Taking Foreign-Trade Zones to the Next Level

Taking Foreign-Trade Zones to the Next Level

Adapting a policy tool from the Great Depression to modern times might not – at first blush – seem a great idea.  However, changes in foreign direct investment (FDI) and foreign trade may have set the stage for exactly this kind of idea.

The US Foreign-Trade Zone (FTZ) program began with the passing of the 1934 Foreign-Trade Zones Act.  The act itself was designed to mitigate the negative effects of the protectionist policies of the era and to encourage US exports. The restrictive Smoot-Hawley Tariffs Act of 1930 – a protectionist measure implemented in response to the Great Depression of 1929 – caused the cost of US companies’ foreign trade operations to rise due to higher US tariffs imposed on imported goods. The establishment of FTZs allowed imported goods (within these zones) to be exempt from certain customs entry procedures, duties, and ad-valorem taxes, thus deferring or even eliminating duties.

The FTZ program continues to this day, and has been enhanced several times to respond to the changing needs of the global economy.  However, despite the customs advantages, viewing FTZs purely as duty savings programs is limiting, and ignores the potential of FTZs as a tool for robust economic development.

FTZs can be used as a tool for economic development in two ways: They can be used to attract Foreign Direct Investment (FDI), and they can also be used to promote domestic investment. Both foreign and domestic investors may use FTZs to tap into global value chains while continuing to make use of the strong competitive environment of the US. A strong FTZ eliminates what might otherwise be a need to move or expand operations overseas. Either type of investment can benefit local communities by creating more jobs, developing a network of local suppliers, and attracting more capital to the area.

However, statutory FTZ incentives through the federal program are equal across the country; that is, apart from individual FTZ fee schedules determined by the grantee, the incentives realizing customs savings will be the same in Florida as in California. Other location attributes become the deciding factor for users of FTZs in such an equal-level playing field. Most domestic companies will opt for a “Usage-Driven” site designation to avoid the cost of moving in order to reap the benefits of the FTZ status. Foreign companies will seek the most strategic location, leaving many FTZs out of consideration. On top of that, numerous FTZs are not even promoted, resulting in low utilization.

FTZ grantees have a huge opportunity to start getting creative in distinguishing their unique value proposition(s). An FTZ should not be regarded by communities as only certification to be hung on the wall or checked off in a brochure.  Instead, these can be one very bright star in a constellation of tools and assets for economic development. In order to do this, communities and FTZ grantees together need to coordinate real strategies for maximizing their FTZ’s potential. How can this be done?

Grantees should ensure their FTZ is integrated into – and aligned with – local economic strategies in the first place. This guarantees that FTZs are key ingredients of the local value proposition and are relevant in the local economic context. This requires analysis of the local industry base and supply chain to target companies, both at home and elsewhere, for FTZ use. It of course also means educating companies about the benefits of FTZs.

FTZ grantees should also partner with their local and regional economic development organization (EDO) in order to provide soft incentives that accompany the statutory benefits of the FTZ. Soft incentives revolve around the provision of services which streamline and simplify administrative procedures, enhancing the ease (and speed) of doing businesses. It means substantial facilitation to remove the burden of the application and activation process from companies. Finally, it means connecting an EDO’s expertise in leveraging local and state tools to the fiscal benefits of the FTZ program, bringing a community’s full arsenal to bear. Let’s take FTZs to the next level.

ICA supports FTZs as well as EDOs with designing and implementing soft incentives and incorporating FTZs as tool for economic growth in economic development plans and strategies. We use our global experience and best practices in combination with our knowledge of corporate site selection to help FTZ grantees, EDOs and policy-makers better understand current and future business needs when (re)developing FTZs. We make FTZs responsible for sustainable economic growth in an accountable and prudent manner.

For more information on ICA’s FTZ-related services, please visit the FTZ section on our website.

 

Mr. Laurens van der Schoor                                                      Mr. Collin Perciballi

Incentives & Free Zones Advisor                                            Economic Development Advisor

Investment Consulting Associates                                          Investment Consulting Associates

E: laurens@ic-associates.com                                                 E: collin@ic-associates.com