Foreign Trade Zones: An Economic Development Opportunity

Contributed by Alex Marach, CFIRE Research Intern
$534 billion of goods entered US foreign-trade zones (FTZ) in 2010 (Foreign-Trade Zones Board, 2012). MAFC FTZs accounted for $98 billion or 18.4 percent of the total US value received by FTZs in 2010. FTZs receive inputs from both domestic and foreign sources, but use US labor to turn inputs into final products. The MAFC has the transportation network to support FTZs and much of the MAFC is FTZ eligible. The MAFC has the opportunity to use FTZs to encourage economic development through the use of US labor.
FTZs by law are located adjacent to a port of entry (POE). A POE is a designated area where a customs officer is authorized to accept entries of merchandise, collect duties, and enforce customs and navigation laws (19 C.F.R. § 101.1, 2012). POEs are typically border crossings, airports, or water ports.
FTZs come in two forms, general purpose zones (GPZ) and subzones. GPZs may have multiple companies using a single site and are usually located at a POE or an industrial park. Subzones are approved for a single companies use when a general purpose zone cannot accommodate the user. Subzones are typically manufacturing facilities and are located at company manufacturing facilities. Adjacency for a GPZ is defined as a location within 60 miles or 90 minutes of driving time by US law. Adjacency for a subzone is reliant on the subzone meeting supervision requirements from Customs and Border Protection (15 C.F.R. § 400.2, 2012).

Benefits to FTZ Users
Zone users can choose to pay a tariff on the final product when it exits a FTZ or pay tariffs on the inputs.
No duty is due if a good is re-exported out of the FTZ, scrapped, or destroyed in a FTZ.
Zones eliminate the need to apply for duty drawback when a good is imported and then re-exported.
Products can be transferred zone-to-zone without paying a duty.
FTZs allow the user to file a weekly entry reports and pay a single processing fee rather than individual fees for each entry.

FTZs confer tariff benefits on the user and exist to encourage foreign commerce (15 C.F.R. § 400.1, 2012). FTZs increase the number of options available to users when applying tariffs to imports. For instance, FTZ users are able to choose when to pay a tariff on a good. Some products have an inverted tariff structure where components have a higher tariff than the finished product. Inverted tariffs incentivize the use of American workers to assemble products. For example, a Chattanooga, TN, Volkswagen factory saved $13 per car or $1.9 million annually from inverted tariff savings (Bolle and Williams, 2012). Similarly, if an imported good is destroyed during the production process there is no tariff due when the product is scrapped (Bolle andWilliams, 2012). Therefore, companies will use FTZs as research facilities if they would otherwise pay high import tariffs on the research materials. Panel A lists some of the benefits to companies from FTZs.
FTZs employed roughly 320,000 or about 3 percent of U.S. manufacturing workers in 2010. Also, 12 percent of all foreign goods entered the United States through FTZs in 2010 (72nd Annual Report of the Foreign-Trade Zones Board, 2012). Table 1 displays the role of FTZs in the MAFC and compares the MAFC to the US. The MAFC has a large number of POEs considering many of the member states are not on a border where POEs are clustered. As of 2010 only 24 of MAFC POEs had either an active GPZ or subzone as defined by The International Trade Administration (ITA) reporting an adjacent GPZ or subzone receiving goods. Many of the active POEs have multiple GPZs or subzones federally defined as adjacent to the POE.

Table 1

Port of Entry Active General Purpose Zones (2010) Active Subzones (2010) Total Value of Received Shipments (billions)
MAFC 47 24 51 $98
US 329 132 263 $534
MAFC as a Percentage of US 14.3% 18.2% 19.4% 18.4%

Additionally, each MAFC state uses GPZ and subzones at different levels. Table 2 breaks out the POEs, GPZ, subzones, and the value of goods received by each MAFC state. Nearly every state has more value received in subzones than GPZs. ITA notes that the trend in FTZs is companies utilizing subzones more than GPZs (Foreign-Trade Zones Board, 2012).

Table 2

Ports of Entry Active General purpose Zones Total Value Received (millions) Active Subzones Total Value Received (millions)
Illinois 9 3 $6,416 10 $22,587
Indiana 3 2 $1,096 5 $5,880
Iowa 1 3 $340
Kansas 1 2 $19 2 $1,229
Kentucky 3 2 $,3088 8 $19,957
Michigan 8 4 $3,406 6 $5,058
Minnesota 10 2 $532 2 $36
Missouri 4 2 $490 3 $585
Ohio 5 6 $3,153 9 $23,682
Wisconsin 3 1 $0.4 3 $382
MAFC Total 47 24 $18,203 51 $79,740

The MAFC has numerous POEs which covers a large portion of the MAFC in the 60 mile buffer where GPZs reside. Additionally, the distance from a POE to a subzone can be much larger. For instance John Deere & Company operates a subzone that is approximately 98 linear miles from the Des Moines IA, airport POE. Figure 1 uses 2010 data from the ITA and Customs and Border Protection to map US POEs with 60 mile buffers. The map shows displays orange buffers around POEs that have an active GPZ or subzone associated with the POE. In contrast the blue buffers do not contain an active GPZ or subzone and represent an opportunity for states to encourage businesses to utilize the benefits of a GPZ or subzone. Some POEs may have a GPZ or subzone within 60 miles, but the zone shown is not legally associated with that POE. Therefore, goods are imported through a different POE that may be further away from the manufacturing or distribution facility.

Figure 1


Overall, FTZ status offers benefits to importers of foreign goods and promotes economic development in the state where the FTZ resides. Furthermore, the MAFC’s location and access to multiple transportation modes creates an attractive environment for companies. State and local MAFC economic development organizations should be aware of local POEs, FTZs, and subzones to attract businesses and enhance the economic competitiveness of their state.

References

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