Introduction

Foreign-Trade Zones are special commercial and industrial areas in or near ports of entry in the United States and Puerto Rico where foreign and domestic merchandise, including raw materials, product components, and finished goods, may be brought without being subject to payment of U.S. customs duties. These zones are particularly useful to business firms engaged in manufacturing for world markets, exporting U.S. products, reexporting from the U.S., importing for the U.S. market, and transshipping foreign goods via the U.S.

At a Foreign-Trade Zone merchandise may be assembled, packaged, displayed, stored, processed or manufactured and subsequently shipped to world markets. Merchandise is not subject to customs duties unless and until it actually leaves the zone for entry into the U.S. market. No duties apply on foreign merchandise or components brought to a zone for processing or transfer, provided they are reshipped abroad from the zone.

In addition to the commercial and industrial opportunities available to a business firm at a location in the United States, firms utilizing the facilities and services of a Foreign-Trade Zone also may enjoy many business advantages usually attributed to an overseas location. Foreign-Trade Zones in the United States can provide a profitable alternative to establishing production and marketing activities abroad. These are but a few of the opportunities afforded to business firms in a U.S. Foreign-Trade Zone:

• Duty-free and quota-free manufacturing for export utilizing foreign components.

• Defer outlay of working capital for payment of customs duties on foreign merchandise or components until actual importation of goods to the U.S. market.

Obtain immediate export status for U.S. exports.

Erect, install, and operate production or distribution facilities, and employ local labor, technology, and management-within the United States, but outside of its customs boundary.

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Production of articles in zones by combined use of domestic and foreign components makes unnecessary either sending the domestic materials abroad for manufacture or the duty paid on bonded importation of the foreign materials into this country. Duties on foreign components involved in such processing or manufacturing are payable only on the actual quantity of such foreign components incorporated in merchandise transferred from a zone for entry into the U.S. market. If there is waste resulting from processing, allowances are made for it. This eliminates payment of duty except on the actual amount of foreign material coming into the U.S. market.

Related Zone Privileges

1. Foreign merchandise may be brought into a zone without customs entry, and without the payment of duties or furnishing of bond therefor. This makes it unnecessary to tie up operating capital in these items. If merchandise is reexported, there is no drawback problem: and if merchandise ultimately is transferred into customs territory, duties are paid only on the merchandise actually transferred.

Generally speaking, the costs of harbor transportation, handling, and storage of zone merchandise are comparable with those involved in the use of corresponding types of facilities in customs territory, so that the aforesaid savings are not offset by any additional costs.

2. Domestic merchandise may be taken into a zone and, provided its identity is maintained in accordance with prescribed regulations, may be returned to customs territory free of quotas and duty. This is permitted so that domestic merchandise may be used in manipulations, manufactures, or exhibits, and also, for example, used for packing material.

3. There are a variety of possibilities for savings through manipulations and manufacture in a zone.

For example, many products shipped to the zone in bulk can be dried, sorted, graded, or cleaned, and bagged or packed, permitting savings of duties and taxes on moisture taken from content or on dirt removed and culls thrown out. From incoming shipments of packaged or bottled goods, damaged packages or broken bottles can be removed. Where evaporation results during shipment or while goods are stored in the zone, the contents of barrels or other containers can be regaged and savings obtained, as no duties are payable on the portions lost or removed. In other words, barrels or other containers can be gaged at the time of transfer to customs territory to insure that duties will not be charged on any portion of their contents which has been lost owing to evaporation, leakage, breakage, or otherwise.

Considerable savings can be made in ocean freight, and sometimes in duties and taxes, by shipping unassembled or disassembled furniture, machinery, etc., to the zone and assembling or reassembling them there. Merchandise may be re-marked or relabeled in the zone to conform to requirements for entry into the commerce of the United States if otherwise up to standard.

Substandard foods and drugs may, in certain cases, be reconditioned to meet the requirements of the Food, Drug, and Cosmetic Act.

4. There is no time limit as to how long foreign merchandise may be stored in a zone, or when it must be entered into customs territory, reexported, or destroyed. When commodities are not affected by long

storage (or when storage for aging is necessary) and prices fluctuate only over periods of years, this is an obvious advantage.

