FOREIGN TRADE ZONE FAQs 

The Western New York Foreign Trade Zone has been servicing Ontario and the
Western New York Region for almost forty years.

Frequently Asked Questions

Why do firms use foreign-trade zones?

To maintain the cost competitiveness of their U.S.based operations vis-a-vis their foreign-based competitors. For a firm, 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.

Why do communities organize trade zones?

A local trade zone contributes to an area's commercial attractiveness as a place to do business. By using local business initiatives and existing facilities, organizing a zone can be a relatively inexpensive feature of an area's overall economic development efforts. A well-organized zone will provide immediate service to the area's current business base as well as aiding in the attraction of new business to the area.

How does the zones program fit within the economic development efforts of the various states?

The trade zone program is a true federal program; the underlying authority to approve the creation of a zone resides with the Federal Government. Composing the general character of individual zones is a responsibility delegated to the states, which they fulfill by enactment of enabling legislation. The initiation and use of individual zone protects usually results from some combination of state and local community interest generated by both the private and public sectors. The Foreign-Trade Zone Boards' staff advises zone organizers to integrate their zone project within their state's or local area's overall economic development strategy rather than segmenting their zone as an individual development effort. Overall, zones tend to be incorporated in their areas' efforts to maintain their attractiveness as a business location and/or as an element in state and local development efforts.

Is zone status more beneficial for a foreign-owned U.S.-based firm (or operation) than a "traditional" U.S. firm?

No. The benefit of zone use is determined by the firm's operations, not its ownership; if a U.S. and a foreign owned firm have identical trade operations, the potential benefit of zone status for each of them will be identical. To the extent to which zones treat ownership differently, the difference is that zones encourage U.S. firms to stay in or return to the United States and encourages foreign firms to come to the United States. Currently, over 90% of FTZ users are U.S. based firms.

Do the cost reduction features of zone status translate into an import subsidy or a cause of imports?

No. Zones do not cause imports. The reverse is true--the increasing importance of international trade in the U.S. economy, imports and exports, has caused an increase in the use of zones. The International Trade Commission and the General Accounting Office examined the zones program in 1983-1988; Congress held two hearings on F1-Zs in 1989; none of the examinations produced any information for concluding that zones cause imports. The decision to import precedes the decision to use zones.

The import decision is usually motivated by one or a combination of factors: price, quality, and product availability. The "cost reduction feature" of zones relates to the cost of conducting business operations in the United States (distribution, manufacturing, and other non-manufacturing activities) that otherwise will be avoided by conducting these operations at a foreign site. In some respects a suggestion that zones cause imports is equivalent to the suggestion that imports are caused by the trucks, ships, and planes that transport these products to the United States.

Do zones provide a vehicle for evading U.S. trade laws and regulations (including tariffs and quotas)?

No. Once a foreign product leaves a zone and enters U.S. commerce, the product is subject to the same legal compliance as a product entering the U.S. commerce after being unloaded from a truck, ship or airplane. To insure this legal compliance is maintained, all zones operate under direct accountability to the U.S. Customs Service and all uses of zones are subject to a public interest review by the Foreign-Trade Zones Board.

Is the zones program part of the solution or part of the problem for the United States' large balance of payments deficit?

The zones program is part of its solution; the nature of zone status and the use to which it is put, provides clear reason to suggest this deficit would be larger than it is, but for the zones program. All current non-manufacturing zone economic activity could be done in a nearby foreign location and be treated by U.S. trade law as if it were done in a zone. By conducting this activity in a U.S. zone, the benefit of it is captured in the United States, and the service income flow that would otherwise be added to the U.S. payments deficit is eliminated. All zones-based manufacturing activity is engaged in foreign competition, and zone status improves this activity's international competitive position. Every car, truck, typewriters, consumer appliance etc. manufactured in a U.S. zone is produced to compete against (displace) foreign competition in the U.S. market or for export. This zone-based import displacement and export production are positive contributions to the United States balance of payments position. The ratio of foreign merchandise received in zones to exports from zones has declined in the last twenty, (20) years from 8:1 to 2:1 while the U.S. balance of trade deficit has increased.

Where does the zones program fit within overall U.S. international economic policy?

Since World War II, overall U.S. economic policy has been characterized by the principle that maximization of economic growth at home and abroad can only be achieved by the operation of market forces. As an extension of this policy, the foreign-trade zone program provides an opportunity for U.S. based firms (operations) to maintain their responsiveness to the competitive forces directing the course of the market(s) in which they compete. By eliminating/diminishing the unintended costs or obstacles associated with U.S. trade laws, zones provide an opportunity to maintain, expand, and create new economic growth in the U.S.

How do zones "expedite and encourage" foreign direct investment in the United States?

The United States welcomes foreign investment but does nothing to overtly attract, discourage, or direct it. Through this policy of "National Treatment," foreign investors are offered the same conditions, rights, and benefits for and from investing in the United States as a U.S. investor can expect to receive.
In keeping with this policy, zones encourage foreign investment by equalizing a tariff bias that unintentionally discourages investment in the U.S. and encourages supplying the U.S. market from off-shore.

Do zones undermine the Tariff Code or the Congressional intent embodied in it?

