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Using Foreign-Trade Zones as a Local Economic Development Tool

9/15/2006

By Greg Jones (©Expansion Solutions Magazine, 2006)

 

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 companies to the Zones program. Many people are familiar with the concept of “Free Trade Zones” which, in some form or other, have existed since Biblical times. However, today’s U.S. Foreign-Trade Zones program offers U.S.-based companies more benefits than many other countries’ so-called “Free Trade Zones.”

In some countries, all manufacturing operations must involve exported finished products. This is not the case in U.S. Foreign-Trade Zones. In fact, under FTZ manufacturing procedures, a number of U.S.-based companies can obtain relief from what would otherwise be irrational duty rate relationships in the manufacture of products destined for the domestic market. An irrational duty rate relationship (sometimes know as an “inverted tariff” relationship) exists when the rate of Customs duty which would apply to the importation of a given finished product is lower than the duty rate that would apply to the importation of one of its components. Think about it – is U.S.-based manufacturing encouraged when the duty rate that applies to a VHS videotape cassette is lower than the duty rate that applies to its plastic housing? The answer is, “No.” However, due to a quirk in the current U.S. tariff structure, the duty rate that applies to the plastic VHS tape housing is 5.3%, whereas the duty rate that applies to the finished VHS videotape cassette is “Free.”

Under U.S. Foreign-Trade Zone manufacturing procedures, the videotape manufacturer may bring the plastic housing into its FTZ facility without the payment of duty then use it to manufacture a finished VHS videotape cassette. When the finished VHS videotape cassette leaves the Zone for domestic consumption, it enters U.S. commerce at the “Free” rate of duty that applies to the finished product, not the 5.3% rate of duty that would otherwise apply to the plastic housing. By fashioning Zone benefits to enable U.S.-based manufactures to be more competitive in making goods for the U.S. market, the U.S. Foreign-Trade Zones program removes any tariff-based incentive for American companies to “outsource” their manufacturing operations to foreign locations, and, enables the U.S. government to maintain its tax base through the taxation of the labor involved in U.S. value-added activity. American consumers benefit by being able to buy finished products that are “Made in the USA” at prices that are relatively more competitive with foreign-made finished products.

Foreign-Trade Zones are also popular because they provide opportunities for companies to streamline their international logistics. Foreign-Trade Zone Direct Delivery procedures allow foreign merchandise to be transported in-bond directly to the Zone user’s facility without clearing Customs at the first port of unlading, and without the necessity of the in-bond carrier reporting to the local Customs office prior to the delivery of the merchandise to the Zone site. Direct delivery procedures often save one to two days in delivery of foreign merchandise to the Zone user. This shortens the Zone user’s international pipeline, thereby eliminating inventory within that pipeline. Foreign-Trade Zone Weekly Entry procedures allow the Zone user to serve the domestic market without paperwork delays. Since the formal Customs entry takes place when merchandise leaves the Zone for domestic commerce, Zone users often use Weekly Entry procedures to streamline shipments and Customs paperwork. Under Weekly Entry procedures, the Zone user files one Customs Entry per week, rather than filing one Customs Entry per shipment. This allows the Zone user to serve the domestic market without paperwork delays. Pursuant to the provisions of the Trade Development Act of 2000, Weekly Entry procedures have been made available to all kinds of FTZ operations, including manufacturing and distribution operations.

Zones provide other trade-related advantages as well.

Unless and until the goods are imported into the United States, no duty payment is required on merchandise brought into a Foreign-Trade Zone. This allows these funds to be used as working capital for the Zone user to earn interest or be invested.

No duty payment is required if merchandise is not brought into the United States. If merchandise is defective, damaged, or not in conformance with U.S. standards, no duty payment is owed while it is being manipulated, repaired, or stored in the FTZ. (The actual importation does not occur until merchandise leaves the Zone and is entered for consumption in the United States). Merchandise may be altered, repackaged and/or relabeled to meet U.S. requirements. Zones are occasionally used for the purpose of properly marking the Country of Origin on goods prior to their entry into the United States. If merchandise is re-exported from a Foreign-Trade Zone, no duty is paid. This is a savings to exporters who would otherwise be required to pay duty on merchandise brought into the United States. If merchandise on which duty has previously been paid, is re-exported from the United States, the exporter must normally engage in the time-consuming process of filing for "drawback" from U.S. Customs. The FTZ user never pays duty on the merchandise – thus saving administrative burdens and cash.

American communities benefit from the U.S. Foreign-Trade 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, intermodal 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 Zones program serves as a tool for the communities who establish Zone projects to maintain and expand their economic base. For global companies with a desire to invest in U.S. production or distribution sites, the availability of Foreign-Trade Zone status is often an important factor in their ultimate site selection.

Greg Jones is a Senior Consultant with the Foreign-Trade Zone Corporation. He began working in the FTZ program in 1986, and has been an active member in the National Association of Foreign Trade Zone (NAFTZ) since 1987. He served as president of the NAFTZ from 1993 to 1995, and was designated as an Honorary Life Member in 2000. The Foreign-Trade Zone Corporation is a service provider offering FTZ cost-benefit analyses, FTZ Board applications, activations with CBP, training, assistance in designing, creating and managing Zone projects, and its SmartZone® Foreign-Trade Zone management software.

    

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