Foreign-trade zones improve the cost competitiveness of U.S. firms but have a limited impact on business decisions, according to a new report from the International Commission.
The report provides an overview of economic activity in FTZs in the U.S. and similar zones in Canada and Mexico, including employment, leading sectors and industries, shipments, exports, and foreign direct investment. It also reviews current FTZ policies and practices in the three countries and analyzes their cost-competitiveness effects. Finally, the report offers case studies on the impact of FTZs and FTZ-type programs on the automotive, upholstered furniture manufacturing, petroleum refining, pharmaceutical manufacturing, and warehousing and distribution industries.
In the U.S., FTZs are designated locations where companies can use special customs procedures for special tariff treatment and duty benefits as well as tax, logistical, and other cost savings.
Among FTZ-type programs in Canada, the duty deferral program – consisting of the duties relief program, the duty drawback program, and the customs bonded warehouse program – offers firms special tariff treatment and various duty benefits. Two other programs, the Export Distribution Centre Program and the Exporters of Processing Services Program, can be used for additional tax relief and may be used separately or together.
The primary FTZ-type programs in Mexico include the Industria Manufacturera, Maquiladora y de Servicios de Exportación (the Program of Manufacturing Industry, Maquila and Export Services, known as IMMEX), Los Programas de Promoción Sectorial (the Sectoral Promotion Programs, or PROSEC), and regla octava (Rule 8). These programs offer various duty benefits and may be used separately or together. Mexico also offers a comprehensive certification scheme for additional tax relief as well as several special customs regimes and the drawback program, but these programs are generally not as impactful.
Highlights of the report’s findings include the following.
- The cost-competitiveness effects of these programs are in large part influenced by non-FTZ-specific policies and practices, including the design of the programs, national tariff regimes and applicable rates of duty, other trade policies, and material sourcing and destination markets for firms’ shipments.
- In the U.S., firms producing in FTZs primarily use the program to lower the production costs associated with foreign-status goods, with $1.2 billion in duty savings in 2021, while goals like duty deferral, tax breaks, and logistical and other benefits play a more limited role.
- Despite these cost-saving benefits, most firms producing in FTZs do not make operational decisions (e.g., expanding U.S. investment, manufacturing output, or employment) primarily based on the use of FTZs.
- Canada’s FTZ-type programs do not provide firms many duty saving opportunities not otherwise available as part of the country’s broader trade and tariff policy, which includes duty rates of near zero for most raw materials and intermediate goods for industrial use, free trade agreements with 51 countries (which accounted for 76.1 percent of Canadian imports in 2021), and the lack of any duty reduction mechanism within the programs that could apply to inputs that are subject to duty.
- In Mexico, IMMEX and special customs regimes provide opportunities for deferral and exemption of duties and some other kinds of import taxes, but with the 87 percent of Mexico’s exports going to the U.S., Canada, and the European Union (which are subject to restrictions on duty exemption and drawback benefits), firms’ use of these programs for duty exemption is limited. Alternatively, duty reduction under the PROSEC and regla octava programs likely provides substantial duty cost savings for production facilities in Mexico.
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