Order Code RL34688
U.S. Foreign-Trade Zones:
Trade Agreement Parity (TAP) Proposal
September 29, 2008
Mary Jane Bolle
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

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U.S. Foreign-Trade Zones:
Trade Agreement Parity (TAP)Proposal
Summary
The National Association of Foreign Trade Zones (NAFTZ) has developed the
Trade Agreement Parity (TAP) proposal, introduced as H.R. 6415 (Pascrell) to
address what NAFTZ claims as the “unintended consequences” of free trade
agreements. These are that free trade agreements (FTAs), in granting tariff
advantages to businesses that import components or products from FTA countries,
put companies that import components from third countries (not a party to an FTA)
at a tariff disadvantage. Critics, however, say the effects the bill generally seeks to
address are the exact intended consequences of FTAs: the United States extends
preferential tariff treatment to components from an FTA partner country in exchange
for that country’s lowering of its tariff rates on U.S. products.
The TAP proposal would permit certain businesses to permanently
“borrow”U.S. free trade agreements (FTAs) in order to import components at rates
below those they would normally be charged under U.S. tariff law. There would be
two stipulations: (1) the products using third-country components would have to be
produced in a U.S. foreign-trade zone; and (2) the product would have to meet the
rules-of-origin (domestic content) requirements of any FTA – which could be
satisfied by using entirely third country parts and U.S. labor, without input from any
other FTA partner country.
The TAP proposal is reportedly being widely promoted on Capitol Hill by its
association sponsor, the NAFTZ, as a tool for helping multinational corporations
sourcing from non-FTA countries “level the playing field”to achieve tariff parity with
manufacturers sourcing from U.S. FTA countries. In addition, it has been the subject
of an editorial in the Wall Street Journal and the subject of two economic studies:
a staff study by the U.S. International Trade Commission (USITC); and a study
prepared for the NAFTZ by economists Dean A. DeRosa and Gary C. Hufbauer.
Major policy implications of extending FTA-related benefits to goods from non-
FTA countries include impacts on U.S. parts producers, customs revenue collections,
and trade and diplomatic relations with FTA partner countries; the potential for the
FTZ Board to be swamped with new applications for FTZ status, and to be under
increased political pressure to grant such status; a debatable assertion by its
association sponsor that it would create new U.S. jobs; and its impact on the ability
of the U.S. Trade Representative (USTR) to negotiate future FTAs.
The primary beneficiaries of TAP appear to be foreign multinational
corporations (especially motor vehicle producers) that source components from non-
FTA countries (i.e. China, Japan and the European Union), and some oil companies
that operate U.S. refineries. Potential losers could include parts producers in the
United States and FTA countries and U.S.-owned motor vehicle producers that
source components from Mexico and Canada. This report will be updated as events
warrant.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Why is This Proposal of Interest to Congress? . . . . . . . . . . . . . . . . . . . . . . . 2
Economic, Policy, and Administrative Implications . . . . . . . . . . . . . . . . . . . 3
Organization of This Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
What are U.S. Foreign-Trade Zones? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
US-FTZs are Free Trade Zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
History and Purpose of USFTZs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Benefits of FTZs Today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Details of the TAP Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
TAP vs. FTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Purpose of the TAP Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Overview of TAP Legislative Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Legislative Language of H.R. 6415 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Part (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Part (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Part (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The FTZ Application Process Under TAP . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Which Tariff Schedule Rates Would Apply to Businesses Granted FTZ
Status Under the TAP Proposal? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Potential Real-Life Examples: Importing Without vs. With TAP . . . . . . . . 12
Example 1: An Auto Assembly Plant Importing Components from
China under the Jordan FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Example 2: A Truck Assembly Plant Importing Components Under
the Morocco FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Potential Winners and Losers Under the TAP Proposal . . . . . . . . . . . . . . . . . . . 14
Proponents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Opponents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Economic Studies on the TAP Proposal: Findings and Analysis . . . . . . . . . . . . 16
USITC Technical Assistance Staff Report . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Findings and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
DeRosa-Hufbauer Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Findings and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Policy Analysis of the TAP Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Potential Trade Policy and Administrative Implications . . . . . . . . . . . . . . . 21
Businesses Otherwise Required to Pay Tariffs Could Obtain a Large
Tariff Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Effects on Trade and Diplomatic Relations With U.S. FTA
Partner Countries and Third Countries . . . . . . . . . . . . . . . . . . . . 21
TAP Would be Like a Broad Trade Preference Program . . . . . . . . . . . 21
Dilution of USTR Authority; Shifting of Some USTR Responsibilities
to the USFTZ Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
The FTZ Board Could Be Swamped with FTZ Applications . . . . . . . 22

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Options for Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Take No Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Include Only Part (a) of the TAP Proposal . . . . . . . . . . . . . . . . . . . . . . . . . 22
Include Only Part (b) of the TAP Proposal . . . . . . . . . . . . . . . . . . . . . . . . . 23
Include Parts (a) and (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Consider Other Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Economic Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Trade Policy Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Administrative Policy Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

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U.S. Foreign-Trade Zones:
Trade Agreement Parity (TAP) Proposal
Introduction
The National Association of Foreign Trade Zones (NAFTZ) has developed the
Trade Agreement Parity (TAP) proposal, introduced as H.R. 6415 by Representative
William Pascrell,1 to address claimed “unintended consequences” of free trade
agreements.2 These are that free trade agreements (FTAs), in granting tariff
advantages to businesses that import components or products from FTA countries,
put companies that import components from third countries (not a party to an FTA)
at a tariff disadvantage. To remedy this “problem,” TAP would “level the tariff
playing field” by permitting companies operating in foreign-trade zones (FTZs) to
“borrow” permanently 3 U.S. free trade agreements (FTAs) for their own use, to
reduce or eliminate tariffs on components from third countries.
Critics of the TAP proposal view the “unintended consequences” TAP seeks to
address as exactly the intended consequences of FTAs. The United States agrees to
preferential duty treatment on components coming from an FTA partner country in
exchange for that country’s lowering its duty rates on U.S. products. The effect of
the TAP proposal would be to provide FTA-related preferential duty treatment to
components from third countries that have not signed FTAs with the United States
and have not made compensating reductions in their own duty rates on U.S. products.
Under the TAP proposal, companies with U.S. manufacturing facilities could
apply to the U.S. Foreign Trade Zones (FTZ) Board for manufacturing authority.
With FTZ manufacturing authority, such corporations would then be entitled to
reduce or eliminate tariffs on imported components under the rules of origin and
tariff provisions of any free trade agreement.4 This means that so long as the product
meets the rules of origin (U.S. domestic content or value added and/or substantial
transformation) requirements of any FTA, the tariff benefits of that FTA would
apply. The rules of origin requirement can be satisfied by using any combination of
1 The Pascrell bill does not mention the words “trade agreement parity,” although its
provisions are substantively identical to those in the NAFTZ proposal. H.R. 6415 would
“provide that goods that are manufactured in a foreign trade zone and comply with the rules
of origin under a trade agreement to which the United States is a party may enter the
customs territory of the United States at the rate of duty applicable under that agreement.
2 National Association of Foreign-Trade Zones. Trade Agreement Parity (TAP) Initiative
Endorsement Statement.
3 Unless the privilege were revoked.
4 For information on rules of origin, see CRS Report RL34524, International Trade: Rules
of Origin, by Vivian C. Jones and Michael F. Martin.

