Worried About Tariffs? Find Out More About Foreign Trade Zones

Patrick J. Hinker, CPA and Eric J Schnieber, CPA/CFF, CFE, Clark Schaefer Hackett

If you are an importer of raw materials, component parts or finished goods, you may be concerned about how the current administration’s proposed import tariffs may impact your business. Through a series of announcements earlier this year, the White House has proposed tariffs on approximately 1,000 products, ranging from solar panels and washing machines to steel and aluminum. While imports from China have been a specific point of emphasis, those from Canada, Mexico and the European Union have been targeted, too.

What can importers do? 

While the notion of tariffs may have importers worried, there may be ways to defer, reduce or even eliminate the associated customs duties. Have you heard of a foreign trade zone (FTZ)?

An FTZ is a designated, restricted-access site in the U.S. that is legally considered outside of customs territory for the purpose of duties and taxes. Goods can therefore be imported into the FTZ duty-free and without formal customs entry. Tariffs and duties are paid only at the time that goods are transferred out of the zone for U.S. consumption. For those goods that are re-exported from the FTZ (i.e., they never enter the U.S. economy), it is possible that no duties will ever be owed.

Companies can establish a designated FTZ within their warehouse or facility, and products imported into the zone can then be mixed with U.S. sourced goods. Some of the activities permitted inside the zone include manufacturing, assembly, repackaging, processing, and relabeling (among others). These processes add value to the product and may allow FTZ users to elect the lower duty rate applied to either the foreign inputs or the finished product manufactured in the zone, often resulting in a reduction of duties (also called an inverted tariff).

One current situation negatively impacting U.S. companies’ use of the FTZ relates to Section 301 of the U.S. Trade Act of 1974. Section 301 creates a “privileged foreign status” for certain imports.  Any “privileged foreign status” goods entered into an FTZ will be subject to the tariff rate applicable for that good. In other words, Section 301 eliminates the ability to use an inverted tariff for imports.

What next?

Most manufacturers and distributors aren’t fully aware of FTZs or the cost savings they can offer. To determine if a FTZ is a good fit for your organization, you’ll want to consider your level of international trade, specifically the volume of imports. You will also want to work with professionals who can help you through the application, implementation, activation and approval phases.