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Are High Tariffs the Only Answer to Leveling the Trade Playing Field?

Last week I wrote about free trade and the issues that sometimes complicate so called “Free Trade” agreements.  This week, I’ll comment and focus on three very critical pieces that can either make or break any “Free Trade” agreement.

The first issue I’ll focus on is environmental rules and regulations.   On December 2, 1970 under President Nixon, the United States created the Environmental Protection Agency, (EPA).  The agency is responsible for protecting health and the environment through the writing and enforcing of environmental laws and regulations passed by the U.S. Congress.  Developing nations around the world have similar environmental rules and regulations.  However, quite often economic growth becomes more of a priority and those environmental rules and regulations take a back seat.  Not so here in the United States.  The EPA, since its inception has expanded its jurisdiction to include the Clean Air Act, Clean Water Act, Toxic Substances Control Act, Chemical Safety Information, Site Security and Fuels Regulatory Relief Act, Federal Food and Drug Act and the Occupational Safety and Health Act.  While most people would agree that it’s necessary to keep our environment clean, the reality is that it can become an additional financial burden for some U.S. companies to do business in the U.S.

The second issue causing headwinds for U.S. businesses is U.S. Labor Law.  The National Labor Relations Act of 1935 was created, in part to set the rules between employees and employers and to correct the “inequality of bargaining power.”  Since 1935 labor laws have broadened to include other such regulations as child labor laws, prison labor law, workplace safety & health laws, workers’ compensation, The Family and Medical Leave Act, Veterans’ Preference, safety & health, the Equal Employment Opportunity Commission and many more.  Again, while many people would agree that these regulations may be necessary, in many instances they have become an additional financial burden on American businesses.  Many of our global competitors do not have the same regulatory burden as U.S businesses and thus the U.S. is put at a clear disadvantage.

The third and final piece of this complicated puzzle is what some perceive as currency manipulation on the part of some of our competitors.  If all other areas of a “Free Trade” agreement between countries are equal, one trading partner could begin to gain an advantage simply by devaluing their currency and as a result causing that country’s currency to be significantly cheaper and more attractive to foreign investment.

As you can see, it’s not always one issue such as tariffs that make up a “Free Trade” agreement.  These agreements can be complicated.  In the end, it’s always about trusting the other trading partners and whether or not they’re holding up to their end of the agreement.

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Free Trade or Fair Trade?

When we think of free trade we typically think in terms of a trade pact with low barriers and tariffs enacted and ratified between two or more countries in an equitable manner which will benefit each signatory country.  Or, we may think of the World Trade Organization, (WTO) and all the participating nations of the world which belong to the WTO.

The WTO states on their website, that they “provide a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development”.  Keeping this in mind, let’s take a look at China for a moment.  China has been a member of the WTO since December 2001. Despite having the world’s second-largest economy, China is considered a “developing” country.  The WTO in trade agreements gives developing countries, “special rights or extra leniency—special and differential treatment”.  In exchange for entry into the WTO, China agreed to change its policy regarding foreign investors and implement the WTO requirement to abide by the   Agreement on Trade-Related Aspects of Intellectual Property Rights, (IPR).  This provision is a legal agreement between all the member nations of the WTO, obligating each county to respect each other’s Intellectual Property Rights.

Fast forward to March 22, 2018, and the release of the U.S. Trade Representatives “Findings of the Investigation into China’s Act, Policies, and Practices related to Technology Transfer”.  The report states that “prior to 2001, China often explicitly mandated technology transfer, requiring the transfer of technology as a quid pro-quo for market access. After joining the WTO, China committed not to condition the approval of investment or importation on technology transfer.   Since then, according to numerous sources, China’s technology transfer policies and practices have become more implicit, often carried out through oral instructions and “behind closed doors.”  According to the report, “China continues to restrict foreign investment while selectively granting market access to foreign investors in exchange for commitments to transfer technology”.  China’s foreign ownership restrictions, joint venture requirements, foreign equity limitations, licensing and approvals process all contribute to pressure foreign investors to transfer their technology prior to conducting business in China.

You make the call.  Is China’s information technology transfer practice consistent with the spirit of the requirements outlined by the WTO?

Next week I’ll look at other ways which the Chinese as well as other countries around the world make the so called “level playing field” not so level.

