U.S. Foreign-Trade Zone (FTZ) Program

U.S. Foreign-Trade Zone (FTZ) Program

Updated February 26, 2020
U.S. Foreign-Trade Zone (FTZ) Program
Congress passed the U.S. Foreign-Trade Zone Act (P.L. 73-
FTZ Activity Snapshot
397, 19 U.S.C. §§81[a-u]) in 1934, which authorized the
According to the FTZ Board’s 2018 annual report, there
creation of the FTZ Program. The intent of the program was
were 195 active zones (out of the approved 260) and each
to encourage international trade and increase U.S. exports.
state (plus Puerto Rico) has at least one zone. Over 440,000
FTZs are designated areas of the United States into which
people were employed at roughly 3,300 firms that used
zone users may import goods duty-free, subject to certain
FTZs during the year. The total value of merchandise
requirements, for warehousing or production purposes
received in FTZs was $794 billion. This includes domestic
within the zones. Duties are collected when goods leave the
goods brought into the zones from elsewhere in the United
zones for consumption in the United States and not when
States, foreign goods imported into the zones for which
exported. Similar programs exist in many other countries.
duties have already been paid (also considered to have
domestic status), and imports on which duties have not yet
The FTZ Act assigns administrative duties to the FTZ
been paid (considered to have foreign status). Domestic
Board, which establishes, operates, and maintains FTZs.
status goods represent the majority of merchandise entering
The FTZ Board is chaired by the Secretary of Commerce.
FTZs. In 2018, 63% ($497 billion) of goods were domestic
The Secretary of the Treasury serves as the Board’s
status compared to 58% ($429 billion) in 2012.
executive officer. The Secretary of Commerce appoints the
Executive Secretary, who is supported by a staff of eight.
Once in a zone, goods may be stored, assembled, destroyed,
The Department of Homeland Security’s Customs and
or manufactured. The majority of goods in FTZs is used in
Border Protection (CBP) advises the Board and enforces
production activities. Production activity is defined as
regulations, including protection and collection of tariff
activity that causes substantial changes of a foreign article
revenue.
or the change in customs classification for the article. In
2018, there were 330 active production operations and 63%
Every CBP port of entry is allowed to have at least one
of imported goods were used in production activity.
zone. FTZs are required to be within 60 miles or 90 minutes
driving time from the outer limits of a port of entry so CBP
Foreign goods imported into FTZs duty-free in 2018
can conduct compliance reviews. Zone operators (grantees)
accounted for almost 10% of total U.S. goods imports.
are usually state or local governments, port authorities, and
Major product categories were oil/petroleum and vehicles
economic development organizations. Grantees are required
and related parts, which respectively made up 25% and
to operate zones as a public utility and provide equal
17% of foreign-status goods (Figure 1). Exports from FTZs
treatment to all zone users.
accounted for almost 5% of U.S. goods exports.
Zone Types
Figure 1. Share of FTZ Foreign-Status Inputs, 2018
Until 2008, the FTZ Program designated specific areas to
operate as general purpose zones that host multiple users
under the Traditional Site Framework (TSF). The FTZ
Board cited the TSF as an outdated model that “imposed a
major burden on applicants, took a long time, and
consumed too many government resources.” To provide
flexibility to the FTZ program and expedited procedures,
the Board adopted the Alternative Site Framework (ASF) in
December 2008. The ASF operates as a service area within
60 miles or 90 minutes driving distance of a CBP port of
entry and introduces two types of sites: (1) magnet sites
meant to attract multiple users to a single area like a general
purpose zone, and (2) usage-driven sites that would bring
zone designation to a single user (subzones). Users looking
for FTZ designation within a service area can obtain it for
eligible facilities within 30 days. Subzones can also be
established outside an ASF service area as long as CBP
determines the ability to oversee it, but approval will
require a longer process of up to five months. Zones under

