In 1934, the US Congress passed the Foreign Trade Zone Act to allow companies to bring in and store merchandise without tariffs as long as these goods were not meant for domestic consumption. Almost 300 of these Foreign Trade Zones [FTZs] are present in the United States. The United States Customs and Border Protection website provides more information here. Companies faced with the 25 percent tariffs on top of regular duties are channeling funds in legal know-how in order to adapt to the Government’s new trade policy, policy designed to change China’s own commercial and business practices, albeit with no success.
The Trump administration, via its use of tariffs, has tried to accomplish different objectives, one of them being the revitalization of US manufacturing. The effort will take time, years possibly. For countries without tradition in manufacturing, it can take decades. The US can grow this sector both in volume and quality via free trade or protectionism. I’ll explain the former path at the end of the article. But now let’s talk about protectionism. Like I stressed on previous occasions, tariffs alone won’t cut it. They have to be part of a nation-wide reindustrialization plan; this means big state contracts for infrastructure creation using domestic resources [materials, equipment, and labor] and skill development programs. In lack of this comprehensive national scheme, the economic drag from the tariffs is felt in net terms and for a longer time period. The case of FEDCO’s new pump model illustrates this perfectly. When they switched product suppliers from Chinese foundries to American ones, the [more expensive] parts arrived late and sprung leaks when put to use. Months later, FEDCO swallowed the tariffs and switched back to importing Chinese parts, which were of better quality. In an effort to keep costs down instead of raising prices and risk losing market share to bigger manufacturers, FEDCO found the FTZ legal loophole from 1934. Without it, the company was contemplating relocation to China.
FTZs [Free Trade Zones] are generally regarded as a location where corporations build plants to take advantage of tax breaks and low wages. They can exist pretty much anywhere in the world if these corporations apply for a permit and receive it. The US 1934 law was amended in the ’50s to open up FTZs to manufacturing, and again in the ’80s to ensure that duties would not be assessed on domestic value added, provided the finished product was then sold in the United States. This last amendment finally made the zone designation useful for companies like automakers, and they quickly began outsourcing parts production to compete with lower priced Japanese imports. With the signing of NAFTA and China becoming part of the WTO, import duties were slashed and manufacturing was encouraged to happen overseas. With container shipment and computerized inventory systems, FTZs remained useful in mitigating any remaining drag. Before the change in trade stance, according to a 2017 report from the Commerce Department’s FTZs Board, 669 billion dollars worth of foreign and domestic material entered into zones and 87 billion was exported from them. About 3,200 companies operate in FTZs. The biggest group is oil and petrochemical corporations [they import crude oil and refine it into duty-free petrochemicals], export-focused automakers second, pharmaceutical companies third.
After Trump’s tariffs, companies with the money and legal know-how sought exemptions, routed imports through other countries, or made small product changes that moved them into a tariff-exempt category. Unlike the original program in ’34, the FTZ is now easy to use. A firm can be anywhere and qualify as a foreign trade zone. In 2012, changes were made to reduce application processing time [from 1 year to around four months]. Companies still have to pay tariffs on components sold domestically, but if the finished product has a different tariff rate than the components, companies can pay whichever is lower. They’re able to better manage their cash by paying only at the point of sale rather than as soon as the good arrives in the USA. Applications for FTZ status have surged. During last year, Stihl, Whirlpool, and Lasko stood out among the new applicants. Companies are reluctant to comment on their ability to avoid tariffs [at least publicly]; they fear being criticized for making use of loopholes. Even with a potential deal struck between Washington and Beijing, some companies will still keep with the program [as a backup in case negotiations go stale again].
In order to revive manufacturing without using tariffs, the Trump administration can approve Federal Government dollar loans to partner nations in bilateral trade agreements – with the obligation for the debtor countries to only use the loans to purchase output manufactured in the USA [goods they need and desire]. The loan would appear on the asset side of the Federal Government’s balance sheet, so it wouldn’t add to the fiscal deficit or the national debt, bypassing the political quagmire of the [arbitrarily self-imposed constraint] debt ceiling. This simple, but effective scheme was even used in an episode of Yes, Minister – a comedy masterpiece from the 1980s – and it’s the same scheme the US applied to Western Europe after WW2. It gave Europeans the ability to absorb imports from the US to help with reconstruction; at the same time, it kept the US economy from going back into depression. In order to pay off these loans, the debtor countries will have to export to the United States in order to obtain USD with which to make the loan payments. If Trump really wants secure borders and no refugee crisis, he needs to fix the cause, not just combat effects. And the first cause is US foreign policy, which props up corrupt strongmen [gangsters] in so-called 2nd and 3rd world countries, arms and coordinates death squads, levies sanctions etc. By allowing US politicians, big capital, the CIA et al to exploit and reek havoc in these countries, the phenomenon of migration and refugee waves will only amplify over time. Trump should pay careful attention to ‘nation-build’ in the USA’s own backyard, instead of ‘nation-subjugate.’ Seek out positive sum deals, work with political factions from these countries who are actually composed of patriots instead of turncoats and mercenaries.
Debtor partners who struggle to make the loan payments should be treated with leniency by Washington and not be subjected to cruel and counterproductive austerity measures, which end up chocking demand [including for US merchandise], causing needless economic hardships, crime, unrest, and political instability. Debts that can’t be paid, shouldn’t be paid [Deuteronomy 15:1]. Since it’s preposterous to expect every country to run neutral current accounts and impossible for every country to be in a net surplus [or deficit], there has to be a [financial] surplus recycling mechanism in place; funds being reinvested from the surplus countries into the deficit countries [in our case, from the US to Central and Latin America] in order to keep money circulating, keep people working. Economies run on sales, sales are a function of [private and government sector] spending. Of course, the first fundamental premise for such a program is multilateralism – treat other states, including those smaller than you, as equals with the same rights you yourself profess to cherish: life, liberty, and pursuit of happiness. The second fundamental is dump neoliberalism for political economy
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of The Duran.