A Foreign Trade Zone (FTZ) is an area that is considered outside the customs jurisdiction of a country where cargo can be placed in a duty and tax-free environment until ready to enter the country. The main advantages of FTZ are thus regulatory and financial, which enables unique and flexible supply chain management practices:
- Custom clearance. Since the FTZ is a bounded facility, customs clearance can be done inland instead of at the port of entry, and the consignment can stay in the bounded area for an unlimited amount of time. It is likely that this can be done faster inland because the facility is less congested than a large gateway port. Thus, the consignee gets better notice about the availability of his shipment and can plan his supply chain management accordingly. If a quota is imposed on a type of good, an FTZ can be used to postpone the entry until the quota is lifted or until the good is transformed into another good not subject to quotas.
- Duties and fees. Despite decades of trade liberalization, duties and merchandise processing fees (fees paid to customs to cover inspection and processing costs even if no duties are levied) are still levied on international trade. With an FTZ, duties are not paid until the consignment is shipped out (re-exported) and can be deferred further if moved to another FTZ. Therefore, an FTZ can be an inventory management strategy for high-duty goods and servicing a multinational market from a single distribution center. For instance, a large quantity of high-duty goods can be imported and stored in an FTZ. Then the products can be gradually sold with the duty paid only when they leave the FTZ. If a transformation (e.g. assembly, labeling, testing) is performed within the FTZ, this added value activity is not subject to duties. It can change the duty class of a product to a more preferential level. Commonly, duties are not levied if a product is damaged, defective, or obsolete since its commercial value is considerably reduced. Thus, by inspecting products in an FTZ, the duty will be waived for any defective products. This is particularly useful for products that have a higher propensity to be damaged or defective.
- Settlement. For most transactions, particularly through letters of credit, the vendor is not paid until the consignment has left a facility (FTZ and/or transport terminal). An FTZ can thus be used to delay settlement until judged suitable by the consignee and also offers the opportunity to readily remove the value of damaged or defective products from the settlement.
- Security. Since FTZs are secure areas of customs jurisdiction, insurance rates are lower because of the reduced theft risks. FTZ can also present the opportunity to delay the inspection and entrance of cargo that does not comply with national regulations.
- Transformation and manufacturing. Cargo can be brought to an FTZ and transformed (e.g., labels) to comply with customs regulations, such as for labels. It makes it possible to import specific categories of goods without going through customs procedures as long as they remain within the FTZ. In the FTZ, the goods can be transformed (e.g. assembled, tested, packaged) into other goods and then “exported” out under a different custom category.