THE FOREIGN-TRADE ZONES ACT
KEEPING UP WITH THE CHANGING TIMES
Remarks for the NAFTZ 25th Annual
Seminar/Conference & Exposition
Tampa, Florida
October 21, 1997
Published (Edited Version)
in Business America
December 1997
John J. Da Ponte, Jr.
Executive Secretary
Foreign-Trade Zones Board
As the twentieth century draws to a close, our laws and
institutions alike are challenged to enter the new millennium
with resilience and without missing a beat. The hectic pace of
the world economy offers little time for pause or idle
speculation as to what the future holds in store.
Especially sensitive to the turbulent economic tempo of our
times are our trade laws, one of which is the Foreign-Trade
Zones(FTZ)Act. As the legislative backbone of the FTZ program,
this 63-year old statute has adapted quite well to the shocks
that have beset the global marketplace over the past quarter-
century. A glimpse into its past is helpful to understanding how
the law achieved its present state of fitness, as well as
instructive in terms of the future effort that will be needed to
keep it in tune with the times.
A LAW NOT TOO LATELY KNOWN
Enacted in 1934 -- after a long spell as a legislative
proposal -- the FTZ Act (19 U.S.C. 18) added to our Customs
system a new alternative procedure borrowed from the historic
free port paradigm to help businesses in the Customs phase of
their operations. Initially, though, the new law received only
limited attention. As of 1970, fewer than ten communities had
applied for and received FTZ authority.
The law's prospects changed for the better, however, in the
highly-charged economic climate of the 1970's. As international
trade with a more complex trade mix escalated, demand grew for
the type of special Customs procedures it made available, as well
as for reasonable access to them. By the mid-1980's, the number
of approved zone projects had multiplied tenfold.
Thus, in its fourth decade the FTZ Act at last found itself
beginning to fulfill its purpose -- a late blooming nurtured by
the energizing forces reshaping the world economy. Paradoxically,
it was the age-old free port concept embodied in the law that
helped project the law's central purpose. That is, once the
adaptability of the concept was recognized.
FREE PORTS AND THEIR FREE ZONE PROGENY
The role of free ports in promoting world trade is
legendary. The historic cities that began using this strategy
were mindful of the negative economic consequences of excessive
tax impositions on trade, and the importance of a cost effective
business environment. Today, one can find this guiding principle
still at work as part of the special provisions of Customs
systems and economic development programs throughout the world.
Modern editions of the free port range from the export
processing zones of developing economies to various types
of free zones and flexible entry procedures in most other trading
countries. The defining characteristic they have in common stems
from special Customs treatment that permits duty-free exports and
deferred duty/excise tax payments, often in combination with
other kinds of investment incentives.
As the U.S. variant, the foreign-trade zone was crafted in a
legislative format that has proved to be particularly resilient.
The special procedures sketched out by Congress allow businesses
to defer formal Customs entry on foreign items, subject to their
being reported to Customs and remaining within designated FTZ
sites. Exports emerge free of tariffs and certain excise taxes,
and goods sold in the domestic market are subject to entry
impositions at that time. Activity under FTZ procedures can range
from warehousing to manufacturing, with entries in the latter
case made either on the components or the finished product.
Though this procedural framework was inspired by the
historic free port archetype, the U.S. version of the free zone
was viewed not as a restatement of the classic form, but rather
as a variation of it -- a sort of new world opus.
AUTHORIZING ZONES VS. REGULATING ZONE ACTIVITY
For one thing, Congress provided a greater opportunity for
wider local community participation than does the historic norm.
Every U.S. Customs port of entry area -- there are over 300 --
became eligible to apply for an FTZ license. It also prescribed
an approval standard for general-purpose(multi-user)zones that is
rather liberal. Applicants are "entitled" to a grant of authority
upon presenting workable plans in applications that also show
their ability to carry out their projects in a public service
context. Upon satisfaction of these basic requirements, the FTZ
Board is expected to pass the baton.
On the other hand, the authorization of activity in zones
was subjected to a stricter standard. The Board was delegated
broad discretionary authority that included responsibility for
adopting rules for reviewing and regulating manufacturing to
ensure that activity conducted under FTZ procedures would be in
the public interest. Customs law enforcement was assigned to the
Treasury Department and the Customs Service. As proposals
involving manufacturing increased, the public interest assessment
of this activity became the Board's main task.
