Foreign Trade Zones

In 2010, as part of his State of the Union address, President Obama announced an ambitious plan to double US exports over the next five years.  This plan, known as the National Export Initiative (NEI), is intended to create roughly 2 million new jobs in the US.   Many countries have proposed similar programmes; however they have not always been subjected to the obstacles confronting the Obama Administration.  Among the difficulties facing NEI are high tax burdens placed upon US companies that invest overseas, the depreciation of Chinese currency, impeding export regulations and disagreement on trade policy within the president’s own political party.

As the US suffers through a slow and disappointing recovery from the worst economic recession since the Great Depression, America’s need to stimulate job growth and retention is immediate.  The approach to solving this problem must be delicate and avoid adding to our massive national debt or increasing the burden of taxes on the hard-pressed American people.  While often overlooked, the US has an existing economic programme with the potential to create and preserve hundreds of thousands of jobs.  As the Obama Administration explores ways to create new jobs and increase exports as part of NEI, they should not overlook the importance of the Foreign-Trade Zones (FTZ) programme. 

The Foreign-Trade Zones programme is a key element in improving the competitiveness of US-based manufacturing and distribution. The National Association of Foreign Trade Zones (NAFTZ) is the leading voice in the United States advocating the utilization of FTZs as an innovative tool to create jobs and economic activity here at home.  In today’s uncertain economy, these things are needed more urgently than ever.

Operating in all fifty states and Puerto Rico, FTZs are specially designated areas that help keep US manufacturing competitive in global and domestic markets.  They create and preserve jobs by making US locations more attractive than foreign options, through reduced US tariffs and Customs-related expenses, thereby promoting efficient and more profitable US business operations.

Essentially, FTZs allow companies to reduce Customs duties when they manufacture and defer payment of duties and fees on imported goods and materials until products are shipped out of the Zone into the US market.  This beneficial tariff treatment, which is similar to the tariff treatment given to finished products made abroad, avoids punishing tariff exposure for companies located on US soil, creating a level playing field for American business.

More than 2,500 American companies employ over 330,000 workers at the 253 General Purpose Zones and 261 active subzones in operation, based on the latest available statistics from the Foreign Trade Zones Board.  The combined value of shipments into US FTZs totalled $430.6 billion in 2009, the latest year for which figures are available, and according to US Customs and Border Protection amounted to more than 15 per cent of US imports by value.

US foreign trade zones have been around since 1934, but the concept is global (e.g., Hong Kong, Panama, Hamburg, Venice) and free zones have existed since ancient times (Greece, Rome, Phoenicia). 

In the US, the Foreign-Trade Zones programme is administered by the Foreign-Trade Zones Board, a government agency housed in the US Department of Commerce.  The regulations governing the FTZ programme have not changed significantly since 1991 and are in need of some modernization.  The Foreign-Trade Zones Board has proposed a sweeping set of new regulations that would fundamentally restructure the FTZ programme.  While some changes are clearly warranted, such as a fully automated admission and reporting system, others are worrisome. 

The National Association of Foreign-Trade Zones (NAFTZ) has submitted comprehensive comments with concrete ideas to reorganize and streamline the FTZ regulations. The Foreign Trade Zones Board proposed regulations provide a new way for zones to provide a greater boost to jobs and economic activity by allowing certain activities, including “manufacturing” to be conducted without waiting for an application to be approved.  The Board’s proposed authorization of zone-based manufacturing without advance approval is a step forward.  At the NAFTZ, we have commented on this proposal to create a practical opportunity for new investment to use zones for international competitiveness. 

Our comments also focused on the restrictions of this new opportunity.  We believe that the jobs that FTZs could help create and preserve could be lost if there is too much uncertainty. We have told the FTZ Board that, if goods or processes of treatment can be used to make products in other countries, then they should be permitted in the US in an FTZ.  We do not want restrictions to cause activity and jobs to take place in other countries when they could be here.  That is our principal objective in creating new regulations for the 21st Century.

The last time the FTZ regulations were comprehensively revised, the FTZ Board provided that goods that would be subject to these duties if entered for consumption must be admitted to a zone in “privileged foreign” status.  This permitted the use of an FTZ for export manufacture.  This is still the right choice.  US exports will decline if production inputs are more expensive in the US than overseas. 

Moreover, the proposed authorization of export manufacturing can be implemented by simply requiring that all foreign products admitted to a zone be declared “privileged foreign” in order to benefit from immediate authorization.  This would mean that goods made from those inputs would not have a zone benefit if entered into US commerce, but would be competitive in export markets. 

The FTZ Board will promote predictability by clearly laying out the circumstances in which companies can count on zone benefits, creating US investment and employment.  Today, companies have a large range of choices in plant location. If the US really wants to grow exports, it will do everything it can to make it less costly to manufacture in the US than overseas. 

Flexibility in the regulations, especially regarding export competitiveness, is vital to the creation of jobs and economic activity that otherwise could happen outside the US.  We need to show companies looking at the US that we will give them the space to be globally competitive.  Continued foreign investment requires that US production be treated the same as foreign production for US tariff purposes. 

Reasonable regulations must accommodate diverse and divergent interests.  Almost all manufacturers are international buyers of inputs as well as international sellers of finished products. That is why the NAFTZ proposed that the FTZ Board issue an order making it clear that export manufacturing was permitted without prior approval of specific activities.  Manufacturers should be able to produce goods in an FTZ without delay if they elect privileged foreign status on foreign inputs. 

While the proposed regulations deal with many other issues, the future of the programme depends on the vision of the FTZ Board, the economic development community represented by the NAFTZ’s Grantee members and other state, local and federal government agencies and officials, as well as the innovation spawned by the private sector.  We are fully committed to FTZ regulations that facilitate trade predictably, flexibly and reasonably, taking into account the interests of all stakeholders.

American British Trade & Investment
This article was originally published in American British Trade & Investment 2012, the annual investment guidebook produced by BritishAmerican Business, the leading transatlantic organization dedicated to helping its member companies build their business on both sides of the Atlantic.

To read the full guidebook click here.
For more information about BritishAmerican Business click here.

Countries: United States
Topics: Customs Procedures, Distribution, Getting Started, and Production
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