Prepared by IMUA's
Loss Control & Claims Committee
Transportation Committee

Copyright 2010 Inland Marine Underwriters Association


The Inland Marine Underwriters Association [IMUA] is a not-for-profit association focused on the commercial inland marine insurance line of business. IMUA was organized in 1930 as a national trade association and rating bureau for all inland marine classes. In 1948 the rating bureau activities of the IMUA were transferred to the Inland Marine Insurance Bureau (now defunct) due to the 1944 US Supreme Court decision in the South-Eastern Underwriters Association case.

Today, IMUA is comprised of --

  • Members - insurance and reinsurance companies that underwrite a significant portion of the commercial inland marine insurance in the U.S.
  • Associate Members - companies or organizations that provide products and/or services to the insurance industry.

IMUA is committed to advancing the educational, governmental, regulatory and technical interests of the commercial inland marine insurance industry.

One of the services IMUA provides its members is the publishing of information for use by underwriters, loss control and claims specialists, and other interested parties. The topics covered by IMUA Reports, Bulletins, News Articles, Seminars and Webinars are intended to provide an overall awareness of the issues, hazards and exposures associated with a specific industry or inland marine class of business.

Volunteer members of a technical committee of the IMUA or IMUA staff have produced this information. Committee members abide by antitrust restrictions and all other applicable laws and regulations while compiling information.

It is generally not possible to treat any one subject in an exhaustive manner, nor is it IMUA’s intent to do so. No warranties are made regarding the thoroughness or accuracy of the information contained in Reports, Bulletins, News Articles Seminars and Webinars or any part of it. Nothing in this information should be interpreted as providing definitive guidance on any question relating to policy interpretation, underwriting practice, or any other issues in insurance coverage.

IMUA does not prescribe to its members how to make underwriting or claims decisions, nor does it require that analysis follow any particular format.



While initially under the direction of the IMUA Loss Control & Claims Committee [LC&CC], IMUA’s Transportation Committee participated in the process, mainly in a review capacity. The final report is the product of this joint effort, has a decided insurance focus, and has been prepared to enhance one’s knowledge and understanding of the role and implications of Foreign-Trade Zones in the movement of goods and merchandise in the supply chain.



From a purely United States perspective the country’s trade policy is based on a free trade model. However, importation of goods and merchandise into the United States and their ultimate distribution may result in a myriad of foreign trade related costs, taxes and duties imposed at present by U.S. Customs & Border Protection [CBP]. One question then revolves around global competition, i.e. how a company can import goods into the U.S. and mitigate these costs, at least initially. The answer to the dilemma is the Foreign-Trade Zones [FTZs] Program.

FTZs were established in the United States in 1934 with the passage of the Foreign-Trade Zones Act as part of a program to "expedite and encourage foreign commerce" or stimulate economic growth and development in the U.S. The FTZs were designed to promote American competitiveness by encouraging companies to maintain and expand their operations in the United States, as well as attempt to mitigate some of the effects of the Smoot-Hawley Tariffs that was passed in 1930. This goal was achieved by designating geographic areas in or adjacent to ports of entry where imported goods receive Customs’ treatment.

This Act also created a Foreign-Trade Zones Board to review and approve applications to establish, operate and maintain FTZs. The Board may approve any zone or subzone and also regulates the administration of the zones. Today these areas have become internationally known as Free Trade Zones or sometimes Special Economic Zones [SEZs]. Since 1986 oversight of FTZs has been conducted on an audit/inspection basis, i.e. compliance is verified by audits and spot checks under a surety bond rather than via direct day-to-day CBP supervision.



A Foreign-Trade Zone [FTZ] is an area within the United States, in or near a U.S. Customs and Border Patrol port of entry, where foreign and domestic merchandise is considered to be "outside the country" where normal trade barriers such as tariffs and quotas are eliminated and bureaucratic requirements are lowered in hopes of attracting new business and foreign investments. FTZs can also include labor-intensive manufacturing centers that involve the import of raw materials or components and subsequently the export of finished merchandise or products such as clothing, footwear, electronics and toys.



Foreign-Trade Zones are secure areas that are under U.S. Customs and Border Protection (CBP) supervision through compliance reviews and visits. The companies operating within the Zone must meet certain physical security and access and inventory control requirements.

Since these FTZs are considered to be outside the territory of the United States, there first has to be a delineation of the activities permitted within the FTZ. Generally, the following activities are permitted -

  • Storage
  • Manufacture (the user must receive special approval for this activity)
  • Assembly
  • Testing
  • Sampling
  • Relabeling
  • Processing
  • Repackaging
  • Manipulating
  • Destruction of goods
CBP personnel are responsible for overseeing FTZ activity and they control the admission of goods into the Zone; the handling and disposition of goods while in the Zone; and, the removal of the goods from the Zone.

