In the Zone: A look at Foreign Trade Zones in the U.S. and Canada – Part 1

Written by John Moccia Regulatory Affairs, Canada

It has been nearly a century since the Foreign Trade Zone Act of 1934 was enacted, which established the first modern foreign trade zones (FTZ) in the United States. Born from the Great Depression these initial FTZs provided a duty exemption when foreign merchandise entered into them.

The concept of the foreign trade zone has evolved significantly since those initial days, and there are approximately 4,300 various types of zones worldwide today. In an era of international competition and globalization, countries around the world are eager to attract foreign direct investment and seize the potential of these foreign trade zones.

While there is no precise definition of what constitutes a foreign trade zone, the term generally refers to a specific location within a country that is officially designated for eligibility for tariff and tax exemption with respect to the purchase or importation of raw materials, components or finished goods.

In the United States, foreign trade zones are secure areas under supervision of U.S. Customs and Border Protection (CBP). Foreign and domestic merchandise may be moved into zones for operations, assembly, manufacturing, and processing. While in the FTZ, merchandise is not subject to duty or excise tax until the merchandise enters the United States territory for domestic consumption.

There are two types of foreign trade zones in the United States: General-Purpose and Special-Purpose Subzones.

  • General-Purpose Zones operate as public utilities proving a variety of services to many users. They are usually located in industrial parks or in seaport and airport complexes with facilities available for the general public.
  • Special-Purpose Subzones are sites ancillary to the general-purpose zone, and typically a part of a single company’s operation used for their exclusive use. Sub-zones are single-use facilities, which cannot be accommodated within the general-purpose zone (i.e. manufacturing or distribution).

In Canada, the benefits of a foreign trade zone extend beyond those found in site-specific FTZs (e.g. in the United States). Essentially, Canada has implemented FTZ policies that are available nationally and while businesses may enjoy this benefit anywhere in Canada, this degree of flexibility becomes a double-edged sword since the lack of “designated” FTZs makes it more difficult to market and promote to businesses and prospective foreign investors who have traditionally viewed FTZ as a specific local area.

Currently, there are three main FTZ-like programs in Canada; the Duty Deferral Program, the Export Distribution Program, and the Exporters of Processing Services Program. Each of these programs offers key advantages and benefits for businesses such as upfront relief of duties and taxes, refunds of duties for exported goods and deferment of duties and taxes.

Look for Part 2 of this article in our next newsletter, where I’ll review in further detail the above Canadian programs exploring their advantages and disadvantages. As is the case with all Customs related programs, a comprehensive understanding of the relevant facts, serves to determine which program best suits the needs of the business community.

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