An oil tanker draws up to a refinery along the Houston Ship Channel and unloads a cargo of Saudi crude. The refinery turns the crude into jet fuel and ships it to the Dallas/Fort Worth International Airport. Jets bound for Asia, Latin America and Europe load the fuel and fly off.
As far as U.S. Customs is concerned, the Saudi oil never entered the United States. Importers never had to pay a tariff of about a quarter of a penny a gallon, which adds up when you’re importing more than 546 million gallons a day.
That’s how a foreign trade zone works.
There are more than 30 federally designated Foreign Trade Zones in Texas, including the seaports of Houston and Galveston, Alliance and D/FW airports and the ConocoPhillips refinery in Midland.
Foreign Trade Zones are supposed to be within 90 minutes’ drive of a port of entry into the United States so customs inspectors can make the trip if they want to have a look around.
Without trade zones, proponents say, Texas might watch refiners, distributors, warehouses and other businesses move abroad, taking 62,700 jobs with them.
“It’s one part of the decision not to go overseas,” said Will Berry, executive director of the National Association of Foreign-Trade Zones. “It might not be the whole story, but I think petroleum refining is a good example. The tariff benefits are one of the reasons they’re still here.”
Foreign Trade Zones are also becoming crucial to rapid movement along global supply chains.
American Eurocopter LLC, based in Grand Prairie, would have to wait three to seven days to clear cargoes through customs at D/FW Airport, said Mike Pettay, the company’s vice president of global supply chains.
By having the Grand Prairie facility designated a subzone of the DFW Foreign Trade Zone, Eurocopter’s supplies can be delivered directly to the plant and cleared immediately through customs there.
The European helicopter maker keeps parts and maintenance equipment at the Texas site for customers across North and South America. If someone in Brazil needs a part, a flight from Dallas will bring it. For tariff purposes, the part never entered the U.S.
This last point is an example of what trade expert Kathy Wilkins calls “a-just-in-time solution rather than a just-in-case.”
Ms. Wilkins, president of the North Texas Association of Customs Brokers and Freight Forwarders and an executive with Exel Inc. in Coppell, said the area is growing as a logistics center because of Foreign Trade Zones.
“We’ve got new clients relocating from the east and west coasts because they realize Dallas truly is the heart of the country. You can get anywhere in the U.S. overnight from here,” she said.
One recent example, she said, is Lego Systems Inc., the Danish toy manufacturer, which is going to use a 400,000-square-foot building at Alliance Airport as its North American distribution center.
Congress authorized Foreign Trade Zones in 1934 to offset some crippling effects of the Smoot-Hawley tariffs enacted in 1930.
Tariffs are imposed to do two things. They protect domestic companies from foreign competition, and they generate revenue. But high tariffs cripple foreign trade, which has become more important to the U.S. and global economies. Various global trade negotiations have lowered tariffs over the years, and U.S. tariffs are generally among the lowest.
In knocking down tariffs on finished goods, some trade agreements left in place higher tariffs on ingredients and components.
That meant crude oil faced a higher tariff than finished oil products, and pharmaceutical ingredients faced higher tariffs than finished drugs.
Foreign Trade Zones help manufacturers get around those inverted tariffs by letting them import raw materials for manufacture assembly in the trade zone.
The raw material goes in without the tariff, and comes out as a finished product that’s tariff-free.
“It actually brings jobs back to the United States,” said Ms. Wilkins.