credit, the vendor is not paid until the consignment has left a facility (FTZ and/or transport terminal). A FTZ can thus be used to delay settlement until judged suitable by the consignee and also offers the opportunity to readily remove the value of damaged or defective products from the settlement.

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