USITC Report: Defining the value of Foreign Trade Zones

Foreign Trade Zones (FTZs) have long been an essential part of the American trade landscape, fostering international commerce and facilitating economic growth. FTZs are designated areas within the United States where goods can be imported, stored, processed, re-exported or brought into the U.S. commerce with certain advantages, such as deferred customs duties and streamlined regulatory procedures.

These zones encourage businesses to engage in international trade while enhancing economic competitiveness. The concept of FTZs was created by Congress in 1934, and their role has evolved over time to accommodate changing economic circumstances.

One such change in circumstances is the ratification of what was first the North American Free Trade Agreement (NAFTA), later modified to the United States-Mexico-Canada Agreement (USMCA). Included in the original agreement were two provisions that put U.S. companies manufacturing in an FTZ at a disadvantage to their competition in Canada and Mexico.

NAFTA’s implementing legislation included a restriction that prevented FTZ manufacturers from using the agreement’s rules-of-origin provisions to qualify goods sold to Mexico or Canada for the same duty treatment given to manufacturers in Mexico and Canada selling to the U.S. market.

NAFTA also included a restriction that required FTZ manufacturers to pay U.S. duties on any non-originating (i.e., non-North American) components in products being exported to Canada and Mexico. These restrictions are contrary to one of the main intended benefits of the FTZ program—promoting U.S. exports by not imposing any domestic duties on components of products manufactured in an FTZ that are subsequently exported.

Since the signing of the NAFTA agreement, there have been multiple efforts to change the language related to U.S. FTZs to correct this lack of parity. When the agreement was renegotiated into USMCA, efforts were once again made, led primarily by the National Association of Foreign-Trade Zones (NAFTZ).

While the restrictions were ultimately carried over into USMCA, the NAFTZ continues to lobby to get the problem addressed. This led to the U.S. Trade Representative (USTR) requesting that the United States International Trade Commission (USITC) investigate FTZ competitiveness.

What resulted is a 361-page report that addresses not only the disparity in the USMCA agreement, but also gives a treasure trove of data about the FTZ program and its benefits to companies in the United States. Here’s what was found.

USITC Report: Key findings

In April 2023, the USITC published its final report on Foreign Trade Zones (FTZs) titled “Foreign Trade Zones (FTZs): Effects of FTZ Policies and Practices on U.S. Firms Operating in U.S. FTZs and under Similar Programs in Canada and Mexico.”

The report delves into the economic impact, benefits, challenges, and recommendations related to FTZs in the United States and sheds light on several important aspects of FTZs and their impact on the U.S. economy. This study is the first of its kind since the 1980s.

To create the report, the USITC received background information from the NAFTZ, conducted public hearings, and issued an industry survey. The result is a deep dive into the FTZ program, including not only in-depth analysis of the data and research, but also anecdotal stories of the usefulness of the FTZ program.

1. Warehouse/distribution operations make up 90% of U.S. FTZ users, but production operations make up 80% of employment. The directive from USTR was to investigate the USMCA disadvantages for U.S. FTZ manufacturers. However, when looking deeply into the program, the USITC report illustrates that both manufacturing and distribution operations in FTZs significantly contribute to American jobs, capital investment, international trade flows, exports, and other indicators of economic growth.

2. U.S. FTZs’ have a positive, indirect “cluster” effect on economic development. Many have reported on the benefits that the FTZ program offers U.S. importers in duty deferral, cost reductions, and supply chain velocity enhancements.

The USITC report includes those benefits, but also underscores how major U.S. FTZ investments can stimulate additional employment and economic development benefits for the communities in which they are located.

The USITC highlights examples of supplier firms clustering around an FTZ, creating thousands of indirect and multiplier-related jobs in the area as a result of the one firm deciding to locate or remain in the U.S. given the cost benefits the FTZ provides.

3. Domestic content and U.S. value-add make up a significant portion of the U.S. FTZ story. The strongest, and perhaps the most startling takeaway from the report is that only 13% of the total value of U.S. FTZ shipments is comprised of foreign status inputs, while the majority of the value of the goods is from value added in the U.S. (31%) and U.S. domestic content (56%).

This finding underscores the truth about FTZs in the U.S. The primary role of the U.S. FTZ program is to stimulate domestic job creation and foster economic development, rather than serving as a platform solely for reducing or eliminating duties.

