As a result of a rewrite of federal regulations in 2012, many U.S.-based businesses will now find access to the U.S. Foreign-Trade Zones (FTZs) program faster and easier. U.S. Foreign-Trade Zones are used by hundreds of companies to enhance the competitiveness of their U.S.-based manufacturing and distribution operations through the reductions in Customs duty costs that the Zones program offers. Zone projects are established in more than 200 American communities to support economic activity in their locales that, if not for the FTZ program, might otherwise be conducted more cost-effectively overseas. Since the FTZ program was instituted in 1934, the federal government’s mandate has been to see that it is used to help U.S.-based businesses engaged in international trade activities level the playing field versus their overseas competitors.
For more than 75 years, local Zone project grantees have been responsible for delivering the FTZ program to members of their respective business communities. The Foreign-Trade Zones Board, which oversees the program on a national basis, is responsible for issuing grants of authority that enable individual companies to use FTZ procedures under the auspices of their local grantee organizations.
Since its inception, the Foreign-Trade Zones program has seen a number of crucial developments. In 1950, the Foreign-Trade Zones Act was amended to allow manufacturing activity within Zones. In 1973, the U.S. Court of International Trade issued a ruling that upheld the Foreign-Trade Zones Board’s legal authority to establish so-called “subzones” to provide access to the FTZ program for companies not located within the boundaries of existing Zones. In 1980, a U.S. Treasury Decision determined that the “value added” in FTZ production activities (i.e., domestic labor, materials, overhead or profit) is not included in the dutiable value of manufactured goods when they enter U.S. commerce. These three developments prompted tremendous growth in the use of the program during the 1980s, notably in the automotive manufacturing sector.
However, growth in the use of manufacturing subzones in the 1980s raised questions in the minds of some, particularly those who were concerned that one particular benefit – that of relief from so-called “inverted tariffs” – might result in less, rather than more, U.S.-based economic activity. An “inverted tariff,” also known as an “irrational duty rate relationship,” exists when the duty rate applied to an import of a particular manufactured product is lower than that applied to one or more of its imported components. This kind of duty rate relationship suppresses the operating margins of U.S.-based manufacturers.
When a U.S-based manufacturer finds itself the victim of an inverted tariff, it has only two ways to rectify this problem: 1) move offshore or 2) be granted relief from inverted tariffs by the U.S. Foreign-Trade Zones Board. There were some people in the 1980s who failed to realize just how willing U.S.-based companies might be to outsource their manufacturing operations to foreign locales and the extent to which companies regularly evaluate the various international options for manufacturing platforms. One need only read the record of the October 24, 1986 Hearing before the U.S. House Ways and Means Subcommittee on Trade to see just how contentious an issue this was.
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