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U.S. and/or third country parts and labor exclusively. No parts, labor or input of any
kind would need to come from any FTA country.
U.S. foreign-trade zones and subzones are physical areas geographically located
in the United States but considered to be outside of U.S. customs territory for
purposes of the tariff laws and customs entry procedures.
Subzones are special-purpose zones established as an adjunct to a zone project
for a limited purpose (for example, a stand-alone manufacturing facility.)
FTZs and subzones provide special customs procedures to U.S.-located facilities
using foreign inputs, which consist of FTA-country inputs and/or third country
inputs. For items that are processed in FTZs and then exported, no duties are payable
on the foreign inputs until the good leaves the zone. At the time the merchandise
leaves the zone for sale in the United States (i.e. is “entered for consumption”), the
duty may be paid either on the condition of the merchandise as it leaves the zone
(with authority from the FTZ Board), or on its condition as it was first brought into
the zone.
FTZs help offset customs advantages available to businesses which produce
goods offshore and then import them into the United States for consumption duty-
free under FTAs or preferential tariff programs such as the Generalized System of
Preferences (GSP), the Caribbean Basin Economic Recovery Act (CBERA), the
Andean Trade Preference Act (ATPA), and the African Growth and Opportunity Act
(AGOA).
In recent years, growth in FTZ activity has continued. While average zone
savings per facility may be lower, the contributory effect from the use of zone
procedures on a U.S. plant’s overall cost reduction efforts may be more significant
than in the past. While the contributory effect will vary by industry, the savings from
the use of zone procedures may have an impact on whether the production costs at
a U.S. facility are competitive with a plant abroad. Many companies maintain
manufacturing facilities throughout the world and are able to shift production among
plants. Any action taken by the U.S. facility to reduce its costs can have an impact
on the maintenance of the activity and associated employment in the United States.
Why is This Proposal of Interest to Congress?
The TAP proposal is of interest to Congress for a number of reasons. It
reportedly is being widely publicized and promoted on Capitol Hill by its association
sponsor, the NAFTZ as a tool for increasing competitiveness and economic
development. It is reflected in legislation that has been introduced in Congress (H.R.
6415). It has been the subject of an editorial in the Wall Street Journal5. In addition,
two economic studies have been undertaken on it. One is a staff study by the U.S.
5 A Democrat’s Good Idea. The Wall Street Journal, July 12, 2008, p. A-10.

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CRS-3
International Trade Commission (USITC). The other is a study prepared for the
NAFTZ by economists Dean A. DeRosa and Gary C. Hufbauer.6
Economic, Policy, and Administrative Implications
The TAP proposal is a complex issue, with potential economic, policy, and
administrative issues and implications. Economic issues, if Congress were to approve
TAP, would include (1) the effect of TAP on U.S. parts producers; and (2) the effect
on Customs duties collectable.
A major trade policy consideration is that U.S. FTA partners agreed to
preferential duty treatment for components coming from the FTA partner country in
exchange for that country’s lowering its duty rates on U.S. products. The effect of
the TAP proposal would be to provide FTA-related preferential duty treatment to
components from third countries that have not signed FTAs with the United States
and have not made compensating reductions in their own duty rates on U.S. products.
Identified trade policy issues include (1) the tariff benefit given operations that would
ordinarily be required to pay tariffs on imports; (2) the extension of FTA benefits to
non-FTA countries; (3) the impact of TAP on trade and diplomatic relations with
FTA partner countries; (4) the creation of a new trade preference program through
TAP; and (5) the impact of TAP on the USTR’s ability to negotiate future FTAs.
The TAP proposal may have implications for the USFTZ Board, made up of
designees of the Secretaries of Commerce and Treasury, an Executive Director, and
a staff of seven professionals. The USFTZ Board would be the gatekeeper charged
with ensuring on a case-by-case basis, after a lengthy process, that granting FTZ
status for TAP purposes would not be “detrimental to the public interest.”
Possible issues include (1) the potential that a flood of new applications by
businesses for FTZ status could swamp the U.S. Foreign-Trade Zones Board,
necessitating a substantial increase in administrative resources to handle the
increased requests for FTZ status;(2) the FTZ Board staff would take on the new
burden of determining whether or not processing activities in subzones would meet
the rules of origin requirements of an FTA and whether duty-free treatment for
articles meeting the requirements would be in the public interest; (3) the potential
that TAP could shift certain tariff policy decision-making responsibilities from the
Office of the U.S. Trade Representative to the U.S. Foreign-Trade Zones Board.
Organization of This Report
The box below is a quick reference guide assisting the reader in going directly
to key sections of this report, which is organized, in greater detail, as follows:
6 The Economic Impact of Trade Agreements Parity for Manufacturing Firms Operating in
U.S. Foreign-Trade Zones. Study prepared for the National Association of Foreign-Trade
Zones by Dean A. DeRosa and Gary Clyde Hufbauer, March 27, 2008.

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CRS-4
First this report defines and describes USFTZs: What are they? How did they
come about? How do they relate to the world-wide system of free trade zones? What
are the benefits of producing in a USFTZ today?
Second, the report explains the TAP proposal and how it would work. TAP is
a short three-page bill (H.R. 6415) which would amend two separate laws – the US
Foreign Trade Zones Act and the NAFTA implementing legislation. This second
section explains the implications of the TAP language, the application process for
FTZ status under TAP, and how
the Harmonized Tariff Schedule
would apply to businesses with
Quick Reference Guide
FTZ status under TAP. It then
for Highlights of this Report
includes real-life examples of
how TAP could be applied to
What are Foreign Trade Zones? . . . . . . . . . . . . . . . . 5
the automotive industry.
Details of the TAP Proposal . . . . . . . . . . . . . . . . . . . 8
The FTZ Application Process Under TAP . . . . . . . 11
Potential Real Life Examples Under TAP . . . . . . . 13
Third, the paper identifies
Potential Winners and Losers Under TAP . . . . . . . 16
potential winners and losers and
Economic Studies on the TAP Proposal . . . . . . . . . 18
reports on the arguments of
Policy Analysis of the TAP proposal . . . . . . . . . . . 23
proponents and opponents of
Options for Congress . . . . . . . . . . . . . . . . . . . . . . . 25
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
TAP.
Fourth, the report examines and analyzes two economic studies – one a staff
report from the U.S. International Trade Commission (USITC), and the other a study
prepared for the NAFTZ by economists Dean A. DeRosa and Gary C. Hufbauer.
Fifth, the report examines policy implications of the TAP proposal.
Sixth, it examines legislative options for Congress, including possible
legislative approaches that could accomplish the same purposes of TAP without
some of the negative implications.
Finally, this report offers some conclusions.
What are U.S. Foreign-Trade Zones?7
US-FTZs are Free Trade Zones
U.S. foreign-trade zones are the U.S. version of what is commonly known as
free trade zones. In general, free trade zones are geographic areas which are
physically located inside the boundaries of a country, but are treated as though they
7 Information from this section, except as otherwise indicated, was taken from U.S. Foreign-
Trade Zones: Current Issues, by Mary Jane Bolle, July 28, 1999. CRS Report RL30268.
See also, U.S. Customs and Border Protection. Importing into the United States: A Guide
for Commercial Importers. (2006, Ed.), p. 151-154. In addition, see Frequently Asked
Questions, available on the U.S. Foreign-Trade Zones Board website at
[http://is/ita.doc.gov/FTZpage/index.html].

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CRS-5
were located outside the country for customs purposes. U.S. FTZs operate under the
direct daily supervision of U.S. Customs and Border Protection (CBP). In addition,
U.S. FTZs remain within the jurisdiction of local, state or federal governments or
agencies.
Because zones exist in many countries worldwide, goods in the making can
move from zone to zone under streamlined customs procedures, having value and
parts added until they are at last complete. No tariffs are owed on goods or materials
until they exit the zone system, at which time the importing company pays any
applicable duties.
The U.S. system of foreign-trade zones consists of general purpose zones,
which are essentially secure, multi-user facilities where activities such as
warehousing, repackaging, labeling, quality assurance, manufacturing, and
distribution can take place; and special purpose subzones, which are single-use sites
which are geographically separated from general purpose zones but affiliated with
them for recordkeeping and organizational purposes.
History and Purpose of USFTZs
The U.S. Foreign-Trade Zone program was created in 1934 by the U.S. Foreign-
Trade Zones Act (P.L. 73-97).8 It was designed to accelerate U.S. trade in the wake
of the restrictive impact of the Smoot-Hawley Tariff Act of 1930, which raised U.S.
tariffs on imported goods as high as 53%. Other countries had retaliated similarly,
and international trade, considered a major force for economic growth in most
countries, came to a near standstill. At the time, the FTZ concept was controversial
because some feared that it would promote imports of cheaper components in the
manufacturing process, and thereby put U.S. components manufacturers at a
competitive disadvantage. As a result, zone activity was initially limited, and
manufacturing was not permitted in FTZs until 1950.
Most zones around the world are “export” processing zones in that they produce
for export abroad. While FTZs in the United States were primarily export processing
zones between 1982 and 1995, since 1995 they have become primarily import
processing zones in that 84% of the imported components end up in the United States
(2006 FTZ data).9 This is due largely to the fact that the United States is the world’s
largest market and is the destination market for both goods produced offshore and
goods produced at U.S. facilities which compete with offshore facilities.
The system of U.S. foreign-trade zones has evolved greatly over its nearly 75-
year history. Envisioned by some as an engine of export growth, USFTZs have
continued to evolve and have become largely a system for reversing the inverted
8 The act and its amendments over the years can be found at 19 USC 81(a) et seq.
Regulations issued by the U.S. Foreign-Trade Zones Board for establishing and maintaining
a foreign-trade zone can be found at 15 CFR 400.
9 These statistics reflect 2006 data from the most recent 68th Annual Report of the U.S.
Foreign-Trade Zones Board to Congress, December, 2007. See also, CRS Report RL30268,
op. cit., Figure 3, p. 12.

