Taking a new look at FTZs to help navigate tariff uncertainty

Interest in establishing a Foreign Trade Zone (FTZ) is increasing in 2025, according to Jackson Wood, Director of Industry Strategy, Global Trade Intelligence for Descartes, suggesting that this renewed attention is likely due to recent U.S. tariff uncertainty.

In a recent AJOT article Wood says FTZs can help companies mitigate the adverse impacts of tariffs, and in a new interview he adds that his company is seeing a significantly higher number of inquiries about Descartes FTZ, a software platform for FTZ operators, compared to a year ago. Wood believes this anecdotal evidence could be an indication that more companies are considering FTZs to deal with tariffs.

While Wood's instincts make sense, he clarifies that the industry doesn't have hard data today to prove more companies are establishing FTZs in 2025. The last FTZ Annual Report from the U.S. Department of Commerce was dated August 2024 and provided statistics for 2023. So, to see the real impact of new U.S. tariff policies on FTZs, we will have to wait for 2025 numbers provided in mid-2026. But meanwhile, importers may not want to wait to take advantage of FTZs.

Smart Tariff Strategy

A Foreign Trade Zone – not to be confused with a Free Trade Zone, also abbreviated as FTZ – is a physical facility established within the geographic boundaries of the United States, typically within a 60-mile radius of a port of entry. It is operated either by the shipper or by a 3PL delivering FTZ as a service.

FTZs are “secure areas located in or near US ... ports of entry but legally considered to be outside the Customs territory for the purpose of tariff laws and CBP entry procedures,” according to U.S. Customs and Border Protection (CBP). Products are only considered to be “imported” into the US when they leave the FTZ.

FTZs have been around since 1934, which is the last time U.S. tariff rates were as high as they are projected to become in 2025, Wood points out. “The US Congress created FTZs to enable US importers to reduce the impacts of very high tariffs,” he continues. “For the last few decades, it has been a niche instrument that only served very specific use cases. Today, however, FTZs are far more likely to have resonance in the current tariff environment because it is so difficult to determine with any certainty what tariffs will be tomorrow, let alone a year from now.”

Tariff uncertainty in 2025 makes FTZs much more compelling, from a cost-benefit perspective.

“Flexibility is the primary advantage that importers gain from FTZs today,” Wood observes. “Some organizations, particularly in light of the tariff volatility that we are experiencing right now, have opted to use their FTZs as distribution hubs for international sales.”

The US typically imposes no time limit on how long merchandise can remain in an FTZ. This affords U.S. importers with the adaptability to hold onto merchandise and wait out changing tariff policies, or export those products originally intended for the US to other markets such as Europe, EMEA or even South America – without paying US tariffs. This advantage makes FTZs uniquely suited to deal with the current US administration's approach to international trade.

Input Versus Output

Companies can also import all the components of products they manufacture onsite at an FTZ and only pay tariffs on the finished product as it enters the U.S. market.

“Merchandise may be manufactured or changed in condition while in the zone, substantially lowering the duties eventually paid,” CPB explains. The importer has the choice of paying duties on either the original imported components or the finished product. This provides a significant benefit for manufacturers facing high tariffs on components required to make their products.

In addition to helping bypass high tariffs, FTZs can also empower importers to manage cash flow better, even when tariffs will ultimately be paid. “With an FTZ, you can pay tariffs in far more manageable installments rather than having to disperse payments to Customs all at once when goods are brought into the country,” Wood explains.

Wood provides a hypothetical example of a company importing a million laptop computers from Asia and operating an FTZ. The importer only pays the duty on those laptops when the product leaves the FTZ, to be sold in the U.S. market. If the company brings 1,000 units at a time from the FTZ into the U.S. market, they are only paying the duty on each thousand-unit tranche. “That can be a huge advantage because we are talking about the difference between a $10 million duty bill and a $5,000 duty bill,” Wood says.

The Investment

FTZs aren't for everyone. Establishing and operating an FTZ can be a time-consuming task and a significant investment, Wood cautions. It is important to engage a consultant to provide guidance on regulatory requirements and the approval process, as well as to conduct a cost-benefit analysis to determine whether an FTZ makes sense for your company.

But he adds – because companies are facing such extremely high potential tariff rates – the cost to establish an FTZ is not as onerous as it seemed in the past.

“My recommendation is to investigate whether an FTZ could help you mitigate the impact of tariff volatility,” Wood advises. “Based on how FTZs have been used historically, there's a lot of evidence that organizations can benefit by improving their cash flow and minimizing the impact of duties on imports of their products.”

Wood concludes, “The number one action organizations can take right now to try to minimize the impact of US tariffs is to get creative and be open minded about the options available – and Foreign Trade Zones are absolutely worth considering.”