|
A
Brief History of the U.S. Foreign-Trade Zones Program
Today, the trade policy of the United States is based on a free
trade model. This theoretical model recognizes only the economic
beneficiaries of free trade; it acknowledges that the costs (or
losers) resulting from free trade are negligible. In reality,
however, free trade has benefits and costs. No doubt, the benefits
far outweigh the costs; however, the costs are very real. The
Foreign-Trade Zones program offers a way to mitigate the costs
of free trade. In doing so, the program allows the United States
economy to enjoy relatively greater benefits from its free trade
initiatives. The various benefits offered by the Foreign-Trade
Zones program make it an effective response to the problems that
arise when the $8.5 trillion dollar U.S. economy operates within
the rapidly changing international trade environment.
The U.S. Foreign-Trade Zones program was created by the Foreign-Trade
Zones Act of 1934. The Foreign-Trade Zones Act was one of two
key pieces of legislation passed in 1934 in an attempt to mitigate
some of the destructive effects of the Smoot-Hawley Tariffs, which
had been imposed in 1930. The Foreign-Trade Zones Act was created
to "expedite and encourage foreign commerce" in the
United States. This is accomplished through the designation of
geographical areas, in or adjacent to Customs Ports of Entry,
where commercial merchandise receives the same Customs treatment
it would if it were outside the commerce of the United States.
Merchandise of every description may be held in the Zone without
being subject to Customs duties and other ad valorem taxes . This
tariff and tax relief is designed to lower the costs of U.S.-based
operations engaged in international trade and thereby create and
retain the employment and capital investment opportunities that
result from those operations. These special geographic areas –
Foreign-Trade Zones – are established "in or adjacent
to" U.S. Ports of Entry and are under the supervision of
the U.S. Customs Service. Since 1986, U.S. Customs' oversight
of FTZ operations has been conducted on an audit-inspection basis,
whereby compliance is assured through audits and spot checks under
a surety bond, rather than through on-site supervision by Customs
personnel.
The FTZ program has grown profoundly over the last 30 years. In
1970 there were 8 Foreign-Trade Zone projects (with a total of
3 Subzones) in the United States. Today there are over 230 Foreign-Trade
Zone projects (with nearly 400 Subzones) in the United States.
This growth is the result of changes in the FTZ program. These
changes have caused the FTZ program to evolve into an important
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.
From 1934 through and beyond the Second World War, Foreign-Trade
Zones were used only on a very limited basis. The reason for this
was clear: the prohibition against manufacturing activity. While
Zones lay virtually dormant, the 16 years between 1934 and 1950
saw a complete change in the dynamics of trade – a change
which would create the need for the FTZ program within the U.S.
manufacturing sector.
The General Agreement on Tariffs and Trade (known by its acronym
"GATT") became the working model by which more than
120 nations participated in round after round of multilateral
tariff reductions for nearly 50 years. From 1946 until 1995, the
GATT served to break down the barriers to trade on a worldwide
basis. This expansion of trade played a critical part in the 50-year
economic boom in member countries following the end of the Second
World War.
Early in this period, an important amendment to the Foreign-Trade
Zones Act was made. In 1950, those members of Congress who were
the original champions of the Foreign-Trade Zones Act of 1934
(Yes, they were still members of Congress!), convinced their colleagues
of the wisdom of allowing manufacturing activity in Foreign-Trade
Zones. Approval for manufacturing in Zones would be done on a
case-by-case basis, and, as was the case in other FTZ’s around
the world at that time, goods manufactured in Zones would be assessed
Customs duty based on their full value, including domestic parts,
labor, overhead and profit, upon entry into domestic commerce.
This was in keeping with the so-called "island" model
of FTZs in which the activity conducted within each Zone is totally
segregated from the domestic economy.
While this new amendment to the Foreign-Trade Zones Act advanced
the cause of U.S. Foreign-Trade Zones significantly, it did little
to spur Zone manufacturing activity. Since the U.S. tariff structure
was still largely biased in favor of domestic production activity,
firms who imported foreign parts to produce finished products
for the domestic market were at a competitive advantage in relation
to their foreign-based counterparts. Zone manufacturing for production
devoted exclusively to export sales was a rare phenomenon. Thus,
throughout the 1950's and 1960's the U.S. Foreign-Trade Zones
program was of little practical utility to businesses. During
this time period, round after round of GATT agreements were reached,
and the competitive environment of global trade changed significantly.
Many of the tariff barriers were reduced by the simple reduction
in Customs duty rates on a multilateral basis. As trade negotiators
completed these agreements, duty rates on a wide variety of products
were lowered worldwide. This promoted international trade through
freer market access and lead to its expansion. However, as round
after round of global trade agreements were implemented, it became
clearer to some that this freer market access came with an unexpected
cost.
