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Columbia Business Monthly

Foreign trade zones are important economic players in the Palmetto State

Apr 02, 2019 09:51AM
By Dan McCue

The statistics do not lie. South Carolina has done amazingly well using an 85-year-old federal initiative—the foreign trade zone—to foster widespread economic development.

Authorized by Congress in 1934 as a means of expediting and encouraging foreign commerce in the United States, a foreign trade zone is a designated, enclosed area into which foreign or domestic merchandise can be brought without being subject to customs duties or government excise taxes. Although the zones are overseen by the Foreign Trade Zones Board, comprised of the secretaries of Commerce and the Treasury, they are effectively islands of acreage outside the U.S. for customs purposes.

By law, merchandise can be stored, processed, or used in the manufacture of other products within the zone and only become subject to U.S. Customs duties when and if it enters the stream of domestic commerce.

Although initially thought of in relation to Atlantic, Pacific, and Gulf port cities, in the fall of 1972 the Foreign Trade Zones Board approved an application for an inland zone for the first time —an inland port  in Little Rock, Ark., setting the stage for the myriad of foreign trade zones that exist today. Texas alone has 31 foreign trade zones, Florida is home to 19, and California has 18.

“When you think about major transportation hubs, you’re often thinking about a foreign trade zone without even knowing it,” says Erik Autor, president of the National Association of Foreign Trade Zones. “Atlanta, for example, has a big foreign trade zone associated with its airport. Chicago is another good example. And the city of Miami is practically one big foreign trade zone.”

“San Antonio is an interesting example of both how a foreign trade zone comes into being and the benefits received by the surrounding community,” he says. “After the Air Force Base in San Antonio was decommissioned, the city decided it wanted to use the land as an enterprise zone.

“Eventually, they applied for foreign trade zone status, and it has been a significant distribution and manufacturing hub ever since,” Autor adds.

But among the states that have benefitted from the economic activity these zones generate, few have done better on a per capita basis than South Carolina, which has three: FTZ 21, based in Dorchester County; FTZ 38, based in Spartanburg County; and FTZ 127, based at the Columbia Metropolitan Airport

Most of the foreign trade zone activity in the state is concentrated in two of those zones, FTZ 38 and FTZ 21, and an astounding 93 percent of that activity is in vehicle assembly and vehicle parts.

A recent study by the Trade Partnership, a Washington, D.C.-based trade research firm, found that employment, wages, and value-added manufacturing activity all increased substantially in communities after foreign trade zones were established near them.

Additionally, the analysis of the 251 communities across the U.S. in which the zones operate found their presence helped ensure that jobs remain in the United States despite considerable economic pressures to relocate elsewhere.

The study mirrors positive findings reported in the U.S. Foreign Trade Zones Board’s annual report to Congress, which was released in December. As relates specifically to the Palmetto State, the Foreign Trade Zone Board found that South Carolina ranked fourth in the nation in merchandise received at its foreign trade zones in 2017, the last year for which final data is available. 

It was surpassed in that category only by Texas, Louisiana, and California. During the same period, South Carolina ranked No. 2 in exports from its FTZs, second only to Texas.

In terms of warehouse and distribution activity, the foreign trade zone in Spartanburg ranked No. 2 and the zone in Dorchester County No. 7 in terms of merchandise received, while the Dorchester zone was No. 1 in the country, beating out the likes of New York, Miami, and Los Angeles. Spartanburg ranked No. 11.

But even the much smaller Columbia foreign trade zone received upwards of $500 million in merchandise in 2017, shipping out an equal amount in goods to the domestic U.S. market.

Best of all, from a job creation perspective, the three zones employed a combined 31,750, the report says.

“The economic impacts of the U.S. FTZ program on communities in which FTZs are located are positive,” says Trade Partnership president Laura Baughman at the National Association of Foreign Trade Zones’ annual legislative summit in February. 

“Many companies have the option to operate inside or outside the United States,” she says. “They will make that decision based in part on the relative costs of doing business in the United States or abroad. To the extent the foreign trade zones program can provide positive financial reasons for a U.S. location, it should merit the support of U.S. policymakers.”

No doubt the centerpiece of all this is BMW, which broke ground on its first U.S. automobile factory in Greer in 1992. In its application for foreign trade zone status, BMW projected it would employ about 1,900 and produce up to 209,000 vehicles, which until then had been imported into the U.S. from Germany. Today, BMW directly employs more than 10,000 workers and annually produces approximately 400,000 vehicles. Over 70 percent of these are for export to 140 global markets, with China the largest foreign destination, followed by Germany. BMW’s suppliers and the businesses that have flourished around them employ another 36,285.

In March, the U.S. Commerce Department reported BMW is the largest vehicle exporter in the U.S. by value—a distinction it has achieved five straight years—accounting for $8.4 billion in exports in 2018. Whether it will hold that title for a sixth straight year is anybody’s guess. Due to the escalating trade war between the U.S. and China, BMW stopped exporting the popular X3 luxury compact it makes at the South Carolina plant to China, and instead has added production at plants in Rosslyn, South Africa and Shenyang, China, to serve that market.

“Higher prices, higher taxes, higher tariffs ... will put some pressure on,” BMW of North America CEO Bernhard Kuhnt said in November at the Los Angeles Auto Show. “That is absolutely clear.”

As vehicles become more expensive because of tariffs, it “will have an effect on the customer behavior,” he says.

Beyond the macro-issues are a number of systemic “quirks” and missed opportunities on the trade policy front further complicating life for foreign trade zones and those that use them.

One program that is “really fairly severe,” Autor says, involves how zone occupants declare the country of origin for foreign source material used in a product bound for consumers in the U.S. By law, manufacturers who have set up operations in a foreign trade zone must report the source and amount of foreign-made content that is incorporated into their finished product. The information is then fed into a computer and an algorithm determines the “country of origin,” establishing the level of duties that must be paid. This is where things can get dicey.

“What’s happening is that the algorithm is making certain, high-value items ... appear to be imports and subject to higher duties, when in fact they are not,” Autor says.

How bad a hit a manufacturer takes on duties as a result of the classification depends on whether the widget, now a “Chinese import,” happens to be on the Section 301 list of retaliatory tariffs.

Section 301 of the U.S. Trade Act of 1974 authorizes the president to take all appropriate action, including retaliation, to obtain the removal of any act, policy, or practice of a foreign government that violates an international trade agreement or burdens or otherwise restricts U.S. commerce.

If the widget is included on the Section 301 list, a 25 percent duty will be assessed on all foreign content used to create it, including the remaining 5 percent of that content from Europe and Mexico.

“That’s not the way the system is intended to work. It’s contrary to law. And despite the fact we’ve complained about it to the U.S. Trade Representative, the administration has been loath to fix it, for whatever reason,” Autor says.

That’s left the association in the position of having to go to Congress for a legislative solution.

But even that approach is fraught with uncertainty, Autor says.

“The first question you have to ask is, ‘What is the most logical legislative vehicle for addressing this situation?’” he says. 

“From our perspective, that vehicle would most likely be the bill implementing the new United States Mexico Canada Agreement (USMCA) on trade. However, given the current partisanship in Congress, there’s a real question as to when and how the legislation is likely to move,” Autor says.