Foreign trade zones internationally known as “free trade zones” – are areas in which goods can be “landed, handled, manufactured or reconfigured, and re-exported without the intervention of customs authorities.” Designed to promote economic development and facilitate international trade, Foreign trade zones offer a way to lower – or even avoid – duties and tariffs and are often seen as a way to benefit import-export businesses and their supply chains.
Utilized by small and large businesses a like, Foreign trade zones are typically organized within major international airports, seaports, and national frontiers,While not new, Foreign trade zones have become of interest recently because of changing tariff rates and shifts toward trade protectionism. As a result, more zones seem to be popping up – even in small towns and rural areas that contain no major import-export businesses, let alone a major port.
Reducing Supply Chain Stress
The main purpose of an Foreign trade zones is to reduce stress on the supply chain by eliminating potential obstacles caused by high costs and complex customs procedures. This reduction of formal custom regulations can lead to faster turnaround of shipping vessels, thus increasing trade efficiency.
Foreign trade zones can also promote the ability to “fabricate, refinish, and store goods freely,” further taking some of the hassle out of supply chain management. For example, standard Foreign trade zones can provide leasable storage and distribution space in warehouse-type buildings, allowing access to various industrial sites and modes of transportation. This allows import-export businesses to construct temporary facilities within an FTZ and manufacture products without paying high import fees. Qualified corporations can operate the facilities themselves.
Benefits of Foreign Trade Zone
One of the main advantages of an FTZ is that goods exported are not subject to duties or excise taxes. Similarly, certain personal property can be exempt from state and local ad valorem taxes. FTZs might also encourage healthy international business competition by making it more desirable for companies – import-export businesses and others – to manufacture domestically instead of overseas.
What’s more, FTZs can help eliminate disincentives or imbalances that are sometimes associated with manufacturing supply chains and import-export businesses. For example, if a product is manufactured abroad and imported into the U.S., duties are calculated according to the finished product rather than on its individual components. This can leave a U.S.-based manufacturer at a disadvantage compared with a foreign competitor, who might pay a lower rate on components. FTZs can remedy this imbalance by treating products made within the zone as if they were manufactured abroad, reducing the ultimate cost of manufacturing.
Recent Trends and the Future of Foreign Trade Zone
“In a world where trade barriers increase, foreign trade zones become more valuable,” said former U.S. trade negotiator Matt Gold. As the realm of import-export trade changes – sometimes in favor of trade protectionism – tariffs can increase and longtime free trade agreements might become vulnerable.
The recent revitalization of FTZs extends beyond a response to trade protectionism, however. “Digital” free trade zones appear to be on the rise. In November 2017, Jack Ma, co-founder of Alibaba, opened a Digital Free Trade Zone (DFTZ) in Malaysia as a response to Southeast Asia’s booming e-commerce sector. Rather than being a geographical location, the DFTZ is based on an electronic platform. The Intent of the DFTZ is to allow smaller businesses – even one-person online merchants – to “make use of the trade hub as easily as larger companies.”
Although an FTZ can be, theoretically, created anywhere, it is difficult to create a zone without large areas of undeveloped land – especially near ports. And if FTZs are developed near residential environments, the walls and fencing necessary for such commercial developments “potentially could make the setting-up of a FTZ disruptive for existing land owners/users.”
Supporters of FTZs say these zones can ease the effects of tariff increases, combat trade protectionism, and help businesses compete internationally. Critics, however, suggest that the actual impact of FTZs is unclear. According to some, “the zones hurt domestic suppliers by making it easier for companies to source components from overseas.” However, the majority of research on the effects of FTZs, thus far, seems to be based on theoretical arguments rather than statistical evidence.
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