Everybody loves exports, and for good reason. The ability of U.S. companies to sell into global markets can boost profits by raising revenue and efficiency through greater economies of scale. But U.S. companies also benefit from the ability to import inputs, including components, commodities and materials, from those same global markets—a point confirmed by a recent study from the St. Louis Federal Reserve Bank.

Many of the same U.S. companies that export are also importing key inputs to lower their cost of production and enhance their competitiveness. In fact, more than half of the goods imported to the United States each year are not final consumer products that American families buy at the store but intermediate parts, commodities, and capital machinery consumed by companies as they make their final products in the United States.

In the St. Louis Fed study, “U.S. Manufacturing and the Importance of International Trade: It’s Not What You Think,” authors Kevin Kliesen and John Tatom examined U.S. manufacturing and trade data from 1973 to 2011. They found that, contrary to the popular view, imports appear to be good for U.S. producers and output.

For producers in foreign-trade zones, duties can be eliminated entirely on imported materials and components that are then re-exported as part of a final product.

As the authors summarize: “Surprisingly, we find that imports have played a critical positive role in boosting manufacturing output in the United States—much more so, in fact, than exports. …The importance of imports to domestic manufacturing performance cannot be overstated… Intermediate goods imports and capital goods imports are the lifeblood of U.S. output.”

Their analysis of almost four decades of U.S. economic data found that 1.0-percentage-point rise in imports is associated with a 0.4-percentage-point rise in manufacturing output in the long run.

Based on their findings, Kliesen and Tatom warn that restrictions on imports only end up hurting manufacturing output and employment in the United States: “From a policy perspective, the importance of intermediate materials to the U.S. manufacturing sector suggests that efforts to either restrict the flow of imports through quotas or raise the price of intermediate materials through tariffs could harm the manufacturing sector.”

An important tool that allows American producers to access global supplies is the U.S. Foreign-Trade Zones program. Established in 1934, the program creates designated areas within the United States that are considered outside U.S. Customs territory for purposes of assessing duties. That means that Customs inspections and duty collection only apply when goods leave the zone for domestic U.S. commerce, rather than when first admitted to the zone from abroad. This can result in tremendous savings for companies that rely on imported materials, components, and machinery for final production.

For a producer located in a foreign-trade zone, duties can be eliminated entirely on imported materials and components that are then re-exported as part of a final product. For products shipped from a foreign-trade zone into the domestic U.S. market, duties can be reduced through the flexibility of choosing the lower tariff rate on either the final product or the imported components. The FTZ environment can also deliver large cash-flow savings because the payment of duties is deferred on foreign goods admitted to a zone until they are actually shipped into U.S. commerce for final sale.

Companies operating in foreign-trade zones have become a thriving sector of the U.S. economy. According to the most recent report from the Foreign-Trade Zones Board in Washington, D.C., the 2,800 firms operating in FTZs in 2011 employed 340,000 U.S. workers in more than 170 active zone projects across the United States.

The $277 billion in foreign-sourced goods admitted to FTZs that year accounted for more than 12 percent of the total value of U.S. goods imports. Meanwhile, exports from FTZs reached a record $54.3 billion in 2011, growing at a pace in recent years that is far faster than overall U.S. goods exports.

Major users of the program include such industries as electronics, automotive, pharmaceutical, petro-chemical, machinery, equipment, apparel, and footwear. The U.S.-based drug industry, for example, must typically import 80 percent of the active pharmaceutical ingredients (API) used in production, and yet most final drug products can be imported duty free. By operating in the FTZ environment, domestic drug makers can access API at the same affordable, duty-free prices as their foreign competitors, keeping thousands of skilled, high-value-added jobs here in the United States.

By facilitating access to global inputs, the U.S. foreign-trade zones program reinforces the positive connection—confirmed by America’s economic experience—between imports, exports, manufacturing output, and employment. The thousands of companies and hundreds of thousands of workers operating in America’s foreign trade zones every day testify that trade is a two-way street.

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Daniel Griswold
About The Author Daniel Griswold [Full Bio]
Daniel Griswold is senior research fellow and co-director of the Program on the American Economy and Globalization at the Mercatus Center.




www.mercatus.org


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