The expansive growth of international trade and investment of the past half century has brought to the stage of the transformed global economy a reappearance of the "freeport" of trade history in a new form.

During the past four decades, multi-faceted versions of the historic freeport prototype have emerged. The only actual present-day approximations of the historic freeport cities that come to mind are Hong Kong and Singapore. The cities that once embodied the archetypical freeports of the Hanseatic League still have vestiges of their special Customs status, but in very limited form. What we have today is a host of variations on the freeport theme and a plethora of new "zone" terms.

What has breathed new life into the historic freeport concept since mid-century is the internationalization of the world economy. Countries in all stages of economic development have become active participants in production and trade. Shipments across national borders have vastly multiplied and the global marketplace has changed in complexity. Products are no longer simply shipped into or out of countries.

Today, a high percentage of trade involves components and materials for manufacturing plants which produce for export markets or for sale in their home markets in competition with imports of finished products. This scenario vastly complicates the Customs phase of trade.

Manufacturing is no longer tied to location by the requirements of the production process to the extent it was in the past. Access to efficient transportation services and adequate production infrastructure makes it possible for a wider range of local communities to compete in international production from a locational standpoint. In order to compete effectively, however, a suitable legal environment with as few external production costs as possible must be provided. This places all forms of taxes, including import taxes, under scrutiny.

This situation has induced the adoption of tax incentive programs in countries and local communities throughout the world. While the scope of benefits vary, there are features that are common across national borders. One such feature involves the use of special Customs procedures to mitigate the import tax burden.

FREEPORTS -- FREE TRADE ZONES

It is this type of incentive that is related to the freeport concept, and projects that feature contemporary freeport type exemptions today are generally known as "free trade zones". Zones in this category tend to be designated sites within or near cities which have direct access to transportation services and infrastructure needed for manufacturing and distribution of goods on a global scale. Most are located as part of sea/air port complexes or industrial estates. Some of the terms used to refer to various types of free trade zones are: "free port", "free zone", "Customs free zone", "transit zone", "entrepot", "industrial free zone", "foreign-trade zone" (FTZ), and "export processing zone" (EPZ). When incentive programs cover a region, terms such as "economic zone" or "free perimeter" are used.

The basic special Customs treatment foreign goods receive under "zone" procedures is the deferral of payments on imports and duty-exemption for exports. Most zone programs include a variety of other tax breaks, but the Customs benefit is the signature feature that marks an incentive program as being within this grouping.

U.S. PERSPECTIVE
Free trade zones were not available in the early stages of economic development in the United States. It was not until 1934 that the zone concept was adopted here. In that year, the U.S. Congress enacted legislation designating an interagency entity, the Foreign-Trade Zones (FTZ) Board, with authority to license and regulate free trade zones. The U.S. term is "foreign-trade zone", and under U.S. FTZ law, incentives are limited to Customs duty and federal excise tax exemptions or deferrals, but additional benefits are often available in zones that are part of state/local development programs.

The FTZ Act (19 USC 81a-81u) makes every U.S. Customs port of entry eligible to apply for a foreign-trade zone based on the demonstration of need and presentation of a suitable zone plan. With over 300 ports of entry along our East, West and Gulf coasts, our borders with Canada and Mexico, and in many inland cities, the law made a large number of U.S. communities potential candidates.

Applicants for U.S. zones are designated by the legislature of the state in which the zone is to be located. Most of our 50 states have adopted enabling legislation that qualifies public and quasi-public corporations within their jurisdiction, such as sea/airport authorities or economic development agencies, to apply for zones.

The application process for U.S. zones involves public notice and an opportunity for comment by interested parties. After the review process, upon receipt of a grant of authority (license), applicants become "zone grantees". The private sector becomes involved in providing and operating zone facilities, and, of course, as zone users.

Until the 1960's, the U.S. FTZ program languished with only ten established zones. It was the explosive growth in world trade and investment of the late 1960's that awakened U.S. interest in greater use of our zone program. Today there are over 200 foreign-trade zone projects dotting the United States. The projects vary in size and vitality, with communities able to participate based on their local trade environment and economic objectives. A typical U.S. FTZ project involves two or three general-purpose (multi-user, public) zone sites, as well as single-user (private) sites, known as subzones. The latter are usually at manufacturing plants.

Shipments into U.S. zones currently exceed $115 billion, of which some 20 percent is from abroad. Some 90 percent of the shipments are received at manufacturing plants. Export shipments from U.S. zones amounted to some $17 billion in 1994.

There is a separate review process for manufacturing authority to ensure that FTZ procedures are not used in a way that is inconsistent with trade policy or that is harmful to domestic industry. The FTZ Board evaluates proposed manufacturing on a case-by-case basis to determine whether allowing the use of FTZ procedures is in the public interest. Restrictions are usually adopted on products subject to quota programs.

Most U.S. FTZ manufacturing activity takes place in the subzones. There are currently over 250 manufacturing plants in the U.S. with "subzone" status. They range from auto assembly plants to shipyards, and many plants that produce advanced technology products have such status.

Subzones are a means of extending the effects of a zone program beyond general zone boundaries for manufacturing activity that has employment creation and retention effects. Ancillary sites of this type are common to many of the world's zone programs.

In the United States, general-purpose zones may be approved only within a 60-mile radius of ports of entry, but subzones, as adjuncts, are not subject to such a limitation if Customs officials concur that the facilities are reasonably accessible for supervision and audit purposes, and meet security standards. This makes most manufacturing plants located in the United States eligible for consideration for subzone status.

The growth of the past two decades in the U.S. zone program has been energized by state/local public and quasi-public agencies with economic development responsibilities. It is they that provide the grass roots political support and operational framework that allows zones to function as an integral part of our nation-wide international trade service infrastructure. In communities with incentive programs, such as "enterprise zones", free trade zone projects frequently operate as part of those programs. This proactive state/local role in the federal program has an important effect on the decision process not only for site selection and project administration, but also in providing a preliminary assessment as to the economic effects of proposed activity.

With the freeport vision very much alive in its new and more complex form in nations throughout the world, persons involved with free trade zone programs face the challenge of adapting them to national as well as local needs, within the framework of international obligations. U.S. foreign-trade zones have met this challenge in taking on a contemporary format adapted to the dynamics of the global economy. The strong involvement of the state/local sector has been a major factor in the significant role U.S. FTZs play today in helping provide the kind of competitive cost environment that is needed out to local economies for a full realization of our international trade and investment potential.

This adaptive use of the freeport concept in the United States provides a common thread with and a competitive counterpoint to the free trade zone programs and related special Customs procedures that have evolved over the past half century in other countries.

In closing, what remains to be acknowledged is the important role that the National Association of Foreign-Trade Zones has played in the advancement of the freeport concept in the United States. Since it was founded in the early 1970's, the association's officials and members have provided essential representation for the communities and zone grantees, operators and users that need a zone program that stays in tune with a fast changing world.

WASHINGTON, DC
10-2-95

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* John J. Da Ponte, Jr., Executive Secretary
Foreign-Trade Zones Board
U.S. Department of Commerce, Washington, D.C.
The views expressed in this paper are those of the author and not necessarily those of the FTZ Board.