an FTZ Project Feasibility Analysis
An Essay and Commentary
There are two prudent things to do before one sets out to pursue
any particular task. The first is to determine whether or not
the particular task can be successfully done; the second is to
determine whether or not the particular task is worth doing. Preparing
an FTZ Project Feasibility Analysis is important for any community
in determining whether it can -- or should -- establish a Foreign-Trade
The U.S. Foreign-Trade Zones program has grown phenomenally over
the past 21 years. There were 38 Zone projects in 1978. Today
there are 238 Zone projects. Clearly, some Zone projects have
been more successful than others. In many cases, this is because
certain companies in certain locales have found themselves with
tariff problems that can best be solved through the use of Foreign-Trade
Zone procedures. In some cases, the success, or lack of success,
of certain Zone projects has been determined by the amount and
quality of homework done before the Zone project was initiated.
Once upon a time, there was an economic development group who
called upon a consulting group to help it prepare an application
to establish a Zone project.
"We want to hire you to prepare our FTZ application,"
said the economic development staff person to the consultants.
"Why do you want a Zone project?" asked one of the consultants.
"We want it as an economic development tool," replied
the economic development staff person.
"Not good enough," responded the consultant. "Why
do you really want a Zone project? What, or who, is driving you
to go to the trouble and expense of hiring us to prepare an FTZ
application? Please -- tell us the real motivation."
"Well," said the economic development staff person,
"Our organizations current president and the incoming
president want to leave the Foreign-Trade Zone as their legacy
to the community."
"Fine," replied the consultant. "Do they want this
legacy to be regarded as a success -- or a failure?"
"Oh," said the economic developer soberly. "Im
not sure thats been considered."
"May I make a suggestion?" asked the consultant. "Do
a feasibility study. Then, whether or not you choose to establish
a Zone project, and whether or not that project is regarded as
successful, at least you will have asked yourselves the right
questions. That way you can increase your chances of doing the
right thing, and can justify whatever you decide to do."
Today that Zone project helped attract more than $300 million
in new investment to that community, in addition to enhancing
the competitiveness of local businesses engaged in international
So, what are the questions that need to be asked when evaluating
the decision to establish a Zone project? They fall into four
areas of inquiry: market feasibility, regulatory feasibility,
economic feasibility, and finally, the evaluation of realistic
options for seeing that the U.S. Foreign-Trade Zones program is
available to local companies who need it.
I. Market Feasibility
In order to evaluate the market feasibility for a potential Zone
project, one fundamental question must be answered: Does the need
for Foreign-Trade Zone status exist?
Note the key word of the question -- "need." Often,
people engaged in marketing the Foreign-Trade Zones program use
terms like "benefits," or even "advantages."
One should keep in mind that the "benefits" of FTZ status
are not unlike the benefits of certain medicines, that is, they
provide relief from an existing malady. In the case of FTZ status,
the malady is suppressed profit margin due to tariff costs. Use
of Zone procedures can sometimes provide the only relief from
certain kinds of tariff problems (and sometimes do so with certain
costs and side effects).
A wise man once said, "FTZ services are always bought, they
are never sold." This advice should be kept in mind from
the very outset, that is, during the evaluation of market feasibility.
The first task in evaluating market feasibility is canvassing
the local or regional business community in order to find out
which companies may have tariff problems for which the Foreign-Trade
Zones program might represent a viable solution.
There are several questions which should be answered as a result
of each company visit:
kind of operations are conducted by the company? (... Manufacturing,
the company manufactures, does the company (or alternatively,
one or more of its domestic suppliers ) import parts or raw
the company manufactures, what is the duty rate relationship
between imported parts and finished products?
the company re-export?
represents the companys main competition? ...Other U.S.-based
companies? ... Foreign-based companies? ... The local plants
foreign-based sister plants?
the company located in an industrial or commercial park setting,
or is it relatively isolated from other companies which might
use the FTZ program?
answers to these questions will help you determine not only the
viability of establishing a Zone project, but its shape
and character as well. If most of the companies who are identified
as having tariff problems are distribution operations, then geography
may become more important. This is because these firms can be
better served in a general purpose zone environment. If these
firms are scattered about the community or region, then a multi-site
general purpose zone will have to be considered. (This in turn
may create some concern on the part of the Foreign-Trade Zones
Board, because the Board would prefer not to designate a single-firm
site as a general purpose zone site.)
