Duty Deferral and Elimination

For many companies, the primary benefit of a Foreign-Trade Zone is the deferral of duties for foreign goods stored in a Foreign-Trade Zone prior to admission into domestic commerce, and the elimination of duties for foreign goods brought into a Foreign-Trade Zone and re-exported. For this reason alone, many distributors of foreign goods operate distribution facilities in Foreign-Trade Zones. Although retail trade is prohibited in a Foreign-Trade Zone, retailers may also benefit from duty deferral by warehousing in a Foreign-Trade Zone.

Lower Duty Rates

A significant cost savings is available for manufacturers or assemblers dealing with completed products that are subject to an inverted tariff, i.e., goods in which component parts have a higher duty rate than does the finished product. By bringing the component parts into the Foreign-Trade Zone on a non-privileged basis, and manufacturing or assembling the finished article in the Zone, the foreign components will be subject to duty at the lower, finished product rate.

For example, the Port of New Orleans established a subzone for the manufacture of steel barges by Equitable Equipment Company, Inc. Equitable Equipment imported comparatively inexpensive Japanese steel plates and sheets, which were subject to a 7.5% ad valorem duty. Barges, however, are exempt from duty. Equitable Equipment was therefore able to eliminate duty on the imported parts of the barges by bringing the steel in to the subzone, manufacturing the barges there, and then transferring the completed barges into the domestic commerce of the United States.

Each of the major U.S. automoble manufacturers, as well as a number of foreign automobile manufacturers, assemble automobiles in Foreign-Trade Zones to eliminate inverted tariff situations. The tariff on a completed automobile is 2.5%, whereas a number of foreign components are dutiable at significantly higher rates. As a result, the automobile manufacturers are able to pay an effective 2.5% duty rate on foreign components of automobiles.

The reverse of an inverted tariff situation may also be avoided in a Foreign-Trade Zone. If a finished product is dutiable at a higher rate than foreign components, the foreign components may be brought into a Foreign-Trade Zone in privileged status, and thereby retain their identity even after assembly with other products. Thus, when the finished product is removed from the foreign-Trade Zone into domestic commerce, the lower duty rate of the component product applies.

Quota Restrictions Not Applicable

Import quotas are generally not applicable to goods stored in Foreign-Trade Zones. If an importer of product subject to quota finds that he has obtained over-quota merchandise, he may store the merchandise in a Foreign-Trade Zone rather than re-exporting the merchandise, and subsequently bring the merchandise into the domestic commerce of the United States during the next quota period. Importers who come across bargain purchases of over-quota merchandise may similarly store the merchandise in a Foreign-Trade Zone until there is an available under the quota to bring the merchandise into domestic commerce.

In some instances, products subject to a quota may be brought into a Foreign-Trade Zone and substantially transformed into a product that is not subject to a quota. This procedure is not always available. There are substantial restrictions, for example, on the availability of this procedure for textile products and with regard to products made from imported sugar.

Obtain Domestic Marking

Foreign components that are substantially transformed within a Foreign-Trade Zone lose their identity as foreign merchandise. The finished product is then marked as a U.S product. This is particularly important for companies desiring to market U.S. products. It can also be important when non-U.S. products are subject to use restrictions. For example, the barges manufactured by Equitable Equipment (discussed above) were marked as made in the U.S., and, therefore, eligible to lade and unlade cargo at points where lading is restricted

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From: Tax and Financing Incentives-A Tribal Perspective (1993)

R. Chris Wyatt is the Director of The North American Free Trade Agreement Office (NAFTA) for Price-Waterhouse in Houston, Texas.
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