U.S. importers are operating from a place of uncertainty as they navigate escalating geopolitical upheaval, supply chain disruptions, and tariff volatility. With the current administration’s unpredictable trade remedies squeezing profit margins and complicating strategic growth planning, C-suite leadership is proactively looking for ways to drive efficiencies and cost savings across their operations—and FTZs are increasingly on their radar.
A growing number of companies are considering foreign trade zones (FTZs) as a strategy to offset rising costs, improve cash flow, and mitigate tariff volatility. FTZs are secure areas authorized by the federal government, located within 60 miles or a 90-minute drive from a U.S. port of entry, in which commercial domestic and foreign merchandise receives the same treatment by U.S. Customs and Border Protection (CBP) as if it were outside the commerce of the United States.
This type of special economic zone (SEZ) enables companies to defer, reduce, or eliminate duties, depending on how the FTZ is used (e.g., re-exporting cargo to avoid applicable duties and taxes) and where the goods end up (e.g., domestic vs. international distribution).
FTZs In Action
FTZs function in two main ways: firstly, as a warehouse or distribution centre where products are imported into the FTZ and held for distribution; and secondly, as a manufacturing/production facility where significant transformation of items can occur.
How companies use an FTZ depends on their industry, products imported, and trade requirements. As of 2023 (the most recent published data from the Foreign Trade Zones Board), there were 200 active FTZs within the U.S., bringing in nearly $950 billion worth of goods, with an approximate 60/40 split between “production/manufacturing” and “warehousing” use cases, respectively.
Top 3 Bottom-Line Benefits of FTZs
Regardless of whether FTZs are used as a manufacturing facility or distribution hub, cost savings are the primary reason most companies elect to establish an FTZ. There are three main ways that importers and manufacturers use FTZs to reduce operational costs.
1. Weekly Customs Entry + Merchandise Processing Fee (Mpf)
By using an FTZ provision that permits companies to consolidate an entire week’s worth of shipments into a single customs entry, importers can save on broker entry fees and dramatically reduce MPF charges. For example, consider an organization that executes 1,000 entries per year. Instead of paying a customs broker a fee for each of the individual entries, they can file one entry each week, reducing the associated costs.
But the real savings are on the MPF side. Every entry is charged an MPF: 0.3464% of the value, with a minimum fee of $32.71 and maximum of $634.62. In this example, if the company is hitting the maximum MPF on each entry, they’re spending approximately $634,000 a year on MPFs.
By switching to weekly entries, the importer would reduce their annual MPF spend to approximately $33,000 (52 weeks x $634 max MPF), delivering a savings of more than $600,000—a welcome shot in the arm. Many companies will use these savings to help offset the costs associated with running an FTZ, such as grantee fees, software to manage the zone, and FTZ consultants.
2. Inverted Tariffs In Manufacturing
Inverted tariffs give manufacturers the option of paying duty on a finished product or on the individual components used to produce the finished good within the FTZ, whichever is lower. This concept was the original intent of FTZs when they were introduced in 1934, with the aim of offsetting the burden of high tariffs to promote domestic manufacturing by helping U.S. businesses get on even footing with offshore manufacturers.
The caveat is that, today, imports subject to Section 232, 301, and International Emergency Economic Powers Act (IEEPA) tariffs must be categorized as “privileged foreign status,” which means the duty rate is locked in at the rate of the raw material, and the savings benefit of inverted tariffs cannot be realized. The hope is that when the prospective U.S. trade deals come to fruition, the provision to require privileged status will begin to revert and inverted tariffs can come back into play.
3. Eliminating Tariffs For Exports
Goods brought in and stored in an FTZ can be redirected for export without incurring quota charges or U.S. duties, insulating businesses from the adverse effects of tariff hikes and helping to cut operating costs and improve cash flow.
Plus, merchandise exported from the U.S. to international customers and subsequently returned can be admitted to an FTZ for storage, repair, and re-export—without being subject to customs brokerage fees or duties.
In addition to the main cost-saving advantages, FTZs deliver a range of efficiency and cash flow benefits, such as increased speed of delivery, both to the warehouse and to customers. With “direct delivery” afforded by FTZs, importers can move goods from the port or airport to their zone without waiting on a customs entry or release, driving a more efficient flow of goods.
On the customer front, foreign entities needing fast delivery to U.S.-based customers may hold inventory in an FTZ in the U.S. When they receive an order from a U.S. customer, they’re able to ship the order to the local customer within a day or two, versus several days or weeks if the inventory was held overseas—a valuable advantage for promoting brand loyalty and driving repeat orders.
The timing of when duties are paid makes a significant difference to cash flow. FTZs enable importers to defer payment of duties and taxes until goods leave the zone; by bringing the duty cost closer to when goods are sold to the customer, companies are able to shorten the cash cycle and optimize cash flow.
In addition, for those states that charge local and state the value and/or property tax on inventory, FTZs offer a safe harbor from these taxes, helping to reduce operational costs and protect the bottom line.
With unpredictable tariffs and higher costs eroding margins and threatening profitability and growth, integrating FTZs into the supply chain becomes a compelling option for mitigating tariff volatility. Although FTZs are not a magic bullet—and companies should engage a consultant to determine whether FTZs are a good fit for their operations—the flexibility, cost savings, and efficiency gains FTZs deliver can be a life raft in the choppy waters of the current tariff environment.