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CRS-6
tariff structures on U.S. imports (higher duties on imported components than on
finished products) under the U.S. Harmonized Tariff Schedule (HTSUS). Inverted
tariff structures can disadvantage U.S. facilities and can be reversed in FTZs because
when assembled goods enter into the customs territory of the United States, the
importer has a choice. He can choose to pay the lower of either the rate applicable
to the imported input or the rate applicable to the finished article.
Benefits of FTZs Today
In recent years, trade agreements (including the multilateral Uruguay Round
Agreements in 1993 and bilateral and regional FTAs) have systematically eliminated
many inverted tariff structures. As a result, some observers conjectured a decade ago
that FTZs would soon become obsolete. However, in the last ten years, usage of the
FTZ system has continued to grow. As a share of GDP, the value of shipments into
foreign-trade zones has grown by two-thirds, from 2.2% in 1996 to 3.7% in 2006.10
Despite the overall reduction in tariff rates and the fact that tariff differentials
are lower than in the past, global cost competition in many industries has increased.
This means that companies focus more than ever on squeezing small savings from
every part of the production and distribution process. As a result, although average
zone savings may be lower than in the past, their contributory effect on a U.S. plant’s
overall cost reduction efforts may be more significant than in the past. While the
contributory effect will vary by industry, the savings from the use of zone procedures
may have an impact on whether the production costs at a U.S. facility are competitive
with a plant abroad.
Many companies maintain manufacturing facilities throughout the world and are
able to shift production among plants. Any action taken by the U.S. facility to reduce
its costs can have an impact on the maintenance of the activity and associated
employment in the United States. In 2006 (most recent data), the total value of
imported materials entering the United States through USFTZs was $159 billion,
which represented roughly 9% of the total customs value of all imports for
consumption for that year.11
Today businesses use zones to save money in at least seven ways aside from
avoiding inverted tariffs: (1) Duty deferral: Duties need not be paid until goods are
transferred from the zone to U.S. customs territory for import; (2) Duty exemption:
No duty is payable on goods exported from a zone or scrapped, or destroyed in a
zone; (3) Duty drawback elimination: Zones eliminate the need for duty drawback
– the refunding of duties previously paid on imported and then re-exported
merchandise; (4) Tax savings: Foreign goods and domestic goods held for export in
zones are not subject to state and local ad valorem taxes, such as personal property
tax; (5) Quota storage: Quota restrictions do not apply to merchandise admitted to
or stored in a zone until it exits the zone and is entered into a customs territory; (6)
10 CRS calculations from data included in the 68th Report of the U.S. Foreign-Trade Zones
Board to Congress, listed above, and the Economic Report of the President, February 2008.
11 USITC Dataweb lists the total customs value for all imports in 2006 at $1,845 billion.

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Zone to zone transfer: Merchandise can be transferred from zone to zone “in bond;”12
and (7) Customs inventory efficiencies: cost savings (especially cash-flow savings)
can occur from zone efficiencies affecting inventory control, such as “direct delivery”
and weekly (instead of individual) entries on zone deliveries.
Details of the TAP Proposal13
The TAP proposal and H.R. 6415 are substantively the same.
TAP vs. FTAs
FTAs are free trade agreements are concluded between the United States and
one or more foreign countries to eliminate tariffs and various non-tariff barriers over
time (usually 10-15 years), on goods traded between or among them. TAP would
permit companies to use existing FTAs to import third country components at
reduced tariff rates. TAP is distinct from FTAs in that it would (1) permit companies
that have applied for and been granted FTZ status for this purpose to import a
specific share of third country components (as permitted under the domestic content
requirements of the specific FTA) into USFTZs; and (2) “substantially transform”
them into finished goods, thus being able to import them into the United States duty-
free or at substantially reduced rates.
Purpose of the TAP Proposal
As mentioned, according to its designers, the main purpose of the TAP proposal
would be to “equalize the unintended consequences of free trade agreements.”
NAFTZ argues that U.S. FTAs never intended to put U.S. facilities that import
components from “third” countries at a tariff disadvantage relative to companies that
source either their components or their final products from FTA countries. A “level
playing field,” NAFTZ argues, could keep companies from moving abroad in order
to obtain tariff-free treatment on third country components.14
The TAP proposal could then offer companies operating in U.S. FTZs access
to “the best and cheapest suppliers worldwide, as a tonic to domestic manufacturing
activity.” In addition, businesses operating in U.S. FTZs, NAFTZ argues, should be
able to obtain components from foreign sources on terms that are at least as favorable
12 “In bond” refers to the status of merchandise admitted provisionally to a country without
payment of duties, either for storage in a warehouse or for transshipment to another point
where duties will eventually be imposed.
13 See National Association of Foreign-Trade Zones. Draft Proposal for Trade Agreement
Parity for U.S. Manufacturers Fact Sheet – Discussion Draft.
14 See four documents available on the NAFTZ Website at [http://www.NAFTZ.org:] (1)
Trade Agreement Parity (TAP) Legislation; (2) Trade Agreement Parity (TAP)(H.R. 6415)
Questions and Answers; (3) Trade Agreement Parity (TAP) Initiative Endorsement
Statement; and (4)The Truth about TAP – Setting the Record Straight.

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as the terms available to” businesses operating in FTA partner countries.15 Further,
the provision, if adopted, could arguably provide a reason for some producers to
remain in the United States instead of relocating abroad, to the extent that tariff rates
contribute to decisions on where to locate production.
Overview of TAP Legislative Provisions
The TAP legislative proposal is in three parts. Part (a), the main part, would
amend the U.S. Foreign-Trade Zones Act of 193416 to “correct” what the National
Association of Foreign Trade Zones (NAFTZ),17 views as a “problem” or inequality
in the Harmonized Tariff Schedule: Functionally identical components for
manufactured goods in this country carry different tariff rates under the U.S.
Harmonized Tariff Schedule (HTSUS) depending on the country or country group
from which they are imported. Components imported from countries with which the
United States has a free trade agreement or trade preference program18 carry a much
lower tariff than goods imported from other countries. To remedy this “problem,” the
TAP proposal would permit importers to pay tariff rates on third country components
as if they had been imported from an FTA country.
Businesses could qualify for reduced tariff treatment on a case-by-case basis if
they met two conditions:
1.
The business would have to apply to and be granted U.S. foreign-trade
zone (FTZ) authority by the U.S. FTZ Board. This means businesses
would need to go through the application process and convince the USFTZ
Board that FTZ manufacturing authority and permission to import under
a selected FTA would not be “detrimental to the public interest.”
2.
The finished product produced in the zone would need to meet the relevant
rules of origin requirements of any FTA.
Part (b) of the TAP proposal would renumber provisions in the North American
Free Trade Agreement (NAFTA) Implementation Act (P.L. 103-182) to eliminate a
provision which denies NAFTA benefits to goods produced in USFTZs. While this
15 Evaluation of CRS Memorandum Dated June 16, 2008, Titled: “Proposed NAFTZ
Changes to the Draft U.S. Customs Reauthorization Bill (Updated). Comment Prepared for
the National Association of Foreign-Trade Zones, July 2, 2008, by Dean De Rosa & Gary
Hufbauer.
16 48 Stat 98-1003, 19 USC 81a-81u, as amended
17 NAFTZ is an organization comprised of 800 businesses, public entities and service
providers focused on promoting the use of the U.S. Foreign-Trade Zone Program.
18 Congress has approved implementing legislation for free trade agreements with Mexico,
Canada, Israel, Jordan, Chile, Singapore, Australia, Morocco, Bahrain, Oman, Peru, and the
Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua under
the Dominican-Republic-Central America Free Trade Agreement (CAFTA-DR). In addition,
four U.S. trade preference programs are currently in effect: the Generalized System of
Preferences, the Andean Trade Preference Act, the Caribbean Basin Economic Recovery
Act, and the African Growth and Opportunity Act.

