Free Trade Zones and Supply Chain Management

What are Free Trade Zones

A free trade zone (FTZ), also known as a foreign trade zone or export processing zone (EPZ), is a geographic area in a country in which some normal trade barriers such as tariffs and quotas are eliminated and bureaucratic requirements are lowered in hopes of attracting new business and foreign investments. Typically, goods may be landed, handled, manufactured or reconfigured, and re-exported without the intervention of the customs authorities. Only when the goods are moved to consumers outside the zone do they become subject to the prevailing customs duties. Free trade zones are organized around major seaports, international airports, and national frontiers. Examples include HongKong, Singapore, Colon (in Panama), Stockholm,Gdansk (in Poland), New York City, and Los Angeles. They play an important role in the supply chain management as it is discussed in the supply chain management courses of AIMS, UK.

Importance of Free Trade Zones in Supply Chains and Their Benefits:

Importers and manufacturers benefit from these FTZs in the following ways:

Exemption from customs formalities, duties, or quotas:

Shippers land their goods in FTZs without going through customs formalities or import duties. They also are exempt from quotas.

Exemption from duties or quotas on reexports:

Goods can be reexported from an FTZ without having been subject to duties and, therefore, without having to go through a lengthy process to receive a duty drawback refund.

Referral of duties on imports:

Duties and federal excise taxes are deferred on imports while they are in the FTZ. They will go through customs on the way out of the zone into customs territory.

Avoidance of fines:

Imports can be processed, remarked, and repackaged in an FTZ before going through customs. Therefore, a shipment with potential compliance problems can be brought into compliance in the FTZ before going through customs.

Reduction of import duties on some cargoes:

Shippers can land cargo in an FTZ, complete the break-bulk process (“dividing truckloads of homogeneous items into smaller, more appropriate quantities for use,” and then go through customs. In some instances this can reduce import duties.

Inspection of merchandise before paying duties:

An importer can have cargo brought into an FTZ for inspection and testing before paying import duties, thus eliminating the possibility of having to reject a shipment after paying the duty on it.

Avoidance of quota problems:

If a shipment of goods exceeds an import quota, the shipper can hold the cargo, in an FTZ until it can come in under quota.

Indefinite, cost-effective storage:

Goods can be stored in an FTZ indefinitely without being subject to local and state inventory taxes. The zones are under customs control, so they provide excellent security for stored items.

Drawbacks of Free Trade Zones

A disadvantage of having a free trade zone is that the host country receivesreduced revenues from import duties. However, with the numerous advantages of providing an FTZ, many countries provide them.More details on Free Trade Zones and its importance in supply chain management is discussed in the diploma in supply chain management program, offered by AIMS, UK.

Now that you understand how FTZs function and the benefits they provide, we are going to discuss trading blocs.