TRADE HORIZON SPREADS INLAND
With geo-economic shockwaves reaching the heartland and
global commerce expanding beyond coastal areas, the vista for
foreign-trade zones widened during the 1970's. Inland trade
centers began taking on port characteristics as modernized
intermodal transportation systems eased the flow of foreign
trade. The latent FTZ law soon gained the attention of local
public officials in these communities and became a common
component of their economic efforts.
These developments gradually broadened the field of
operations for FTZ activity to such a degree that during the
l980's the number of FTZ projects at inland port areas increased
to over 50 percent of the total.
ZONENESS REDESIGNED AND REDEFINED
With the program in ascent, it came time to review practices
adopted during its less active early years. It became apparent,
for example, that the configuration of the early zones was in
need of reexamination. Despite the intent that the U.S. free zone
model should be customized to suit the U.S. economy, the design
that was holding sway emulated too closely the old free port
format. Influenced by the free zones that were then operating
within the former free port cities of Europe, the typical layout
of an early U.S. zone consisted of an isolated enclave, skirted
with a high chain-link fence.
A practice also had evolved that restricted the use of
approved zone space to FTZ activity. Because zone sponsors were
reluctant under these circumstances to commit facilities before
they had users under contract, the size of individual zone sites
tended to be minimized, handicapping marketing efforts. Time-
consuming applications were required for every new prospect
needing a significant amount of space.
All of this meant that the few early U.S. zones had to make
do in a constrained setting with burdensome operating costs.
Recognizing that this was a hindrance to the FTZ program's
potential, the Board took a closer look at the Act and found the
latitude it needed to contemporize the FTZ program.
Soon more expansive zone plans were accepted so that
communities could tailor their projects to address local business
needs. Form was now to take more notice of function, unfettered
by outmoded historic strictures. At the same time, the control
element inherent to FTZ operations was not to be ignored.
CUSTOMS CONTROL CONSIDERATIONS
Staying within acceptable parameters that did not compromise
Customs security concerns presented no large problem. In fact,
the Customs Service was developing new approaches to Customs law
enforcement that seemed perfectly suited for FTZ use.
After consultations with Customs, the FTZ Board issued a
general order in 1975 asking that agency to use its most current
and efficient systems in supervising zones. With new technology
now making it possible to segregate and account for shipments
electronically, the enclave and chain-link fence model was no
longer a valid security standard.
These changes permitted the integration of zone sites into
larger facilities with related but broader purposes, such as
industrial parks. Individual projects could now include a greater
number of sites, and each site more space. Eventually, port
agencies were able to request zone status for most of the
potentially usable space within their port complexes.
ACTIVATION PROCEDURES
As a corollary to greater openness in design, new practices
made it possible for an FTZ project to have approved zone space
available on a standby basis. Unless and until "activated" under
separate Customs procedures, zone space could now be used for
nonzone activity. Activity not conducted under FTZ procedures
simply remained subject to normal Customs rules.
The FTZ Board also adopted abridged administrative
procedures so that grantees could more readily revise and update
their zone layout plans. The main function left for the Board in
the activation process was the review of proposed manufacturing.
With the new format and procedures, business access to zones
greatly improved, making it possible for the FTZ program to
become a more effective component of state/local economic
development programs. FTZ status could now be combined with
economic programs such as enterprise zones to highlight their
international potential. As more local public agencies became
zone sponsors, they became direct participants in the approval
process because of the preliminary local public interest
assessment they conducted before submitting applications.
SUBZONES AS PRIVATE ADJUNCTS
Another initiative that helped invigorate the FTZ statute
was the introduction of the "subzone" as an offshoot of the basic
general-purpose zone format. Introduced by the FTZ Board in 1952
as an interpretative amendment to its regulations, this
litigation-tested extension of the law's core concept allows
privately-owned manufacturing plants to operate as adjuncts to
general-purpose sites.
