By Greg Jones (©Trade & Industry Development, September 2014)
The continued growth of the U.S. Foreign-Trade Zones in light of long-term reductions in overall U.S. tariff rates is no longer a surprise. As noted in the 2012 U.S. Foreign-Trade Zones Board’s Annual Report to Congress, the value of goods flowing into Zones for that year was $732 billion – more than three times the total for the year 2000. Yet, answers to the question of what has driven this growth are both simple and complex. The simple answer is the U.S. Foreign-Trade Zones program offers cost-saving benefits to U.S.-based businesses that allow them to maintain or expand their U.S.-based operations. The more complex answer involves the way in which 70 years of trade globalization continues to squeeze the operating margins of U.S.-based businesses. To better understand the dynamic of trade globalization, one would do well to look at its development over the past several decades.
It would be safe to say that a lot was going on in terms of world events during July of 1944, and that many of those global events would determine the kind of world that would exist long after. In places such as Europe, the Pacific and Asia, people from many nations were engaged in armed combat, the result of which would settle many questions about the manner in which people of different nations would engage each other for a long time to come. Meanwhile, from Army ammunition plants in the Appalachian Mountains to shipyards in coastal seaports, an army of American workers manufactured the tools of warfare that would inevitably lead to an Allied victory. In Bretton Woods, New Hampshire, a group of representatives from 44 Allied nations gathered to discuss and plan for the creation of global institutions whose rules would reduce or eliminate the kinds of political and economic distortions that can serve as root causes to large-scale armed conflict. Among their aims was the free commercial flow of goods, currency, and capital between nations. The ultimate, practical results of their free trade initiatives were several rounds of multilateral tariff reduction agreements under the auspices of the General Agreement on Tariffs and Trade (GATT), culminating in the creation of the World Trade Organization (WTO) in 1995. They initiated institutions to facilitate the free exchange of currencies. This made possible the free flow of capital investment, which in turn meant that companies that engaged in manufacturing activities would have a world of choices in which to establish production platforms.
Round after round of duty rate reductions among GATT member countries offered a number of benefits for U.S.-based manufacturing operations – especially opportunities to expand export sales. Conversely, reduced U.S. tariffs, combined with the free flow of capital investment, meant there was a world (at least what was known in the post-war age as the “Free World”) of competition for production and market share within the U.S. market. For any American plant, this competition no longer came from other U.S. brand names; it came from foreign brand names, and, on an ever-increasing basis, from foreign “sister plants” within the same global corporation.
Naturally, this gave rise to conflict and debate over trade liberalization and its role in fostering the “outsourcing” of manufacturing operations to foreign, “low-cost” locations. This conflict has been further exacerbated by membership in the WTO by countries (e.g., China, Viet Nam) whose governments are yet to embrace the institutions and values that have characterized the nations that continue to define the “Free World.” Some argue that offering WTO membership to countries that have yet to embrace democratic institutions will offer new markets for American exporters, and will create and expand the middle class of citizens in those countries who, in time, will demand decent wages and democratic institutions and government for themselves. Others argue that WTO membership for such countries is akin to inviting the fox into the henhouse. However, even if one accepts the argument that free trade promotes worldwide peace and democracy, the stark question remains: How do we keep our hometown USA factory doors open until the arrival of that wonderful day when worldwide peace and democracy erase the economic distortions that still exist today?
The obvious answer for the U.S-based manufacturer is: We have to lower the production costs of our manufacturing facility. How? Well, first, we’d better get lean. No more “buffer stock” of parts and components that we’ve paid for but haven’t used yet. We need to order and receive parts and materials on a “just-in-time” basis. We need to actively manage our worldwide supply chain costs and do what we can to encourage our domestic suppliers to manage costs within their supply chains. We need to use any available tool to lower our global supply chain costs, keep our doors open, employ the people of our town and remain as viable customers for our domestic suppliers.
For communities that are home to U.S-based manufacturing operations, the answer is perhaps less obvious, but no less clear: We need our community to be a beneficiary of globalization – not one of its victims. Companies looking to build new production facilities have a world of potential site locations. An area’s existing industries can close or leave tomorrow. To attract and retain value-added activity, we have to have the physical infrastructure, services and human resources that enable our local companies to remain efficient and compete on a global basis. We have to have an educated, trainable workforce. We have to provide school systems and public facilities that make a community an attractive place to host high value-added business operations. We need the tools to attract and retain both domestic and foreign investment.
One tool that helps individual companies and the American communities in which they reside respond to the challenges of globalization is the U.S. Foreign-Trade Zones program. Operating under Zone procedures enables many U.S.-based companies to lower their global supply chain costs.