If most distribution operations are within one or more industrial
or commercial park areas, then geographical considerations are
less sticky. Manufacturing operations can be scattered with little
effect on the physical boundaries of the general purpose zone.
This is because all manufacturing or processing activity conducted
under Foreign-Trade Zone procedures must have the prior approval
of the Foreign-Trade Zones Board. Thus, whether a company who
wants to manufacture using Zone procedures is within a general
purpose zone or not, an application will have to be submitted
to and approved by the Foreign-Trade Zones Board. If the company
is located within the general purpose zone, the application will
be for FTZ manufacturing or processing authority. Otherwise, the
application will be for subzone status on behalf of the company.
If the company (or one of its domestic suppliers) does not import,
then there is no tariff problem to be solved. (It should be noted
that domestic merchandise held in a zone for export, as well as
foreign merchandise held in a zone, is exempt from state and local
inventory taxes. However, the merchandise must be in the zone
for a bona fide customs purpose. This will be difficult to demonstrate
if the company does not import.)
If the company does import and appears to have a tariff problem,
then further inquiries must be made.
The first of these is whether or not other U.S.-based companies
in the same industry are already utilizing the FTZ program. If
the company refines oil, manufactures autos or auto parts, or
manufactures pharmaceutical products, then the answer will be
"Yes." Find out if this is the case. If so, find out
how these companies are utilizing the FTZ program. (For example,
if a prospective zone user is a ship builder, you will need to
know that the Foreign-Trade Zones Board does not allow certain
zone "benefits" for certain steel mill products used
in shipbuilding.) In this way, you can properly ascertain the
viability of the FTZ program as a potential solution to the companys
If the company has other domestic competitors and none utilize
the FTZ program, find out why. It may be that the industry has
yet to discover the FTZ program; it may be that the industrys
use of the FTZ program would be deemed inconsistent with U.S.
trade policy. The answer to this question may be important to
your overall evaluation.
The answers to these questions, along with the answers to questions
concerning duty rate relationships, re-exports, material lost
as production waste, and so-on, will help you assess the real
viability of each companys use of the FTZ program.
If no real need for the FTZ program already exists within your
community, then pursuing the establishment of a Zone project may
result in little more than a piece of paper, nicely framed, hanging
on a wall. If, however, a need does exist, then the regulatory
and economic feasibility of establishing a Zone project should
be evaluated. This will enable you to evaluate the best realistic
option for providing access to the Foreign-Trade Zones program
for companies who need it.
II. Regulatory Feasibility
With over 230 Zone projects already established in the United
States, this set of questions has recently become more sticky.
However, before coming to the sticky bit, a couple of simple questions
should first be answered.
1. Are the prospective general purpose zone sites in or adjacent
to a Custom port of entry?
If there is a local customs office in your community (as either
a port of entry, or a user fee airport), then the answer will
be "Yes." If not, then you have a bit of homework to
First, find out where the nearest port of entry is. Find out its
boundaries. (First, look in Section 101 of CFR 19, Title 19 of
the Code of Federal Regulations, and find a complete list of U.S.
Customs ports of entry. The boundaries of some ports are referenced
in various Treasury Decisions. Find the Treasury Decision pertaining
to your nearest port of entry, and you will see its boundaries
defined.) Next, find out if your prospective sites meet the adjacency
requirements. If the prospective general purpose zone sites are
within the port boundaries, then the answer is "Yes."
If not, you must determine whether the sites are "adjacent"
to the port boundaries. The Foreign-Trade Zones Board regulations
as set forth in 15 CFR, Section 400.21, define adjacency as within
60 statute miles or 90 minutes driving time of the outermost limits
of a port of entry. If you have any doubts about this, coordinate
a joint measurement with the Customs port officials. If the results
are affirmative, get the Customs Port Director to confirm it in
writing before you begin to prepare your application. Much grief
has been avoided by those who have done so.
