Companies could beat Trump’s tariffs the same way they did 80 years ago

At the height of the Great Depression, Congress created a program to help American businesses ease the pain of crippling tariffs.

That program, which allows the designation of certain geographic areas as “foreign trade zones,” is still in use today. And cities and states are sure to seize on FTZs as a way to reduce the effects of President Donald Trump’s newly ordered tariffs, experts told NBC News.

“Generally, if tariffs increase, foreign trade zones become much more popular, and on the whole, a lot more valuable,” Matt Gold, a professor of international trade law at Fordham University School of Law, told NBC News.

The Foreign Trade Zone program was originally intended to reverse some of the most paralyzing consequences of the Smoot-Hawley Tariffs — protectionist trade measures economists have said worsened the worldwide economic downturn at the time and helped spark one of the worst trade wars in modern history.

In the last 80 years, these enterprising zones have sprung up everywhere from New York to Idaho.More than 200 remain active in 2018, according to the U.S. International Trade Administration, a division of the Department of Commerce that oversees the federal FTZ Board.

Experts on international trade and commerce, as well as the local officials who help to administer the zones, said they have already seen an increase in their use since at least 2015, when Trump unleashed his fiery trade rhetoric during the early stages of his presidential campaign.

Charles Wood, the vice president of economic development for the Chattanooga, Tenn., Chamber of Commerce, said his city has seen “a noticeable uptick in the use of the zone” in his area in the last four years, citing the Trump administration’s “tough talk on trade” and as well as as the “economy having gotten a lot better.”

Image: Ford truck plant Image: Ford truck plant

The 2018 Ford Expedition SUV goes through the assembly line at the Ford Kentucky truck plant on October 27, 2017 in Louisville, Kentucky. Bill Pugliano / Getty Images

The new tariffs — 25 percent on imported steel and 10 percent on imported aluminum — as well as Trump declaring trade wars “good” on Twitter, prompted dire warnings from critics, who have said the move will lead to retaliation and raise costs for companies that rely on steel and aluminum to make their products, which could in turn result in price increases and layoffs.

According to Brad Hemingway, executive director of the Town of Islip FTZ Authority, in Islip, N.Y., on Long Island, those are exactly the type of companies that would benefit the most from FTZs.

“And if all of this stuff goes through,” Hemingway said this week, shortly before Trump announced his tariff decision, “we’ll definitely be anticipating a huge spark” in foreign trade zone use.

Such a spark is all but certain to occur now that Trump has officially signed the proclamation, trade experts said, although concrete data proving such a rise won’t be available for years, due to the cumbersome application and approval process.

Within an FTZ, companies receive favorable tariff treatment. Under the rules governing the zones, companies that are operating in an FTZ (or who have applied to make their factory an FTZ) can choose from an array of tariff treatments that can dramatically reduce tariffs and other costs.

One of those treatment options, called “inverted tariff relief,” would particularly help companies looking to unburden themselves of the government’s just-announced tariffs. Inverted tariff relief allows companies that are importing components of a product the option of paying the tariff for the finished good, instead of the component. For example: Car parts.

Image: Port of Los Angeles Image: Port of Los Angeles

A container ship is docked at the Port of Los Angeles in Long Beach, California on February 6, 2015. Bob Riha Jr / Reuters

“Let’s say you’re bringing in [imported] steel or aluminum alloy and the steel, or aluminum, is now taxed at the higher rate. But you’re bringing in steel to make into chassis for cars,” Hemingway said.

“And chassis or other components have lower tariffs. Let’s say they have a two-percent tariff,” he continued.

Under inverted tariff relief, “the company has a choice about which tariff you can pay, essentially. Now you can have the option to pay, on the steel that went into the product, the two-percent tariff” instead of Trump’s new high tariff.

Experts noted that applying to create an FTZ, or moving into one, doesn’t come without drawbacks. Application and compliance costs are substantial, even for large multinational companies.

Wood, of Chattanooga, said increased use of his city’s FTZ No. 134 doesn’t just help the manufacturers and importers — but the local economy, too.

“Having one helps you land major employers, which helps hire local people, increases your tax base,” Wood said.

Volkswagen’s application to build a plant in Chattanooga’s FTZ in 2008 breathed new life into both the local economy and the decades-old zone itself. A large tire manufacturer and a construction vehicle manufacturer relocated to the zone, following Volkswagen’s lead.

“I think companies are going to start looking at them a lot more, due to the direction, as far as trade is concerned, of national politics,” Wood said.

Image: United States first foreign trade zone poster Image: United States first foreign trade zone poster

A poster from 1937 for the first foreign trade zone located in Staten Island, New York1937. Universal History Archive / Getty Images

Mark Wu, an assistant professor at Harvard Law School who specializes in international trade law, agreed.

“I would expect the use of them to increase, as a result of the shift in government policy, trade and otherwise … whether that’s by way of making better or greater use of existing FTZs or applying for new ones,” Wu said.

“Increased uncertainty over additional trade remedies or other protectionist measures might cause firms to take a second look” at the program, added Wu, who earlier in his career worked inside the U.S. Office of the U.S. Trade Representative during the George W. Bush administration.

Wood, for one, is bullish on the benefits.

“Without the foreign trade zone we have, we would be even more limited in attracting investment,” Wood said. “It’s almost like having our own little free trade agreement.”