Looking for Respite From Trade Wars? Try Foreign Trade Zones

(Bloomberg) --

There are still places companies can go if they want to avoid the full force of rising tariffs -- foreign trade zones.

FTZs are areas where imported goods can be handled, manufactured and re-exported without the intervention of customs authorities. About 14% of U.S. imports got favorable treatment via FTZs in 2018, according to research by the European Central Bank.

The key is that U.S. tariff rates are higher on intermediate goods than on final products. That means components can be imported duty-free into FTZs, and assembled into finished goods. The levy on the end-product is lower than it would have been had the components been imported through normal channels.

The ECB published a paper on Wednesday showing that such zones, originally designed to promote economic development, may have already cut effective levies between the U.S. and China by as much as 0.7 percentage point. If all imported Chinese intermediate goods were to go through U.S. FTZs, the effective tariff rate would be reduced by as much as 4.5 percentage points.

With protectionism on the rise, the incentive to funnel more trade through those zones is growing. The U.S. National Association of Foreign Trade Zones estimates that about half the corporate cost savings from locating to FTZs are due the effect on tariffs.

“FTZs can cushion the impact of the U.S.-China trade war,” Virginia di Nino, Simone Cigna and Srdan Tatomir wrote in the ECB paper. They “can break the ‘chain effect’ of tariffs to the extent that parts and components are either exempted from duties when they are re-exported or can enter the market at favorable rates.”

Chinese FTZs, which handle about 17% of inbound shipments, don’t yet attract import relief but the idea has been under consideration, according to the paper. The European Union offers a similar measure called an import duty suspension, covering about 12% of imports.

©2020 Bloomberg L.P.

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