CRS Releases Report on Benefits and Costs of FTZs

While international tariff and non-tariff barriers remain, along with the need for heightened security to deal with issues such as terrorism and money laundering, the U.S. foreign trade zone system is “likely to continue and even, possibly, expand,” said the Congressional Research Service in a report on U.S. FTZs. The Sept. 5 report, entitled “U.S. Foreign-Trade Zones: Background and Issues for Congress,” gives background on free trade zones in general, outlines the U.S. FTZ program, and discusses current FTZ and worldwide zone-related issues for Congress.

According to the report, over 12 percent of foreign goods entered the U.S. through FTZs -- 75 percent of them as crude oil. Most shipments arriving through FTZs were consumed in the U.S., CRS said. Crude oil byproducts such as gasoline, diesel, jet fuel, kerosene, and petrochemicals dominate FTZ output, but other key products include automobiles, consumer electronics, and machinery.

Sources of cost savings for FTZ users include, among other things, duty reduction in inverted tariff situation (i.e., when the tariff rate on foreign inputs is higher than the tariff rate on the finished product); duty deferral; duty exemption on exports; duty drawback elimination; tax savings; and customs inventory control efficiencies, CRS said.

But FTZs include considerable start-up and recurring costs as well, said the report. Startup costs include (1) the application process; (2) background checks for importers; (3) a physical security system for the FTZ site; and (4) an inventory control system and related software to track the movement of products. Maintenance costs include (a) greater oversight by CBP officials; (b) at least one full-time person to manage a zone; (c) the bonding requirement; and (d) annual fees by grantees for zone use.

The report said FTZs may impose costs on the wider economy as a whole by encouraging a misallocation of U.S. resources. FTZs may disproportionately benefit large firms because, while FTZs are available to all U.S. companies in theory, the high costs of setting up and running an FTZ limit benefits to large companies with high volumes of production, CRS said. Missing data may also complicate policy recommendations as well. Neither the FTZ Board nor the Census Bureau collects or publishes industry-specific data on (1) domestic inputs into zones; (2) goods transferred from zone to zone; (3) value added in zones; or (4) the relationship between the actual character of goods entering and goods exiting FTZs. Such data are collected by CBP, but are not available publicly for other uses, CRS said.

NAFTZ Lauds Report, but Questions Sections on Domestic Industry Impact

The National Association of Foreign-Trade Zones generally applauded the CRS for its effort in compiling the report, in a statement released on Sept. 7. NAFTZ did, however, take issue with CRS’ concerns regarding the potential for injury to competing domestic producers by the FTZ program. “The NAFTZ believes these concerns are clearly and adequately addressed in the FTZ statute and regulations, and in the fair and transparent process of considering new applications,” NAFTZ said. Referring to the recent streamlining of the zone application by the FTZ Board final rule published on Feb. 28, NAFTZ said the “program is now even more accessible to U.S. firms of all sizes.”

Email documents@brokerpower.com for a copy of the CRS report and/or NAFTZ’s response.