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How Trump Tariffs Affect Your Manufacturing or Warehousing Business

The Steps Your Company Can Take to Minimize the Impact

Look closely at the window sticker of a new vehicle and you may see a list of the larger foreign components (engine, transmission, etc.), and their country of origin. This is not unusual, as most manufacturing companies in the United States use a number of different components when producing or assembling a finished product. For example, an automobile assembled in the U.S. can have as much as 30%-40 % of its vehicle consist of foreign manufactured parts. Unfortunately, many of these components have significantly high import duties associated with their importation. Fortunately, there is a process that many companies can put in place to avoid paying these high tariff rates; they have employed a not well-known government statute known as the Foreign Trade Zone Act, (FTZ).  

What is the Foreign Trade Zone Act?

The Foreign Trade Zone Act was established by Congress in 1934 during the great depression. It was intended to be used as an incentive for U.S. manufacturers to continue manufacturing in the U.S. and not move manufacturing operations overseas.

How do Foreign Trade Zone Procedures work?

Foreign material that is moved into a Foreign Trade Zone is never dutiable, (tariffs never assessed) until it leaves the Foreign Trade Zone and is entered into the “Customs Territory”. The Foreign Trade zone can be identified simply as your manufacturing facility. In some instances, the component foreign material is exported from the Foreign Trade Zone and never enters the “Customs Territory” and therefore a tariff is never collected by U.S. Customs. When Anti-Dumping, (ADD) or Countervailing duties (CVD) are implemented by the U.S. government, (as President Trump has recently imposed on some imported steel and aluminum) a Foreign Trade Zone may be established to avoid those ADD’s/CVD’s only for those component parts that ultimately leave the FTZ and are exported outside the territory of the U.S.

According to the 2016 annual FTZ Report to Congress, some 3,300 businesses that employed more than 42,000 people leveraged the value and benefits of Foreign Trade Zones. In short, if your company can utilize the benefits of a Foreign Trade Zone by eliminating the ability of the government to collect tariffs on imported material, it’s something to seriously consider.

For further information on Foreign Trade Zone’s or for a free consultation to determine if your business would benefit from establishing an FTZ, please contact us at glenn@foreigntradezonesolutions.com or visit our website at http://foreigntradezonesolutions.com/.

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Introducing: Foreign Trade Zone Solutions

ftz-event

On Thursday, October 13, 2016, Glenn Page of FTZ Solutions, and David Trumbull of Agathon Associates, appeared as subject matter exporters on behalf of Gino Marconi, Director of Ports and Harbors, Pease Development Authority (Foreign-Trade Zone #81) at the Fourteenth Annual Governor’s Advanced Manufacturing and High Technology Summit, held in Concord, New Hampshire. Page and Trumbull conducted one-on-one discussions with New Hampshire manufacturing companies regarding the potential for cost savings using FTZ procedures for production, warehousing, and distribution activity. Recently the team assisted a textile manufacturing in Massachusetts to have $200,000 per year, and hire 20 new workers, using FTZ procedures.

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FTZ Report Shows Program Under Utilized in New England

Last week the Foreign-Trade Zone Board released the 76th ANNUAL REPORT of the Foreign-Trade Zones Board to the Congress OF THE UNITED STATES.

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Foreign-trade zones are secure areas under supervision of U.S. Customs and Border Protection (CBP) that are considered outside the customs territory of the United States for the purposes of duty payment. Located in or near customs ports of entry, they are the U.S. version of what are known internationally as free trade zones. Authority for establishing these facilities is granted by the Foreign-Trade Zones Board under the Foreign-Trade Zones Act of 1934, as amended (19 U.S.C. 81a-81u), and the Board’s regulations (15 C.F.R. Part 400). The Executive Secretariat of the Board is located within Enforcement and Compliance of the U.S. Department of Commerce in Washington, D.C.

During Fiscal Year 2015, the FTZ Board received and docketed 85 requests, and issued 87 decisions. The FTZ Board’s decisions included the establishment of four new foreign-trade zones, the reorganization or expansion of 22 zones under the alternative site framework (ASF), as well as decisions on 54 applications and notifications for new or expanded production authority. Under delegated authority, the FTZ Board Staff processed an additional 181 requests that included minor boundary modifications and scope determinations.