Today there are FTZs in all 50 states with a total of 256 general purpose Zones and 498 Subzones in the United States and Puerto Rico. In all, over 2,600 companies are actively involved in Zones and Subzones.

FTZs are chartered by state or local governments, port authorities, nonprofit organizations or economic development agencies. A typical general-purpose Zone provides leasable storage/distribution space to users in general warehouse type buildings with access to various modes of transportation. Many Zones include an industrial park site with lots upon which users can construct their own facilities. Subzones are normally private plant sites for more extensive manufacturing/processing or other operations that usually cannot be accommodated within an existing general-purpose Zone.

In a January 2009 article in Inbound Logistics the firm Pernod-Richard USA [a Purchase, NY-based wholesaler of wine and spirits] was cited as an example of FTZ activity. The firm manufactures goods in the U.S., but also imports many products from abroad through two FTZs, one in Baltimore, and one in Oakland, CA. FTZ rules allow the company to import packaging with the product to avoid paying separate excise taxes.

The National Association of Foreign-Trade Zones reports receipts into FTZs totaled $502 billion in its 2007 annual report. Jobs associated with FTZs number in excess of 30,000 according to the Association.



There are some obvious benefits offered by a Foreign-Trade Zone. While most are tangible financial advantages, there are others that are equally important but harder to quantify.

  • Foreign-Trade Zones encourage U.S.-based operations by removing certain disincentives associated with manufacturing domestically. The duty on a product manufactured overseas and imported into the United States is assessed on the finished product rather than on its individual parts, materials or components. Therefore, the American company finds itself at a disadvantage compared with foreign competitors when it must pay a higher rate on parts, materials, or components imported for use in their manufacturing process. Foreign Trade Zones correct this apparent imbalance by treating products made in the Zone, for the purpose of tariff assessment, as if they were manufactured abroad.

  • Goods for which a quota is filled or for which a quota on entry has been established may be placed in a Zone until the quota opens or is removed, since Foreign-Trade Zones are considered outside CBP territory for entry purposes. Such goods, with a few exceptions, namely certain textiles, may be manipulated or manufactured into a product not subject to a quota.

  • Due to physical security, access and inventory control requirements, Foreign-Trade Zones complement and support secure supply chains. The Customs-Trade Partnership Against Terrorism (C-TPAT) program recognizes the use of U.S. Foreign-Trade Zones as a best security practice.

  • In calculating the dutiable value on foreign goods removed from a Foreign-Trade Zone, users are authorized to exclude Zone costs related to processing or fabrication, general expenses and profit. Thus duties are not owed on labor, overhead and profit attributed to production within the Foreign-Trade Zone. Also, no duty is charged on merchandise sold from a FTZ to the U.S. military or NASA.

  • Using a Foreign-Trade Zone can have an immediate impact on import expenses from duty deferral, reduction or total elimination. Goods within a Zone will only incur import duties once they are withdrawn and enter the United States. They can; however, stay there indefinitely. Import goods not destined for a Foreign-Trade Zone will be charged a duty on each component of a device whereas within the Zone the components can be packaged into a single unit and only one duty charge applies. If goods within a Foreign-Trade Zone are shipped outside the United States, there is no duty; also, if materials enter the Zone and later become scrap, there are no duties charged.

  • Certain tangible personal property is generally exempt from state and local ad valorem taxes.

  • Companies within a Foreign-Trade Zone can transfer goods from one Zone to another and because the goods are transported in-bond, duty may be deferred until they are removed from the final Zone for entry into the United States.

  • Reduced Inventory Tax - Goods held in inventory may incur business/personal tax in some states. However, within a Foreign-Trade Zone, foreign goods never officially enter domestic commerce and thus are not subject to this tax unless they remain in that state for sale. The tax on goods headed to other destinations is avoided altogether. Moreover, the user can have tighter inventory control that may virtually eliminate year-end reconciliation.

  • Merchandising Processing Fee Reduction- Under certain regulations, a merchandising processing fee (MPF) must be paid on every importation through Customs and Border Protection based on a percentage of value, to a maximum of $485 per shipment. Within a Zone these MPFs can be consolidated weekly, allowing goods to be imported on a 24 x 7 basis but requiring only a single weekly payment.