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CRS-9
provision was designed to protect U.S. parts manufacturers from competition from
Mexico or Canada, it has arguably served to encourage certain businesses to drop
their USFTZ status and/or relocate to Mexico or Canada instead. The denial of FTA
benefits for firms producing in USFTZs was not included in subsequent FTAs.
Part (c) of the TAP proposal would set an effective date of 15 days after
enactment.
Legislative Language of H.R. 6415
The technical language of TAP proposal parts (a), (b), and (c) is as follows:
Part (a). Part “a,” of the TAP proposal would authorize businesses to apply for
reduced tariff rates on third country components by adding a small provision to the
U.S. Foreign Trade Zones Act [19 USC Sec. 81(c)(a)] after the word “provided” at
the end of the paragraph immediately below. Thus, the new language appears in the
indented paragraph below that.
Sec. 81(c)(a) of the U.S. Foreign-Trade Zones Act lists activities that may be
undertaken on a good that has been brought into a U.S. foreign trade zone. It This
section says that a good may be: “stored, sold, exhibited, broken up, re-packed,
assembled, distributed, sorted, graded, cleaned, mixed with foreign or domestic
merchandise, or otherwise manipulated, or manufactured.” It may then be “exported,
destroyed, or sent into customs territory of the United States. . .subject to the laws
and regulations of the United States affecting imported merchandise: Provided,” and
then Part (a) of H.R. 6415 reads:
further, That if foreign merchandise is incorporated into a finished good, or is
processed, manipulated or manufactured in a zone, and complies with the rules
of origin under any agreement which affects the rates of duty for merchandise
and to which the United States is a party, then upon authorization under this Act,
such merchandise shall enter the customs territory of the United States at the rate
of duty provided under the Harmonized Tariff Schedules of the United States for
such merchandise that complies with such rules of origin.
Part (b). Part (b) of the proposed legislative language would amend the North
American Free Trade Agreement Implementation Act (P.L. 103-182). It would
renumber provisions to eliminate language which denies NAFTA benefits for goods
produced in USFTZs for importation and consumption in the customs territory of the
United States. If the currently existing language included below were removed,
NAFTZ users would be eligible to import under NAFTA in the same way that they
are currently eligible to import under all other FTAs. The language which H.R. 6415
would eliminate reads:
19 USC Sec. 3332(a)(2)(A) RULES OF ORIGIN: FOREIGN-TRADE ZONES
Subparagraph (B) of paragraph (1) shall not apply to a good produced in a
foreign-trade zone or subzone (established pursuant to the Act of June 18, 1934,
commonly known as the Foreign Trade Zones Act [19 U.S.C.A. Sec. 81a et
seq.]) that is entered for consumption in the customs territory of the United
States.

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If the above clause were eliminated, the currently existing clause below would
then govern tariff charges on third country components for goods produced in
USFTZs:
A GOOD ORIGINATES IN THE TERRITORY OF A NAFTA COUNTRY IF:(B)(i) each
nonoriginating material used in the production of the good –
(I) undergoes an applicable change in tariff classification set out in Annex 401
of the Agreement as a result of production occurring entirely in the territory of
one or more of the NAFTA countries; or
(II) where no change in tariff classification is required, the good otherwise
satisfies the applicable requirements of such Annex; and
(ii) the good satisfies all other applicable requirements of this section;
Part (c). Finally, the amendment would set as an effective date applicable to
any merchandise entered into the United States or withdrawn from warehouse for
consumption, 15 days or later after the date of enactment of the bill.
The FTZ Application Process Under TAP
Under TAP, in order to import third country components at tariff rates and under
domestic content requirements prescribed under any FTA, a business would need to
have FTZ manufacturing authority. To obtain FTZ manufacturing authority a
business would have to follow normal USFTZ procedures and apply to the USFTZ
Board19 under guidelines set forth in the Code of Federal Regulations (15 CFR Part
400), with information showing why its proposed manufacturing activity would not
be “detrimental to the public interest” based on two sets of criteria.
The first set of criteria is threshold factors. To meet threshold factors, the
business would have to convince the USFTZ Board that FTZ status for purposes of
importing components tariff free under an FTA (1) would not be “inconsistent with
U.S. trade and tariff law or policy . . . formally adopted by the Executive Branch;”
that (2) FTZ status would not “seriously prejudice U.S. tariff and trade negotiations
or other initiatives;” and that (3) “the activity involves items subject to quantitative
import controls or inverted tariffs, and the use of zone procedures would be the direct
and sole cause of import that, but for such procedures, would not likely otherwise
have occurred.”20
The second set of criteria is economic factors. Under economic criteria, the
USFTZ Board would consider an application for FTZ status based on its net impact
on: (1) overall employment; (2) exports and re-exports; (3) retention or creation of
19 There is a fee to apply for FTZs and subzones. Fees are: for general-purpose zones within
a port of entry: $3,200; for subzones, non-manufacturing processing or fewer than 3
products: $4,000; for manufacturing/processing 3 or more products: $6,500; expansions:
$1,600.
20 U.S. Foreign-Trade Zone Regulations, CFR Title 15, Part 400.31(b)(1).

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CRS-11
manufacturing or processing activity; (4) value-added activity; (5) import levels of
relevant products; (6) import displacement; (7) foreign competition in relevant
products; (8) related domestic industry; and (9) other factors including technology
transfers and investment effects.21
The application process for FTZ authority is lengthy and involved for both the
applicant and the USFTZ Board, and typically takes six months to a year. However,
the Board may determine that it requires additional time based on special
circumstances.
Processing any business application for FTZ status requires considerable
research and preparation on the part of the Board, which shall be responsible for
publication in the Federal Register of a notice, invitation for public comment, and
time for rebuttal by the applicant. During the process, Board examiners must also
conduct their own research in addition to that presented, conduct hearings as
necessary, review case records and public comments, request evidence, develop
information and evidence necessary for analysis of the threshold and economic
factors, and report on their findings. An examiner’s report, along with the technical
report from the local Customs and Border Patrol (CBP) Port Director, is circulated
to CBP headquarters and the Treasury Department for review and concurrence before
final action can be taken by the FTZ Board in the Commerce Department.
FTZ Board regulations provide that in the course of being considered for FTZ
status, the applicant will be permitted a number of opportunities to provide
supplemental information. The applicant may be notified of deficiencies in the
application. If a USFTZ Board decision on the application is unfavorable, it shall be
considered preliminary. The applicant may then provide additional evidence, which
the Board would consider in its review.
If, in its final report, the Board rules against the applicant, based on any of the
threshold or economic factors, it shall deny or restrict authority for the activity. In
evaluating the economic factors, “previous evaluation in similar cases are considered.
The net effect is arrived at by balancing the positive and negative factors and arriving
at a net economic effect.” [15 CFR 400.31 (c)].
The Board has, on occasion, denied FTZ status, particularly in certain kinds of
cases. More frequently, the Board implements specific restrictions on approval to
address in a targeted manner issues or concerns. The Board will deny or restrict an
application where granting zone status would handicap other businesses in the
industry. On the other hand, once a business in a specific industry has obtained FTZ
status, this could provide a precedent for future applications involving similar
activity. In other cases, the USFTZ has denied zone status based on policy
considerations such as those relating to agricultural products and textiles.
21 U.S. Foreign-Trade Zone Regulations, CFR Title 15, Part 400.31(b)(2).

