'Foreign' Trade Zones Aim at US Use of Zones by US Automakers to Lower Import Duties on Parts Draws Call for Change

By Dennis Melamed, Monitor | The Christian Science Monitor, April 23, 1991 | Go to article overview

'Foreign' Trade Zones Aim at US Use of Zones by US Automakers to Lower Import Duties on Parts Draws Call for Change


Dennis Melamed, Monitor, The Christian Science Monitor


IN 1934 Foreign Trade Zones started out as modest warehousing and refurbishing facilities that imported goods for re-export. The idea was to provide some relief from import duties to spur exports and encourage business activities that would not otherwise have come to or stayed in the United States economy.

In the last 10 years, however, FTZs became dominated by automakers that use the zones to reduce the cost of foreign-made parts in cars destined for the US market. The practice has aroused an intense debate over whether it is costing American jobs, reducing federal government revenue, and hurting the US trade deficit.

Typically, FTZs are located near a US Customs' point of entry, such as a harbor or airport. In these zones, imported materials and components are free of customs duties or taxes until they enter the US market. For many years, these zones were used to receive imports with an eye toward shipping them back out for sale abroad.

But from 1983 to 1986, economic activity in the FTZ program grew from $8.1 billion to $51.2 billion, according to a 1989 report by the House of Representatives' Committee on Government Operations.

As the program progressed, the federal government allowed the growth of subzones - areas that can accommodate large manufacturing facilities - sometimes located miles away from the zone itself. And manufacturing in subzones soared. The House committee found that manufacturing accounted for 93 percent of activity in 1986, up from 9 percent in 1970.

Automakers accounted for 87 percent of the value of shipments from FTZs in 1986. Bait for automakers

The carmakers were drawn by two decisions by the federal government during the 1980s. First, it let companies pay lower duties by allowing them to choose between the tariff on the value of the component alone or on the component's value as part of a finished product. Second, the government let the automakers value the imported parts used in FTZs without including overhead, such as transportation costs. Both these decisions reduced the duties on foreign components, thus saving the companies millions of dollars. …

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