International Trade:

Foreign Trade Zones Program Needs Clarified Criteria

NSIAD-89-85: Published: Feb 7, 1989. Publicly Released: Feb 14, 1989.

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Allan I. Mendelowitz
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Pursuant to a congressional request, GAO provided information on the Foreign Trade Zones (FTZ) program, focusing on: (1) program growth; (2) the economic effects of subzones; (3) industry concerns about subzones; (4) the FTZ Board's operations and standards for approving new subzones; and (5) the effectiveness of the U.S Customs Service's supervision over zone activities.

GAO found that the: (1) FTZ program experienced dramatic growth, particularly in the automobile manufacturing industry, after 1950 amendments to the FTZ Act and regulatory changes authorized subzones, single large manufacturing facilities, and increased duty savings on inverted tariffs; (2) FTZ Act and FTZ Board regulations included minimal guidance on criteria for evaluating and approving proposed zones; (3) FTZ Board informally predicated subzone grants upon proof of a significant public benefit, but did not strictly adhere to this standard; (4) Board generally approved subzone applications and attempted to identify compromise solutions when applications were opposed, but was hesitant to take negative actions and allowed applications to remain pending for lengthy periods; (5) Board's continued approval of automobile industry subzones resulted in reduced federal revenues and lowered parts duty rates for automobile manufacturers, without any evidence of significant public benefit or meaningful savings or competitive advantage to the domestic industry; and (6) Board's small staff could not keep pace with the rising number of zone applicants and the increasing need for monitoring activity.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: The House Government Operations Committee and Ways and Means Committee held hearings in 1989, and received testimony from many interested parties, including GAO. Bills incorporating GAO suggestions were introduced in 1990, but died. No bills were introduced on this issue in 1991, indicating interest in the issue has dissipated and, possibly, satisfaction with revisions to Commerce regulations.

    Matter: Congress should amend the FTZ Act to provide guidance for decisions on grant applications, particularly those involving manufacturing. Such an amendment should establish that subzone grants, with their potential tariff revenue loss, are a privilege to be based on a demonstrated public benefit. It should also specify factors to be considered, such as the estimated effects of a proposed grant on exports, imports, employment, and investment. The FTZ Board's 1986 draft regulations provide public benefit criteria that could be included in the amendment.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Commerce has determined that the Board requires additional permanent staff. The President's fiscal year 1991 budget calls for three new positions, including two professional economists. Import Administration has provided interim authority to hire two staff members, recruitment has been completed, and the two new staff are now on board.

    Recommendation: The Secretary of Commerce should consider providing the FTZ Board with additional professional staff from existing resources within the International Trade Administration on at least a temporary basis to relieve the backlog of applications and facilitate adoption of new regulations. If applications continue at a high level, these positions could be made permanent.

    Agency Affected: Department of Commerce

  2. Status: Closed - Implemented

    Comments: Commerce initiated improvements in the application process, thus reducing processing time on non-controversial cases and providing expedited consideration for urgent circumstances. More comprehensive revision of procedures will depend on anticipated direction from Congress. Commerce published proposed regulations on January 26, 1990, and expects final regulations by July 31, 1991.

    Recommendation: The FTZ Board should revise its application processing procedures to minimize delays, instituting deadlines and revising its criteria in accord with any action Congress may take. After clarifying its criteria, the FTZ Board should revise its system for acquiring information on zone operations to permit determination of whether grants continue to meet the criteria upon which their award was based.

    Agency Affected: Department of Commerce: Industry and Trade Administration: Foreign Trade Zones Board


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