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U.S-based Businesses Benefit from Continued Growth of Foreign-Trade Zones

9/22/2014

By Greg Jones (©Trade & Industry Development, September 2014)

The continued growth of the U.S. Foreign-Trade Zones in light of long-term reductions in overall U.S. tariff rates is no longer a surprise. As noted in the 2012 U.S. Foreign-Trade Zones Board’s Annual Report to Congress, the value of goods flowing into Zones for that year was $732 billion – more than three times the total for the year 2000. Yet, answers to the question of what has driven this growth are both simple and complex. The simple answer is the U.S. Foreign-Trade Zones program offers cost-saving benefits to U.S.-based businesses that allow them to maintain or expand their U.S.-based operations. The more complex answer involves the way in which 70 years of trade globalization continues to squeeze the operating margins of U.S.-based businesses. To better understand the dynamic of trade globalization, one would do well to look at its development over the past several decades.

It would be safe to say that a lot was going on in terms of world events during July of 1944, and that many of those global events would determine the kind of world that would exist long after. In places such as Europe, the Pacific and Asia, people from many nations were engaged in armed combat, the result of which would settle many questions about the manner in which people of different nations would engage each other for a long time to come. Meanwhile, from Army ammunition plants in the Appalachian Mountains to shipyards in coastal seaports, an army of American workers manufactured the tools of warfare that would inevitably lead to an Allied victory. In Bretton Woods, New Hampshire, a group of representatives from 44 Allied nations gathered to discuss and plan for the creation of global institutions whose rules would reduce or eliminate the kinds of political and economic distortions that can serve as root causes to large-scale armed conflict. Among their aims was the free commercial flow of goods, currency, and capital between nations. The ultimate, practical results of their free trade initiatives were several rounds of multilateral tariff reduction agreements under the auspices of the General Agreement on Tariffs and Trade (GATT), culminating in the creation of the World Trade Organization (WTO) in 1995. They initiated institutions to facilitate the free exchange of currencies. This made possible the free flow of capital investment, which in turn meant that companies that engaged in manufacturing activities would have a world of choices in which to establish production platforms. 

Round after round of duty rate reductions among GATT member countries offered a number of benefits for U.S.-based manufacturing operations – especially opportunities to expand export sales. Conversely, reduced U.S. tariffs, combined with the free flow of capital investment, meant there was a world (at least what was known in the post-war age as the “Free World”) of competition for production and market share within the U.S. market. For any American plant, this competition no longer came from other U.S. brand names; it came from foreign brand names, and, on an ever-increasing basis, from foreign “sister plants” within the same global corporation.

 

Naturally, this gave rise to conflict and debate over trade liberalization and its role in fostering the “outsourcing” of manufacturing operations to foreign, “low-cost” locations. This conflict has been further exacerbated by membership in the WTO by countries (e.g., China, Viet Nam) whose governments are yet to embrace the institutions and values that have characterized the nations that continue to define the “Free World.” Some argue that offering WTO membership to countries that have yet to embrace democratic institutions will offer new markets for American exporters, and will create and expand the middle class of citizens in those countries who, in time, will demand decent wages and democratic institutions and government for themselves. Others argue that WTO membership for such countries is akin to inviting the fox into the henhouse. However, even if one accepts the argument that free trade promotes worldwide peace and democracy, the stark question remains: How do we keep our hometown USA factory doors open until the arrival of that wonderful day when worldwide peace and democracy erase the economic distortions that still exist today?

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