Tesla’s Megapack factory in Brookshire, Texas, has now officially been designated as a foreign-trade zone (FTZ), a U.S. Customs program that allows manufacturers to defer payment of duties on imported components. The approval by the FTZ Board was published in the Federal Register on Monday, with a validity period of 14 months.
It’s easy to interpret this as Tesla being exempt from paying tariffs on Chinese LFP cells inside Megapacks, but Tesla’s own application states otherwise: components subject to tariffs under Sections 301, 232, or 122 still require payment.
What did Tesla apply for?
On May 20, Tesla submitted an application to include the 84AM zone within Foreign Trade Zone 84 in Houston. This facility is where Tesla will begin producing Megapack 3 in August, with a planned annual capacity of 50 GWh.
The application lists approximately 80 components that Tesla seeks to import under the foreign trade zone program, including cooling pumps, transformers, busbars, wire harnesses, circuit boards, and battery cells. These components are subject to tariff rates of up to 6.5%, while finished Megapack and Bento inverters face tariff rates ranging from duty-free to 3.4%.
These differences in tax rates are typically why companies establish foreign trade zones. Manufacturers within a foreign trade zone can often choose to pay taxes at the lower rate applicable to finished goods, rather than at the higher rates applicable to each imported component.
Restrictions related to tariffs
However, the application documents also outlined this restriction. The notice states that components subject to tariffs under Section 122 of the Trade Act, Section 232 of the Trade Expansion Act, or Section 301 “must enter foreign-trade zones with privileged foreign status.”
Privileged foreign status locks in the classification and tariff treatment of components when they enter a foreign trade zone. Therefore, Chinese LFP cells used in Megapacks ultimately sold in the U.S. market are still subject to Section 301 tariffs on Chinese non-electric vehicle lithium-ion batteries; this rate increased from 7.5% to 25% effective January 1, 2026. Tesla simply defers payment of this duty until the finished Megapack exits the foreign trade zone.
The actual benefits Tesla received include:
- Tariffs can be deferred until the Megapack leaves the foreign trade zone, which helps improve cash flow during the factory’s ramp-up phase.
- Megapacks exported directly from the foreign trade zone are exempt from U.S. tariffs.
- Components not subject to Chinese, steel, or other special tariffs may qualify for a lower finished product tariff rate.
- Scrap is tax-exempt and requires less customs declaration.
This is helpful, but not an exemption.
Treated the same as other businesses
This approval uses the same wording adopted by the Foreign Trade Zone Board throughout this year. Production is “authorized on a limited basis” and “further restricted by a 14-month deadline.”
This summer, Tesla also received similar one-year approvals for Megapack and inverter production in Fremont, Livermore, and Lathrop, California. Eastman Chemical, battery pack manufacturer Rose Batteries, and chipmaker Qorvo also received similar, time-limited "limited basis" approvals for 2026.
A 14-month clock means this approval will expire around the end of 2027. This timing roughly coincides with LG Energy Solution’s planned start of supplying LFP cells from Michigan to Tesla’s Megapack 3 under a $4.3 billion contract, with large-scale production expected to begin in the second half of 2027.
Tesla's battery cell issues in China
Tesla did not avoid this issue. During the April 2025 tariff escalation, Chief Financial Officer Vaibhav Taneja stated that the energy storage business would be "particularly hard hit because we source lithium iron phosphate (LFP) battery cells from China." At the time, we wrote that Tesla's only growing business had been "stuck" by Trump's tariffs.
Since then, Tesla has built its own LFP cell factory in Nevada, but Taneja noted that this will only cover a small portion of Tesla’s installed capacity. Just the Brookshire facility alone is designed for an annual production capacity of 50 GWh, in addition to the 40 GWh capacity from the Lathrop factory in California.
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