By showcasing that a notable segment of the value within shipments from FTZs originates from value-added activities taking place within the U.S., the report underscores the essential function fulfilled by American workers and enterprises within the FTZ program. These findings underscore that FTZs act as enablers for job prospects and actively contribute to the expansion of the U.S. economy.

Furthermore, the considerable ratio of U.S. sourced content underscores the program’s commitment to utilizing local inputs and resources. This signifies that the U.S. FTZ program is firmly committed to optimizing domestic manufacturing and harnessing the capabilities and advantages of the U.S. market.

Room for improvement

The report also showed that there’s room for improvement of the U.S. FTZ program to further help U.S. companies compete in the global marketplace.

1. Mexico has significantly more FTZ-type program activity, particularly in the automotive sector. Mexico has multiple FTZ-type programs, including IMMEX and PROSEC. Created in 2002 and 2006, respectively, these programs are much younger than the U.S. FTZ program.

According to the report: “5,191 establishments had IMMEX authorizations during 2021. They employed approximately 2.8 million workers, significantly higher than the 480,000 employees in the U.S. FTZ program. According to the limited information available on PROSEC, almost 4,000 firms participated in PROSEC in 2022.”

When you compare the differences between the U.S. and Mexican economies and populations, it’s a huge difference. In developing these programs after the signing of NAFTA, Mexico specifically targeted mechanisms to counter the restrictions in the agreement to incentivize manufacturing, and the U.S. did not take similar action to level the playing field for its manufacturers by modifying the existing FTZ program accordingly.

2. U.S. FTZs are at a competitive disadvantage compared to firms operating under Mexico’s FTZ-type programs. Throughout the report, the USITC team acknowledges that Canadian and Mexican companies are not hindered by the USMCA restrictions like U.S. FTZs are. The cost disadvantage occurs because producers in Canada and Mexico have multiple mechanisms to reduce or eliminate duty costs on imported materials critical to their production operations, and the U.S. government has not provided similar mechanisms for U.S. enterprises.

In some cases, Most Favored Nation (MFN) duty rates have been reduced, in some cases to 0%, on imported components to manufacturing, where similar rate reductions have not occurred in the United States. In other cases, Mexico and Canada have negotiated free trade agreements with other countries that allow manufacturing components to be imported at preferential rates. And, in Mexico, additional duty benefits offered through PROSEC and its Regla Octava rule are not subject to the restrictions of USMCA.

3. The Section 321 de minimis provision puts U.S. FTZs at a competitive disadvantage. While the U.S. has not created similar additional duty deferral programs to be used in conjunction with zones, still other import program adjustments since the creation of FTZs put U.S. companies at a disadvantage.

The study highlights one such program—the Section 321 de minimis provision, which is an informal customs entry procedure codified under 19 U.S. Code § 1321(a)(2)(C) where it gets its name. This provision allows duty-free importation for certain low-value shipments, valued at $800 or less, requiring importers provide only minimal information to CBP.

Due to an interpretation of the language of the FTZ Act, U.S. companies utilizing FTZs are unable to use de minimis entry although considered outside of the customs territory (like foreign competition or operations).

So, companies outside the U.S. can ship to U.S. customers duty free, while U.S. companies are not able to service their customers from U.S. warehouses employing U.S. workers with the same duty-free treatment.

Download the report

The 2023 USITC FTZ Investigation Final Report provides a comprehensive analysis of the role, impact, and challenges of FTZs in the United States. As a critical component of the nation’s trade strategy, FTZs contribute to economic growth, job creation, and global competitiveness.

The report’s insights and recommendations offer valuable guidance to policymakers, businesses and communicates as they navigate the complexities of international trade and seek to harness the potential of FTZs in a rapidly changing global landscape.

“The USITC FTZ Report offers fantastic insight into the current state of the program,” says Jeff Tafel, president of the NAFTZ. “We’re most excited, though, about the opportunities highlighted in the report to strengthen the program as an economic tool to make U.S. companies even more competitive in North America and globally.” •

The full report can be found here: usitc.gov/publications/332/pub5423.pdf.

Melissa Irmen, director of advocacy & strategic relations, NAFTZ. She can be reached at [email protected]. For more information about advocacy for U.S. FTZs go to naftz.org.