From Ikea couches to BMWs, goods landing in the zones

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The year was 1934, in the middle of the Great Depression. Franklin Roosevelt was in his first term as president. A few years earlier, tariffs on imports had been raised to record levels on some 20,000 types of goods.

To counter some of the effects of the new tariffs and help U.S. businesses compete better in global markets, the Foreign-Trade Zones Act was born.

Today, roughly 2,400 businesses nationwide use the program to help lower the cost of business.

"U.S. businesses need to import material from around the world -- raw materials, parts ... machinery to install in factories," said Dan Griswold, president of the National Association of Foreign-Trade Zones in Washington, D.C. "If they face high tariffs, that drives up their costs and makes their goods less competitive in global markets."

Businesses located in areas that are designated as foreign trade zones -- there are roughly 250 nationwide and some 450 subzones -- can import goods from around the world, create products and resell them in markets outside the United States without having to pay import fees.

If the goods are sold domestically, import fees are due at that time but often at a much lower rate.

That's because U.S. tariffs on parts and materials often are higher than duties on the finished products, something known as an inverted tariff.

Take automobiles, for example. The U.S. tariff on imported cars is 2.5 percent. But the tariff on the components used to make cars can be as high as 30 percent.

At the BMW automobile plant in Spartanburg County, S.C., a major user of the trade zone program, the company can import parts duty-free. If the assembled cars are exported, no import fees are due.

If the cars are sold in the U.S. market, the company pays 2.5 percent, which is much lower than the fees on the imported components would have been.

"The beauty of the program is it puts producers on U.S. soil and their workers on equal footing with their foreign competitors when it comes to paying duties," Mr. Griswold said.

The program also allows wholesalers and retailers to save money by letting them defer import fees on goods while the items are being warehoused.

"Let's say you import $1 million worth of goods into a zone but don't ship them to stores for three months," Mr. Griswold said. "Instead of paying duties upfront, you don't pay until the products are shipped."

Retailers Crate & Barrel and Ikea, which both import large volumes of merchandise for sale in the United States, operate several distribution centers in foreign trade zones across the country.

Another important benefit of the program allows companies in foreign trade zones to import machinery -- such as a lathe, stamping machine or robotic equipment -- tariff-free.

The machinery "never enters U.S. commerce. It gets bolted to the factory floor, so you never pay a duty on it," Mr. Griswold said.

Overall, some $534 billion worth of goods entered foreign trade zones in the latest fiscal year. The bulk of that activity was in subzones.

Subzone status is awarded to individual companies, typically a manufacturer or processor, which allows the business to take advantage of foreign trade zone benefits without having to physically relocate within a general purpose zone.

The BMW plant in South Carolina is designated a subzone.

Recently, new regulations were put in place to allow small and medium-sized businesses to operate under the program in so-called mini-subzones.

Companies in the foreign trade zone program must fence in certain areas of their facilities so that goods coming in and out can be monitored. They must keep electronic records and are subject to periodic inspections by U.S. customs inspectors.

Locally, foreign trade zone No. 33 covers southwestern Pennsylvania. The zone encompasses 17 sites where businesses can operate under the program, including Pittsburgh International Airport, RIDC Park West and a number of industrial and business parks. (See map.)

Altogether, $263.3 million in goods entered the local foreign trade zone in the latest fiscal year.

Two subzones also are in the region, but both are inactive.

The Regional Industrial Development Corp. of Southwestern Pennsylvania has been administering the foreign trade zone program in this region since 1977, when the agency and the zones program helped bring the now-defunct Volkswagen plant to Westmoreland County.

Today, one of the biggest companies operating in a local foreign trade zone is a Russian-owned titanium distributor, VSMPO-Tirus in the Leetsdale Industrial Park, said Tim White, assistant vice president of development at RIDC.

The RIDC can help companies make an initial assessment of how they might benefit from being in a foreign trade zone, Mr. White said.

In general, businesses should gain at least $100,000 in duty savings per year for a subzone to be worth the company's effort, because of extra security and other operating costs associated with the program, according to the Foreign-Trade Zones Board, which oversees the program and approves zone applications as part of the U.S. commerce and treasury departments.

Although foreign trade zones enjoy broad bipartisan support on Capitol Hill, the program isn't without its detractors.

Domestic suppliers that want to restrict imports sometimes oppose zone applications and have won some restrictions.

In 2010, for example, the Foreign-Trade Zones Board approved new subzones for the tariff-free import of silicon metal for Dow Corning in Kentucky and REC Silicon in Washington state but did not exempt them from antidumping duties after domestic silicon metal producers objected.

Because of the program, "It's possible a domestic supplier is losing a sale," Mr. Griswold acknowledged.

"But in the long run, if production moves abroad, they won't have the sale anyway, and we won't have the production on U.S. soil."

Patricia Sabatini: or 412-263-3066.


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