A foreign trade zone is a site within the U.S., in or near a U.S. custom's port of entry, where foreign and domestic merchandise is generally considered to be in international commerce. There are two basic ways to utilize a foreign trade zone. The first option is to lease space in an existing general purpose zone site. The general purpose zone is essentially a public warehouse where more than one company can use space for the foreign trade zone program. A second option is for a company to set up a subzone or special purpose zone where a company has its own plant or facility designated as a foreign trade zone.

Merchandise can be admitted into a subzone or general purpose zone without a formal customs entry or the payment of customs duties or government excise taxes. Customs duties are deferred in foreign trade zones when merchandise is admitted to the zone without formal customs entry or payment of customs duty. This benefit equates to a cash flow savings that allows companies to keep operating funds within their business instead of in the hands of the U.S. customs service.

Merchandise in a foreign trade zone can be stored, tested, relabeled, repackaged, manipulated, assembled, manufactured, or processed. If the final product is exported from the U.S., no U.S. customs duty or excise tax is levied. If the final product is imported into the commerce of the U.S., customs duties and excise tax are due only at the time that the merchandise is transferred from the foreign trade zone and formal customs entry in the U.S. is made. The U.S. government grants these benefits to companies as an incentive to maintain or expand their operations in the U.S.. In addition, certain states grant additional incentives to operate in a foreign trade zone. For instance, in Ohio, a company operating in a foreign trade zone is granted a state inventory tax exemption on all goods located within a zone.

Below is a list of the major advantages of the foreign trade zone program:

• Customs duties can be avoided on merchandise received and stored in a Foreign Trade Zone (FTZ). The duty is paid only when those imports are shipped into U.S. Customs territory.

• Merchandise exported from an FTZ is not assessed with any customs duties.

• When materials are subject to defect, damage, obsolescence, waste or scrap, customs duties may be reduced or totally eliminated.

• Labor, overhead or profit in the U.S. attributed to FTZ production operations are also not subject to duties.

• Duty payment is not required on items identified by quality control to be substandard.

• The duty rate on component materials, or the duty rate on products produced from component materials are paid by FTZ users, whichever is lower.

• Duty payment is not required on merchandise exported and then returned to an FTZ.

• No duty is required on spare parts which are stored, returned or destroyed within an FTZ.

• Duty drawback procedures and customs clearance delays are eliminated.

• Labeling with country-of-origin labels is not required on merchandise received in an FTZ; correct labeling is required on merchandise entered into the U.S.

• Tangible personal property held in an FTZ for export and foreign-sourced personal property is not subject to state and local ad valorem taxes.

• Any merchandise brought in for exhibition purposes may be held without incurring duty.

• Since the FTZ has excellent security, cargo insurance rates have been negotiated at a discounted rate.

• Some merchandise subject to U.S. quotas may be held until quotas open.

• If no "retail sale" is involved, transfer of merchandise may occur within the FTZ.