For Manufacturers, This Old Solution May Ease Today’s Tariff Troubles

The Taiwan Semiconductor Manufacturing Company fabrication plant in Phoenix was designated as a Foreign-Trade Zone in 2023. (Rebecca Noble/Bloomberg)

About the author: Erin McLaughlin is a senior economist at The Conference Board.

The average effective U.S. tariff rate is now 18%. That is the highest rate Americans have seen since 1933, so it is perhaps no surprise that a tool created in the 1930s might prove useful once again: U.S. Foreign Trade Zones, or FTZs.

FTZs are secure areas within the U.S. that are legally designated as being outside U.S. Customs territory, such as airports, seaports, and inland ports. Inside them, foreign and domestic merchandise can be stored and manufactured, assembled, repaired, and stored indefinitely—without formal customs entry procedures or the payment of duties.

Although FTZs have been a part of the U.S. manufacturing landscape and infrastructure network since 1934, U.S. importers considered them a niche strategy. This is because average tariff rates have hovered below 5% for the last few decades, making FTZ’s main selling point—being duty-free—largely irrelevant. President Donald Trump’s rapid escalation of levies changed that. FTZ brokers say interest in them has quadrupled since the president’s “Liberation Day” tariff announcement in April.

FTZs can be a tool for managing the new uncertainties of ever-shifting import costs. Importantly, they permit businesses to import input products and materials and process or store them duty-free. Importers only pay tariffs for their “finished products”—which face lower duties than the inputs—when they sell the products domestically. And if they export the processed item, they pay no tariff at all. As a result, FTZs encourage domestic manufacturing while also preserving cost competitiveness for goods that are made in the U.S. and exported into booming middle-class populations abroad.

Even before Trump’s tariffs, FTZs handled nearly a trillion dollars worth of products a year. There are 200 FTZ programs—at least one in every state—encompassing 1,300 active operations and employing more than half a million people. High-profile projects using FTZs include the Taiwan Semiconductor Manufacturing Company’s new $165 billion campus in Arizona, a BMW plant in South Carolina, and Pfizer’s production of COVID-19 vaccines in Michigan. Over the last seven years, growth of FTZs has largely been flat—with a slight uptick in 2019, perhaps connected to Trump’s first term-tariffs. However, economic development officials and the federal Foreign-Trade Zones Board should prepare for double-digit growth as tariffs become reality.

The administration contends that tariffs will incentivize domestic manufacturing. That will require the manufacturing base to be price competitive on the global stage. Yet, in his “Liberation Day” executive order, Trump implied that tariffs on materials imported by U.S. manufacturers—even those coming into FTZs—would be paid at its rate at import, and wouldn’t qualify for a lower rate on the finished product.

For U.S. importers using FTZs, their inputs could be tariffed at levels of up to 50%. The result would be U.S. manufacturers—even in FTZs—having an extra levy global companies outside the U.S. don’t face. According to the Department of Commerce, 20% of inputs in FTZ production are imported. Shielding that 20% from tariffs would help U.S. manufacturing be globally competitive.

FTZs aren’t a silver bullet. But they can help spark the onshoring of manufacturing and support U.S. exporters. Trump ought to reverse course.

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