U.S. Foreign-Trade Zones Attract FDI to United States
With their streamlined regulations and many advantages, U.S. foreign-trade zones have become home to the successful operations of many foreign-owned affiliates.
Location USA / April 2013
Companies operating in foreign-trade zones have become a thriving sector of the U.S. economy. According to the most recent report from the Foreign-Trade Zones Board in Washington, D.C., firms operating in FTZs in 2011 employed 340,000 U.S. workers in more than 170 active zone projects across the nation. Exports from FTZs reached a record $54.3 billion in 2011, growing at a pace in recent years that is far faster than overall U.S. goods exports.
Major users of the program include such industries as electronics, automotive, pharmaceuticals, petrochemicals, machinery, equipment, apparel, and footwear. The program is open to U.S.-based companies and affiliates, whether the parent company is located domestically or abroad. Automotive companies using the program include such well-known international nameplates as BMW, Honda, Hyundai, Mercedes-Benz, Nissan, Subaru, and Toyota. Locating in a U.S. foreign-trade zone allows affiliates to continue to source materials and components from international suppliers at globally competitive prices, while employing productive U.S. workers creating products for the world’s largest domestic market as well as for export. For example, STIHL USA, an affiliate of the German chainsaw manufacturer, produces a range of power tools in a foreign-trade zone in Virginia Beach, Virginia. The company has enjoyed robust growth in production, sales, and employment at its facility. And BMW Manufacturing Co. in Greer, South Carolina, announced in 2012 that it would invest an additional $900 million in its four-million-square-foot facility. The plant now employs 7,000 workers able to produce more than 300,000 vehicles per year. The company exports more than $5 billion in motor vehicles from its foreign-trade sub-zone, 70 percent of total production.
The concept behind FTZs is simple and the benefits are many. FTZs are zones located at or near U.S. ports of entry that are considered outside U.S. Customs territory. That means that Customs inspections and duty collection only apply when goods leave the zone for domestic U.S. commerce, rather than when first admitted to the zone from abroad. This can result in tremendous savings for companies that rely on imported materials, components, and machinery for final production.
The benefits can be especially appealing for a globally connected, multinational company locating an affiliate in the United States. For a producer located in a foreign-trade zone, duties can be eliminated entirely on imported materials and components that are then re-exported as part of a final product. Foreign-owned companies can use the FTZ as a “land bridge” to export to North and South American markets as well as those of Asia and Europe. Duties are also eliminated on inputs that are scrapped or destroyed in the production process.
For products shipped from a foreign-trade zone into the $15 trillion domestic U.S. market, duties can be reduced through the flexibility of choosing the lower tariff rate on either the final product or the imported components. Those global automakers, for example, are able to source parts from their home country and other foreign suppliers that can face significant duties if imported into U.S. commerce, but because the company is located in a foreign-trade zone, the parts face the same relatively low duty of 2.5 percent imposed on the final automobile when it is shipped from the zone to U.S. consumers. The FTZ environment can also deliver large cash-flow savings because the payment of duties is deferred on foreign goods admitted to a zone until they are actually shipped into U.S. commerce for final sale. FTZ users can also consolidate weekly entry forms that can reduce payments for the Merchandise Processing Fee. And inventory stored in an FTZ is exempt from state and local ad valorem taxes.
Beyond the Costs Savings
Beyond the direct duty savings, locating in an FTZ can speed supply-chain velocity by reducing the need to file numerous forms with U.S. Customs. FTZ users can plug into a thriving support network offering sophisticated inventory-management software, third-party logistics, and experienced grantees that manage overall zone administration.
By operating in a zone, companies can also build “trusted-trader” relationships with Customs officials. Other agencies that regulate import compliance, such as the Food and Drug Administration, can offer additional flexibility in the production, labeling, and packaging of goods within a zone. In general, import regulations, like Customs duties, are only applied when goods leave the zone for U.S. commerce, not when they are first admitted to the zone.
Although more than 100 countries offer some kind of special trade-zone status, the U.S. Foreign-Trade Zones program has proven to be one of the most successful in the world. The security and reporting requirements imposed on U.S. zones minimize any incentives for illegal activities. Unlike in special economic zones elsewhere, companies operating in a U.S. foreign-trade zone are subject to all domestic tax, health, labor, and other laws. Additionally, in contrast to other countries, zone users in the United States are not required to export all or a minimum share of their output, nor are they required to locate in certain limited regions of the country.
A User-Friendly Program
The program has become more user-friendly than ever because of an overhaul of the FTZ Board regulations in April 2012. The new rules allow expedited approval of applications for new zones and for companies seeking to operate in an existing zone, while the amount of information required for application has been sharply reduced. Approval times have dropped from 12 months or more to less than 30 days for most users. Approvals for production activities, including manufacturing, now take 120 days or less in most cases.
The program’s usefulness has been enhanced by the introduction and wide adoption of the Alternative Site Framework (ASF) since 2009. ASF allows a foreign-trade zone grantee — typically a local port authority or other nonprofit administrator — to offer FTZ status to companies operating anywhere in a multi-county “service area,” rather than requiring the user to locate in a specific General Purpose Zone near a port of entry. Combined with the new FTZ Board regulations, the ASF has opened the program to a wider range of users, including small and medium-size companies.
The FTZ program enjoys bi-partisan support in Washington that has remained unaffected by the recent U.S. election. In February 2012, the Obama White House lauded the program in a statement that said the new regulations will advance administration goals of attracting foreign investment, stimulating manufacturing in the United States, and promoting exports through the National Export Initiative. Members of both parties in Congress understand that the FTZs located in their states help to attract and keep productive activity in the United States and thus create sustainable, well-paying jobs for their constituents.
Any company interested in locating in a U.S. foreign-trade zone should seek information from the U.S. Commercial Service as well as state and local development officials in the United States. Foreign-trade zones have become an important tool for enhancing the attractiveness of the United States as a destination for foreign investment. The grantees that administer each zone project are required by law to be nonprofit entities that operate as a public utility, which means reasonable and transparent fees and uniform treatment for all user companies.
The success of so many foreign-owned affiliates in the FTZ program testifies to its usefulness and availability to all U.S.-based producers, whatever the nationality of their parent companies.