There were 186 FTZs active during the year, with a total of 324 active production operations. Over 420,000 persons were employed at some 2,900 firms that used FTZs during the year. The value of shipments into zones totaled nearly $660 billion, compared with $798 billion the previous year. About 63 percent of the shipments received at zones involved domestic status merchandise. The level of domestic status inputs used by FTZ operations indicates that FTZ activity tends to involve domestic operations that combine foreign inputs with significant domestic inputs.

Warehouse/distribution operations received nearly $228 billion in merchandise while production operations received over $431 billion (65 percent of zone activity). The largest industries accounting for zone production activity include the oil refining, automotive, electronics, pharmaceutical, and machinery/equipment sectors.

Exports (shipments to foreign countries) from facilities operating under FTZ procedures amounted to over $84 billion.

Main Foreign-Status Products Received in U.S. FTZs

  

WAREHOUSE/DISTRIBUTION OPERATORS($ million)PRODUCTION OPERATORS($ million)
Vehicles33,269Oil/Petroleum64,822
Consumer Products12,781Consumer Electronics15,890
Consumer Electronics11,153Vehicle Parts13,605
Electrical Machinery10,954Pharmaceuticals6,416
Oil/Petroleum9,665Machinery/Equipment6,104
Textiles/Footwear8,907Petrochemicals2,606
Machinery/Equipment7,731Chemicals1,498
Other Electronics5,915Other Electronics1,316
Other Metals/Minerals4,850Plastic/Rubber724
Pharmaceuticals3,615Aircraft/Spacecraft722
Vehicle Parts2,457Other Metals/Minerals513
Optical, Photographic and Medical Instruments777Consumer Products448
Beverages/Spirits733Electrical Machinery422
Plastic/Rubber638Optical, Photographic and Medical Instruments314
Iron/Steel479Textiles/Footwear209
Food Products311Advanced Fiber Materials75
Tobacco Products278Fragrances/Cosmetics67
Wood/Paper175Dyes/Pigments/Paints67
Rail Cars, Parts & Equipment153Food Products54
Stone/Plaster/Cement/Ceramics126Beverages/Spirits54
Petrochemicals118Ships/Boats45
Chemicals103Stone/Plaster/Cement/Ceramics41
Fragrances/Cosmetics95Vehicles39
Aircraft/Spacecraft87Iron/Steel27
Advanced Fiber Materials36Arms/Ammunition18
Arms/Ammunition8Wood/Paper9
Dyes/Pigments/Paints3Rail Cars, Parts & Equipment7
Ships/Boats2

 

FTZ Procedures Under Utilized in New England

Connecticut

FTZ 71, WINDSOR LOCKS, no activity.

FTZ 76, BRIDGEPORT, no activity.

FTZ 162, NEW HAVEN, no activity.

Maine

FTZ 58, BANGOR, no activity.

FTZ 179, MADAWASKA:

  • Production: Evergreen Trading Co. LLC (Fragrances/Cosmetics), $25-50 million.

FTZ 186, WATERVILLE, no activity.

  • Flemish Master Weavers(Textiles/Footwear) was approved in 2016, but effectively limited to warehousing/distribution and production for export.

FTZ 263, AUBURN, no activity.

FTZ 282, BRUNSWICK, no activity.

Massachusetts

FTZ 27, BOSTON:

  • Warehousing/Distribution: 14 companies, $500-750 million.
  • Production: AstraZeneca (Pharmaceuticals), $1-5 million.
  • Production: Claremont Flock was approved in late 2015 and actived in 2016.

FTZ 28, NEW BEDFORD:

  • Warehousing/Distribution: 1 company, $100-250 million.
  • Production: Acushnet Company (Textiles/Footwear), $70-100 million

FTZ 201, HOLYOKE, no activity.

New Hampshire

FTZ 81, PORTSMOUTH:

  • Production: Millipore Corporation (Advanced Fiber Materials), $100-250 million.

 

Rhode Island

FTZ 105, PROVIDENCE & NORTH KINGSTOWN:

  • Warehousing/Distribution: 1 company, $1-5 million.

 

Vermont

FTZ 55, BURLINGTON:

  • Production: Wyeth Nutritionals, Inc. (Food Product), $0-0.5 million.

FTZ 268, BRATTLEBORO, no activity.

FTZ 286, CALEDONIA, ESSEX AND ORLEANS COUNTIES, no activity.

 

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