Foreign-trade zones, a '30s tool to spur US ports, enjoy new growth
New York — America's foreign-trade zones (FTZs) are thriving, in spite of and even because of the current recession. First created to help spur a resurgence of port activity during the Great Depression of the 1930s, they now number 57, according to Commerce Department officials.
Despite their great growth, however, spokesmen for the AFL-CIO continue to view the zones unfavorably, for the most part depicting them primarily as tax dodges.
FTZs vary in size from the wharves and warehouses of the old Brooklyn Navy Yard here in New York to some that cover hundreds of acres. They are "zones" where goods are housed indefinitely without shippers having to pay state or federal duty on them until they leave the zone and enter the domestic market, thus freeing users to use this tax deferral elsewhere in the interim. No duty at all is paid on goods re-exported. The zones can also be used to assemble or repackage imported products. Again, no duty is paid until the finished product leaves the zone.
More than 1,000 companies use these zones; about 60 percent of the companies are foreign and 40 percent domestic, according to John J. Da Ponte Jr., executive secretary of the Foreign Trade Zones Board of the Department of Commerce.
The main purpose for these customs-free facilities "is to provide sites at domestic ports of entry where operations involving foreign goods can take place which would otherwise have been done abroad for customs reasons," Mr. Da Ponte says.
And in a recession, when new orders are down, the zones are great tools for companies with cash-flow problems to put their goods "on ice" until there is a need for them once again, according to Patricia Agnew, acting executive director of the National Association of Foreign Trade Zones. The association's membership stands at just over 100 people and is "growing all the time," like the FTZs themselves, she adds.
But the biggest boost for the zones came in April, when the Treasury Department changed its regulations so there would be no value-added tax on items in the zones. In other words, any additional cost of labor or overhead -- such as reassembling, repackaging, or testing -- which goes into the original goods being stored would not be subject to customs duty when the finished product left the zone.
While some local trade-zone executives forecast that this change in rules will result in a dramatic increase in FTZ activity, Mr. Da Ponte is more cautious. "This factor in and of itself is not enough for a company to make a decision on whether to locate in a foreign-trade zone," but it will certainly help, he says. For example, the change helped Honda to decide once and for all to build an automobile plant near Columbus, Ohio, Mr. Da Ponte told the Monitor.
Ironically, this example illustrates precisely why much of organized labor is opposed to foreign-trade zones. Here is a Japanese automaker getting tax concessions -- actually, they are tax deferrals that can amount to big monetary savings -- on US soil and competing against a flagging American auto industry.
"Do you really think we need more imports into the United States?" asked Elizabeth Jager, a foreign-trade zone specialist with the AFL-CIO in Washington. "What this amounts to is extra savings for the foreign firm."
Mr. Da Ponte agrees, in part, with this criticism. But, he argues, Honda or any other popular foreign automaker is going to compete with US manufacturers anyway, so they might as well do it in the States, where at least American labor can be put to work on the foreign goods.
"To the extent that they assemble the cars [or anything else, for that matter ] here," he stressed, "we in the US are benefiting. We don't get the whole cake , but at least we're getting part of it."
A part of the cake the US is not getting is in helping to ease the nation's balance-of-trade deficit; in fact, the zones so far may be hurting the effort, although the Commerce Department could not estimate how much the deficits were increased by FTZs.
Nevertheless, $2 billion worth of goods entered zones throughout the country in 1979, up from only $800 million in 1978.
In the meantime, Boston is preparing to open its first free-trade zone this summer; the Port of New York, with shipping space in both New York City and New Jersey, across the Hudson River, is preparing to expand its latest FTZ in Elizabeth, N.J.; and the Ford Motor Company has applied to the Commerce Department for approval of a minizone near Detroit, where the company wants to assemble imported tractor parts.
But people should not suppose such development is going to be the salvation of America's often economically troubled ports, according to Frank Drozak, executive vice-president of the 80,000-member Seafarers International Union, AFL-CIO. He says it must be remembered that foreign-trade zones, which need local mandates as well as sites, should take a back seat to other efforts which he feels will do more to enhance the nation's ports. Two of these are better rail and highway transportation and merely dredging ports, albeit at great taxpayer expense.
Contrary to the AFL-CIO's view from Washington, Mr. Drozak feels that the zones are at least "a step in the right direction" for US shipping.