Chapter 4: Problem 14

What is meant by the terms bonded warehouse and foreign-trade zone? How does each of these help importers mitigate the effects of domestic import duties?

Short Answer

Expert verified

A bonded warehouse is a secure storage area where importers can store goods without paying duties until the goods are removed. A foreign-trade zone is an area considered outside of a country's customs territory, where goods can be stored or modified without initial imposition of import duties. Both these facilities help importers mitigate the effects of domestic import duties by deferring or reducing the payment of these duties.

Step by step solution

Define Bonded Warehouse

A bonded warehouse is a secure area where imported goods can be stored without actually paying the imposed import duties until those goods are removed from the warehouse. Unless the goods are withdrawn for consumption, they can be kept in the warehouse for a defined period of time with no duties paid.

Explain Benefit

The utilization of bonded warehouse can help importers to mitigate the effects of domestic import duties by deferring the payment of import duties until the goods are sold or used. This can improve an importer's cash flow since the duty is not paid upfront, only when the item leaves the warehouse. Therefore, if goods are never sold, or are re-exported, no duties are paid.

Define Foreign-Trade Zone

A foreign-trade zone (FTZ), on the other hand, is an area within a country (but considered outside of its customs territory) where imported goods can be stored, modified, or used in manufacturing, without having to pay import duties.

Explain Benefit of FTZ

FTZs can be of great benefit to importers. This is because the duties are either lowered or eliminated for goods brought into the zone that are later re-exported. If the goods are sold domestically, duties are only paid when they leave the zone and officially enter into commerce of the country. Depending on the type of transformational operations the goods undergo, the tariff rate can also be lower.

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