In today's global economy, U.S. shippers are constantly searching for ways to reduce costs and streamline operations.
One of the most powerful tools available to them is the foreign trade zone (FTZ) — a designated area where goods can be stored, assembled, and processed with deferred or reduced customs duties.
FTZs offer businesses across various industries — from automotive to construction — significant financial and logistical benefits. They are often compared to bonded warehouses, a similar but distinct storage solution commonly confused with FTZs.
At Anderson Trucking Service (ATS), our international division helps shippers assess the best duty-deferred storage solutions for their cargoes by weighing these benefits against potential drawbacks, and we’re happy to help you do the same.
In this article, we’ll dive into what FTZs are, how they compare to bonded warehouses, and how to determine if your company could utilize FTZs to achieve those highly-sought-after savings. Let’s get started!
- What is a foreign trade zone (FTZ)?
- What’s the difference between an FTZ and a bonded warehouse?
- Is an FTZ right for your company?
What is a Foreign Trade Zone (FTZ)?
A foreign trade zone (FTZ) is a location within the United States that has special approval to operate under unique customs procedures that encourage international trade activity. These procedures are largely related to customs duty.
Customs duty is a tax or tariff imposed on goods when transported across international borders.
FTZs allow companies to import goods, store, assemble, process, or otherwise manipulate them without immediate customs duties.
The duties are only paid when goods leave the FTZ for domestic consumption, and goods exported from the FTZ may avoid duties altogether. FTZs are also sometimes called “free-trade zones” for this reason.
Shippers in many industries — including those in the automotive, energy, construction, and agricultural sectors — use FTZs to their strategic advantage.
Imagine you are an American manufacturer of heavy construction equipment. Every bulldozer you make starts its life as a collection of unassembled components — components that must be imported from a variety of different manufacturers in several foreign countries.
By shipping each of these components to an FTZ and assembling your bulldozers within the zone, you can avoid paying customs duty on each component individually. Instead, customs duty is paid on the finished product when it leaves the FTZ for shipping.
Why does this matter? Because your finished, assembled product may actually have a lower duty rate than its component parts. Smart shippers crunch the numbers on precisely this scenario and use FTZs to achieve major financial savings. Think of this method as a tax loophole that is 100 percent Uncle Sam-approved!
As you can imagine, FTZs are heavily favored by manufacturers of complex, multi-component goods for this reason — and several others, which we’ll get to below.
What’s the Difference Between an FTZ and a Bonded Warehouse?
Foreign trade zones and bonded warehouses are both used in international trade to help companies manage imports and exports more efficiently by deferring or reducing duties, but they have some key differences in how they operate.
And, hey, what is a bonded warehouse, anyway?
Another tool in a savvy shipper’s tool belt, a bonded warehouse is a secure storage facility where imported goods can be stored without payment of customs duties. Duties are only paid when the goods are withdrawn for domestic consumption. Bonded warehouses are largely managed by either a private party or the U.S. government.
Like goods stored in an FTZ, goods in a bonded facility can be re-exported without incurring duties. This is beneficial for companies importing goods with the intention of exporting them again, as they avoid customs costs entirely.
If you’re thinking to yourself, “That sounds a lot like an FTZ,” you’re not wrong — but their similarities end here. Let’s take a look at the crucial ways in which these two storage methods differ:
Operations and Flexibility
One of the most significant differences between FTZs and bonded warehouses is the ability to manipulate the goods stored within. In this case, “manipulating” stored goods can mean testing, assembly, manufacturing, repackaging, repairs — any action that changes the goods.
FTZs allow the manipulation of goods held within the zone. This flexibility is key to unlocking those decreased duty rates often associated with products assembled or manufactured within FTZs. Companies are also free to perform inspections, maintenance, and quality assurance on goods within the FTZ prior to shipping.
Bonded warehouses have a far more limited scope when it comes to the manipulation and assembly of goods, with many prohibiting it altogether. The goods must remain in their original state until duties are paid and they enter the domestic market or are re-exported.
Storage Duration
There is no limit to how long goods can stay within an FTZ. This is especially advantageous for businesses with long-term storage needs; it provides the freedom to manage stock levels within the FTZ in accordance with fluctuations in demand.
Bonded warehouses, on the other hand, typically limit how long goods can be stored (though the limit varies from country to country.) In the U.S., bonded warehouse storage duration is limited to five years. Depending on the speed and cadence of a company’s supply chain, this restriction could be a dealbreaker.
Compliance
Up to this point, you may be wondering why anyone would choose a bonded warehouse over an FTZ. Well, we’ve got one word for you: Compliance.
FTZs tend to involve more complex regulatory and reporting requirements than bonded warehouses. Companies must comply with Foreign Trade Zone Board regulations and customs laws while also managing detailed inventory control.
While bonded warehouses also require customs oversight and compliance, their regulatory environment is generally less complex. Because these types of facilities focus mainly on storage and inventory control, they are not subject to the rules and regulations relating to more complex manufacturing or assembly operations.
Is an FTZ Right for My Company?
If you’re interested in the cost savings associated with deferred-duty storage solutions, both FTZs and bonded warehouses offer those benefits. The choice largely depends on your business's need for a solution that can support operational complexity versus overall ease of compliance.
While FTZs offer broader operational scope and unlimited storage terms, bonded warehouse facilities tend to have simpler regulatory requirements. Here’s a quick guide to determining which type of solution is best for your business’s unique needs:
Ultimately, both FTZs and bonded warehouses offer valuable opportunities for cost savings, but FTZs generally offer greater flexibility and benefits for businesses with more complex operational needs.
Choose the Right Deferred-Duty Storage Solution
For shippers with complex international supply chains, the choice to utilize a foreign trade zone can have a substantial impact on their business’s bottom line.
FTZs provide a high degree of flexibility and operational scope for businesses handling imports and exports, particularly of multi-component finished goods.
By allowing these shippers to pay duty on assembled and/or finished goods when they leave the FTZ to enter the domestic market (as opposed to paying duties on each individual component of the product as they enter the U.S.), FTZs offer a significant cost-savings opportunity.
Often compared to FTZ, bonded warehouses also provide deferred-duty benefits, and tend to have simpler compliance standards. However, bonded warehouses do not allow goods to be manipulated in any way that affects their value — which limits the scope of potential duty-related savings — and storage terms are capped at five years,
The right choice for your company depends on the nature of your supply chain and business goals. By understanding what FTZs bring to the table and how they differ from simpler solutions like bonded warehouses, you can make informed decisions that enhance your efficiency and maximize your savings in international trade.
Customs bonds are one critical component of importing cargoes to the U.S. Learn more about them — and the bonded carriers and warehouses that support the process of moving in-bond freight — in our article Bonded Shipments: What You Need to Know About Transporting Freight In-Bond.
