ITC Report Provides Some Support to NAFTZ Arguments

An International Trade Commission study of foreign-trade zones, and how U.S. policy supports or undermines their effectiveness, gave some support for the argument free trade zone advocates have made about using FTZs as a staging area for de minimis shipments, but suggested that complaints about treatment under USMCA were overblown.

The ITC wrote that fewer than 10% of firms producing in FTZs expect that, if goods produced inside FTZs were allowed to claim USMCA benefits, it "would result in any changes in their operations’ shipments, investment, or input sourcing," and that most firms aren't aware of the effects of the USMCA restrictions.

The president of the National Association of Foreign-Trade Zones, Jeff Tafel, said in an e-mail response to questions from International Trade Today that they do not believe that the report undermines NAFTZ's lobbying to allow goods made in FTZs to enter into U.S. commerce or be exported duty free under USMCA. "On the contrary, the report underscores the benefits and challenges faced by companies engaged in the U.S. FTZ program, particularly in the context of USMCA. It also illuminates the technical issues that are part of a broader initiative to achieve parity for U.S. FTZs," he wrote.

The ITC did write:"In certain sectors,such as the automotive industry, firms cannot use the U.S. FTZ program to reduce their duty costs to zero due to the non-free normal trade relation (NTR) rates of duty applicable to automotive inputs and finished goods. This may put U.S. producers at a competitive disadvantage relative to firms operating in Canada and Mexico due to free rates of duty applicable to most inputs (in the case of Canada) or to the particular features of the FTZ-type programs (in the case of Mexico)."

But it also cited a survey that showed small numbers of firms producing in FTZs said this was a big enough problem to either consider producing in Mexico or Canada instead, or to produce outside the FTZ. Only 6% said they believed employment would increase in the U.S. at their company if the rule changed. Also, only 10.4% said they'd pay less in tariffs if it changed. About 7% of respondents said Mexican firms have a cost advantage compared to them because of the limitation.

Almost 25% of respondents in the automotive sector say they produce the same goods in the U.S. both inside and outside FTZs.

Tafel said, "We do not believe the data in Table G.50 is damaging towards our efforts to enable U.S.-based manufacturers to benefit from USMCA’s Rules of Origin. The percentage of competitors that responded was small relative to the overall universe and we know from anecdotal evidence that companies are significantly adversely impacted by this provision. Most survey respondents indicated that they do not know or cannot evaluate the impact of that question/provision and for those that did, it is counterintuitive to believe that the absence of USMCA benefits would decrease an FTZ operator’s cost relative to those competitors listed."

The FTZs briefly benefited from the ability to export under USMCA benefits, until a technical correction was made to the USMCA implementing law.

The ITC argued that even without that language in the implementer "foreign-status inputs of goods produced in a U.S. FTZ would not be eligible for preferential treatment when goods produced with them are entered into U.S. customs territory for consumption or subsequent exportation to USMCA partner countries."

It's not clear why that would be, since the USMCA text says that FTZs are part of the U.S. territory for the purpose of the agreement.

The ITC report also talks about the limitations on drawback for FTZs under USMCA, and says that Canada and Mexico also limit drawback under the treaty.

The report said a looser substitution standard under the Trade Facilitation and Trade Enforcement Act has allowed car companies to substitute vehicles made in the U.S. for imported foreign-made vehicles.

"One automotive company noted that, as a result of changes to the substitution standard, its annual drawback refunds increased from $2 million before TFTEA to $20 million afterward. Another firm in the automotive sector reported that the TFTEA change has prompted its company to enter more of its FTZ shipments destined for export into U.S. customs territory so that it may qualify for drawback, rather than exporting these shipments directly from the zone," the report said.

Foreign Trade Zones help companies save money broadly, with respondents saying they saved about $730 million in 2021 on U.S. customs entries from using FTZs, and they saved $497 million in duties on exports from using FTZs.

Even with such large savings, the report said: "Although most firms producing in U.S. FTZs experience net cost savings through use of the program, fewer firms consider their FTZ use to be a factor causing increases in investment, output, or employment in the United States."

NAFTZ's Tafel said the ITC report "offers a wealth of data and research that will bolster our advocacy efforts in promoting the important role of the U.S. FTZ program in facilitating international trade."

The report also analyzed the question of whether FTZs are harmed by the practice of Mexican and Canadian warehouses taking bulk shipments from overseas, and then sending individual packages to U.S. customers under the de minimis threshold. Foreign-trade zones were stopped from doing the same in 2018 (see 1810050031).

The ITC wrote: "Despite the competitive disadvantage that FTZ warehousing and distribution operations face related to de minimis shipments, they also have built-in geographic advantages over facilities in Canada and Mexico for sales to certain parts of the U.S. market. U.S. FTZ warehousing and distribution operations are close to some of the largest ports and markets in North America. For regional markets that are far from border regions, U.S. FTZ warehousing and distribution operations do not face substantial competitive pressures from such operations in Canada or Mexico. For example, one grantee in the mid-Atlantic region stated that it was unaware of competition from warehouses and distribution operations in Canada or Mexico, because its focus was serving markets that were far from those countries."

Tafel said NAFTZ, in the Ship Safe Coalition, is lobbying "to correct the disadvantage U.S. companies face as a result of not being allowed to ship packages from U.S. FTZs under the de minimis provision. Pages 142 and 143 of the ITC report specifically highlight the competitive advantage Canadian and Mexican warehousing and distribution operations have based on the use of de minimis as compared to those companies operating within the United States. Providing that same benefit to U.S. FTZs would inarguably level the playing field if not more strongly incentivize companies to establish and/or retain their warehousing and distribution operations within the United States."