Second, find out whether or not a Zone project has already been
established in or adjacent to the nearest port of entry. The Customs
officials at the port should be aware if there has been. If not,
then youre in luck because, as set forth in 15 CFR, Section
400.21, each port of entry is entitled to a Zone project. If so,
you may have a relatively easy -- or tough -- row to hoe. This
is because (according to 15 CFR, Section 400.21) additional Zone
projects may be established within a single port of entry if the
existing Zone project will not adequately serve the convenience
of commerce. You will find no definition of the "convenience
of commerce" in the regulations. Yet, in order to be granted
an additional Zone project, the burden of proof that the original
Zone project cannot serve the convenience of commerce is on you.
Often, the opinion of the Grantee of the original Zone project
is an important factor in the Boards assessment of this
question. Therefore, whether you like it or not, find out what
the existing Grantees opinion of your establishment of a
Zone project is likely to be. Talk to the existing Grantee. Find
out what the goals and objectives of its project are. They may
be consonant with your own; thus providing you with an ally rather
than a foe. In any event, find out what response youre likely
to trigger if you apply for FTZ status.
2. Is your organization qualified to serve as a Zone Grantee
under state enabling legislation?
Each state has enacted legislation concerning the establishment
of Foreign-Trade Zone projects. Contact your state government
(the Secretary of State or Clerk of the Legislature is a good
place to start) and get a copy of the latest state enabling legislation.
Note that some states have amended their legislation concerning
the establishment of FTZ projects. Be sure you have a copy of
the law which is currently in effect.
The state enabling legislation should indicate any special qualifications,
if they exist, regarding the nature of organizations which are
eligible to serve as Zone Grantees.
III. Economic Feasibility
Evaluating the economic feasibility of a potential Zone project
involves a number of issues. These include questions relating
to the nature of services the Zone will render (a question that
is an outgrowth of the goals the Zone project seeks to achieve);
the costs of establishing a Zone project; the costs of providing
Zone services; and the means by which these costs will be covered
The nature of services the Zone will render will depend upon the
reason for its establishment. The reason, or reasons, for establishing
a Zone project fall generally into one or more of the following
and economic development
park or real estate development
handling or warehousing business development
trade and economic development is the primary goal of the Zone
project, then services rendered will be of an administrative or
consulting nature. Expertise in international trade, distribution
and manufacturing functions, and U.S. trade policy will be necessary
to provide adequate services to FTZ users. The aim of such services
will be to enable businesses within the Zone projects service
area to utilize the Foreign-Trade Zones program effectively and
efficiently. If the Zone project is to be financially self sufficient,
the users will be charged ongoing user fees for these services.
If industrial park or real estate development is the primary goal
of the Zone project, then services rendered will be more involved
with the development of the physical infrastructure necessary
to enhance the flow of product to and from companies facilities.
Nevertheless, effective, efficient access to the Zones program
remains a service that cannot be overlooked. Some Grantees roll
Zone fees into other costs of facilities purchase or use. In these
cases the Grantee must make sure that the Zones program is a viable
solution for the Zone resident, especially if that company is
paying a premium to locate within the Zone. Therefore, knowledge
of international trade, distribution and manufacturing functions,
and U.S. trade policy remain requisites for providing quality
If cargo handling and warehousing is the primary goal of the Zone
project, then services rendered will involve storage, handling,
inventory control, and other logistical services. Users will no
doubt already be aware of the specific tariff problems they want
the Zone to solve. Therefore, knowledge of logistics and Customs
compliance will be necessary ingredients to success.
If the goals of the Zone project encompass more than one of the
areas discussed above, then great care must be taken that the
achievement of one set of goals does not impinge upon the Grantees
ability to achieve others. Many a Zone project has been rendered
lame by engaging in exclusive operator agreements with parties
unqualified to perform certain kinds of services.