the TSF have an option to reorganize under the ASF.
Source: FTZ Board, 2018 Annual Report to Congress.
Today, around two-thirds of approved zones and most new
zone applications fall under the ASF.
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U.S. Foreign-Trade Zone (FTZ) Program
Potential Benefits and Concerns
may commence as soon as CBP activates the zone, unless
The FTZ Program offers zone users a variety of cost
users intend to use it for production activity. In that case,
savings including duty exemption, duty deferral, duty
users are required to apply for production authority from
reduction, tax savings, and bundling of merchandise
the FTZ Board (Figure 2). This additional step, which
processing fees (see text box on “Types of Cost Savings”).
includes a public comment period, seeks to ensure domestic
They may also benefit from improved logistic efficiencies,
suppliers are not harmed as a result of foreign import
such as direct delivery of merchandise into FTZs and ease
competition. In 2012, the FTZ Board implemented new
of transfers between zones. In general, users that benefit the
regulations that simplified the production application
most from FTZs are those that deal with high volume
process, and introduced an optional two-stage procedure,
activity.
potentially shortening the processing time from more than
one year to 120 days.
Supporters of FTZs argue that the program has an overall
positive impact on the U.S. economy as it provides
In the first stage, grantees, on behalf of the user, submit a
incentives for companies to keep manufacturing operations
production notification. If the FTZ Board does not find
in the United States due to its tariff benefits. This, they
issues during the 120-day review and stakeholders do not
argue, generates manufacturing jobs as well as service jobs
object during the public comment period, the user can begin
in the communities surrounding FTZs. A 2017 Government
production activity with full approval or partial approval for
Accountability Office (GAO) report, however, found that
specified goods. If full approval is not given, companies
few studies had been done on the economic impact of
have the option to submit a production application for
FTZs, and noted that these studies are mostly theoretical
consideration under a more extensive review process based
and lack quantitative analysis. GAO also raised concerns on
on a set of criteria listed under FTZ regulations (15 C.F.R.
CBP’s ability to assess and respond to compliance risks
§400.27). In response to concerns raised by GAO, the FTZ
across the program. In response, CBP has since conducted a
Board updated its procedures in November 2018 to
program-wide risk assessment in 2018 and continues to
document consideration of all criteria listed in the
update its compliance review handbook.
regulations during the review process.
Types of Cost Savings
Figure 2. Overview of Application Process
Duty exemption: No duty is paid for imported goods that
are subsequently exported out of or destroyed in a zone.
Duty deferral: Users pay duty only when goods enter the
United States for consumption, allowing users more control
over their cash flow.
Duty reduction: On inverted tariff situations, when the duty
rate of a finished good is lower than the input, users can
choose to pay the lower rate with prior authorization.
Tax savings: Goods held in zones for export are not subject
to state or local inventory taxes. Some jurisdictions may
provide additional benefits to FTZs.
Bundling of merchandise processing fees: Users can file
one entry and pay the merchandise processing fee (up to
$485) once per week for multiple shipments instead of filing

separate entries for each shipment leaving the zone.
Source: FTZ Board.
Notes: *Users may apply for production authority and zone
Some companies have raised concerns that tariff exemption
designation simultaneously.
and reduction put competing domestic producers at a
disadvantage when zone users opt to import rather than
Issues for Congress
source domestically. There are also concerns that those
FTZ users have access to tariff-related and logistical
benefits result in a loss of tariff revenue for the United
benefits, which may have become increasingly relevant in
States, although U.S. tariffs constitute a small part of total
light of the Administration’s various tariff increases since
government revenue. Furthermore, some opponents of
2018. Congress may conduct oversight of the program in
FTZs argue that few industries benefit from the program
general and explore specific issues, including:
and the resources required to operate in a zone, including
 The costs required to gain access to and maintain
the application process, make the program less accessible to
operations in FTZs that may affect accessibility.
all companies. The FTZ Board attempts to address these
 The limited information on the program’s overall
concerns by inviting input during the application process
economic impact.
from domestic stakeholders that may face a negative impact

from new FTZ activity, as well as streamlining the
CBP’s current efforts to update its compliance
application process to increase accessibility to the program.
review handbook.
Application Process
Liana Wong, Analyst in International Trade and Finance
The application process may require additional
IF11348
administrative costs that affect accessibility. Operations
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U.S. Foreign-Trade Zone (FTZ) Program

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