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U.S. Foreign-Trade Zones Help U.S. Based Manufacturers Stay in Business

6/30/2005

By Greg Jones (©Trade & Industry Development, June 2005)

Listen to any talk show that addresses the subject of international trade trends and you will hear concerns about “outsourcing” U.S.-based manufacturing operations to foreign locations. You may also hear about manipulation of currency value by foreign governments that make “outsourcing” of value-added manufacturing operations even more attractive, and the continued proliferation of free trade agreements that enable products produced abroad to be entered into the United States at even lower tariff rates. You may hear some discussion about free trade initiatives as a means of promoting democratic and labor reform on a worldwide scale, and the promotion of U.S. exports. To the U.S. manufacturing plant manager and to his or her fellow plant workers, democracy and exports seem like good ideas only if the local manufacturing facility can manage to keep its doors open. In today’s multinational corporate environment, one can ask any well informed employee of a U.S.-based manufacturing plant who that plant’s biggest competitor is. The answer may surprise you. No, it’s not the Brand X plant across town. No,it’s not ABC Company in a nearby state. In terms of real production capacity, the answer often is, “Our own company’s sister plant in the Far East.” Solutions to the challenges imposed by today’s global trade environment may seem few and far between; however, one solution that shows continued popularity despite the apparent fall in U.S. tariff rates is the U.S. Foreign-Trade Zones program.

For the past three decades, U.S. tariff rates have fallen significantly, with many new products eligible for duty-free importation into the United States. Yet, over the same timeframe, the use ofthe U.S. Foreign-Trade Zones program – which is predicated on the ability to reduce costs associated with tariffs – has risen. In 1970, roughly 65% of total U.S. import value consisted of dutiable products, with Customs duties comprising 6.5% of the total value of all imports. In 2003, roughly 32% of total U.S. import value consisted of dutiable products, with Customs duties comprising only 1.6% of the total value of all imports. The fall in the effective tariff rates that apply to products imported into the United States can be traced to multilateral tariff reductions such as the Tokyo Roundof GATT and the Uruguay Round Agreements, and, to regional and bi-lateral trade initiatives such as the Generalized System of Preferences (GSP), the Caribbean Basin Economic Recovery Act (CBI), the U.S.-Israel Free Trade area Agreement, the North American Free Trade Agreement (NAFTA) and the Andean Trade Preference Act. In 1970 there were eight U.S. Foreign-Trade Zone projects in the United States. Included within these Zone projects were a total of three special-purpose subzones. Today there are more than 150 active Zone projects with a total of more than 200 active special-purpose subzones.Total Zone-related manufacturing activity exceeds $200 billion annually.

Most people who are familiar with Foreign-Trade Zones are familiar with the idea that companies use Zones to reduce their tariff-related costs. Given this understanding, one might well ask, “Hey – U.S. tariff rates are falling. Foreign-Trade Zone use is climbing. What’s the reason?” The primary reason is that U.S. Foreign-Trade Zones save U.S.-based manufacturers money in ways that are different than so-called “Free Trade Zones” in other countries. In a number of “Free Trade Zones” the sole benefit is the avoidance of internal customs duties on products that are re-exported from the Zone. In some instances – for example, the manufacture of computer-related products – U.S. Foreign-Trade Zones enable companies to reduce or eliminate duties on products produced for domestic consumption. This “tariff rate rationalization” benefit is a key distinction between the U.S. Foreign-Trade Zones program and many other free zone or customs duty regimes.

The use of the Foreign-Trade Zones program by U.S.-based manufacturers of computer-related peripheral products provides an instructive example of howU.S. Foreign-Trade Zones enable American businesses to compete with their foreign counterparts on a level playing field in what would, in the absence of the Zones program, be an irrational tariff rate environment.

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