Regardless of the services to be rendered or the goals to be achieved,
one fundamental question must be answered: From where is the money
going to come? Many Grantees are surprised to find that finding
the money for establishing the Zone project turns out to be the
easy part. The hard part comes with funding the Zone project on
a continuous basis. In more than one instance, businesses within
the international trade community who have provided the initial
impetus for the Zone projects establishment have never actually
utilized Zone procedures.
In developing a schedule of user fees, both sources and uses of funds must be analyzed. Who is going to provide what services on an ongoing basis? What will the user base be? How long will it take to establish that base? From where will operational funding come in the meantime? How will fees be established in a fair way which meets public utility principles? All of these questions should be well on their way to being answered before proceeding. Otherwise, the Zone Grant may turn out to be a piece of paper hanging on the wall, and the Zone project may be hung with the label "boondoggle."
IV. Implementing Realistic Options
Successfully implementing realistic options for providing access
to the Zones program involves the correct analysis of the needs
of the business community, the objective evaluation of the resources
of the prospective Grantee organization, and the wisdom and gumption
to act upon these.
For almost any prospective Grantee, there are basically two choices:
establish a local Zone project, or allow area businesses who need
the FTZ program to use another Zone project within the state.
The answer to this question involves geography, economics, and
Geography comes into play in two ways. First, is whether or not
it necessitates the establishment of a local Zone project as a
second Zone project for a given port of entry. If so, the Grantee
of the existing Zone project may have a lot to say about whether
or not such an effort may be successful. Second, the establishment
of one or more general purpose zone sites is often dictated by
the geographical concentration of firms needing FTZ status and
the nature of their particular operations. If potential users
are concentrated in one or more industrial park areas, and if
they are engaged in activities not involving manufacturing or
processing, then clearly, the establishment of the area or areas
as general purpose zone sites represents the best solution. If
the various firms are engaged in manufacturing or processing,
or are scattered about geographically, then the establishment
of each as a subzone may represent the best solution.
One should note that there have been some instances where the
proliferation of separate Zone projects has served to create multiple
Zone projects, each of which is financially weak. This is a poor
alternative to multiple communities enjoying first class service
from a single, financially able Zone Grantee.
Some communities have had sites within their community designated
as general purpose zone sites of a Zone project already operating
in another community. Others have formed multi-entity Grantee
organizations. If this sounds appealing, a note of caution is
in order. Multi-community Zone projects that have operated successfully
have done so because of strict adherence to public utility principles:
that is, Zone users have enjoyed the same access to the FTZ program
regardless of their location. Before joining another communitys
Zone project, make sure that Zone services will be available just
as readily for the Acme Widget plant in your community as they
will be for the Acme Widget plant located in the hometown of the
existing Grantee. If not, then strong consideration should be
given to forming your own Zone project.
In any case, talk to your local businesses. Find out if they really
need the FTZ program to enhance their competitiveness. Find out
if theyre willing to put their money where their mouths
are. Talk to other Grantees in you state and region. Find out
how successful theyve been. Learn from their successes as
well as their mistakes.
Crunch the numbers. Dont expect any area businesses to use
the Zone unless they find it to their economic advantage. Make
them understand that you dont intend to establish a Zone
project that doesnt eventually support itself.
Ask yourself the really hard questions, such as "Why to we
really want a Zone project? Do we really need a Zone project?
What are the real goals of Zone project? How will the project
be operated and financed in a way to meet those goals?
If you decide to go ahead, keep in mind that nobody gets it quite
right from the beginning. Almost every successful Zone project
goes through trials and tribulations, and, as evidenced by the
number of Zone projects that have been expanded over the years,
If you decide not to go ahead, keep in mind that you can still
provide a valuable service to area businesses by putting them
in contact with the Grantee of the nearest Zone project within
the state. Even if they become subzones of a Zone project in another
community, your community still gains many of the benefits that
result from the companys enhanced economic activity. Remember
that in the Foreign-Trade Zones program, the competition is overseas.