As befits most professional negotiators, the community of international
trade negotiators shared (as, no doubt, it still does), the common
characteristic of trying to gain the most for their native countries,
while yielding the least. Naturally, over the course of time,
high value-added manufactured goods would be the subject of intense
trade negotiation. As agreements for tariff reductions on high
value-added finished products proliferate, so do inconsistencies
within the tariff structures of individual nations.
The classic, domestically-biased duty rate relationship between
raw materials, parts and components which make up intermediate
stages of production, and a given finished product, is characterized
by increased rates of import duties as value is added in the production
process. This classic structure meets the twin aims of tariffs:
to raise revenue and encourage domestic production activities
(which, in the United States are taxed through individual and
corporate taxes).
However, as multilateral tariff agreements reduce duty rates on
a world-wide basis, an odd set of duty rate relationships can
sometimes occur as a result of a particular end product's reduced
tariff rate. On occasion, the duty rate applicable to imported
intermediate parts is higher, rather than lower, than the duty
rate that applies to the finished product. While providing market
access for the end product – a desired result because of
a corresponding concession by other member nations – this
duty rate relationship also imposes an unintended counterproductive
cost on the domestic producer of that end product. Now the domestic
producer is competing with its foreign-based counterpart at an
inherent cost disadvantage. Why? Because it must now pay a higher
rate on one or more of its imported parts than its foreign-based
competitor pays to import its finished product. This tariff imposition
reduces the domestic producer's profit margin and thereby makes
it irrational for it to continue to make the finished product
domestically. Such duty rate relationships are known as irrational
duty rate relationships or "inverted tariffs." Such
a tariff structure is biased against the higher value-added activity
to produce the finished product domestically. In this situation,
value-added activity (which, if conducted domestically, would
produce income taxes on profits and wages) is encouraged to be
moved to a foreign location.
By 1980, the combination of cheap and efficient transportation,
and the use of such programs as Mexico’s Maquiladora, or
"twin plant" program, provided the means for U.S. firms
to shift production of their products overseas, and for foreign-based
firms to more easily compete in the U.S. market. Falling tariff
rates, and, in particular, the way they affected the U.S. tariff
structure, provided additional motivation to conduct value-added
activity overseas.
Fortunately, a truly effective remedy was at hand. Since 1972,
the National Association of Foreign-Trade Zones (NAFTZ) has served
the interests of the communities and companies who participate
in the U.S. Foreign-Trade Zones program. The NAFTZ observed the
existing Customs and tariff treatment afforded to domestic parts
shipped overseas for value-added activity and then returned to
the U.S.. The NAFTZ began to press for equivalent tariff treatment
of products manufactured in a U.S. Foreign-Trade Zone environment.
The NAFTZ asserted that Customs duty on products manufactured
in Zones should not be assessed on U.S. value-added – that
is, value which consists of domestic materials, parts, labor,
overhead, or profit.
On April 12, 1980, the U.S. Customs Service issued a formal ruling
that agreed with the NAFTZ's position. At last, the U.S. Foreign-Trade
Zones program, born in 1934, could be of real utility in attracting
and retaining U.S.-based economic activity. This economic activity
generates investment, labor, and profit, which collectively produce
far more tax revenues than do Customs duties.
Now, at last, the U.S.-based manufacturer could bring foreign-sourced
parts or materials into the Zone, pay no duty, incorporate those
parts or materials into a finished product using U.S. parts and
labor, and, if the finished product entered the U.S. commerce,
pay duty on the value of the foreign non-duty-paid content only.
This "integrated" model, which has replaced the previous
"island" model, has spurred the growth in the U.S. Foreign-Trade
Zones program, and has allowed U.S.-based manufacturers to engage
in economical sourcing – from both foreign and domestic suppliers
– to displace imports of foreign-produced finished products.
This, along with the overall expansion of global trade, is why
the number of Zone projects, and the number of Subzones, has grown
so profoundly.
In historical summary, the 1950 amendment which allowed manufacturing,
and the 1980 ruling which effectively eliminated the "island"
model for U.S. Zones (thereby integrating Zone activity with the
U.S. economy), provided the legal and regulatory framework for
the Foreign-Trade Zones program to effectively serve U.S.-based
businesses. Round after round of multilateral trade agreements
created the need for the U.S. government to make exceptions to
the published tariff rates in instances where the structure of
the U.S. tariff is counterproductive. Therefore, today, the Zones
program acts as a tool by which the United States can practice
both the letter and spirit of its trade laws and policies.
|
