Whirlpool, Target Stores, Abbott Labs, Petsmart, Exxon/Mobil, IBM. They may operate in very different industries and cater to very different customers, but they all have one thing in common. They—along with hundreds of other importers—all benefit from using foreign trade zones (FTZs).

FTZs are special zones that are considered to be located "in foreign commerce"—that is, they are legally outside the customs territory of the United States. The U.S. government established these special areas—which can be as small as a single warehouse or comprise many acres—as a way to eliminate some of the disadvantages of manufacturing in the United States compared to overseas.

Essentially, FTZs let companies combine cheaper imported components and raw materials, through manufacturing or assembly operations, with U.S. labor and distribution services. Operating in a foreign trade zone can save money because goods within an FTZ are not subject to import duties until they leave the zones and enter domestic commerce. If they are exported directly from the zones and never enter domestic commerce, they are not subject to import duties at all. In addition, importers that use FTZs may choose to pay duties on either imported parts and materials or on the finished product that leaves the zone, whichever is less. Finally, zone users are exempt from paying duties on labor, overhead and profits for foreign merchandise that leaves the FTZ.

Clearly, FTZs offer many cost advantages for importers. Yet they have not been as popular as you might expect. That's largely because many companies are unaware of their benefits, says William R. Fisher, a board member of the National Association of Foreign Trade Zones and executive vice president of Memphis, Tenn.-based Centrepot, which operates nearly 300,000 square feet of customs-bonded warehousing and foreign trade zone space. To remedy that, Fisher is working with several customs brokers to boost their clients' awareness of FTZs' advantages.

In other cases, companies have not been willing to wade through the additional customs regulations that govern FTZ operations, says Curtis Spencer, president of IMS Worldwide, a foreign trade zone and industrial park consulting firm in Houston. U.S. duty rates have fallen steadily in recent years, moreover, leading many importers to assume (often wrongly) that there would be little cost advantage to using an FTZ, he adds.

Despite these perceptions, interest in foreign trade zones has been increasing in the last couple of years. The number of companies applying for new or expanded FTZ authority—especially for sub-zones, which operate on the importer's premises—is growing. The reason, say industry observers, is that regulatory changes, the current economic climate and the need to improve cargo security are leading more importers to take a fresh look at the FTZ program.

One factor that's making foreign trade zones more attractive to importers is a policy change that was included in the Trade Development Act of 2000. That legislation authorized FTZ users to file weekly entry summaries with U.S. Customs for goods that leave the zone and enter into domestic commerce. That reduces the amount of paperwork because the importer no longer needs to file a separate entry for each shipment. The cost savings can be significant for a large-scale importer. One of Spencer's clients, for example, was able to move from an average of 35 entries per week to just one. Not only did that reduce the amount of time required to prepare documentation from a full-time to a part-time position, but it also sharply reduced customs brokerage fees and slashed the importer's Merchandise Processing Fees (MPFs).

The MPF is payable to U.S. Customs at a rate of 0.21 percent of the value of the merchandise on each entry, with a maximum of $485 per entry. Instead of paying many thousands of dollars on 35 entries per week, the importer now pays just $485 for a single weekly entry, he explains. For some companies, adds Ronald DeBarr, executive director of FTZ operator Northeast Ohio Trade & Economic Consortium (NEOTEC), the switch to weekly entries has saved $100,000 or more annually.

Weekly entry and another program called direct delivery also cut costs by reducing processing time for inbound shipments. Direct delivery, which requires prior approval by customs authorities, allows importers of repetitive, low-risk shipments to deliver merchandise immediately to a free trade zone. Because the importer can take delivery of the goods without waiting for formal customs clearance, it can receive and process materials more quickly, Spencer explains.

According to Katherine Reiter, import/export manager for semiconductor giant ST Microelectronics in Phoenix, Ariz., direct delivery gets product into her company's 18-acre manufacturing and distribution subzone about 24 hours faster than it would take without that program. That's a big advantage, both from a cost and from a customer-service standpoint, says Giovanni Leghezza, vice president of business operations and administration. "The benefit is in the reduced cycle time," he says. "By having consistently shorter cycle times you can better respond to immediate customer demands." Faster entry into the FTZ also reduces inventory-carrying costs for the manufacturer—a significant savings when you consider that about 19 percent of the $6 billion company's business moves through that subzone. And because the customs-required recordkeeping functions are integrated with ST Microelectronics' internal business systems, the manufacturer can quickly complete customs filings and ship finished product to customers.

Today's increased emphasis on cargo security is another factor leading importers to take a second look at foreign trade zones. U.S. Customs imposes tight restrictions on access to the duty-free merchandise in the zones. As a result, foreign trade zones already have in place the kind of security measures many shippers are looking for these days. At Centrepot, for example, only carefully screened employees wearing badges with embedded computer identification chips may pass beyond the general reception area without an employee escort. There are armed guards on duty at all times, and customs authorities perform security audits of the facility and background checks on key personnel as a condition of granting operating authority, Fisher explains.

Those same restrictions apply to private subzones, says Reiter. "Customs has standard guidelines for all subzones, but you have conversations with the agency about how those guidelines pertain to your particular site and your industry," she notes. All those precautions are paying off, Leghezza says. "The security aspects of an FTZ are definitely an advantage, especially these days, because almost everything we move goes by air," he says. "We are a qualified, known importer. Our intimate contact with U.S. Customs puts us in a different light compared to someone who's starting from scratch."

General economic conditions are helping foreign trade zones gain new adherents as well. Globalization and the need to cut operating costs during a weak economy have encouraged more companies to investigate FTZs, says NEOTEC's DeBarr. FTZs are especially helpful to importers that have seen a slowdown in orders and are forced to stockpile some inventory, adds Fisher. "They can hold product until orders come in and defer import duty payments for a longer period of time," he says, "and thus reduce their operating costs."

Changing economics and sourcing patterns in specific industries also are fueling slow but steady growth in FTZ usage. DeBarr, Fisher and Spencer have all seen an increase in FTZ activity in the chemical industry, and they expect textiles, which are governed by quota restrictions, to move into foreign trade zones in a big way in the next few years.

Whether or not using an FTZ will offer financial benefits for a particular importer depends on many factors. In addition to considering customs-related and inventory-carrying costs, importers should also look at state taxes, transportation, implementation of security and regulatory compliance measures and warehouse construction and operation. Even with all those factors to consider, Spencer says, the total savings for many companies, especially those that can benefit from weekly entry and direct delivery, can be substantial. "Importers who have not looked at FTZs in the last two years," he says, "are doing themselves a disservice."