Death of foreign trade zones?

Overview

Recent executive orders (EOs) by the Trump administration have introduced changes that may significantly impact businesses utilizing foreign trade zones (FTZs). These changes relate to the imposition of reciprocal tariffs on goods processed within FTZs as part of broader efforts to address trade imbalances and enhance domestic production.

Key Points

It is well known that President Trump has expressed support for the book “Death by China,” written by his trade adviser Peter Navarro. The book criticizes China’s trade practices and economic policies, arguing that they are detrimental to the United States. The EOs imposing reciprocal tariffs to reduce trade imbalances with China and other countries are borne out of those concerns. The EOs also seek to address what are perceived to be loopholes around the tariffs and fuller domestic production, including the use of FTZs.

Specifically, inputs entering the FTZs for further processing will be applied reciprocal tariffs once they leave the FTZ as part of a downstream product that enters U.S. customs territory. This is a significant departure from the long-standing benefits of FTZs.

FTZs in the United States were established under the Foreign Trade Zones Act of 1934, during the Great Depression as a tool to promote international trade and economic recovery. Modeled after similar free zones in Europe, FTZs were designed to encourage businesses to operate within U.S. borders rather than relocate overseas to avoid tariffs and import duties. By allowing goods to be imported, stored, assembled, or manufactured in designated zones without immediate customs duties, FTZs aimed to enhance U.S. competitiveness in the global marketplace, stimulate domestic employment and investment, and streamline supply chains.

The primary purpose of FTZs is to facilitate trade and improve the efficiency of companies engaged in international commerce. FTZs allow businesses to defer, reduce, or even eliminate customs duties on imported goods, especially when those goods are later re-exported or used to manufacture finished products domestically. This flexibility reduces operating costs and helps streamline supply chains, particularly for industries such as automotive, electronics, and pharmaceuticals. Today, FTZs are integral to U.S. trade infrastructure, providing a secure and regulated environment that supports importers, exporters, and manufacturers in navigating complex customs requirements while enhancing economic development and job creation.

“Privileged Foreign Status” Provision

Under section 3(g) of EO 14257, effective April 9, goods entering FTZs must be classified under “privileged foreign status:”

(g) Subject articles, except those eligible for admission under “domestic status” as defined in 19 CFR 146.43, which are subject to the duty specified in section 2 of this order and are admitted into a foreign trade zone on or after 12:01 a.m. eastern daylight time on April 9, 2025, must be admitted as “privileged foreign status” as defined in 19 CFR 146.41.

Privileged foreign status requires goods to be treated as foreign for tariff purposes, with duties assessed based on their condition upon entry into the FTZ, regardless of subsequent processing. In other words, the applicable tariff rate at the time of entry into the FTZ remains binding, even if the merchandise undergoes further manipulation or manufacturing within the FTZ. The privileged foreign status ensures that the duties and taxes are assessed based on the original condition of the merchandise (e.g., inputs) when brought into the FTZ, rather than its condition (finished product) upon leaving the FTZ.

By including section 3(g) in the EO, the administration is taking a proactive step to ensure that reciprocal tariffs on foreign-made inputs are applied when further processed goods exit the FTZ and enter the U.S.  Privileged foreign status in this context means that inputs used in an FTZ to make a downstream product could be charged the same tariffs as if they are imported into the U.S. directly and not through the FTZ.

Implications for Businesses Using FTZs

This provision could significantly affect businesses using FTZs for duty deferral or duty reductions. Companies may need to reassess their supply chains and consider relocating production to the U.S. to mitigate tariff impacts – which is at the heart of the EOs, but may not be feasible for all products.

There are also likely to be logistical implications. For instance, customs entry documentation may have to break out the imported inputs by Harmonized Tariff Schedule (HTS) subheadings for corresponding reciprocal tariffs. Companies will need to quantify tariffs for each foreign-sourced subheading.

For many businesses, this will raise costs and strain resources. The policy shift indicates a potential decline in the benefits historically offered by FTZs, necessitating a strategic review of current operations. Provisions such as 3(g) in EO 14257 demonstrate a negative disposition towards FTZs, which may impact their viability. While the exact number of jobs created by FTZs can fluctuate over time and depends on various factors such as economic conditions, industry growth, and policy changes (such as this one), FTZs have been reported to support hundreds of thousands of jobs across the United States. According to the National Association of Foreign-Trade Zones, in recent years, FTZs have directly and indirectly supported around 420,000 jobs.

If FTZs no longer offer the benefits previously relied upon, businesses should evaluate the impact on their operations and seek professional advice to navigate these changes effectively.

Contact Clark Hill

If you have any questions regarding the content of this alert, please contact Mark Ludwikowski (mludwikowski@clarkhill.com; 202-640-6680), Kevin Williams (kwilliams@clarkhill.com; 312-985-5907), Aristeo Lopez (alopez@clarkhill.com; 202-552-2366), Kelsey Christensen (kchristensen@clarkhill.com; 202-640-6670), Sally Alghazali (salghazali@clarkhill.com; 202-572-8676), Amal Sheheen (asheheen@clarkhill.com; 202-552-2354) or other members of Clark Hill’s International Trade Business Unit.

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