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Which Tariff Schedule Rates Would Apply to Businesses
Granted FTZ Status Under the TAP Proposal?
Once a business receives FTZ Board approval to undertake manufacturing under
a specific FTA, as provided by the TAP proposal, it would be eligible for the reduced
tariff rates applicable to that FTA under the U.S. Harmonized Tariff Schedule
(HTSUS)22 The tariff rates to be assessed the business on third country components
would be determined as follows:
In the HTSUS, there are three columns representing tariffs assessed to three
different groups of countries. The first is called“Column 1, General.” It shows the
“general” rate – often referred to as either the “most favored nation” (MFR) rate or
“normal trade relations” (NTR) rate – assessed to most countries.23 The second is
called “Column 1 Special.” It shows the “special” rates assessed articles from
countries with which the United States has free trade agreements (FTAs); articles
from beneficiary countries under various trade preference laws (i.e. the Generalized
System of Preferences – GSP); articles eligible for duty-free treatment under special
programs, such as the Civil Aircraft Agreement; and articles eligible for the
temporary suspension or reduction of duties. The third is called Column 2. It
provides the much higher rate charged to countries to which the United States does
not apply NTR rates. Currently in this list are Cuba and North Korea.24
With FTZ status, approved businesses would then be eligible to pay the reduced
tariff rate in “Column 1, Special” for the FTA they are authorized to import under,
instead of the current tariff rates under “Column 1, General.”
Potential Real-Life Examples: Importing Without vs. With TAP
The following examples show how a business might save money on tariff
assessments under TAP, when importing under the applicable FTA of its choice.
Example 1: An Auto Assembly Plant Importing Components from
China under the Jordan FTA. As the law currently stands, without the TAP
proposal, assume Company A, a foreign-owned, U.S. based business, has an auto
assembly plant in the United States and is operating in an FTZ to take advantage of
the inverted tariff structure for autos. The company imports auto parts from China
22 The HTSUS, produced by the U.S. International Trade Commission (USITC), provides
the applicable tariff rates and statistical categories for all merchandise imported into the
United States; it is based on the international Harmonized System, the global system of
nomenclature that is used to describe most world trade in goods.
23 Column 1 “general” tariff rates differ by industry, and many tariff rates are zero,
especially on products not manufactured in the United States. Components involved in FTZ
manufacturing activity generally have duty rates less than 10%. Average U.S. tariffs, as
reported by the World Bank, were 2.7% for 2007. Source: The World Bank. Table 1.
Trends in Average Applied Tariff Rates in Developing and Industrial Countries, 1981-2007
(Unweighted in %).
24 Source: Harmonized Tariff Schedule of the United States (2008), General Notes 3(b).

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CRS-13
(some with a duty rate up to 5%) and assembles the finished vehicle, which has a
duty rate of 2.5%. Under FTZ procedures the company has the choice of paying the
duty on the foreign components in their condition as they leave the zone (i.e., as an
assembled car) rather than as they enter the zone as components. In this way, it is
able to reduce its duty rate on foreign components from 5% to 2.5%. As in all FTZ
operations currently, the duty rate comes from the general Column 1 duty rate in the
Harmonized Tariff Schedule of the United States.
Under the TAP proposal as written, Company A could seek authority to apply
the rules of origin (including local content requirements) and duty rate from the U.S.
Jordan FTA to the assembled cars leaving the subzone. Under the Jordan FTA, the
duty rate on the cars would be zero, providing the company with a savings of the
2.5% tariff it pays currently on the value of the parts imported from China.
Discussion. In the U.S.-Jordan FTA, no specific rules of origin provision was
included for automobiles. As a result, the Jordan FTA general rules of origin apply.
This means that Company A’s finished vehicles would quality for duty-free treatment
under the Jordan FTA if they contained the minimal amount of 35% U.S. or
Jordanian content (including value added by labor). Further, up to 65% of the value
of a finished automobile could be comprised of third-country components, and the
car would still qualify as “originating” under the Jordan FTA. Thus, it is conceivable
that a car with 65% of its value comprised of components from China could have
20% U.S. components and 15% “value added” through the assembly process in a
U.S. factory, and then qualify as “originating” (duty-free) automobile under the
Jordan FTA.
Since negotiators of the U.S.-Jordan FTA (which was signed in 2000) may not
have foreseen that there could be a significant number of vehicle imports from
Jordan, the language of the U.S.-Jordan FTA and the rules of origin negotiations may
not have taken into account potential concerns of the U.S. automobile and auto parts
industries. The proposed legislation does not require that the parts used in the
assembly be from Jordan, or that Company A or the industry have any connection to
Jordan to qualify under the Jordan FTA. While the tariff effect from one company
may appear small, the broader impact on U.S. industry could be significant. In
addition, the specific impact of allowing duty-free treatment for the industry may not
have been evaluated during the FTA negotiations.
Company A's auto assembly is one example of a situation that would be allowed
under the TAP proposal. However, the proposal would allow for similar duty free
treatment in any industry under the rules of any FTA.
Example 2: A Truck Assembly Plant Importing Components Under
the Morocco FTA. As the law currently stands, assume that Company A also has
another assembly facility for pick-up trucks in the United States. Assume further that
for this facility, Company A is importing some components from Japan at a duty rate
of 5%. The general column 1 HTS duty rate on the trucks themselves is 25%.
Currently Company A would not benefit from FTZ procedures for reversing inverted
tariffs, since the inverted tariff situation does not exist for trucks (because the U.S.
tariff rate is higher on completed trucks than on its components.) Therefore, the

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CRS-14
company has chosen not to pursue FTZ designation for the factory.
Under the TAP proposal, however, Company A could apply for subzone status
for its truck assembly operations. In this case, instead of the Jordan FTA (which
maintains a 5% duty on the trucks), assume that the company decides to use the
Morocco FTA. The Morocco FTA also requires only 35% U.S. or Moroccan content
(including value added) to qualify under its rules of origin provision. In addition, the
Morocco FTA also has a more favorable – duty-free – rate for trucks. Company A
has no connection to Morocco (as it had no connection to Jordan in Example 1), and
none of the parts are imported from Morocco. Further, up to 65% of the value of a
finished truck could be comprised of third-country components, and the truck would
still qualify as “originating” under the Morocco FTA.
Potential Winners and Losers Under the
TAP Proposal
The primary beneficiaries of the TAP proposal would appear to be foreign
multinational corporations – especially foreign motor vehicle producers, which could
save on their customs duties. Many foreign motor vehicle producers are companies
which already do or could assemble their products in USFTZs from foreign parts
sourced from countries like Japan, South Korea, and the European Union. These are
countries with which the United States does not have free trade agreements, and on
whose imports relevant duties may typically be around 2.5%.
Other beneficiaries could include some oil companies that operate refineries in
FTZs. Their savings come from an inverted tariff situation on petrochemical products
(which are generally duty-free) produced from imported crude oil (which is assessed
a duty rate of either 5.25 or 10.5 cents per barrel.) Currently, the duty rate on
gasoline is 52.5 cents per barrel; however, it is duty free under many FTAs. TAP
could increase refinery savings by allowing gasoline produced from imported crude
oil to be entered at a rate of duty-free.25
U.S. FTZs and various FTZ support groups would also stand to benefit from the
TAP legislation.
U.S.-owned motor vehicle producers might not stand to benefit from this
proposal to the same extent as foreign-owned motor vehicle producers, because
Canada and Mexico are the principal suppliers of foreign auto parts used to
supplement the U.S. made parts used in their U.S. vehicle assembly operations.
Because most of the imported parts used in the assembly plants of the U.S.-based
motor vehicle companies enter free of duty under NAFTA, there was little incentive
for these operations to maintain their FTZ special purpose subzone status following
the implementation of NAFTA.
25 For list of oil refineries that operate in U.S. FTZ subzones, see U.S. Department of
Commerce, U.S. Foreign-Trade Zones Board. 68th Annual Report of the U.S. Foreign-
Trade Zones Board to Congress of the United States, December, 2007, p. 26-58.

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Potential losers under TAP could be both U.S. parts manufacturers who could
lose market share to imported third country components, and other U.S.
manufacturers whose products would compete with articles assembled in FTZs.
Proponents
The TAP proposal is being promoted by some groups as an economic
development and economic growth tool, with U.S. employment benefits. These
groups include some multinational corporations (especially foreign-owned motor
vehicle producers), the National Association of Foreign Trade Zones (NAFTZ) and
some economic development groups.
More specifically, according to NAFTZ, proponents of the TAP proposal
include the following: Abbott, BMW Manufacturing Co., Centrepot International
Logistics, Inc., DNP Electronics America, Eastman Kodak Company, Hitachi
Automotive Products, Logistics International, LLC, Toyota, the Association of
International Automobile Manufacturers, Sony Electronics, Valero, Conoco Phillips,
and Daimer. They also include the following FTZs and related support
organizations: the National Association of Foreign Trade Zones, Colombus Regional
Airport Authority FTZ # 138, Dallas/Fort Worth International Airport FTZ #39,
Eastern Distribution Center FTZ #24, Florida Free Trade Zones Association, Georgia
FTZ Inc, FTZ #26, Greater Dayton FTZ #100, Kansas City FTZ Inc FTZ#15, Greater
Rockford Airport Authority FTZ #176, Lawrence Economic Development Corp FTZ
#270, NEOTEC FTZ #181, PAC-AM Oakland FTZ #56, Point Trade Services, Port
of South Louisiana FTZ #124, Port of Stockton FTZ #231, Organization for
international Investment, Summit County Port Authority FTZ #181, South Carolina
State Ports Authority, Piedmont Triad FTZ #230, Greater Indianapolis FTZ Inc., and
the Rockefeller Group.26
Opponents
According to the Automotive Trade Policy Council, representing domestic
companies Chrysler, Ford, and General Motors, among other things, the TAP
proposal: (1) Undermines the primary goal of FTAs and offers FTZ producers a
subsidy to continue using non-originating content; (2) Provides an incentive to
minimize NAFTA content, since producers would be able to decrease NAFTA
sourcing down to the bare minimum in order to import theoretically cheaper non-
originating content duty-free; (3) Further disadvantages U.S. corporations operating
outside an FTZ, because the most favored nation (MFN) duty rates on third country
imports would still apply to those goods not admitted and processed in an FTZ; (4)
Would not create job growth in the United States because non-originating goods may
become duty-free, thus encouraging the expanded use of non-originating goods or
components. Thus, any job growth would more likely occur in non-FTA countries;
and (5) Does not contain an approval process that can limit the inherent flaws, since
26 Source: NAFTZ. Trade Agreement Parity (no date) and Trade Agreement Parity (TAP)
Initiative Endorsement Statement (also no date).

