President Obama’s 2014 State of the Union address included welcome pledges of support for U.S. manufacturers and exporters. But there was no mention of the ambitious goal the president set in announcing the National Export Initiative just four years ago — to double U.S. exports by 2014. After an initial burst, U.S. export growth is no longer on track to meet that target and is likely to fall considerably short.
Mr. Obama is right to recognize the need for new trade promotion authority and other resources to promote more exports. But he and Congress should not overlook some simple steps that would also help to remove obstacles that currently keep America’s Foreign-Trade Zones — a shining exception to the sluggishness of the overall export economy — from doing even better.
According to the U.S. Foreign-Trade Zones Board in Washington, exports from the thousands of U.S. companies operating in FTZs reached a record $70 billion in 2012, the latest year for which data is available. That is more than double their 2009 value — two years ahead of the NEI’s target date.
Exports from U.S. Foreign-Trade Zones have enjoyed explosive growth and actually achieved the president’s goal — two years ahead of schedule.
Created in 1934, the Foreign-Trade Zones program now encompasses more than 250 zones across the United States and Puerto Rico. By 2012, 3,200 companies were operating in a foreign-trade zone, employing 370,000 American workers. Thanks to new streamlined regulations issued by the FTZ Board, the number of companies participating in the program has risen by one-third in the past two years. FTZ employment during that same period has grown by 16 percent, far faster than overall job growth.
The FTZ program is thriving because it recognizes the reality that U.S.-based companies must have equal access to global inputs to remain competitive in global markets. More and more U.S. companies are imbedded in sophisticated global supply chains that depend not only on the freedom to sell abroad, but also to buy imported raw materials, components, and industrial machinery to fuel exports and overall output.
Policymakers need to appreciate the importance of both imports and exports to a robust U.S. economy. A recent study by the St. Louis Federal Reserve Bank found that rising imports are actually more closely correlated to expanding U.S. industrial output than rising exports. Analyzing data from the past three decades, the authors found that every 1.0 percentage point increase in imports has been associated with a 0.4 percent increase in manufacturing output. The study concluded, ”Intermediate goods imports and capital goods imports are the lifeblood of U.S. output.”
The Foreign-Trade Zones program infuses U.S. manufacturers with that lifeblood by reducing and eliminating tariffs on imports important to U.S. production. A foreign trade zone is a secure area under the supervision of U.S. Customs and Boarder Protection that is considered outside the customs territory of the United States for purposes of duty payment. This means that customs agents collect duties on imported goods and components only when they leave the zone to enter the U.S. market.
By locating in an FTZ, a U.S.-based producer can reduce operating costs by deferring duty payment until a time closer to the actual sale of its final product. Duties on imported industrial machinery are not payable until the equipment is installed and operating within the FTZ. Companies can also save on payment of the Merchandise Processing Fee by consolidating customs entries into one weekly filing. And manufacturers importing components for automobiles, pharmaceuticals or other finished products can elect to pay either the duty rate that applies to the components or the rate that applies to the final product — whichever is lower.
For exporters located in a foreign-trade zone, duties are eliminated entirely on imported components and materials that are then re-exported as part of a finished good, because these imports never enter U.S. commerce. Exporters operating in an FTZ are spared the expense and inconvenience of filing for duty drawback. This crucial FTZ benefit helps to level the playing field for U.S. exporters by eliminating a cost of production that is not imposed on their foreign competition. As a result, the FTZ program encourages value-added production on U.S. soil, with U.S.-based companies employing American workers to combine foreign and domestic inputs to create globally competitive final products.
Major exports from FTZs include motor vehicles, refined petroleum products and pharmaceuticals. Among the top auto exporters operating from FTZs are BMW Manufacturing Co. in South Carolina; Mercedes-Benz U.S. in Alabama; Toyota Motor in Indiana, Kentucky, and West Virginia; and Nissan North America in Tennessee and Mississippi. Top pharmaceutical exporters from FTZs include Bristol-Myers Squibb Co. in Indiana and Lilly del Caribe Inc. in Puerto Rico.
The FTZ program also contributes to more balanced U.S. trade in energy. Dozens of refineries along the Gulf Coast and elsewhere in the United States export refined petroleum products to global markets from the competitive platform of a foreign trade zone. Among the top exporters from FTZs in 2012 were refineries operated by Marathon Petroleum, Valero Refining, Chevron Corp., ExxonMobil, Citgo, Shell, and Phillips 66.
The Foreign-Trade Zones program is a powerful, non-partisan tool for promoting trade, investment, economic development and job creation in communities across America — without increased federal spending. President Obama could back up his promise of greater support for exporters by instructing his administration to encourage greater U.S. business participation in FTZs. Meanwhile, Congress should stop postponing action on a customs reauthorization bill and fully fund the Automated Commercial Environment to finally eliminate wasteful, outdated mid-20th-century red tape that prevents FTZ businesses from operating more profitably.
Daniel Griswold is president of the National Association of Foreign-Trade Zones in Washington, D.C. He can be reached at firstname.lastname@example.org. NAFTZ represents more than 680 companies, local authorities, and service providers involved in the FTZ program.