The economic benefits of resurging foreign trade zones is attracting more business

BY: DAVID HODES

The U.S. Customs and Border Protection (CBP) agency defines foreign trade zones (FTZ) as secure areas supervised by the CBP and located near CBP ports of entry, serving as the U.S. equivalent of free-trade zones worldwide.

There are dozens of ports of entry in and around seaports on the coasts of the U.S. But others are inland—Omaha, Nebraska; St. Louis, Missouri; Des Moines, Iowa and others—and often located in or near airport properties. For example, there are six ports of entry in airports in California alone.

FTZs can be established by qualified public or private corporations that operate the facilities themselves or contract with zone sponsors. These facilities often provide leasable storage and distribution space, and some projects include industrial park sites for zone users to construct their own facilities.

These zones, first developed in 1934 under the Foreign Trade Zones Act and designed to expedite and encourage foreign commerce, allow for the movement of foreign and domestic merchandise for storage, assembly, manufacturing, and processing.

The companies operating within FTZs must meet certain physical security and access and inventory control requirements.

The FTZ program can help businesses reduce production, transaction, and logistics-related costs as a result of lower duty rates, allowing special entry procedures, and encouraging production closer to market. Delays at the U.S. port of entry can be avoided by bypassing customs and moving the goods directly into the zone. Customs clearance is not required until the goods are ready to leave the zone, saving on import processing time.

Foreign goods imported into FTZs duty-free in 2018 accounted for almost 10 percent of total U.S. goods imports, according to a Congressional report.

“We are in the middle of an FTZ renaissance,” James Grogan, managing director at the Houston office of Washington D.C.-based FTI consulting, told BXJ. Grogan is a global trade practitioner experienced in FTZs, duty and tariff mitigation strategies, general U.S. customs compliance and global trade function assessments. “We’ve seen a real explosion in use of FTZs over the last decade or so. The three biggest contributing factors to that growth are the FTZ board’s streamline procedures and new regulations, which came out in 2012. Secondly, FTZ is being used to address the recent rise in punitive tariffs. And third, FTZ is being used to mitigate supply chain disruption and contribute to the effort towards supply chain resiliency.”

Zones Profiled

The Greater Kansas City Foreign Trade Zone, Inc. (GKCFTZ), has two trade zones: FTZ 15 in Kansas City, Missouri, and FTZ 17 in Kansas City, Kansas. Zone 15 serves 23 contiguous counties in the western half of Missouri. Zone 17 presently serves nine counties in metropolitan Kansas City, Kansas.

The GKCFTZ has over 450 million square feet of approved foreign trade zone space. The two trade zones handle more volume than those of Chicago, Dallas, Denver, Minneapolis and St. Louis.

Companies that use an FTZ are typically either a warehouse/ distributor or a producer/manufacturer. Some of the top FTZ operators, which are generally state or local governments, port authorities, and economic development organizations, work with vehicle and vehicle parts companies, oil and petroleum companies, electronics companies, machinery and equipment companies, textiles and footwear companies, pharmaceuticals, consumer products, and chemical companies.

Issues

With all of the help provided by FTZs in storing and moving goods, they can create some challenges.

For example, there are complex customs regulations and compliance requirements for FTZs.

And there is uncertainty in trade policies, such as tariffs, regulations, political landscape issues and movements in trade agreements that can affect FTZ operations.

According to Global Financial Integrity (GFI), a Washington, DC-based think tank, because customs oversight and other regulatory checks are weak or nonexistent, FTZs have become hotspots for illicit and trade-based money laundering operations, tax evasion, terrorist financing, and other forms of financial crime.

There are also ongoing concerns that FTZs are being increasingly used to manufacture, sell, and move counterfeit and pirated goods across the world.

Data from the Organization for Economic Development (OECD) shows that the counterfeit and pirated goods trade grew by 80 percent between 2008 and 2013.