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any FTZ that wanted to participate in this program could do so by receiving the
approval of the FTZ authority.27
Economic Studies on the TAP Proposal:
Findings and Analysis
Two economic studies have analyzed the possible impact of the TAP proposal.
The first, a USITC staff report examined the potential effect of the proposal on
Customs revenues lost through tariff reduction or elimination. Another study, by two
economists Dean DeRosa and Gary Clyde Hufbauer, examines the potential effect
of the TAP proposal on Customs revenue losses and counter-balancing economic
gains.
USITC Technical Assistance Staff Report28
Findings and Methodology. The USITC staff report estimated the potential
annual Customs revenue loss from the TAP proposal of “at least $437 million (or
1.5% of the total duties receivable for 2005)29 if FTZs were granted “parity with”
FTAs.
This estimated customs revenue loss is based on actual Customs duties paid in
2005 on the foreign parts and materials that were used in processing operations in
FTZs where the processing operations appeared to satisfy the rules of origin
requirements of an FTA.
To estimate the potential loss of Customs revenue resulting from
implementation of the TAP proposal, Commission staff identified:
(a) Companies in General Purpose FTZs and Special Purpose Subzones whose
processing operations would sufficiently transform or add value to imported parts
and materials that the assembled articles would qualify for duty-free entry. This
duty-free entry would result from the fact that the processing met the rules of
origin requirements of an FTA; and
27 Automotive Trade Policy Council. Foreign Trade Zone-FTA Parity Proposal. Fact Sheet.
(No date.)
28 Staff of the U.S. International Trade Commission. Potential Loss of Customs Revenue
Resulting from FTZ Parity with Trade Promotion Agreements, June, 2007. A USITC
“Technical Assistance Staff Report” is different from a “USITC Report” in that it is
prepared by a specific Office within the USITC for purposes of providing technical
assistance, and is not released by the USITC as an official document. It also contains the
disclaimer “This technical assistance does not reflect the views of the U.S. International
Trade Commission or any of the Commissioners and is not an official Commission
document. It should be referenced as the work of the staff of the USITC.” For copies of this
study contact Lyn Schlitt, Director, Office of External Relations, USITC (202) 205-3141.
29 Source of duty figure: U.S. Customs and Border Protection. Performance and
Accountability Report, Fiscal Year 2006, p. 84.

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(b) the duty paid by each company with “FTA-eligible” FTZ operations on third
country (non-FTA) components.
The USITC staff then tabulated duty paid by each company with operations that
would meet the rules of origin requirements under NAFTA (as a proxy for any FTA)
and whose components imported from third countries could thus be eligible for duty-
free treatment under the TAP proposal.
Results of the USITC study suggest that the TAP proposal could eliminate
almost 90% of actual duties paid by FTZ subzone users, based on 2005 data. The
estimate does not take into account FTZ processing operations that became active in
2006 and 2007. The estimate is based on public information contained in annual
reports submitted by operators of FTZs including FTZ subzones.
The USITC study noted that the TAP proposal may increase the incentive to use
dutiable foreign parts and materials in FTZ processing operations instead of U.S.
parts and materials, because the dutiable foreign parts and materials could qualify for
“de facto” duty-free treatment.
The summary of estimated Customs revenue loss by principal sectors, based on
USITC staff tabulations indicates that the sectors responsible for the $437 million
estimated total revenue loss includes motor vehicle assembly ($305 million),
petroleum refining ($77 million), chemicals/pharmaceuticals processing ($19
million), and other assembly operations ($36 million). Thus, under the TAP proposal,
the largest estimated customs revenue loss ($305 million or 70%) would come from
the motor vehicle assembly sector.
According to the USITC, ten companies accounted for 76% of the total revenues
paid, and may be the leading beneficiaries of the proposal for FTZ “parity” with
FTAs. All but three of these are foreign multinational corporations in the automotive
sector. These are, in order of the duties they paid on operations which potentially
would be considered FTA-eligible (i.e. potentially TAP-eligible) because their
operations would have met rules-of-origin requirements of NAFTA had they been
performed in Mexico or Canada, combining U.S.-origin and third country inputs:
BMW, Toyota, Honda, Mazda, Nissan, Motiva Enterprises (petroleum refinery),
Subaru, Sony Electronics, Hyundai, and Valero Refining.30
The USITC staff study is static. It predicted customs revenue losses based on
a “snapshot” of actual 2005 FTZ usage by businesses that already hold USFTZ status.
It did not take into account the potential for new FTZ applications if businesses were
to take advantage of the TAP proposal, should it become law. Thus, it did not project
ahead to estimate the potential additional Customs revenues foregone that might
occur over the next 5, 10, or 15 years if TAP were adopted.
30 Potential Los of Customs Revenue, USITC staff, op. cit., p. 5.

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DeRosa-Hufbauer Study31
The NAFTZ retained two economists, Dean DeRosa and Gary Clyde Hufbauer
to produce “an economic development study on the impact of TAP on the U.S.
economy and manufacturing sector.” The study estimated the potential impact of
TAP over the “medium term” at (1) “over $66 billion in new shipments from the
FTZs into the U.S. market;” (2) “the creation of nearly 95,000 new manufacturing
jobs in FTZs;” (3) a total annual gain to the U.S. economy of $530 million; (4)
“higher pay and living standards for manufacturing and other zone workers;” and (5)
“clear evidence that the proposal will benefit the U.S. economy in both job increases
and U.S. business growth.”32
Findings and Methodology.33 The DeRosa-Hufbauer study bases its
estimates on a gravity model (which predicts bilateral trade flows based on the GDP
levels of trade partners and the geographic distances between them). Using this
model, it assumes that the TAP proposal will shift output from non-zone to zone
production, amounting to a 13% (or $66 billion) increase in shipments from zones,
in 2006, and a counter-balancing decline in shipments from locations outside of
FTZs.
Estimates of Economic Losses: Customs Revenues Foregone. The
DeRosa-Hufbauer study’s gravity model estimates foregone customs revenues to the
U.S. economy from the TAP proposal at $186 million per year (or 18% of 2005
Customs revenue), of which $146 million, or nearly 80% (similarly to the USITC
staff study) would be in the motor vehicle sector – notably vehicles, other transport
equipment, and related parts and accessories.
This estimate of Customs revenues foregone, at $186 million, is less than half
the estimate reported by the USITC Staff study of $437 million based on 2005 data.
The different estimates reflect the difference in methodology between the two
studies.
While the DeRosa-Hufbauer study obtained its estimate from economic
modeling, based on imports actually arriving from present and prospective FTA
partners, the USITC staff obtained its numbers by sorting through public information
31 The Economic Impact of Trade Agreements Parity for Manufacturing Firms Operating
in U.S. Foreign-Trade Zones. Study prepared for the National Association of Foreign-Trade
Zones by Dean A. DeRosa and Gary Clyde Hufbauer, March 27, 2008. Thirty sponsors of
the study include 12 multinational corporations (including Toyota, BMW, Daimler,
ConocoPhillips, Sony, Hitachi, Abbott, and Kodak) and 18 U.S. foreign-trade zones and
related operations. The study states that the views expressed are solely those of the authors,
and do not necessarily represent the official views of their respective organizations.
32 Taken from the NAFTZ website at [http://www.naftz.org/index_categories.php
/resources/66]: Trade Agreement Parity (no date); and The Economic Impact of Trade
Agreements Parity for Manufacturing Firms Operating in U.S. Foreign-Trade Zones. Study
Prepared for the National Association for Foreign-Trade Zones by Dean A. DeRosa and
Gary Clyde Hufbauer, March 27, 2008.
33 Dean A. DeRosa and Gary Clyde Hufbauer, op. cit., full cite at footnote #8.

