What is Foreign Trade Zone (FTZ) and the Benefits for US Manufactured Products

A Foreign Trade Zone (FTZ) is a designated geographical area within a country’s borders where certain trade barriers, such as tariffs, quotas, and customs duties, are eliminated or reduced for goods imported into the zone. The purpose of FTZs is to promote economic growth, facilitate international trade, and encourage investment by providing advantages to businesses engaged in import-export activities.   

For ecommerce brands manufacturing products in the US but assembling components imported from abroad, you can reduce customs duties by warehousing the finished products in a Foreign Trade Zone in the US.  

Shipping internationally is complex, but leveraging FTZs can offer significant benefits, enabling them to optimize their supply chain management, reduce costs, and enhance their competitiveness in the global marketplace.  

Here’s a closer look at what FTZs entail for ecommerce brands, along with examples of when they can be beneficial and best practices for execution. 

Understanding and Using FTZs for Ecommerce Business 

High-growth ecommerce brands are always trying to ensure they are maximizing their supply chain for lowered operational costs.  

Also known as an inverted tariff, an FTZ program means the tariff on a component is higher than the tariff on the corresponding finished good when imported for US consumption. By implementing an FTZ strategy FTZ zone users can benefit from lower merchandise processing fees and reduced import costs.  

Here are many ways FTZs can help support your global trade and ecommerce business. 

1. Reduced Customs Duties and Tariffs: One of the primary advantages of operating within an FTZ is the ability to defer, reduce, or even eliminate import duties and tariffs on imported goods until they are transferred out of the zone for domestic consumption. This can result in substantial cost savings for ecommerce brands importing products for sale. 
2. Streamlined Customs Procedures: FTZs often offer streamlined customs procedures, allowing for faster clearance of goods through customs processes. This efficiency can help ecommerce brands reduce lead times and improve overall supply chain efficiency. 
3. Inventory Management: Ecommerce companies can use FTZs as distribution centers or fulfillment centers to store imported inventory duty-free until it is sold domestically. This enables them to maintain lower inventory carrying costs and respond quickly to fluctuating demand without incurring additional customs duties. 
4. Value-Added Services: FTZs may also offer value-added services such as labeling, repackaging, and assembly, allowing ecommerce brands to customize products or packaging to meet specific market requirements without the burden of additional customs duties. 

Examples of When FTZs are Beneficial for Ecommerce Brands

Not all international shippers should make use of an FTZ strategy. Because import fees, customs, import duties, and tariffs change often due to international trade agreements, the need or benefits associated with FTZs may shift.   

Here are the best cases when FTZs will be the most beneficial. 

• High-Tariff Products: Ecommerce brands importing high-tariff products, such as electronics or luxury goods, can benefit significantly from an inventory management strategy with an FTZ program, often by lowered duty rates, duty exemption, or duty deferral thereby improving profit margins. 
• Seasonal Products: For brands dealing with seasonal products or fluctuating demand, FTZs provide flexibility in inventory management by allowing them to store goods duty-free until needed, reducing the risk of excess inventory or stockouts. 
• Global Expansion: When expanding into new international markets, ecommerce brands can use FTZs as strategic hubs for distributing products regionally, leveraging the benefits of reduced customs duties and streamlined logistics to penetrate new markets more efficiently. 
• Customizable Products: Ecommerce brands offering customizable products or personalized services can utilize FTZs for value-added activities such as assembly, labeling, or packaging customization without incurring additional customs duties, thereby enhancing their competitive advantage. 

Best Practices for Executing FTZ Strategies for Ecommerce Brands 

Whether you outsource fulfillment and logistics to a 3PL or manage it in-house, these are the best practices for ensuring your FTZ strategy optimizes your international ecommerce business. 

1. Strategic Location Selection: Choose FTZ locations strategically based on proximity to key markets, transportation infrastructure, and access to suppliers to optimize logistics and distribution efficiency. 
2. Compliance Management: Ensure compliance with FTZ regulations and customs procedures to avoid penalties or disruptions to operations. Maintain accurate record-keeping and documentation to facilitate customs clearance and audit processes. 
3. Supply Chain Integration: Integrate FTZ operations seamlessly into the overall supply chain strategy, coordinating with suppliers, logistics providers, and fulfillment partners to maximize efficiency and minimize costs. 
4. Continuous Improvement: Regularly evaluate FTZ operations and performance metrics to identify opportunities for optimization and continuous improvement. Stay informed about changes in FTZ regulations or trade policies that may impact operations. 
5. Risk Management: Implement robust risk management practices to mitigate potential risks associated with FTZ operations, such as compliance violations, inventory shrinkage, or supply chain disruptions. 

What is Considered an FTZ and How are FTZ Users Managed? 

There are various types of FTZs. General Purpose Zones are usually an industrial park or port complex whose facilities are available for use by the general public. Subzones are sponsored by General Purpose Zones and are normally single-purpose sites for operations that cannot be feasibly moved to or accommodated in a General Purpose Zone. 

The Foreign-Trade Zones Board is a federal agency responsible for overseeing and administering the Foreign-Trade Zones program in the United States. The Foreign-Trade Zones Act of 1934 created a FTZ board to review and approve applications to establish, operate, and maintain foreign-trade zones.  

The U.S. Customs and Border Protection (CBP) plays a crucial role in regulating Foreign Trade Zones (FTZs) within the United States. CBP is responsible for ensuring compliance with customs entry, payment of duties, and all port of entry laws and regulations. 

Bottom Line  

In conclusion, leveraging FTZs can offer significant advantages for ecommerce brands seeking to optimize their global supply chain operations, reduce import/export costs, and enhance competitiveness in the international marketplace. By understanding the benefits of FTZs, identifying strategic opportunities, and implementing best practices for execution, ecommerce brands can effectively capitalize on the opportunities afforded by FTZs to drive growth and success in the global economy.

Tags: International, Omnichannel Fulfillment