Making the most of Foreign Trade Zones

There are numerous things governments do to bolster the competitiveness of local companies. Some activities are better known than others. For years Boeing and EADS, the parent corporation of Airbus, have both been accused of receiving subsidies from their respective governments. Other activities are not so conspicuous and often go overlooked. One such form of support is the designation of a foreign trade zone.

Foreign trade zones (FTZ), were created to encourage exports by allowing manufacturers to defer duty payment on components they import into the United States until they have been assembled and placed on the market in the U.S. or to avoid any duties on those components if the final product is exported to a market outside of the U.S. The savings on such duties could have a significant cost advantage for those firms who are able to develop an export market.

I was discussing FTZ with one of my students the other day which made me want to further look into the data associated with their use here in Oklahoma. What I found was rather interesting: Oklahoma has four designated foreign trade zones, which in 2008 generated a volume of $2.51 billion in goods. Of those goods $42.3 million were exports.

This data alone is not so interesting, until we put it into a context. In order to make a comparison, I looked at data from states similar to Oklahoma (See table below). First, I looked at the two states that are similar to Oklahoma in terms of economic output. In 2008, out of 50 states and the District of Columbia, Oklahoma ranked 29th in terms of GDP, which was $153.8 billion. Kentucky ranked 28th ($156.5 billion) and Iowa 30th ($142.3 billion).

All three states have a similar number of designated foreign trade zones: Kentucky 2; Oklahoma 4; and Iowa 3. What is interesting is how these states use their respective FTZ. Oklahoma has only four firms that utilize the FTZ where as Kentucky has 21 active firms. While Iowa has the fewest firms actively using their FTZ, 13.8% of the FTZ volume were exports, compared to only 1.7 percent in Oklahoma. The proportion of Kentucky’s FTZ volume which ended up as exports was about eight percent.

The total volume of exports from the entire state of Oklahoma, $5.1 billion, seriously lagged behind both Kentucky and Iowa, $17.7 billion and $12.1 billion respectively. Finally, if we look at the average FTZ export per active firm, Oklahoma once again finds itself underachieving. On the average each company using the FTZ in Iowa exports about $28.7 million, which is almost three-times as much as Oklahoma. The gap is much worse when compared to the exporting efficiency of Kentucky’s FTZ firms who produce an average of $112.4 billion of exports – eleven-times more than Oklahoma firms.

What are we to make of this information? Oklahoma companies are not utilizing their foreign trade zones near as much as they could or should. If they were to do so they might find that they would gain a significant cost advantage and thus make their products more attractive in the world market.

Free Trade Agreements and U.S. Jobs

While we are paying attention to weightier matters that our government is dealing with such as whether WikiLeaks founder Julian Assange is a pervert or whether John Boehner, the incoming Speaker of the House, cries too much, United States government representatives has been busy working on the final touches on the Korea-U.S. Trade Agreement (KORUS). This would be the largest free trade agreement for the U.S. since the signing of the North American Free Trade Agreement.

Even before the latest economic downturn, there was a lot of talk regarding globalization and its impact on the United States economy. Many people who are lamenting the loss of thousands of manufacturing jobs in the U.S. to overseas alternatives have called for the U.S. to retreat from global cooperative agreements. They build their argument by focusing on merely one aspect of the trade agreements while ignoring the structural benefits provided.

Anti-free traders or protectionists, as they are more commonly known, claim that these free trade agreements only work to hurt our economy by exposing our companies to increased competition. Free trade agreements work to eliminate trade barriers such as tariffs, thus making foreign-produced goods cheaper since they no longer have to pay a tax on the import. Thus, protectionists predict that foreign goods will flood the U.S. market and cause a loss of even more jobs.

There are two problems with this argument. First, it neglects the fact that in trade agreements all signatories reduce their tariffs on imports. According to the International Trade Administration (http://trade.gov/fta/korea/), Korean exporters currently pay, on average, a 2.8 percent tariff on all goods brought into the United States. Obviously, under KORUS they would no longer have this expense. However, conversely, under the agreement U.S. exporters would no longer be obligated to pay an average tariff of 6.2 percent on goods shipped to Korea. According to my third grade math teacher, 6.2 is greater than 2.8, which means that U.S. companies would benefit greater than their Korean counterparts.

The other problem with their argument is simply that it betrays a lack of confidence in U.S. products and their ability to compete in the global market when there is a level playing field. If their lack of confidence is grounded in fact, then we do have something to worry about since we would be fighting an uphill battle against the physics of the natural market – wherein the market will allocate societies resources to those producers who are most efficient and effective at utilizing those resources. And if that is the case, then by advocating protectionism, we are not addressing the root cause of our economic woes, but merely trying to cover up the symptoms. If their confidence is not grounded in fact, then that means that American products and services will thrive once they become unencumbered by the burden of trade barriers.

Furthermore, if someone is interested in trying to save manufacturing jobs in America, fighting against free trade agreements is counter productive. Let’s return to the U.S.-Korea trade situation. If KORUS does not pass, it means that U.S.-based manufacturers will have to continue to pay 6.2 percent tariffs on all goods exported to Korea. This burden would encourage U.S. manufacturers to find a source to manufacture their product either in Korea or in a country that has a free trade agreement with Korea. Thus, arguing against KORUS to save U.S. manufacturing jobs would be counter-productive.

Anyway you slice it, the protectionist argument against free trade agreements is about as questionable as the personal exploits of Julian Assange and should cause us to cry as much as John Boehner if it begins to have some sway in our congress.

From the Field: Focus on Australia

Australia is wrestling with a decision regarding how their economic policies for the future. Some are encouraging the country to embrace globalization while others prefer to take a more "measured" approach. This video also discusses some of the characteristics of Australia that heavily influences the marketing of products. One note of correction: In the video I erroneously said that Brisbane was in the southern portion of Australia as opposed to its proper position in the East. Let's just say that it can be hard to concentrate on such specifics when you are taping your video in beautiful weather, at one of the world's most beautiful locations.

From the Field: Focus on New Zealand

New Zealand provides an example of an economy in transition - from agricultural to industrial to service-based. This video, produced while I was traveling in New Zealand on the Oklahoma Christian University Pac Rim Study Abroad program, discusses this transition and the fiscal policy that goes along with it in New Zealand. I also take a closer look at one of the industries most associated with this beautiful Polynesian country - the Kiwi Fruit industry.