  • Accelerated Supply Chain- A Foreign-Trade Zone operator can create a number of efficiencies in the supply chain that can result in an overall reduction of costs as well as an improvement in the speed to market. Delays at the U.S. port of entry can be avoided by bypassing Customs and moving the goods directly into the Zone. Customs clearance is not required until the goods are ready to leave the Zone, saving on import processing time. This can result in tremendous time savings especially during periods of congestion at the U.S. port of entry.

  • If assembly or kitting, packaging, inspection and/or testing take place in the Foreign-Trade Zone, the importer can receive the components in bulk and lower cost packaging materials can be procured locally.

  • In situations where manufacturing done in the Foreign-Trade Zone results in a finished product that has a lower duty rate than the rate on its imported raw materials or components, the finished products may be entered at the duty rate that applies to its condition as it leaves the Zone.

  • Status as a Foreign-Trade Zone may also make a site eligible for state and/or local benefits that are unrelated to the Foreign-Trade Zone Act.
Additionally, FTZs provide a few benefits that accrue to the public. Foreign-Trade Zones:
  • help facilitate and expedite international trade
  • encourage and facilitate exports
  • help attract offshore activity and encourage retention of domestic activity
  • assist state and local economic development effort
  • help create employment opportunities



  • Goods deemed by the Foreign-Trade Zone Board to be detrimental to the public interest, health or safety may be excluded from entry into the Zone. The Board may also place restrictions on certain types of goods, the kinds of operations on goods within the Zone, the entry of the goods into the stream of commerce or similar transactions or activities.

  • Products subject to internal revenue tax may not be manufactured in a Zone. These include alcoholic beverages, and products containing alcoholic beverages (with some exceptions), perfumes containing alcohol, tobacco products, firearms and sugar. Additionally, the manufacture of clock and watch movements is not permitted in a Zone.

  • Although foreign and domestic goods may be stored, examined, sampled and exhibited in a Zone, no retail trade of foreign goods may be conducted.



Source: National Association of Foreign Trade Zones (

Activation   Approval by the grantee and U.S. Bureau of Customs and Border Protection’s Port Director permitting operations to begin which allow the admission and handling of merchandise in zone status.

Admission   The physical arrival of goods into a zone in a specified zone status with the appropriate approvals of the zone grantee and the U.S. Bureau of Customs and Border Protection. The word "admission" is used instead of "entry" to avoid confusion with CBP entry processes under Parts 141-144 of the CBP Regulations.


  • A change in the boundaries of an activated zone or subzone
  • Activation of a separate site of an already activated zone or subzone with the same operator at the same port.
  • The relocation of an already activated site with the same operator
Customs and Border Protection Territory (CBP Territory)   The territory of the U.S. in which the general tariff laws of the U.S. apply. The U.S. Bureau of Customs and Border Protection territory includes the states, the District of Columbia and Puerto Rico, but not any areas within the boundaries of foreign-trade zones.

Deactivation   Voluntary discontinuation of the activation of an entire zone or subzone by the grantee or operator. (Discontinuance of the activated status of only part of a zone is an alteration.)

Direct Delivery   A procedure for delivery of merchandise to a zone without prior application and approval on CBP Form 214; designed for low-risk, repetitive shipments whose ordering and timing are under the control of the operator. Approval to utilize direct delivery must be obtained from the Port Director.

Domestic Status (D)   Status of zone merchandise grown, produced or manufactured in the U.S. on which all internal revenue taxes have been paid, or the status of zone merchandise previously imported on which all applicable duties and internal revenue taxes have been paid.

Drawback   Import duties or taxes repaid by the government, in whole or in part, when the imported goods are exported or used in the manufacture of exported goods.

Entry   Notification to CBP of the arrival of imported goods in the appropriate CBP territory of the U.S. Merchandise withdrawn from a zone for consumption in the U.S. is considered entered when it is removed from the zone.

Foreign-First (FOFI)   An accounting method based on the assumption that foreign-status merchandise is disposed of first. Permission to use FOFI must be obtained from CBP and is granted on a case-by-case basis.

General-Purpose Zone (GPZ)   A general-purpose zone is established for multiple activities by multiple users. Storage, distribution, testing, repackaging and repair are some of the possible activities in a GPZ. Processing or manufacturing in a GPZ requires the permission of the Foreign-Trade Zones Board.

Grantee   A corporation to which the privilege of establishing, operating and maintaining a foreign-trade zone has been granted by the Foreign-Trade Zones Board. Grantee corporations must be either public corporations or private corporations organized for the purpose of establishing a zone project. Examples of public entities that might receive an FTZ grant include: a political subdivision (including a municipality), a public agency, or a corporate municipal instrumentality of one or more states. Qualified private corporations must be chartered for this purpose under a law of the state in which the zone is located.

