While the Obama and Romney campaigns spar over who or what “saved” the U.S. automotive industry, available data indicate that the nation’s frequently overlooked Foreign-Trade Zones (FTZ) program should be in line for a lot of the credit—without bailout loan guarantees or massive federal appropriations.

Enacted by Congress in 1934, the FTZ program allows producers in the United States to bring foreign merchandise for processing into the United States at reduced or zero tariff duties. The hundreds of foreign-trade zones and subzones established across the country—such as Nissan’s two Tennessee manufacturing facilities—are considered outside U.S. Customs territory even though all health, safety, labor and other U.S. laws fully apply.

The FTZ program makes U.S. producers more competitive in global markets by reducing the cost of accessing the foreign materials and components they use to make final products sold in the U.S. market or exported for sale abroad. In 2010, a total of 2,400 companies and 320,000 American workers made use of the FTZ program to manufacture, process, and distribute a wide range of products, including clothing, electronics, refined petroleum, pharmaceuticals—and motor vehicles.

The FTZ program has proven to be especially useful to global automakers located in the United States. In addition to Nissan’s plants in Smyrna and Decherd, other international auto companies that make use of the FTZ program include BMW in South Carolina, Honda in Ohio, Hyundai and Mercedes-Benz in Alabama, Subaru in Indiana, and Toyota in West Virginia and Kentucky.

Like many other industries, automakers in the United States face the problem of “inverted tariffs.” While finished automobiles can be imported to the United States at the relatively low tariff of 2.5 percent, tariffs are significantly higher on a number of major component parts needed to manufacture and assemble a showroom-ready automobile. This creates an unintended incentive for manufacturers to locate production offshore, rather than in the U.S.

The FTZ program puts U.S.-based auto plants on an equal footing with foreign producers by allowing them to source components internationally without paying the higher tariffs. If the finished automobile enters U.S. commerce, the tariff is charged at the lower 2.5 percent rate. But if the finished product is exported for sale abroad, no tariff is due. This provision has given a strong and positive stimulus to U.S. auto exports.

Collectively, FTZ-based auto plants received a total of $45 billion in merchandise in fiscal year 2010 (the most recent figures available), more than 80 percent of it sourced from domestic commerce. Those same auto subzones exported an impressive $11 billion of their final production to other countries. Nissan’s Tennessee subzone alone accounted for $902 million of that total, while employing 6,702 workers. In South Carolina, BMW’s plant exported $5.2 billion worth of automobiles in 2010, an incredible 70 percent of its production.

Along with manufacturing automobiles, the FTZ program facilitated a range of other auto-related activities in 2010 in at least 30 other zones and subzones. A survey of individual zone reports conducted by the National Association of Foreign-Trade Zones identified such activities as manufacturing, warehousing, and distribution of tires, manufacturing of audio speakers for automobiles, receiving, storage and distribution of engines, warehousing of vehicle parts, and warehousing and distribution of imported vehicles.

As a sector, global automakers employed a total of 45,583 workers in FTZ subzones in 2010 in relatively well-paying jobs, while stimulating further employment among their domestic suppliers. Earlier in 2012, both BMW and Nissan announced they would be adding more than 1,000 jobs each at their plants located in FTZ subzones.

The number of Americans working in FTZ auto plants is significantly more than the 35,000 workers that Chrysler employed domestically in 2010, and more than half the 77,000 employed by General Motors. Yet in contrast to the multibillion-dollar federal bailout extended to those two Detroit-based automakers, the FTZ program requires no loan guarantees, federal borrowing or annual appropriation from Congress. (GM, Ford and Chrysler at one time made use of the FTZ program, but they now enjoy similar benefits from extensive production in Canada and Mexico through the North American Free Trade Agreement.)

At a time when so much attention has been focused on whether or not the administration’s “bailout” of Detroit automakers was the proper thing to do, the FTZ program has been quietly building a successful record of accomplishment. Both candidates and parties would do well to recognize the success of the FTZ program and make every effort to replicate its positive impacts in their economic proposals for the next four years.

This article appeared in Impact Analysis, July-August 2012.

Daniel Griswold
About The Author Daniel Griswold [Full Bio]
Daniel Griswold is senior research fellow and co-director of the Program on the American Economy and Globalization at the Mercatus Center.


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