In a short essay, explain how foreign trade zones work. How are FTZs utilized by firms?

What will be an ideal response?

A foreign trade zone is an area within countries that receives imported goods for assembly or other processing, and re-exports. Thus exported products receive preferential tariff treatment. Products brought into an FTZ are not subject to duties, taxes, or quotas until they, or the products made from them, enter into the non-FTZ commercial territory of the country where the FTZ is located. Firms use FTZs to assemble foreign dutiable materials and components into finished products, which are then re-exported. Alternatively, firms may use FTZs to manage inventory of parts, components, or finished products that the firm will need eventually at some other location. A successful experiment with FTZs is maquiladoras—export-assembly plants in northern Mexico that import materials and equipment on a tariff-free basis for assembly or manufacturing and then re-export the assembled products.