NAFTZ Says Section 301 Tariffs Unfairly Applied to Foreign-Trade Zones

Manufacturers in foreign-trade zones are being treated worse than other U.S. manufacturers when their products are on Section 301 lists, said National Association of Foreign-Trade Zones President Erik Autor. He said he's attempting to educate the U.S. trade representative on how zones work in an effort to resolve the problem. Autor said that these products are "being erroneously treated as imports from China" if the highest-valued component is from China. He said this mistake is happening because Census is trying, however imperfectly, to measure the amount of imports by country. Because the imports did not go through customs when they entered the U.S., the Census bureau asks about the finished products leaving FTZs, and assigns a country of origin to it by determining what country was responsible for the greatest proportion of its imported components.

The point of the FTZ program is to incentivize American manufacturing. Typically, if an imported input is subject to a higher tariff than importing a finished good with that input, a manufacturer can bring those inputs into the zone without paying the tariffs. The components are transported from the port in a bonded status. Then, when the finished good is entered into commerce, the manufacturer pays the tariff rate on the imported inputs at the level of tariff on the finished product.

Autor testified about the issue on Aug. 20, and the questions the USTR representative asked after his testimony suggested confusion about how this tariff inversion is not working during this trade war. Autor, in an interview after his testimony, explained that FTZs do not work to evade trade remedies. So if inputs are brought into the zone that are subject to higher tariffs than the most-favored-nation rate -- such as they are under Section 301 -- they will be taxed at that component rate when the finished good enters commerce, not the rate of the finished product. Because of the way the proclamations are written for the Section 301 tariffs, finished goods on the 301 list are sometimes facing 25 percent taxes on their foreign content -- even though those goods are American-made.

In the interview, Autor said that an FTZ in Pennsylvania that assembles locomotives for Union Pacific and Burlington Northern is paying a 25 percent tariff on all the imported components of the locomotive, even though they're not all from China. The same thing is also happening to manufacturers in FTZs that make augers, capacitors and semiconductor manufacturing equipment. Because some of these items are very high-value goods, collectively, companies are facing millions of dollars in unexpected liabilities.

Not only are companies paying duties on inputs that aren't Chinese when the single highest-value imported component is Chinese, they're also paying duties on Chinese inputs that are not subject to Section 301 duties, just because the finished product is classified in a tariff provision on the Section 301 list. In his testimony, Autor said "Customs regulations and case law confirm goods manufactured and substantially transformed in foreign-trade zones are U.S. origin, not foreign-origin products."

In an exchange after his testimony, a USTR representative told him that goods made in FTZs "are not ever duty free, they receive the rate of the final product." Autor said no, many final products do come out zero-duty. "What we’re saying is that if it is manufactured in a zone, it should be treated just like a good manufactured outside the zone. You pay the duty on inputs; once it is manufactured, it is a product of the United States."

The USTR official asked, "isn’t the whole point of the zone [that] they aren’t treated the same?" Autor said, "They shouldn’t be treated worse than manufacturers outside a zone. They’re having their final product treated like it is imported from China."