Free Trade Zones (FTZs) are central in attracting foreign investment and new business through tariff reductions, streamlined import procedures, and supply chain efficiencies. In light of shifting trade policies and increasing domestic protectionism, do free trade zones still provide benefits to those in the tech industry?
What is a Free Trade Zone?
A Free Trade Zone (FTZ) is a specific location within a country where goods can be imported, stored, processed, or exported without paying import duties or taxes until they enter the domestic market. Thus, the primary purpose of an FTZ is to facilitate trade, promote economic development, and improve the efficiency of companies involved in international commerce.
Free Trade Zones enhance supply chains by facilitating warehousing, repackaging, relabeling goods, performing light assembly, or manufacturing products for export or before they enter the domestic market.
Free Trade Agreement vs Free Trade Zone
A Free Trade Agreement or Free Trade Area is an agreement between multiple countries, independent of customs areas. The signed agreement eliminates tariff and non-tariff barriers to trade for selected goods.
A Free Trade Zone, or Foreign Trade Zone, or Tax-Free Trade Zone is a designated area that experiences preferential tax rates and supervision policies.
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The Case Study | Foreign Trade Zones and the US
Foreign trade zones are the US equivalent of free trade zones. Supervised by US Customs and Border Protection (CBP), imported goods do not require the usual CBP entry procedures and payments until the goods enter the domestic market for consumption.
Foreign Trade Zones
The driving principle behind the Foreign Trade Zone is tariff mitigation. As businesses reassess supply chains, FTZs may be the panacea for reducing total costs.
In the US, tariff rates are higher on intermediate components than on the final product. When imported through a foreign trade zone, the components are exempt from duties or are levied at a lower tariff rate after final assembly. This is known as tariff inversion.
Tariff Inversion Explained
A laptop manufacturer that uses imported electronic components can use tariff inversion to import the component materials duty-free and only pay tariffs on finished goods when sold domestically.
As no import duties are charged on the import of the goods, cash flow can be improved and forecasted when goods are eventually sold on the domestic market. The value created within the FTZ is shielded from US taxation on foreign imports. Thus, items manufactured within global value chains benefit financially from FTZs through the deferment. This chain has deep roots in tech and high-profile investment projects. TSMC is developing a $65B campus in Arizona, which operates within an FTZ. Pfizer’s COVID-19 vaccine production took place in a Michigan FTZ.
However, with Trump’s reciprocal tariffs, companies operating in FTZs must now pay the tariff rate of the inputs. Furthermore, FTZs cannot be used to mitigate Section 301 tariffs (duties imposed by the US on China), and any inputs imported are charged the same tariffs as if they were imported directly into the US and not through a foreign trade zone.
Understanding Harmonized Tariff Schedule (HTS) subheadings for inputs/materials and reassessing supply chains has become the norm for those within the global value chain.
The Future of Free Trade Zones in Tech
While today’s trade environment is more complex than ever, Free Trade Zones continue to be a strategic lever for companies navigating global supply chains. For tech manufacturers and distributors, the ability to defer duties, leverage tariff inversion, and streamline customs procedures can mean the difference between staying competitive and losing ground.
However, their effectiveness depends on careful planning. With shifting trade policies, tariff structures, and increasing protectionism, businesses must weigh the advantages of FTZs against evolving regulatory challenges. Those who invest in understanding compliance and reconfigure supply chains accordingly can still unlock significant value.
The real question isn’t whether Free Trade Zones still matter, but how effectively companies can adapt them to a rapidly changing trade landscape.
