Thursday, January 27, 2011

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.

2 comments:

  1. And FTZs aren't solely a U.S phenomenon. Other countries also make use of FTZs. For example, China has a number of FTZs, most often associated with port cities for the reasons given in your very insightful post.

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