The OECD also reported that some FTZs have been found to be key trans-shipment points for illicit goods that have been repackaged or relabeled to conceal their point of origin before entering the legitimate supply chain.

The OECD is reviewing recommendations now to monitor and alleviate this specific issue, which includes establishing a diagnostic tool for the assessment of the performance and the compliance of FTZs with a code of conduct.

“I think such things as circumvention, money laundering and some of those concerns are what we see more of in the application of programs overseas than we do in the U.S.” Grogan said. “But it’s certainly something that everyone in the U.S. government and industry alike want to make sure doesn’t happen here.”

There are also trade policy uncertainties—TPU—to deal with as they impact FTZs.

TPU uncertainty refers to the possibility of changes in a country’s trade policy, mainly the possibility of the non-renewal of tariff preference programs, temporary trade bans, economic sanctions, intellectual property disputes, and anti-dumping measures, among other issues.

According to an article penned by researchers at the School of Economics, Beijing Technology and Business University, since the establishment of the World Trade Organization (WTO), countries worldwide have been conducting international trade under the framework of the multilateral rules of the WTO. The level of trade policy uncertainty has greatly decreased. Most recently, trade policy uncertainty had a significant impact on the trade margins of Chinese exports of goods to America.

Other researchers demonstrated how trade policy uncertainty and sustainable development policies affected investment in medical innovation from 1980 through 2020, according to the article, concluding that reducing tariff uncertainty “has large economic and statistical effects on medical innovation, and these impacts are suggestive of real innovation rather than merely an increase in patent applications.”

The Recovery of Shipping and FTZs

The problem with shipping traffic stacking up in various U.S. ports because of the pandemic is being corrected—for the most part. But it’s impact is still being felt.

In a sign of this ongoing recovery, the Port of Long Beach just had its second-busiest year on record, according to a report by the port, by moving 9.13 million twenty-foot equivalent units (TEUs) in 2022, marking a return to near-normal operations.

Asked about how FTZs can contribute to the normalization of port traffic, Grogan said that FTZs actually complement the reshoring efforts better than any incentive program or customs program that exists in the U.S. “What we’re seeing is that the industries that are reshoring the most, like electric vehicles, electric vehicle batteries, semiconductors, renewable energy, are the same ones that we’re seeing the most interest in FTZs,” he said. “A lot of that is about supply chain predictability with these companies, in that they want to make sure they can be close to market in the U.S. so that they’re not a victim to these port disruptions and supply chain disruptions.”

He talked about direct delivery as one angle that the FTZ program plays. “Direct delivery is a benefit that FTZ operators can apply for and customs can grant for goods to move directly to the FTZ zone site, often bypassing the examination or port congestion at the first port of arrival,” he said. “So companies that understand direct delivery can model their supply chains in a way to avoid port disruption. Those companies are poised to mitigate potential supply chain disruptions.”

Another way that FTZs are being used to alleviate congestion is inventory staging, he added. “So if you have a distribution center that imports a bunch of stuff, they can store all that inventory in there, at a U.S. FTZ, without paying duty, and stockpile a little bit more inventory than they would normally,” Grogan said. “Then they just pay the duty when it leaves the FTZ. So they’re able to reshore, or onshore, a little bit more inventory without increasing the cost.”

Business Advantages Still Murky

A recently released report by the U.S. International Trade Commission (USITC) discussed the operation of the U.S. Foreign-Trade Zones program and similar FTZ-type programs in Canada and Mexico, as well as the impacts of these programs on employment and the cost-competitiveness of products of firms operating in U.S. FTZs.

The report found that the cost-competitiveness effects of the U.S. FTZ program and FTZ-type programs in Canada and Mexico are impacted by multiple factors, including the design of the programs, national tariff regimes and applicable rates of duty, other trade policies, and material sourcing and the destination markets for firms’ shipments.

Other findings include:

- U.S FTZs improve cost-competitiveness