As overall U.S. export growth decelerates, one sector of the economy continues to enjoy booming sales abroad — the thousands of companies operating in U.S. Foreign-Trade Zones. According to the just-released annual report from the U.S. Foreign-Trade Zones (FTZ) Board, exports by FTZ-based companies reached a record $70 billion in 2012. That is an exponential jump from 2009, when FTZ exports totaled less than $30 billion.

Created by Congress in 1934, the Foreign-Trade Zones program seeks to make U.S.-based producers more competitive in global markets by reducing or eliminating the duties they pay on key imported inputs used to make their final products. An FTZ is a secure area under the supervision of U.S. Customs that is considered outside the Customs territory of the United States for purposes of duty payment. Today there are more than 250 authorized FTZs throughout the United States and Puerto Rico.

Leading the export charge from FTZs are automobiles, refined petroleum products, pharmaceuticals, and machinery and equipment. Top FTZ exporting companies include BMW Manufacturing in South Carolina, Mercedes-Benz U.S. in Alabama, Toyota Motor Manufacturing in Kentucky, and Nissan North America in Tennessee. Along with most of the top oil-refining companies, the list of top FTZ exporters is rounded out by drug-makers Lilly del Caribe in Puerto Rico and Bristol-Myers Squib Co. in Indiana.

Operating in a zone eliminates the need for an exporter to apply for duty drawback, reducing paperwork, cost and uncertainty.

The program has attracted a wide variety of users, but it has been especially beneficial to export-oriented manufacturers. Duties are eliminated entirely on inputs such as automobile parts, crude oil, and active pharmaceutical ingredients that are then re-exported as part of final products produced in a U.S. foreign-trade zone. Operating in a zone eliminates the need for an exporter to apply for duty drawback, reducing paperwork, cost and uncertainty.

U.S. manufactures also benefit from the reduction in duties on imported raw materials, components, and machinery used to make products sold in the United States. When the tariff on the final product is lower than on the imported inputs, producers in an FTZ can elect to apply the lower, finished product tariff to the inputs. This eliminates the disincentive of “inverted tariffs” against locating production in the United States, placing U.S. producers on a more equal footing with their foreign-based competition.

FTZ-based companies also benefit from duty deferral since duties are paid only when imported goods leave the zone to enter U.S. commerce, not when they are first admitted to the zone from abroad. FTZ companies are also exempt from paying state and local ad valorem taxes on inventory. And the weekly entry program allows them to consolidate entry filings in reduce payments for the Merchandise Processing Fee. 

More streamlined FTZ Board regulations issued in 2012 and the growth of the Alternative Site Framework for administering zones have combined to make the program more user friendly than ever. In 2012, 3,200 companies were reported to be using the program, a one-quarter increase from 2010. Employment in FTZs has grown by more than 15 percent in that same period, far faster than overall U.S. job growth.

Merchandise received by FTZs in 2012 reached a record $732 billion. The biggest category of imported merchandise was oil/petroleum, followed by vehicles, vehicle parts, consumer electronics, pharmaceutical ingredients, and machinery/equipment. Those imported goods are combined in zones with the 58 percent of merchandise received that was sourced domestically.

Political leaders in Washington should take more notice of the FTZ program’s success—especially its impressive export growth. Back in January 2010, President Obama launched the National Export Initiative, with the explicit goal to double total U.S. exports of goods and services within the five-year period of 2009 to 2014. The goal, while admirable, has proven to be overly ambitious.

After a fast start, U.S. export growth has slowed to a crawl in the past year. As a result, U.S. exports are no longer “on track” to double by 2014. In fact, as of mid-year 2013, annual exports are more than $300 billion behind where they would need to be to meet the president’s benchmark. In contrast, exports from U.S. foreign-trade zones have already met the president’s goal—and they have reached that milestone a full two years ahead of schedule!

President Obama and his trade advisors should join with members of Congress in highlighting the Foreign-Trade Zones program as a powerful, non-partisan tool for promoting exports. The president should also work with Congress to fully fund the Automated Commercial Environment in the pending Customs Reauthorization bill to make FTZ transactions as frictionless and efficient as possible.

The FTZ program needs to be at the center of America’s economic and trade policy as we seek to promote more trade, investment, economic development, and job creation in communities across America.

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.




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