What Is a Free-Trade Zone (FTZ)? 5 Benefits of Free-trade Zones

Free-Trade Zone

Foreign and domestic items may be imported without paying customs taxes in a commercial and industrial zone near or at ports of entry called free-trade zones. Before re-export or admission into the national customs authority, merchandise, including raw materials and components, may be kept, sold, exhibited, repacked, assembled, sorted, graded, cleaned, or otherwise manipulated. Only when the goods transit from the zone into a customs-controlled area of the country are duties imposed on the commodity. Free ports are sometimes known as foreign trade zones, bonded warehouses, or foreign free zones.

According to the World Bank, free-trade zones (FTZs) are considered duty-free areas organized around different ports and national borders. These areas are highly advantageous for trading. Free-trade zones can also be defined as labor-intensive manufacturing centers that import raw materials or components and export finished goods, but this is an outdated definition as today, more and more free-trade zones focus on service industries like software, back-office operations, research, and financial services.

Free-Trade Zones Background

In 166 BCE, the world’s first known free-trade zone was formed on the Greek island of Delos. It endured until pirates conquered the island in around 69 BCE. The Romans had several civitas Libera, or free cities, some of which were able to coin money, create their laws, and avoid paying an annual tribute to the Roman Emperor. These lasted at least until the first millennium CE. The Hanseatic League began functioning in Northern Europe in the 12th century and developed trading colonies across Europe.

Hamburg and the Steelyard in London were among these free-trade zones. The Steelyard was a separate walled town with warehouses, weighing houses, churches, counting houses, and residential quarters, just like the other Hansa stations. Archaeologists discovered the remnants of the ancient Hanseatic Trade House, once the most significant medieval commercial complex in Britain, during maintenance work on Cannon Street Station in 1988. Shannon Free Zone claimed to be the first “modern” free-trade zone when it opened in 1959.

How Does A Free-Trade Zone (FTZ) Work? 

An FTZ provides a one-of-a-kind opportunity to defer, cut, or eliminate customs duties on your products, potentially saving you a lot of money.

When your items leave the FTZ and reach the local market, customs duties are applied. No tariffs are charged if a product is re-exported.

While each component, as well as the parts associated with it, is subject to import duty outside the FTZ, units that are entirely assembled within the FTZ are subject to only one duty charge upon export.

Furthermore, if the zone is located in a country where inventory is dependent on local taxes, holding items in an FTZ may result in additional savings.

Are Free-Trade Zones Beneficial to Your Business? 

Foreign-Trade Zones benefit your business since they allow them to bring goods into the intended country without paying duties and tariffs or to assemble a finished product that may later be exported without paying import/export charges. Let’s take a look at the most critical advantages of FTZs. 

  1. Deferral and Elimination of the Duty 

FTZs are recognized as exempt from customs rules and laws, meaning that goods entering these zones are not subject to customs until they leave the FTZ. The interval between import and export allows a corporation to defer or even eliminate duty expenses while re-assembling or producing goods in preparation for entrance into the market or re-exportation.

  1. Elimination of the AD VALOREM TAX

An ad valorem tax (sometimes known as an inventory tax) is a tax levied on existing inventory. Stockpiling things in an FTZ permits inventory to stay tax-free until it is required to be transported to the mainland. This can result in considerable landed cost reductions.

  1. Being An Exemption of Duty

Re-exports are not subjected to duties or quotas. A corporation can avoid the lengthy Customs duty drawback process by using a Free-Trade Zone. No tax is paid on products destroyed in the zone, which can help a company with fragile imports or industrial operations that produce a lot of waste.

  1. Being an Export Distribution Center 

A foreign trade zone removes import duties when finished goods are brought into the country for potential export. When promoting the sale of goods in international markets, using a foreign trade zone as an export distribution hub may offer several advantages.

  1. Straightforward Logistics

Imports may be delivered straight to the zone after receiving Customs approval. Permission to break and attach Customs seals can also be requested. A single entry can be used to file entries and exports for seven days.

The Final Word

For further information on the world’s free-trade zones and their recent news, keep checking DFreight’s blog page for more related blogs!

FAQs

What is a free trade zone?

A free trade zone is where goods can be imported and exported without paying taxes or tariffs.

What are the benefits of setting up a free trade zone?

The benefits of setting up a free trade zone include the elimination of tariffs and taxes on imported and exported goods and creating more efficient and cost-effective trade system.

How can I set up a free trade zone?

To set up a free trade zone, businesses must obtain approval from the relevant government. Once approved, businesses can then apply for a free trade zone license.

What businesses are permitted to operate in a free trade zone?

Businesses that are permitted to operate in a free trade zone include manufacturers, retailers, wholesalers, and logistics providers.

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