Foreign Trade Zones: Using Federal Trade Program as a Local Economic Development Tool
31 Mar, 2003By: Greg Jones
The U.S. Foreign-Trade Zones program has grown profoundly over the last three decades. In 1970 there were 8 General Purpose Zones and 3 special purpose subzones in the United States. Today there are over 250 Zone projects and over 400 special purpose subzones in the United States. This growth has been dependent upon the evolution of the FTZ program as a means by which U.S.-based companies can enhance their cost-competitiveness, and as a means by which the United States can practice both the letter and the spirit of its trade laws.
A unique strength of the FTZ program is that it involves both public sector and private sector participation. Foreign-Trade Zone Grantees serve as the public voice and the public self-administration of Zones on behalf of the firms that operate and use Zones. This public voice has resulted in the evolution and development of more user-friendly Zone procedures. These have vastly increased the utility of FTZs for U.S.-based firms, which has in turn enhanced the competitiveness of Zone users; thus attracting and retaining trade opportunities which translate into jobs and capital investment for the communities each Zone serves and into domestic economic activity for the United States.
Each active FTZ project has a Grantee, one or more Operators, and one or more users. Each Zone project has a General Purpose Zone, which may consist of one or more sites, in which any number of users may conduct operations constrained only by the physical limitations of the site or sites. A special purpose subzone is a single-firm site, usually involved in manufacturing, operating independently from the General Purpose Zone. Each subzone operates under the auspices of the Grantee. The Foreign-Trade Zones Board authorizes the establishment of subzones in instances where the activity cannot be accommodated within a General Purpose Zone and where Zone status for a particular business operation will result in a significant public benefit, such as the creation or retention of domestic economic activity. Typically, the nearest Grantee within a given State establishes each subzone. Some Zone projects have no subzones, others have several subzones. Typically, the Zone Grantee is a municipal government body, a port or airport authority, or an economic development organization.
Foreign-Trade Zone projects are a popular economic development tool because they offer locally-based businesses engaged in international trade an opportunity to enhance their bottom-line competitiveness. There are a number of key benefits that attract most companies to the Zones program.
Relief from Inverted Tariffs
In certain instances, there are tariff (duty rate) relationships that actually penalize companies for making their product in the United States. This occurs when a component item or raw material is subject to a higher duty rate than the finished product. Hence, the importer of the finished product pays a lower duty rate than a manufacturer of the same product in the United States. This gives the importer an unfair and unintended advantage over the domestic manufacturer. The Foreign-Trade Zones program levels the playing field in these circumstances.
FOR EXAMPLE: A Foreign-Trade Zone user imports a motor (which carries a 4% duty rate) and uses it in the manufacture of a vacuum cleaner (which is duty-free). When the vacuum cleaner leaves the FTZ and enters the commerce of the U.S., the duty rate on the motor drops from 4% to the “free” vacuum cleaner rate. By participating in the Zones program, the vacuum cleaner manufacturer has eliminated duty on this component, thereby reducing the component cost by 4%.
Duty Exemption on Re-exports
When not utilizing a Zone, an importer is required to pay Custom duties at the time the imported merchandise enters U.S. commerce. Merchandise in a Foreign-Trade Zone is considered to be outside the commerce of the United States and the U.S. Customs territory. When foreign merchandise is brought into a Foreign-Trade Zone, no Customs duty is owed while the merchandise remains in the Zone. If the foreign merchandise is exported from the U.S., no Customs duty is ever due.
Cash Flow (Duty Deferral)
No duty payment is required on merchandise brought into a Foreign-Trade Zone unless and until the goods are imported (entered) into the United States. This allows these funds to be used as working capital to earn interest or be invested.
No Duty on Value Added
No duty is assessed on domestic parts or materials, OR on domestic labor, overhead, or profit.
A vendor located at one Foreign-Trade Zone may sell goods to a company in another Zone or subzone anywhere in the U.S. and transfer those goods to the purchasing company’s FTZ with no duty paid on the goods.
Damaged or Nonconforming Items
No duty payment is required if merchandise is not entered into the United States. If merchandise is defective or damaged, no duty payment is owed while it is being tested, repaired, or stored in the FTZ. (The actual importation does not occur until the merchandise leaves the Zone and enters the commerce of the United States). Merchandise may be altered, repackaged, and/or relabeled to meet various U.S. requirements. Zones are often used for the purpose of properly marking the Country of Origin on goods prior to their entry into the United States.
Government and Military Sales
In many cases sales of foreign merchandise may be entered into the United States duty free if the vendor has a government contract in place.
The Foreign-Trade Zones Board issues grants of authority to local public entities (Grantees) for the establishment and operation of Foreign-Trade Zone projects within their service areas. Grantees are usually city or county government entities, or public port authorities or airport authorities. When the facilities of various manufacturing operations are designated as subzones, they are established by the local Grantee on behalf of the subzone user.
When the fathers of the Foreign-Trade Zones Act deliberated its passage, they were wise to make local public participation mandatory. Since the Zones program was created to serve the public interest, and since businesses typically pursuet heir own more narrow interests, joint public/private participation has served the Zones program well.
Local Grantee organizations benefit from the Zones program through the economic activity the program promotes. When a local business uses the Zones program to enhance its profitability, the economic effects ripple throughout the local and regional economy. First, direct employment is increased or maintained. Second local suppliers and vendors gain or maintain their geographical advantage (it is easier and cheaper to sell goods or services to the company across the street than to do the same to a company across the ocean). In turn, second, third, and fourth tier suppliers maintain their economic base. In every case, the people involved in this economic activity buy homes, food, and other goods. Many local governments maintain their operations through the taxation of the economic activity that directly or indirectly results from manufacturing and distribution operations conducted in the Zone. These taxes can be property taxes, taxes on the retail sale of goods, and so-on.
This enhanced local or regional tax base allows local governments to provide the physical and social infrastructure necessary to maintain their communities as attractive places for people to live. Very often the building and maintenance of roads, schools, hospitals, ports and airports is dependent on local tax revenues. Police, fire, and sanitary services are all dependent on local sources of tax revenue. Very often, communities who benefit from the economic activity conducted by firms engaged in international trade make their own contributions to the competitiveness of those business operations. This is often done through the building and expansion of the infrastructure associated with trade; that is, port facilities, inter-modal centers, airports, air cargo centers, universities and so-on. It is these communities, not those who specialize in providing cheap low-skill labor, who continue to benefit from the globalization of trade. The Foreign-Trade Zone program serves as a tool for the communities who establish Zone projects, and for all of the communities within a given Zone project’s service area.
(This article contains excerpts from A Brief Overview of the U.S. Foreign-Trade Zones Program, copyright 2000 by Greg Jones. Used by permission of the Author.)