Foreign trade zones in the United States : A study with special emphasis on the proposal for trade agreement parity

Purpose – In 2008, a bill was introduced in the 110th Congress (HR6415) to address the “unintended consequences” of US free trade agreements (US FTA) on manufacturers operating in US foreign trade zones (FTZs). Presently, US manufacturers operating in FTZs that use imported components pay a tariff (on finished goods entering the US market), which is not paid by their competitors in countries that have free trade agreements (FTAs) with the USA. The purpose of this paper is to explore the implications of a legislative proposal to address this issue (the bill is still under consideration and not yet been passed by Congress) for domestic firms and the overall economy. Design/methodology/approach – The paper is largely based on the analysis of the legislative proposal (HR6415), and US trade data obtained from the United Nations. Findings – The paper shows that the trade agreement parity (TAP) proposal may have the undesirable effect of encouraging local firms (in US FTZs) to use foreign components and increasing the trade deficit. It also shows that the proposal, by facilitating the entry of more foreign imports undermines the original purpose for which FTZs were designed. Originality/value – There are no papers examining the implications of this Congressional bill on domestic competition and the overall US economy. This paper and its recommendations will help US policymakers to re‐evaluate the existing proposal and also revisit the role of FTZs in the US economy.