PORTS & FREE TRADE ZONES
From Site Selection magazine, November 2009
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The need for a competitive edge
in today’s global economy
ompeting in today's interdependent global economy requires economic development professionals to adopt a "glocal" (think global, act local) paradigm in order to succeed. The world is becoming increasingly competitive, and company decision-makers are seeking every advantage possible to shave costs and improve margin. Tools and tactics that can reduce the total delivered cost of goods and services (the amount of money it takes a company to manufacture and deliver a product) need to be aggressively leveraged for competitive success. The Foreign Trade Zone is an effective, and potentially underutilized, tool for delivering local economic development for globally focused enterprises.
A Foreign or Free Trade Zone is a specially designated area in or near a Port of Entry, and considered outside the Customs Territory. According to the National Association of Foreign Trade Zones, there are currently 256 general-purpose zones and 498 sub-zones in the U.S. and Puerto Rico. In general, Foreign Trade Zones offer an opportunity to help companies reduce total delivered cost and be more competitive in three very important ways:
- Reduces supply chain process time;
- Reduces importing costs;
- Reduces cost of loss through better security.
A recent paper entitled "Asia-Pacific and European Economic Competitiveness: An Analysis of Economic-Power-Shift from the West to Emerging Giants," authored by Sheriff Ghali Ibrahim and published this year in the Journal of Economics Theory, suggests that continuing to view the economic universe with the United States at the center is becoming less useful as an effective model to guide economic development thinking in the 21st century. Now, more than ever, there needs to be a compelling business reason to invest capital in the U.S. versus an increasing number of viable locations around the world. Free Trade Zones offer an opportunity to provide that compelling business reason by effectively "leveling the playing field" and helping improve U.S. competitiveness.
A Gateway for FDI
The successful creation of the European Union as a competitive trading block, and the emergence of a rapidly growing, large middle class in China and India have resulted in a declining share of foreign direct investment (FDI) inflow into the United States. Companies are increasingly investing capital to create both the capacity and capability to serve consumers in these new and underdeveloped markets.
One important tool to encourage FDI is the Foreign or Free Trade Zone. Comparing FDI inflow dollars reported in the UNCTAD 2009 World Investment Report indicates FDI inflows to developed countries fell sharply in 2008 as a direct result of the global financial crisis. Companies cut investments at home and abroad. This suggests business executives will be under increasing shareholder pressure to ensure expansion plans are well conceived. Competition for a smaller pool of global foreign investment is likely to increase dramatically. Executives will be even more closely scrutinizing location options to find the best fit with long-term strategic plans.
Economic development professionals need to step back and re-evaluate their location value proposition to ensure it is relevant, authentic and competitive versus global location alternatives. They need to find a differentiating reason for foreign direct investors to choose their location.
Cost of doing business is one of the key differentiating reasons one location is selected over another. Costs that cannot be offset and therefore must be passed on to the consumer in the price of a product or service are viewed negatively when an investor is making a location comparison. Therefore, tools that help eliminate or dramatically reduce such operational costs can be critical to successfully compete for capital investment.
When doing business in a foreign country, companies incur additional costs that do not burden their domestic competitors. One of the more important of these costs is a tariff. Broadly defined, a tariff is a fee imposed on goods when they are imported across country boundaries. It is essentially a duty assessed for not doing business domestically.
Many multinational companies have global supply chains, and the components required for finished product production are imported from around the world to ensure the best quality for the lowest price. From the company perspective, tariffs represent an operational cost that they will either need to pass on to the consumer in the form of a higher price or to their shareholders as a profit margin reduction.
For capital investors who choose to locate operations in a Free Trade Zone, there are several ways they are able to reduce the cost of doing business. As long as product remains inside the FTZ:
- No duty is paid on re-exported merchandise;
- No duty is paid on merchandise for domestic consumption until it leaves the FTZ — resulting in duty deferment;
- No duty is paid on defective merchandise that is not sold;
- The lowest duty is paid for manufactured finished goods;
- Product can be stored, manufactured, altered, destroyed or changed in the FTZ without incurring duty cost.
Two additional considerations are security and logistics.
Foreign Trade Zones are under U.S. Customs and Border protection and must meet or exceed their standards for security. These standards are established, in part, to ensure compliance with the Department of Homeland Security. As a consequence, companies operating in a Foreign Trade Zone may experience lower levels of product loss due to theft than many locations not under the secure protection of a Foreign Trade Zone.
Most Foreign Trade Zones are supported by a robust multi-modal transportation capability that is very familiar with the rules and procedures of working with the U.S. Customs. This provides the capital investor an easy, cost-effective and reliable way to ship finished goods to market. Simplification of distribution can be an important factor to consider in the capital investor's location decision.
Free Trade Zones can play an important role in the economic development strategy of any location. Securing a Foreign Trade Zone in your location can help reverse the decline of FDI inflow into the U.S., and create sustainable jobs to support local economic prosperity. Minimally, every state should evaluate its current use of Foreign Trade Zones and whether investing in the creation of additional general-purpose sub-zones will enhance global competitiveness for FDI. This forward-looking evaluation should lead to a written 5- to 10-year strategy to guide state infrastructure investment and public policy reform decisions.
Edward Burghard is CEO and manager of place branding firm The Burghard Group, which recently launched "Strengthening Brand America" at www.strengtheningbrandamerica.com. He also serves as executive director of the Ohio Business Development Coalition.