Free/Foreign Trade Zones

A key component to the prosperity of global trading hubs is their proximity to a Free/Foreign Trade Zone (FTZ) – most if not all have FTZs nearby.  These zones are designed to help countries to improve their relative competitiveness as hubs of trade and transportation.  Accordingly, the concept has exhibited strong growth and economic success throughout the world.

Foreign trade zones (FTZs) are facilities where goods from outside a country can be stored or processed duty and tax free, prior to a) shipment to another country, or b) import (via the normal custom process) into the domestic economy. FTZs have proven to be powerful economic generators, providing a number of advantages to their users, firms involved in international trade, including:

• Improved cash flow
• Reduction or elimination of duties
• Fewer quota restrictions
• Avoidance of inverted tariffs
• Access to economic incentives.

 
However, while the Canadian government attempted to introduce similar incentives earlier this decade through the Export Distribution Centre (EDC) and other programs, several limitations in the application of these programs have meant lower than expected uptake by Industry. Indeed, available information suggests only 30 applications for EDC programs were received by 2004 and only a few in the years since.

Canada’s airports contend that existing programs do not meet the needs of globalized businesses and new policy and programs are necessary to improve Canada’s competitiveness in stimulating the use and investment in Canadian transportation systems.

Background

Foreign Trade Zones are designed to help countries to improve their relative competitiveness as hubs of trade and exports.  The FTZ concept has exhibited strong growth and economic success throughout the world and while diverse in the number and types of incentives, Canada is the only G8 country that does not utilize a true FTZ program.

There are more than 500 distinct FTZs worldwide, a number that has more than tripled in the past three decades. In the United States alone, there are more than 250 general purpose FTZs in all 50 states and Puerto Rico.

Canada’s approach to FTZs – the Export Distribution Centre Program (EDCP) –  was proposed in the 2000 federal budget and came into effect in June of 2001. The program, in combination with the existing Duty Deferral Program, allows goods to be imported into Canada tax and duty free, undergo limited value-added activity, and be re-exported.

The stated intent of the EDCP was to create zones analogous to FTZs in other countries.  However, the problem is that the program was not designed for a typical situation. It was implemented as a program with appeal to a limited target audience – domestic or foreign distributors of product with very limited interest in the Canadian domestic market. Substantial alteration of property and/or manufacturing simply cannot be done within the provisions of the EDC program.

While there are Canadian programs that would allow manufacturing, they face their own limitations. The Duty Relief program applies only to duties and not taxes, and thus imposes a cash-flow burden on operators. The EOPS program applies to both duties and taxes, but the services have to be performed on goods from unrelated entities (i.e. you are in the business of providing a service rather than a product).

There are critical changes occurring in the logistics world, however, which indicate strongly that the time is right for Canada to revisit its lack of a true FTZ policy. There is an emerging trend to nearshoring manufacturing by U.S. firms, in large part due to rising transportation costs, but also due to an ability to achieve greater reliability.

There also continues to be significant foreign investment interest in facilities to penetrate the NAFTA marketplace. This indicates an opportunity to reverse historic trends to off-shoring manufacturing to nations with inexpensive labour and to capture foreign-financed manufacturing activities in Canada. Having a comprehensive FTZ program in place would be an extremely useful element in the Canadian investment business case.

Additionally, three specific areas of the current programs have put Canada at a competitive disadvantage to foreign FTZ programs:

• Visibility – Among potential users of the program, as well as within government, there is limited awareness of the program and its components.  This is exacerbated by the number of federal governmental agencies with specific responsibilities within the program.
  
  
• Accessibility – It can be an extremely cumbersome application process for certification in the EDCP.  Applicants also must deal with several federal agencies, rather than a single point of contact.
  
  
• Applicability – A 10% cap on value-added activity under the program can make it difficult for organizations to rationalize the time and expense associated with setting up in Canada under the EDC process.  Meanwhile the ability of the federal government to revoke certification adds significantly to the financial risk of setting up a zone in Canada compared to other markets.
  

As a result of these challenges, results from the EDCP have been disappointing.