What is a Foreign Trade Zone?

A Foreign or Free Trade Zone is neutral, secured area legally outside of U.S. Customs territory. Foreign or domestic merchandise may enter this enclave without a formal customs entry or the payment of customs duties or government excise taxes, and without a thorough examination.

If the final product is exported from the United States, no U.S. customs duty or excise tax is levied. If the final product is imported into the U.S., customs duty and excise taxes are due only at the time of transfer from the foreign trade zone and formal entry into the U.S. on the product itself or its imported parts, whichever is lower. Spoiled, damaged or waste goods may be disposed of or re-exported without payment of duty.

The Foreign-Trade Zones Act was created to "expedite and encourage foreign commerce" in the United States. This is accomplished through the designation of geographical areas, in or adjacent to Customs Ports of Entry, where commercial merchandise receives the same Customs treatment it would if it were outside the commerce of the United States. Merchandise of every description may be held in the Zone without being subject to Customs duties and other ad valorem taxes. This tariff and tax relief is designed to lower the costs of U.S.-based operations engaged in international trade and thereby create and retain the employment and capital investment opportunities that result from those operations.

These special geographic areas – Foreign-Trade Zones – are established "in or adjacent to" U.S. Ports of Entry and are under the supervision of the U.S. Customs Service. Since 1986, U.S. Customs' oversight of FTZ operations has been conducted on an audit-inspection basis, whereby compliance is assured through audits and spot checks under a surety bond, rather than through on-site supervision by Customs personnel.