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contained in annual reports submitted by operators of FTZs and subzones and
actually tabulating tariffs paid on third country components by companies that would
be eligible to apply for FTZ status under TAP. This estimate is based on calculations
that, based on NAFTA rules of origin, the processing/assembly in the FTZ of third-
country parts and materials with U.S.-origin content and labor would qualify the
processed or assembled good leaving the FTZ for duty-free entry into the United
States under NAFTA had the processing or assembly occurred in Mexico or Canada.
Estimates of Economic Gains. The DeRosa-Hufbauer study mentions
three kinds of gains to the U.S. economy: job gains to FTZs, annual wage gains of
$394 million and producer gains of $136 million, for a total benefit to the U.S.
economy of $530 million. It finds that these gains “dwarf [estimated] foregone
customs revenues” at $186 million.34
Job Gains. The DeRosa-Hufbauer study estimated that the TAP proposal
would shift 95,000 additional full-time equivalent jobs from a location outside FTZs
to a location inside FTZs, as existing businesses gain zone status.35 This number,
accounts for about 0.7% of all manufacturing employment in 2005. It is not clear
from the study whether any of these FTZ job gains would represent actual job gains
to the company (as opposed to job gains to FTZs which would result from a simple
switch of the company from non-zone to zone status.)
The DeRosa-Hufbauer study acknowledges that this shift of workers from non-
zone to zone status would not change total U.S. employment. Citing the DeRosa-
Hufbauer study, NAFTZ claims the addition of 90,000 U.S. manufacturing jobs.”36
Wage Gains and Producer Gains. DeRosa-Hufbauer use a 95,000 figure as
the basis for their argument that the TAP proposal would result in U.S. wage gains
of 7% or $394 million ($179 million in the transportation sector and $82 million in
the petroleum sector.)37
DeRosa and Hufbauer arrived at this 7% estimate using research published by
Lewis and Richardson in 2001, incorporating data from the late 1980s and early
1990s. Lewis and Richardson’s research found that on average, workers in: export-
oriented multinational firms with foreign investment backing operating in the U.S.
enjoy earnings that are about 7 percent higher than their counterparts in the same U.S.
34 Dean A. DeRosa and Gary Clyde Hufbauer, op. cit., p. 1, abstract.
35 This would include 45,000 jobs in the transport equipment, 14,000 jobs in machinery
production, and 14,000 jobs in mineral products. The jobs with new subzone status would
be located primarily in Ohio, Tennessee, Texas, and Florida.
36 NAFTZ. Trade Agreement Parity (TAP) Legislation fact sheet. Available at
[http://www.naftz.org/docs/news/TAP Fact Sheet from PBN.pdf]
37 However, some wage gains could result if tariff reductions achieved by businesses were
passed on to workers.

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industries.38 However, DeRosa and Hufbauer apply this 7% wage differential in a
different way – to workers in primarily import-oriented firms.39
The estimate of $82 million in wage gains in the petroleum sector (the second
largest set of wage gains) is problematical because these projected gains appear to be
attached to new jobs in the petroleum sector that the authors suggest are likely not
to materialize because anticipated investment and expansion in that sector are
unlikely to occur, reflecting “the complexities of the petroleum-based fuel blends
demanded in the U.S. market, [and] increasingly stringent environmental standards
regulating the construction of new refineries.”40 As a result, a projected elimination
of the 0.01% trade-weighted tariff on crude petroleum might not yield sufficient cost
savings to promote the investment required to build more petroleum refineries. While
this might lead to producer gains (estimated at $136 million), if these producer gains
do not lead to new investment, there would likely not be significant increases in
employment or wages relating to the TAP legislation.
Policy Analysis of the TAP Proposal
If FTZ status were obtained and permission thus granted, the following
conditions would come into play for TAP beneficiaries:
! The beneficiary company under TAP would be entitled to reduced
or zero tariffs on third country components so long as the completed
good leaving the FTZ met the rules-of-origin requirements of any
FTA.
! The beneficiary company would not need to import any components
from or through the FTA country under whose FTZ goods were
being imported.
! Neither the beneficiary company nor the U.S. government would be
required to notify the country whose FTA was being thus used, that
this was occurring.
38 Lewis, Howard III, and Richardson, J. David. Why Global Commitment Really Matters!
Institute for International Economics, Washington, D.C., 2001, p. 29-31.
39 Other issues are: (1) the research quoted is nearly 20 years old, over which time the capital
structure of businesses – especially multinational businesses – has changed considerably;
and (2) the Lewis and Richardson study, in a footnote, pointed out that different wage
premiums are largely explained by the heavier capital intensity of plants backed by foreign
investors, and that premiums vanish if plants are made comparable in their machinery and
equipment per worker as well as in industry and location. Since the plants are already in
existence and there would not necessarily be any capital changed involved as a result of a
shift from non-FTZ to FTZ status, and workers themselves would not necessarily change
jobs or employers or locations, the arguments for wage increases might not apply.
40 DeRosa-Hufbauer, op. Cit. P. 18.

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! The beneficiary company could meet the rules-of-origin
requirements of the selected FTA entirely by using U.S. components
and labor. Remaining non-domestic components could come from
any FTA or non-FTA trading partner.
! Thus, through this proposal, FTA benefits could be extended to non-
FTA countries. That is, components from non-FTA countries could
potentially receive import benefits to which they would not
otherwise be entitled.
! The only U.S. “gatekeeper” regulating or intervening in this practice
would be the U.S. foreign-trade zones Board (FTZ Board) which
could restrict or prohibit zone activity “that in its judgement is
detrimental to the public interest.” (15 CFR 400.31).
Potential Trade Policy and Administrative Implications
The TAP proposal is a complex issue, with both economic and policy
implications. Policy effects of TAP could include the following:
Businesses Otherwise Required to Pay Tariffs Could Obtain a
Large Tariff Benefit. Businesses likely to reap the most benefits from reduced
tariff obligations under TAP would be multinational corporations headquartered in
Asia and Europe, with production operations located in the United States that source
components from the home country. Based on manufacturing subzone activities in
2005, the USITC estimated that subsidiaries of 15 German, Japanese, and Korean
motor vehicle and parts producers would account for 70% of the revenue lost to the
U.S. treasury if the current TAP proposal were enacted.41
Effects on Trade and Diplomatic Relations With U.S. FTA Partner
Countries and Third Countries. If the TAP proposal were approved by
Congress, it could affect trade with FTA partner countries and third countries. FTAs
negotiated between the United States and various partner countries could be used to
allow non-FTA countries to reap the benefits of the FTAs in terms of duty-free access
to the U.S. market without providing equivalent access to exports from the United
States. This would reduce the advantage of FTA partners in the U.S. market,
undercutting the value of the agreements that they signed with the United States. The
TAP legislation arguably would be a disincentive for potential future FTA partners
to negotiate a free trade agreement with the United States.
TAP Would be Like a Broad Trade Preference Program. If adopted,
the TAP could offer equivalent tariff treatment on certain goods to suppliers in all
foreign countries and to all U.S. businesses incorporating those goods under certain
circumstances in FTZ subzones. The TAP proposal would, in essence, be another
trade preference program, offering tariff reductions on a business-by-business basis.
As with other trade preference programs, the TAP program would offer unilateral
41 Potential Loss of Customs Revenue Resulting from FTZ Parity with Trade Promotion
Agreements, USITC staff report, op. cit.

