FAQs about Foreign Trade Zones (FTZs)
Q. Why do companies use an FTZ?
A. To maintain the cost competitiveness of their U.S. based operations with their foreign based competitors. For a company, zone status provides an opportunity to reduce certain operating costs associated with a U.S. location that are avoided when operating from a foreign site.
Q. How does the zones program fit within the economic development efforts of the various states?
A. The zones program is a federal program. The underlying authority to approve the creation of a FTZ resides with the federal government. However, every state has enabling legislation providing statutory authority for the establishment of FTZs in each state. FTZs complement other state and local incentives that are incorporated into the overall efforts of a community to maintain their attractiveness as a business location.
Q. Is zone status more beneficial to foreign owned companies as compared to American owned companies?
A. The benefit of zone use is determined by the location of a company’s operations in the U.S., not by its ownership. If an American owned company and a foreign owned company have identical trade operations in the U.S., the potential benefit of the U.S. FTZ program for each of them will be identical. The U.S. FTZ program encourages investment and production in the U.S. that might otherwise take place in another country.
Q. Does the cost reduction feature of zone status translate into an import subsidy?
A. No. Zones do not cause imports. The reverse is true. The increasing importance of international trade in the U.S. economy has caused an increase in the use of zones. Periodically, oversight agencies including the International Trade Commission and the General Accounting Office examine the impact of the U.S. FTZ program. Congress has also held hearings on the subject. These periodic studies and reviews have not produced any information leading to the conclusion that zones cause imports. The decision to import precedes the decision to use zones.
Q. How do zones expedite and encourage direct foreign investment in the U.S.?
A. The U.S. welcomes foreign investment but does nothing to overly attract or discourage it. Through the policy of “National Treatment”, foreign investors are offered the same conditions, rights and benefits associated with investing in the U.S. as an American investor can expect to receive. In keeping with this policy, zones encourage foreign and domestic investment by removing a tariff bias that unintentionally discourages investment in the U.S. and encourages supplying the U.S. market from off-shore.
Q. Is there a need for FTZs since the U.S. participates in trade agreements?
A. Trade agreements, including the Uruguay Round and the NAFTA, have resulted in the reduction of many U.S. tariffs. As a result, certain companies that have benefited from the FTZ program in the past may find that they no longer need FTZs to place them on a level playing field with their competitors abroad. This phenomenon occurs by design and is a positive reflection on the FTZ program as a temporary solution to irrational tariff relationships. It is for this reason that companies must continually evaluate the impact of the evolving trade environment on their business. At the same time that some companies find the FTZ is no longer required to rationalize irrational tariff relationships, other companies find that the FTZ program offers needed relief from the unintended effects of trade agreements and changing tariff schedules, which place U.S. based manufacturers at a disadvantage as compared to their competitors abroad. For example, when industries that were previously subject to quotas transition to tariffs, new industries benefit by use of FTZs. An analysis of the growth of the U.S. FTZ program over the past 20 years illustrates that overall the volume of trade moving through zones has increased steadily over time, despite trade liberalization efforts and shift in industry participation.