The recent public announcement regarding the extension of the Foreign Trade Zone (FTZ) to the Rafael Hernandez Airport in the northwestern town of Aguadilla could produce a renewed interest from domestic and global businesses concerning the purpose and niceties of this international trade operation.
The inclusion of the aforementioned airport to a group of other 84 FTZ airports throughout the US, should not surprise our insular colleagues who should be aware of the historical fact that contemporary zone growth started with an 1959 “experiment” for reuse of the Shannon Airport in Ireland.
In the United States the 1934. Foreign-Trade Zones Act (P.L. 73-397) was enacted, in the middle of the Great Depression, intended to step up American trade after other federal legislation increased tariffs on imported goods. Although it was intended to expedite and support international trade while promoting domestic movement and investment, it has been used as a job creation program.
But, what are really FTZ’s? What role does CBP have? Foreign-Trade Zones are protected areas under U.S. Customs and Border Protection (CBP) supervision that are generally considered outside customs territory upon activation. The Foreign-Trade Zones Board, overseen by the U.S. Department of Commerce and the US Department of Treasury, has the statutory authority for establishing the establishment of zones, the endorsement of particular production activity, and the general supervision of all zones. CBP is responsible for the transfer of merchandise into and out of the FTZ and for matters involving the collection of revenue.
In Puerto Rico the CBP Area Port of San Juan is responsible for the supervision zone activity as the local representative of the Foreign-Trade Zones Board, managing the admission of merchandise into the zone, the handling and disposition of merchandise in the zone, and the removal of merchandise from the zone. In addition to the Foreign-Trade Zones Act, the Area Port enforces all laws normally enforced by CBP that are relevant to foreign-trade zones.
Qualified public or private corporations that may operate the facilities themselves or contract for the operation sponsors foreign-trade zones. The operations are conducted on a public utility basis, with published rates. Subzones are normally private plant sites authorized by the Board and sponsored by a grantee for operations that usually cannot be accommodated within an existing general-purpose zone. For Puerto Rico, there are three authorized zones:
Aerial shot of the Rafael Hernández Airport in Aguadilla. (Credit: Google Maps)
FTZ #61 – grantee is the Puerto Rico Trade and Export Company has its main facilities are in the Cataño/Guaynabo wards and now is extended to the Rafael Hernandez Airport in Aguadilla.
FTZ #7- grantee is the Puerto Rico Industrial Development Corporation, located in Mayaguez.
FTZ #163 – grantee is CODEZOL Inc., located in Ponce.
What can be done and placed in a Zone?
Foreign and domestic merchandise may be moved into zones for operations, not otherwise prohibited by law, including storage, exhibition, assembly, manufacturing, and processing. All zone activity is subject to public interest review.
Foreign-trade zone sites are subject to the laws and regulations of the United States as well as those of the states and communities in which they are located. Merchandise, which lawfully cannot be imported into the United States, is prohibited without exception. Furthermore, placing merchandise subject to a quota into a zone cannot circumvent quota on the imported merchandise.
No retail trade of foreign merchandise may be conducted in a FTZ. However, foreign and domestic merchandise may be stored, examined, sampled, and exhibited in a zone. The Foreign-Trade Zones Board may exclude from a zone any merchandise that is in its judgment detrimental to the public interest, health, or safety.
The Board may place restrictions on certain types of merchandise, which would limit the zone status allowed, the kind of operation on the merchandise in a zone, the entry of the merchandise into the commerce, or similar transactions or activities.
Many products subject to an internal revenue tax may not be manufactured in a zone. These products include alcoholic beverages; products containing alcoholic beverages except domestic denature distilled spirits, perfumes containing alcohol, tobacco products, firearms, and sugar. In addition, the manufacture of clock and watch movements is not permitted in a zone.
What are the advantages?
CBP duty and federal excise tax, if applicable, are paid when the merchandise is transferred from the zone for consumption in the US. While in the zone, merchandise is not subject to U.S. duty or excise tax. Among other advantages:
- Certain tangible personal property is generally exempt from state and local ad valorem taxes.
- Goods may be exported from the zone free of duty and excise tax.
- CBP security requirements provide protection against theft.
- Merchandise may remain in a zone indefinitely, whether or not subject to duty.
The rate of duty and tax on the merchandise admitted to a zone may change as a result of operations conducted within the zone. Therefore, the zone user who plans to enter the merchandise for consumption to CBP territory may normally elect to pay either the duty rate applicable on the foreign material placed in the zone or the duty rate applicable on the finished article transferred from the zone whichever is to its advantage.
The FTZ program encourages U.S.-based operations by removing certain disincentives associated with manufacturing in the United States. The duty on a product manufactured abroad and imported into the U.S. is assessed on the finished product rather than on its individual parts, materials, or components. The U.S. based manufacturer finds itself at a disadvantage compared with its foreign competitor when it must pay a higher rate on parts, materials, or components imported for use in a manufacturing process.
The FTZ program corrects this imbalance by treating products made in the zone, for the purpose of tariff assessment, as if it were manufactured abroad. At the same time, this country benefits because the zone manufacturer uses U.S. labor, services, and inputs.