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CRS-22
tariff reductions without requiring any reciprocating tariff reductions by other
countries, and without investment protections for U.S. businesses that FTAs would
carry.
Dilution of USTR Authority; Shifting of Some USTR Responsibilities
to the USFTZ Board. TAP could decrease the usefulness to USTR of being able
to cite the potential elimination or reduction of U.S. tariffs on specific articles as a
“carrot” – an incentive for trading partners to take action of interest to the United
States. Such action could include improving access for U.S. exports, protecting
worker rights, improving protection of intellectual property, or participating in
multilateral efforts to eliminate tariffs on a sectoral basis (known as “zero for zero”
agreements). Responsibility for determining eligibility for duty-free access to the
U.S. market through FTZ manufacturing authority would flow to the USFTZ Board
located in the Department of Commerce’s Import Administration.
The FTZ Board Could Be Swamped with FTZ Applications. It is not
clear how the FTZ Board would handle its charge to determine whether the use of
FTZs in this way would be in the “public interest.” If, in fact, the 144 companies that
the USITC staff report identified as TAP-eligible manufacturing operations were to
immediately assert to the USFTZ Board that duty-free treatment for imported
components used in their FTZ operations would be in the public interest, the task of
verifying the assertion could overwhelm the small board.42 In addition, new
applications would likely add to this overload as businesses calculate the potential
costs and benefits of applying for FTZ status to achieve tariff savings on third
country components.
Options for Congress
Take No Action
Congress has several options available to it. First, Congress may decide to take
no action. If this were to occur, the FTZ program would likely continue as a way for
producers to save money through continued use of zones for purposes such as
righting “inverted tariffs,” duty deferral, duty exemption, duty drawback elimination,
tax savings, quota storage, zone to zone transfer, and customs inventory efficiencies.
Include Only Part (a) of the TAP Proposal
If Congress were to adopt only Part (a) of the TAP proposal, a company could
apply to the USFTZ Board for permission to import components from third countries
under any FTA except NAFTA. This is because the NAFTA implementing
legislation still prohibits NAFTA benefits to businesses producing in USFTZs. Any
42 The board consists of the Secretaries of the U.S. Commerce Department and Treasury
(whose designees – the Assistant Secretary of Commerce for Import Administration, and
the Deputy Assistant Secretary of the Treasury for Tax, Trade, and Tariff Policy – typically
function for them; plus the Executive Director and a professional staff of seven..

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CRS-23
company wishing to import under NAFTA would thus need to import under another
FTA instead, and meet that other FTA’s rules of origin requirements.
Include Only Part (b) of the TAP Proposal
Congress could decide to approve Part (b) of the TAP proposal, but not Part (a).
If Congress were to adopt Part (b) but not Part (a), businesses manufacturing in
USFTZs could at last receive NAFTA benefits on components they import from
Mexico or Canada. This would make the NAFTA implementing legislation
comparable to that of subsequent FTAs.
Include Parts (a) and (b)
If Congress were to adopt both parts (a) and (b) – the entire TAP proposal,
businesses could import components from third countries under any FTA, including
NAFTA.
Consider Other Amendment
Finally, Congress could consider another amendment(s) to modify or replace
the TAP proposal.
If the objective is to reduce or eliminate tariffs on components incorporated into
goods produced in the United States, one possibility is to do it more directly.
Legislation could be constructed to eliminate tariffs on components incorporated
into other goods in the United States, so long as the final product met rules of origin
requirements designed specifically for the legislation. These rules could call for a flat
percent of domestic content (e.g., somewhere between 35 and 65%), or specific
domestic content shares for different products. The importer would have to certify
to Customs and Border Protection that the value-added requirements of such
legislation had been met.
Such an amendment might include further qualifications. For example, the
legislation could also limit the TAP benefit eligibility to components imported from
countries that afford reciprocal treatment for U.S. components exported to certified
assembly operations in the partner country.
Such a proposal would: (1) not directly involve current FTA partners; and (2)
not overload the USFTZ board.
As with all trade legislation, however, there would still be winners and losers.
Losers could still be the volume of trade with current FTA partner countries, whose
trade with the U.S. could be diverted to other countries. Losers could also be U.S.
parts producers. On the other hand, opening up the U.S. economy to reduced or zero
tariffs on components imported from third countries could stimulate a new round of
U.S. business process reorganizations, as companies look for new ways to cut
production costs while maintaining a required level of U.S. value added in parts and
labor.

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Conclusions
Conclusions regarding the TAP proposal can be divided into two groups:
economic conclusions and policy conclusions.
Economic Conclusions
Economic conclusions include the following:
! The primary benefit of TAP would be tariff benefits for corporations
that source components from third countries.
! Loses in customs revenues could be between the $186 million
estimated by the DeRosa-Hufbauer study and $437 million estimated
by the USITC staff study. However, neither study projected ahead
to take into account the extent to which U.S. businesses might re-
engineer their products to take advantage of small tariff savings per
item produced – savings which, on a large production scale, could
end up being considerable. In addition, the estimated loss in customs
revenue figures were based on existing levels of zone activity. Any
shift to FTZ manufacturing (as exemplified through the shift of an
estimated existing 95,000 U.S. jobs into zones in the DeRosa-
Hufbauer study) would substantially increase the loss in customs
revenue.
! The TAP proposal could result in a potential decrease in demand for
U.S.-made parts as a result of any tariff-free benefits for third
country components. Neither the USITC staff study nor the
DeRosa-Hufbauer study addresses this issue or estimates its impact.
The potential decrease in demand could be considerable since it
could spread across many industries. A study estimating this impact
would be useful.
! Estimated employment increases of 95,000 in the DeRosa-Hufbauer
study do not represent a net gain to the U.S. economy. They
represent primarily a shift among existing plants from non-FTZ to
FTZ status. Some additional job shifts from elsewhere in the
economy into plants operating in zones, however, could result if
businesses were to pass cost savings from tariff elimination on to
consumers in the form of lower prices.
! Estimated wage gains of 7% for certain jobs, for a total of $394
million nationwide, were based on a 20-year old study which found
that workers producing for export from multinational corporations
enjoyed higher wages. The data are then applied to workers
producing primarily for import.
! Some producer gains may not materialize; however, profits could
increase The DeRosa-Hufbauer study estimate of producer gains of

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$136 million annually from the TAP proposal, if it were adopted,
may overstate investment benefits in some firms, as the authors
acknowledged. For example, elimination of the approximately
0.01% duty (trade-weighted ad valorem equivalent) on crude
petroleum under TAP may not convince petroleum refiners to
expand their capacity. Instead, the primary economic benefit of TAP
may be increased profits to foreign-based multinational corporations
which would be afforded tariff savings on third-country imports.
Trade Policy Conclusions
Among policy conclusions are the following:
! The effects the TAP proposal generally seeks to address are widely
considered to be the intended consequences of FTAs: the United
States extends preferential tariff treatment to components from an
FTA partner country in exchange for that country’s lowering of its
tariff rates on U.S. products.
! TAP would give FTA benefits to non-FTA components, with likely
effects on trade and diplomatic relations with FTA partner countries
and with third countries. There could be a negative impact on
diplomatic relations with FTA partner countries, since FTA benefits
would be extended to non-FTA partner countries without the
permission or knowledge of the partner country whose FTA would
be used in this way. This could put the FTA partner country at a
competitive disadvantage vis-a-vis other countries whose businesses
would be using the FTA without the partner country’s permission,
to import third-country components duty-free. Conversely, third
countries which have not negotiated FTAs with the United States
could reap the benefits of FTA duty rates without any compensating
concessions on their duty rates for American goods.
! TAP could complicate diplomatic relations with FTA partner
countries, since FTA benefits would be extended to non-FTA partner
countries without necessarily any notification to or consultation with
the partner country whose FTA would be used in this way.
! TAP would in essence create a new trade preference program
offering all countries tariff benefits equal to those included in FTAs,
with permission granted by the FTZ Board on a business case-by-
case basis.
! TAP would extend FTA benefits to non-FTA countries, without
requiring reciprocal tariff reductions of the part of the country
whose companies are supplying components for FTZ subzone
assembly operations.

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Administrative Policy Conclusions
! TAP would remove in a de facto sense, certain tariff policy
responsibilities from the Office of the U.S. Trade Representative and
delegate them to the U.S. Foreign-Trade Zones Board. It would
create a new category of administratively determined tariff
beneficiaries – specific businesses.
! TAP could potentially overload the USFTZ Board with
investigations to determine whether granting duty-free entry of
components for use in assembly operations meets the “public
interest” mandate of the TAP legislation. The FTZ Board could also
face many new requests for approval of FTZ manufacturing
authority.
Ultimately the potential costs and benefits of TAP, as well as its effects, would
depend on the extent to which businesses would apply for FTZ status to take
advantage of potential tariff relief offered. Some crucial questions for further research
are: Would adoption of the TAP proposal encourage businesses with assembly
operations in the United States to substitute imported components for domestic
components? To what extent would adoption of the TAP proposal impact U.S. parts
producers and suppliers? To what extent would TAP encourage businesses to stay
and expand in the United States instead of moving operations abroad?

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