IN 1934 Foreign Trade Zones started out as modest warehousing and refurbishing facilities that imported goods for re-export. The idea was to provide some relief from import duties to spur exports and encourage business activities that would not otherwise have come to or stayed in the United States economy. In the last 10 years, however, FTZs became dominated by automakers that use the zones to reduce the cost of foreign-made parts in cars destined for the US market. The practice has aroused an intense debate over whether it is costing American jobs, reducing federal government revenue, and hurting the US trade deficit.
Typically, FTZs are located near a US Customs' point of entry, such as a harbor or airport. In these zones, imported materials and components are free of customs duties or taxes until they enter the US market. For many years, these zones were used to receive imports with an eye toward shipping them back out for sale abroad.
But from 1983 to 1986, economic activity in the FTZ program grew from $8.1 billion to $51.2 billion, according to a 1989 report by the House of Representatives' Committee on Government Operations.
As the program progressed, the federal government allowed the growth of subzones - areas that can accommodate large manufacturing facilities - sometimes located miles away from the zone itself. And manufacturing in subzones soared. The House committee found that manufacturing accounted for 93 percent of activity in 1986, up from 9 percent in 1970.
Automakers accounted for 87 percent of the value of shipments from FTZs in 1986.
Bait for automakers
The carmakers were drawn by two decisions by the federal government during the 1980s. First, it let companies pay lower duties by allowing them to choose between the tariff on the value of the component alone or on the component's value as part of a finished product. Second, the government let the automakers value the imported parts used in FTZs without including overhead, such as transportation costs. Both these decisions reduced the duties on foreign components, thus saving the companies millions of d ollars.
"Automotive assembly subzones circumvent US auto parts duties by giving carmakers more than $100 million in tariff breaks on billions of dollars in parts imported to build cars for US sale," says Julian Morris, president of Auto Part and Accessories of America Inc., in Lanham, Md. "Instead of paying the congressionally set auto parts duty rate, which averages 4 percent and can range as high as 11 percent, subzone imports enter the US at the low 2.5-percent car duty rate."
The biggest problem for domestic companies may be the committee's conclusion that the US "has become the predominant market of choice for goods leaving FTZs." The committee concluded that the program "is increasingly becoming a way for automotive assemblers, especially domestic corporations, to combine imported components with a core of domestic parts to produce hybrid automobiles that are sold in the US."
The Commerce Department's Foreign Trade Zone Board has proposed regulations increasing the scrutiny of applications. Under the proposal, applications must meet "threshold criteria," including one requiring no net increase in imports.
The proposal prompted concern from localities that have benefited from industries in their FTZs. Also, companies operating in FTZs have cautioned the Commerce Department that its changes may hurt the economy.
Net impact questioned
The National Association of Foreign Trade Zones, which represents zone licensees and has worked closely with the Motor Vehicle Manufacturers Association, says foreign trade zones were a significant factor "in creating $5.6 billion in new capital investment in the United States and new and retained US jobs totaling 170,000."
However, an International Trade Commission report suggests that net job losses alone in the auto parts industry may have reached up to 10,300.
"The encouragement of imports into these zones as permanent destinations creates a net national loss of benefits," says David Roland, president of the Washington-based Automotive Service Industry Association.