5. Foreign merchandise in bonded warehouses may be transferred to the zone at any time before the limitation on its retention in the bonded warehouse expires. This may result in substantial savings if the final disposition of merchandise is to be long delayed for one reason or another, but such a transfer to the zone may be made only for the purpose of eventual exportation or destruction.

6. When foreign merchandise is taken into the zone from customs bonded warehouses for the sole purpose of exportation or destruction, the bond is canceled and all obligations in regard to duty payment, or as to the time when the merchandise is to be reexported, are terminated. Similarly, the owner of domestic merchandise stored in customs or internal revenue bonded warehouses may transfer his goods to a zone for the sole purpose of exportation, and obtain cancellation of bonds. If such products are subject to taxes, such taxes may be avoided or refunds obtained for taxes already paid. Consequently, the owner's funds that otherwise would be tied up in taxes are at hand for investment in the business proper. A manufacturer, operating in customs territory and using dutiable imported materials in his product, may also obtain drawback of duties paid or cancellation of bond upon transferring the product to the zone and complying with the appropriate regulations. Thus, he need not wait until he finds a foreign customer, or until his customer is ready for delivery, to obtain these benefits.

Notwithstanding these advantages, it is apparent that the trade is not taking full advantage of the many benefits to be derived from zone use. However, it is gratifying to note that operations in the zones are beginning to reflect their potentials for carrying out the intent of the Congress in providing for such means to encourage and expedite foreign trade.

EXAMPLES OF ZONE OPERATIONS

There are countless opportunities for imaginative, convenient and profitable business operations in foreign-trade zones. The following are examples of activities that have been, or are being conducted in zones around the country:

New York

For many years an importer has been renting the heated area of several thousand square feet of space on an annual basis at the New York Foreign-Trade Zone. This firm brings to the zone new designs and weaves of British woolen textiles and suiting materials in bolts and rolls packed in cases. These are unpacked upon arrival and the contents are stored away on shelves for ready accessibility. Samples and swatches are entered through customs, displayed at trade shows, or shown to leading stylists. Larger samples of those attracting attention and meeting favorable approval are made up (not in the zone) into preseason suits for display to the clothing trade.

Other clothes, designed expressly for South American wear, are packed for shipment to Latin American countries. Use of the zone permits small samples of a large number of trial shipments to be brought into this country for display before stylists. Larger quantities of the goods chosen are immediately available for delivery. If the zone facilities were not available case lots could not be broken up, and thus cumbersome quantities and excessive duty payments would be involved.

A perfumery company is developing the Latin American trade for its perfume, soaps, powder, makeup preparations, and toilet water. Import duties on these luxury items are so severe, both in this country and South America, that stocks on consignment cannot be maintained for every potential South American marketing city without tying up considerable sums of the firm's capital. Yet deliveries direct from France against orders received are so slow as to engender loss of sales. Consequently, this company has for some time maintained an ever-increasing stock of wares unpacked on shelves in a privately rented stockroom at the New York Foreign-Trade Zone.

Furthermore, certain other of this company's products, that is, face powders and novelty packages, are made up in the United States and kept available as local stocks here. Orders received from Latin America for immediate supply are filled at the New York zone, packed, and shipped out by air express. Because these orders sometimes cover small replacement quantities of half a dozen bottles at a time, but of many different types, they could not be handled through facilities where case lots may not be broken. Absorption of United States duty payments in the Latin American sales price would raise the cost prohibitively. Valuable metal ores are brought to the zone for analysis of content before delivery is made to purchasers. If the ore conent should fall slightly below specifications, forfeiture would be faced by the supplier and an adjustment would have to be made by him. If the imported ore should turn out to be fractionally high in content, then an unnecessary delivery of overly high grade ore would normally be made. By bringing it to the zone for analysis and possibly for mixing with ores of opposite specifications, an exact delivery can be made. There would be no opportunity other than in a zone to mix and average the grades after official entry examination has occurred. Considerable amounts of the ores are for Government stockpiling account.

One of the more important metal corporation users of the zone mentioned three reasons for use of the zone for temporary storage of imported aluminum ingots and copper wire bars, etc. The company purchases these metals abroad with the intention of reselling them at a very small profit in the United States, in Canada, or in Latin America. By bringing them to the zone the traders have all of these markets at their immediate option, without being involved later with bonding troubles and delaying-action drawbacks.