While subzone status became an important means of extending
the FTZ opportunity to manufacturers, only a handful of
applications were submitted at the outset. But, this changed
during the 1980's when the number rose steeply. With subzones and
manufacturing on the increase, the Board amplified the public
interest standard, scrutinizing such activity more intensely in
terms of its net economic effect and consistency with trade
policy. Authority was denied or restricted when negative economic
consequences were indicated. By the 1990's, manufacturing plants
with FTZ subzone status had begun to account for over 75 percent
of overall FTZ shipments by value.
CONGRESSIONAL OVERSIGHT -- REVISED REGULATIONS
The fast-paced FTZ program growth of the 1980's led to
studies by the ITC and GAO, and eventually to Congressional
oversight hearings in 1989. Out of this public scrutiny came a
reaffirmation of the FTZ program, and with it the expectation
that manufacturing activity would remain subject to a thorough
review process.
Receiving Congressional encouragement to proceed with
rulemaking on draft revisions to its regulations, the FTZ Board
grasped this long-awaited opportunity to codify practices and
interpretations that had been developed on a case-by-case basis
since the start of the program's growth spurt.
The new regulations went into effect in November 1991. They
were -- and still are -- generally viewed as providing a balanced
procedural framework for a sound participatory decision process
suitable for addressing current issues.
TIME PRESENT
The role of the FTZ Act in our economy continues to be
important both for reasons of business demand and public policy.
More than ever, the FTZ program is engaged as part of the
government's total efforts to maintain a level playing field for
international trade. With refined versions of free port
procedures widely available in other countries, our domestic
program continues to be needed as a counterbalance.
In assessing business demand, it is useful to first note
that the expansion of the FTZ program has made the supply of zone
services available throughout the country. Wherever demand arises
it should today find a reasonably accessible service provider.
The level of demand for FTZ procedures has followed the
overall growth trend for global trade and investment. Presently,
some 150 FTZ projects are in operation and, as part of their
activity, over 180 manufacturing plants are operating with
subzone status (of the 90 applications currently pending with the
FTZ Board, 50 are for subzone status). Warehousing and
manufacturing activity combined account for incoming zone
shipments of some $165 billion annually, and over 2,800 firms
employing over 315,000 persons are now using FTZ procedures.
These numbers represent the sum of a pattern of growth that
stretches over the past 25 years, averaging 15 percent each year.
Statistically, the growth of international trade itself --
now some 25 percent of our GDP poses the prospect for new
activity. The continuing high rate of export growth -- twice that
of the GDP should also affect potential demand. Additionally,
the use of FTZ procedures to offset the unintended negative
effects of inverted tariffs appears to be extending to a wider
range of industries, given the fact that tariff rate reductions
often apply to finished products but not to all their component
parts.
There are, as well, indications of a greater use of FTZ
procedures by the logistics sector, itself undergoing intensive
change. Technologically driven improvements in logistics
management are increasing production and distribution efficiency,
with optimal time scheduling along the production/distribution
chain a key factor. Whatever the efforts to create a borderless
global economy, the Customs border clearance phase of the
logistics process remains an enduring reality. Because of the
jurisdiction Customs retains over zone shipments, FTZ procedures
offer a means of facilitating the border process.
On the whole, as trade negotiations further affect tariff
rates in ways that can lessen demand as well as create new
aspects of it, all who are involved in the FTZ program must stay
informed and alert to change. Too, the reach of the FTZ program
must be viewed in terms of all forms of international trade
impositions, not just conventional tariffs.
TIME FUTURE
The odyssey of the FTZ Act through the economic tempests of
the time-warped second half of the twentieth century has been a
maturing experience. At first considered outdated because of its
weak early impact, the law turned out to contain an enduring
concept that found renewal in the new world economy. It has
indeed demonstrated the stamina needed to navigate the economic
rapids that surge from recent past into foreseeable future.
Looking to the future, thanks to the unique nationwide
network the law has made possible, the FTZ program -- at full
tilt -- should be able to move seamlessly past the daunting
datelines that lie ahead. Whether it succeeds in continuing to
adapt to change and meet new challenges will depend upon how
innovatively the local, state and federal agencies involved in
its administration carry out their intersecting roles. Just as
important is how effectively they work as partners with the
business sector to achieve a goal we all share: helping improve
the international competitiveness of businesses located in the
United States.
J. DaPonte
10-29-97