Harmonized Tariff Schedule of the United States (HTSUS)   Published by the U.S. International Trade Commission, the HTSUS is used in the classification of imported merchandise for rates of duty and statistical purposes.

Inverted Tariff Structure   Where imported parts are dutiable at higher rates than the finished product into which they are incorporated.

Manipulation   As defined in Section 562 of the Tariff Act, processing wherein merchandise is packed, unpacked, repacked, cleaned, sorted, graded or otherwise changed in condition. The precise distinction between manipulation and manufacturing is subject to interpretation and enjoys a long history of case law.

Manufacturing   U.S. Bureau of Customs and Border Protection determines what constitutes manufacturing on a case-by-case basis, distinguishing it from other operations such as manipulation, processing, production and blending. The FTZ Board has defined it as any process that results in a change in CBP classification of the merchandise, and therefore, requires prior clearance from the Board pursuant to the manufacturing conditions in specific foreign-trade zone grants.

Merchandise   FTZ merchandise includes goods, wares, and chattels of every description. Not included is prohibited merchandise, building materials and supplies for use in the operation of a zone.

Nonprivileged Foreign Status (NPF)   Status of zone merchandise not previously cleared by CBP which is appraised in the condition of the merchandise at the time it enters the CBP territory upon exiting the zone. NPF status may be changed upon approval from CBP, provided the merchandise is still in the same condition as when admitted to the zone. While in the zone, NPF status merchandise can be manipulated or manufactured into another commercial item with a different tariff classification. NPF status allows zone users to pay duty at the rate of the finished product produced in the zone.

Operator   A corporation, partnership or person that operates a zone or subzone under the terms of an agreement with the grantee. A grantee may act as its own operator.

Operator's Bond   A bond submitted to CBP, on CBP Form 301, to assure compliance with the CBP Regulations as set forth at 19 CFR 113.73.

Port of Entry   A place designated by the U.S. Government at which a CBP officer is assigned with authority to accept entries of merchandise, collect duties, and enforce the various provisions of the CBP laws.

Privileged Foreign Status (PF)   Zone status whereby merchandise is classified and appraised, with duties and taxes determined, at the time the status is elected. Once chosen, privileged foreign status cannot be changed.

Processing   Any zone activity (other than manufacturing) requiring a change in condition of merchandise which results in a change in the Customs classification of an article or in its eligibility for entry for consumption.

Subzone   A special-purpose zone established as part of a zone project for a limited purpose that cannot be accommodated within an existing general-purpose zone. Subzones must be sponsored by the grantee of a general-purpose zone.

U.S. Bureau of Customs and Border Protection (CBP)   The unified border agency within the Department of Homeland Security (DHS) responsible for merchandise brought into the U.S.

User   A person or company using a zone for storage, handling or processing of merchandise. An operator may authorize a user to maintain its own inventory system and procedures manual. However, the operator remains responsible to Customs for inventory control unless the user posts its own operator's bond.

Weekly Entry Procedures   A CBP procedure that permits zones and subzones to file a weekly entry for the estimated removals of merchandise destined for domestic consumption during the following business week. Once the Port Director has approved the entry, the operator may ship the products all week up to the quantity estimated.

Zone Lot   A collection of merchandise maintained under an inventory control method based on specific identification of merchandise admitted into a zone by lot and lot number (ZLN).

Zone Restricted Status (ZR)   Status of zone merchandise transferred to a zone for the sole purpose of exportation or destruction. Zone restricted merchandise cannot be changed or brought into the CBP Territory without the specific permission of the Foreign-Trade Zones Board on a case-by-case review.

Zone Status   The status of merchandise admitted to a zone, i.e. domestic (D), non-privileged foreign (NPF), privileged foreign (PF), or zone restricted (ZR).



Foreign-Trade Zones Act, 19 USC Chapter 1A- Foreign-Trade Zones. Title 19- Customs Duties, Chapter 1A, Foreign-Trade Zones.

Foreign-Trade Zones Board
U.S. Department of Commerce
1401 Constitutional Avenue, NW
Room 2111
Washington, D.C. 20230

Foreign-Trade Zone Manual, Foreign-Trade Zone Resource Center at

Foreign-Trade Zone Resource Center

National Association of Foreign-Trade Zones

U.S. Customs and Border Protection
Office of Field Operations
Cargo and Conveyance Security
1300 Pennsylvania Avenue, NW
Room 5.2C
Washington, D.C. 20229

U. S. Customs and Border Protection Regulations, 19 CFR Part 146- this section of the Code of Federal Regulations governs the transfer of merchandise to and from Foreign-Trade Zones.


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