Understanding Bonded Warehouses & Foreign Trade Zones

Maximizing Flexibility in Global Trade

Amid ongoing trade policy uncertainty and rising tariffs that have pushed the effective rate to its highest level since 1901, U.S. manufacturers and importers are facing increasing costs, particularly for parts sourced overseas. To mitigate these expenses, many are turning to bonded warehouses and Foreign Trade Zones (FTZs) as strategic tools to help reduce or defer these expenses.

Bonded warehouses allow importers to delay duty and tariff payments until goods are removed for domestic sale, providing valuable cash flow flexibility. FTZs, which are often located near ports of entry, including airports, offer similar benefits by allowing companies to store, assemble or manufacture goods without immediate tariff obligations.

FOREIGN TRADE ZONES VS. BONDED WAREHOUSE: KEY DIFFERENCES

WHAT IS A BONDED WAREHOUSE?

A bonded warehouse is a facility where imported goods and materials can be stored without immediately incurring duties or tariffs, with the potential to store goods for up to five years from the date of import. These warehouses operate under customs supervision until the goods enter the market and are typically located near ports and airports.

Historically, bonded warehouses have offered several benefits:

• Cash flow management: Companies can delay tariff payments on bulk imports, paying only as individual goods are sold and shipped domestically.
• Tax reduction on exports: Business avoid local taxes on goods that will be re-exported.
• Potential tariff savings: Importers can store goods with the expectation that tariff rates may be lower later, since tariff rates are assessed upon withdrawal from the warehouse.
• Low-level value-added services: Goods can undergo assembly, packing or other minor value-added services within the warehouse, helping offset duties when raw materials typically carry higher rates than finished products.

However, companies should consider the setup process and associated costs of operating a bonded warehouse. Bonded warehouses are subject to strict customs regulations and oversight, which can increase costs associated with inventory tracking and compliance. Additionally, they are less beneficial for goods not intended for long-term storage or those re-exported without entering the domestic market.

ESTABLISHING A BONDED WAREHOUSE

To establish a bonded warehouse, either the owner or tenant of the proposed warehouse must submit a written application to the Customs and Border Protection (CBP) Port Director at the nearest port of entry.

Application requirements:

• Submit CBP Form 300 External Link, detailing the premises, location and class of warehouse.
• Attach a certificate signed by the president or a secretary of a board of fire underwriters certifying that the facility is suitable for warehousing and acceptable for fire insurance.
• Include a blueprint showing measurements.

Bonding costs: The warehouse must obtain a bond, with the cost determined by the Port Director. The bond cannot be less than $25,000, with costs typically ranging from 1% to 5% of the bond amount, depending on factors like the cost of goods kept in the warehouse.

WHAT IS A FOREIGN TRADE ZONE?

FTZs, created by Congress in 1934 under the Foreign-Trade Zones Act, are secure areas where cargo entering the U.S. can be stored without immediately incurring duties or tariffs. Considered outside of U.S. Customs territory, goods in an FTZ haven’t technically cleared customs. They are located nationwide, typically near ports of entry, including airports. U.S. Customs and Border Protection oversees FTZs.

There are 197 active FTZs in the U.S., employing approximately 550,000 people. By 2023, there were 374 active production operations receiving $949 billion in merchandise (a 24% increase from 2019) and exporting $149 billion, a 34% rise over the past five years.

ADVANTAGES OF OPERATING IN AN FTZ

• Flexibility in tariff rates: Companies can lock in the tariff rate at the time of entry or use the rate at the time of withdrawal, whichever is lower. This flexibility is especially attractive right now given higher levels of uncertainty.
• Reduced tariffs through manufacturing: Importing raw materials and parts into the FTZ and manufacturing them into finished products often results in lower costs, as finished products often have lower tariff rates than the raw materials.
• Export exemptions: No tariffs or duties are paid on goods exported directly from an FTZ to another country.
• No time limits: FTZs allow indefinite storage, enabling higher inventory levels if required.
  
  

APPLYING FOR FTZ DESIGNATION

For tenants wishing to produce goods under FTZ procedures, the facility must first be granted FTZ designation and receive production authority.

• Production activity within an FTZ requires advance approval from the FTZ Board. Authorization is needed if the production changes the Harmonized Tariff Schedule of the U.S. (HTSUS) classification at the six-digit level for any foreign item or alters its eligibility for entry.
• Production includes traditional manufacturing and assembly operations.

Process for requesting production authority:

• Submit a production notification listing all foreign components and finished goods.
• A 40-day public comment period will follow.
• The FTZ Board typically decides within 120 days of submission.
• There is no fee to apply for production authority.
• If a manufacturer needs authority faster than the 120-day window, FTZ Board regulations allow interim authorization during the 120-day review period, however, it will only be considered if U.S. Customs and Border Patrol permits activity without objection.
• Send all applications External Link to ftz@trade.gov.

A sortable list of Foreign Trade Zones in the U.S. External Link can be found on the International Trade Administration website.

FOREIGN TRADE ZONES IN CANADA

Canada’s FTZ programs differ in that they have no geographic limitations; companies can access FTZ benefits from any location in the country. This flexibility allows businesses to choose sites best aligned with their logistics or operational needs while still taking advantage of FTZ benefits. Canada offers five FTZ programs, with three core programs that fall under the Duty Deferral Program (DDP). The DDP delays or reimburses duties and taxes on goods exported within four years of importation. The program is accessible to a wide range of applicants, including importers, warehouse operators and owners. To participate, applicants must submit the required documentation to their local Canada Border Services Agency (CBSA External Link) office.