They like the harborside storage facilities, where they have arranged direct and very inexpensive discharge and delivery right out of steamers berthed at the zone piers. These traders operate at exceedingly small profits. They often figure margins in very small fractions and eagerly seek any savings.

Another reason given for preferring the zone is the ease of the transfer out of a zone by lighter; storage having been in the zone's open area, nearness to a loading berth helps to keep costs down.

Perhaps the most interesting activity, because one of the oldest at the zone, is the handling of Brazil nuts. The principal user of the zone's facilities stated that the zone had been a most useful asset to the organization for drying and curing Brazil nuts, and he doubted that the development which had taken place in treating these nuts could have occurred were it not for the space and the equipment provided by the zone.

To begin with, many dollars are saved by the firm-and by others similarly using the piers-by unloading in bulk direct from shipside into permanent storage. In former years, it was necessary to bag the Brazil nuts and transport them to a warehouse, thereby adding unnecessary costs for bagging and transportation and for the value of the bags used.

Originally, treatment at the zone was limited to drying and trenching the nuts. The company has designed and built automatic machines which pick out, by airflow, lightweight nuts (the hearts of which are almost always decayed), broken nuts, and other discards. With these culls rejected and destroyed, the customs duty evenutally collected by the Government is figured only on the sound, firstclass nuts. A further advantage, and a very important one, is that this duty, paid on the weight ascertained at the moment of import into customs territory, is not on the weight landed from the steamer. The curing and drying processes at the zone usually shrink the nuts by as much as 20 percent in weight, thereby effecting a substantial saving.

The foreign-trade zone management has made available to this firm additional rooms where machinery automatically packs Brazil nuts intended for the retail trade. They are also mixed with domestic nuts (almonds, walnuts, etc.) and put up in 1-pound salable packages and trays. At the peak of this operation as many as 200 people are employed, and because of the efficiency of operation a saving in costs is achieved which permits a lower price to customers. Another interesting operation in the New York zone, because of the many proved advantages, is that of sorting, inspecting, and bagging cocoa beans. About half a dozen firms dealing in cocoa bring large shipments of cocoa beans, cocoa powder, and cocoa press cake into the zone. Because the beans are not a dutiable article the question arises, "Why use the zone?" The importers favor bringing them to the zone because they may be inspected there for quality and condition and before an official entry is made. Once a customhouse entry has been effected, inspection is made promptly by the Food and Drug Administration, which bears down heavily on arrivals that fail to qualify under its standards. One importer, in particular, values highly the opportunity to make, in advance, his own private inspection and to recondition his beans and bags, if required, before an official entry.

Another advantage to the cocoa bean importer, and one which has not been fully explored by other members of the trade, is that the eastern railroads consider shipments of cargo tendered to them from the foreign-trade zone as having just arrived in this country, because an official entry has usually just been made. Therefore, the railroads accept the cargo, in whatever bags it is then packed and under whatever marks it then bears, at the through import rail rate for this class of cargo. Were cocoa beans to be reconditioned at a warehouse or on a steamship pier and then tendered to an eastern railroad for inland shipment, the local rail rates would be applied. Under the rail tariff, rebagging, re-marking, or reconditioning in transit is not permitted (exceptions are made in 4 or 5 types of cargo), and obviously this prohibition in itself would be a very valid reason for importers to use the zone facilities.

The cocoa trade finds the location of the New York Foreign-Trade Zone convenient for reaching the chocolate plants in the eastern and midwestern sections of the country because of the direct rail connections.

For a number of years the New York zone's facilities have been used for the importation of tale from Italy by regular merchants for the account of important customers. The reason for using a zone is that tale is imported in shipload lots and discharged direct from the ship to the zone piers, where it is stored until shipping instructions are received from customers. By having these cargoes brought in and stored in the zone the importers have eliminated the need to cart bugs from steamship pier to inland warehouse for storage until the customers are ready to make the pickup. This, of course, materially reduces the trucking and handling charges.

Also, of special benefit to the importers and to the customers is the fact that no customs duties or bouds are required while cargoes are stored in the zone. The duty on imported tale is assessed only on such portions as are actually brought into the United States for domestic consumption. Any portion lost in handling, and this is considerable, would not be subject to customs duties. Any lots