No to both questions. Virtually all of the non-manufacturing related trade that passes through trade zones goes to export markets, or enters U.S. commerce at the same tariff rate that would have been assessed had the trade entered U.S. commerce directly after its arrival. With respect to manufacturing activity, zones provide for releasing some of the Code's unintended adverse effects; by providing this opportunity, zones help make the Code more economically efficient. Congress has never intended for the Code to encourage the importation of a product by discouraging the production of the same product here in the United States.
Unintentionally, there are instances in which the Tariff Code has irrationally encouraged U.S. firms to import rather than produce in the U.S. Zones create an opportunity to reverse these instances, restoring the intent with which Congress expected the Code to operate.

Are there any practical or economic limits to the number and uses of zones?

For the foreseeable future, there are no economic limits for the use of zones. As the U.S. economy becomes even more internationalized than it is today, and as markets become more globally homogenous, the operational flexibility and other benefits for which zones are used will motivate commensurate increase in zone use. As a practical matter the limits on the number of zones are a function of the number of U.S. Customs Ports of entry and the individual communities adjacent to them.

Does it make sense to allow a company to use zone status when this use will diminish the effect of some import relief (e.g., quotas, higher tariffs, etc.) provided to an industry?

In some cases it makes sense to do so. Such a case of adverse effect can occur when, as a result of some relief, the potential zone user loses its export competitiveness and/or the ability to compete with (displace) imports in the U.S. market. Zones create an opportunity for distinguishing and selective diminishing the adverse effects created by the import relief granted.

Does the employment generated by zone operations represent new jobs, or employment displacement?

There are a large number of jobs attributable to zone based operations that represent new jobs created by companies both regaining and increasing U.S. market shares or competing in export markets more effectively. On a national level, the majority of employment directly attributable to zone operations is job retention. On a level in some instances this retention has been criticized as relocation or displacement; with the general availability of zone status throughout the United States no community has lost a plant or job due to a relocation that was motivated just by obtaining zone status.

Would the termination of the zones program cause a transfer of economic activity from the United States to foreign locations?

Yes. The termination of the cost reduction features and the operational flexibility provided by the zones program would trigger a transfer of manufacturing activity to foreign locations. This transfer would become evident in stages. In the first stage, the termination would diminish the ability of current zone-based manufacturers (U.S. and foreign firms/operations) to maintain their competitive position in the United States and foreign markets; this diminished position would transfer to the benefit of foreign-located producers with a commensurate increase in their (foreign) activities. In the second stage, firms (U.S. and foreign) that decided or are deciding on the United States was opposed to some foreign location) as a site for new investment (including reinvestment), with the zones program as a favorable factor in this decision, would have to reevaluate or reverse their consideration of the United States. For a variety of reasons, firms abandon existing plants reluctantly. Ultimately in the third stage firms will be induced to phase down their U.S. zone-based operations and look to foreign locations as sites for serving their U.S. and foreign markets.

The zones program is not a series of loopholes. It is based on deliberate actions by Congress in the Foreign Trade Zones Act of 1934 and an amendment added to the Act (the Boggs Amendment of 1950) to permit manufacturing activity in zones. Unlike a tax shelter where a transaction is constructed for no economic reason other than to diminish taxable income, tariffs are not subject to some of corresponding offset. Zones provide an opportunity to reduce certain operating costs associated with a U.S. location in the course of making economic value, i.e. making the U.S. a more profitable location for doing business.

Is the zones program harmful or helpful to producers of intermediate stage products (parts suppliers)?

In general the program's effect on these producers ranges from neutral to helpful. The financial value of lone status for most zone-based manufacturers is generated by the Tariff Code. Most intermediate stage products (parts) have tariff rates equal to or lower than the rates assigned to products in which they are incorporated. In these rational tariff situations, the zone is not needed to correct a tariff bias since none exists, and there is no effect on intermediate stage products. To the extent that zone status is helpful in making the producer of the product into which the parts have been incorporated more competitive, the benefit would normally through the upstream supplier as it will continue to have a market for its parts. For a short period of time, when un-competitive pricing and/or a quality differential is added to an international tariff situation (i.e. where the tariff rate assigned to an intermediate stage product (part) is higher than the rate assigned to the product in which it is assembled), the zone effect can be temporarily adverse, i.e. a temporary loss of sales to foreign competition. At the same time, zones status helps the zone-based consuming firm or industry remain in business in the United States and is a potential customer for the adversely affected firm or industry when this firm or industry returns to price and quality competitiveness.

How are the Generalized System of Preferences (GSP) and Harmonized Tariff Schedule of the U.S. (HTSUS) programs different from the zones program?

The zones program and these other programs provide alternatives to the general tariff treatment of imports. They are distinguishable by the purpose for which they were created in that zones cover a wide range of activity, while these others are comparatively restrictive.
The zones program is directed at diminishing the cost of conducting economic activity in the United States that can otherwise be done offshore.

GSP is a unilateral tariff concession the U.S. vides less-developed countries to contribute to economic development. HTSUS represent recognition that U.S. merchandise should not have a tariff assessed on it, when in the course of a product's production cycle the product leaves and returns to the United States.