Among the ways this happens are:
Customs Duty Deferral – No Customs duties are paid while imported material remains in the Zone.
Duty Avoidance on Re-exports – Goods stored in Zones may be shipped to foreign markets without the payment of U.S. Customs duties. The same benefit applies for exports of goods manufactured in Zones that are exported to non-NAFTA countries.
Tariff Rate Rationalization – With prior U.S. Foreign-Trade Zones Board approval, Zone users may choose the duty rate that is applied to foreign components used in the manufacture of goods sold in the domestic market — that is, the rate that applies to the imported component, or, alternatively, the rate that applies to the FTZ manufacturer’s finished product, whichever is lower.
Lower Supply Chain Costs – FTZ Direct Delivery procedures reduce the time between unlading at a U.S. port and the arrival of parts and components to the FTZ user. FTZ Weekly Entry procedures reduce the paperwork involved in serving the domestic market from the Zone operation.
U.S.-based companies obtain access to the FTZ program under the auspices of local FTZ Grantee organizations. Zone Grantee organizations come in many forms (e.g., port authorities, airport authorities, local government bodies, economic development organizations), however, nearly all Grantee organizations are involved in economic development. Successful Grantee organizations make sure they deliver the FTZ program to businesses in their local area that need it to remain globally competitive.
When U.S. Congress passed the FTZ Act in 1934, it specified that each Zone project would be established and operated under the auspices of a local Grantee organization. Why did members of Congress create the Grantee structure? They knew that the benefits of the FTZ program would not be broadly distributed unless they were promoted at a local level throughout America’s communities. It is improbable that any of those who created the FTZ program in 1934 could have envisioned the ways in which it has contributed to the encouragement of U.S-based manufacturing, the retention of domestic capital investment, domestic employment and the attraction of foreign capital investment to the United States. Today, however, one can easily see how the program Congress created in 1934 has evolved, expanded and played a significant role in mitigating the unintended costs of the initiatives and institutions created by the delegates who gathered a decade later in Bretton Woods with the aim of encouraging the nations of the world to turn their swords into plowshares.
An interesting example of how this has happened is represented by the development of Foreign-Trade Zone No. 134, which serves southeastern Tennessee. The Grantee organization, the Chattanooga Chamber Foundation, promotes economic development not only in Chattanooga; it coordinates with economic development agencies in 10 surrounding counties. Steve Hiatt, who is responsible for overseeing the Zone-related activities of the Chattanooga Chamber Foundation, tells the story as follows:
“The history of our community and our Zone project’s role in it draws a direct line between the Second World War, post-war expansion and globalization, and the role of our FTZ project in supporting domestic industry and attracting foreign investment.
One of our Zone sites – Enterprise South Industrial Park – is a perfect example of this transformation. In 1942, an Army Ammunition Plant was built at the base of one of the many mountain ridges that run through our area. The plant produced TNT for American bombs and artillery used in the War. The plant’s location was considered ideal because the mountain ridge immediately adjacent to it would serve as a buffer in the event of a catastrophic accident. From the War until the early 1990s, the plant was devoted to the production, treatment and storage of high explosives. As you can imagine, having such activity in your community might not be the best way to encourage growth and economic development in the area. The Chattanooga Area Chamber of Commerce and the Chattanooga Chamber Foundation took the lead in redeveloping the site for use as a nature park and an industrial park. Naturally, we were interested in attracting high value-added, clean industry. Today, the site is home to Volkswagen, which produces the company’s Passat sedan, and is the only Platinum LEED certified manufacturing facility in the world. The plant employs more than 2,500 Americans and supports more than 9,000 American jobs in its domestic supply chain. FTZ status helps our plant compete with its Volkswagen sister plants located in Germany and Mexico, and our FTZ project was a requirement for Volkswagen to choose Chattanooga as its new American home.
When the VW site selection team visited us, they had lots of questions about the FTZ program. Our team was able to provide detailed answers about the program and share with them the way our particular Zone project works. Recently, word came from Volkswagen’s headquarters in Germany that the Chattanooga site has won the production of several VW cross-over models. This will create 2,000 more jobs at the plant and another $600 million investment. You can bet that efficient cost-of-production was essential to that decision.
In addition to supporting the supply chain cost structure of General Electric – an American brand name that is familiar to everybody – our FTZ project has also enabled us to lower the cost structure of two companies that have migrated from Japan: Komatsu and Sofix Corporation. These companies compete for production share with their Asian sister plants.
We are in the process of reorganizing our Zone project under the Alternative Site Management Framework to help companies in our 11-county area more quickly designate individual company sites with Zone status as their needs arise. We want to capture as much value-added activity in our little corner of the globe as we can. Our FTZ project is one of the tools we can count on to do this.”