Commentary: Foreign trade zones are not “free trade zones”

DHL was founded in the United States in 1969. Founders Dalsey, Hillblom and Lynn lent their initials to the company name. Germany’s Deutsche Post began acquiring stock in DHL in 1998 and by 2003 absorbed it into its global organization. Today, Deutsche Post DHL Group is a global air cargo integrator sharing the stage with FedEx and UPS. Each works to “integrate” door-to-door pickup and delivery services either in-house or in partnership with other companies.

Unlike FedEx and UPS, DHL is no longer a U.S. company. This means it cannot pick-up letters/packages at U.S. airports and fly them to other U.S. airports because that would be a cabotage violation. The European Union (EU)-United States Bilateral Air Agreement (2007) also prohibits EU-based airlines from flying from one U.S. airport to a second or more just to drop-off letters/packages imported in or pick-up those to be exported out. Technically, this means that the airplanes cannot co-terminalize. This prohibition is something that U.S.-based airlines are not burdened with when they operate in the EU.

Why? The EU-U.S. Bilateral Air Agreement considers the U.S. a single sovereign territory while the EU is made up of 28 sovereign territories. Under that interpretation it is not co-terminalization when flying from one European country to another despite them being part of a larger trade bloc. The agreement allows for “open skies” to the extent that an EU-based airline can fly into any U.S. airport that has a landing slot available. After that it must fly to a non-U.S. airport.

But what about DHL trucks and vans which are integral to its door-to-door U.S. activity? It is important to note that U.S. cabotage laws do not apply in the same way across all transport modes. As long as the trucks are licensed in the U.S. and driven by U.S. citizens then U.S. shipments can be picked up and dropped off within the U.S. – even if the truck fleet is owned by a foreign-based company like DHL.

(Photo credit: DHL)

On Nov. 26, 2019, DHL opened its seventh location utilizing a U.S. Foreign Trade Zone (FTZ). This one is located at New York’s JFK Airport and operations will be handled by its freight forwarder subsidiary, DHL Global Forwarding. The other six FTZs are located at airports in: Atlanta, Chicago, Dallas-Fort Worth, Los Angeles, Miami and San Diego. These public spaces (typically, airports and ocean ports) are known as General Purpose Zones under the Foreign-Trade Zones Act (1934; 19 U.S.C. 81a-81u).

The purpose of FTZs is to promote U.S. exports whether they be facilitated by domestic or foreign companies. It makes sense, therefore, for DHL to provide its customers with the benefits that FTZs offer when they wish to export. Companies on private land can also apply to the U.S. Foreign-Trade Zones Board for status known as FTZ Subzones. Currently, DHL assists its customers who have subzones in Dallas and El Paso. 

(Photo credit: Shutterstock)

While sometimes incorrectly referred to as “free trade zones,” FTZs are at best a managed form of free trade and with a special motive attached. The motive is that imports that would otherwise be subject to trade tariffs by U.S. Customs and Border Protection would be exempt if the item is either exported or, in very rare cases, is transformed into an item not subject to tariffs before it enters the U.S. economy. The point is that items within the FTZ and those moved from one FTZ to another are not considered a part of the U.S. economy until they leave these designated spaces and enter the U.S. economy as a true import. Under bilateral and multilateral free trade agreements, by contrast, tariffs are systematically eliminated and items would typically enter the U.S. economy duty-free.

FTZs may be useful even for U.S.-based importers who do not wish to ultimately export the item in its original form or as a transformed product. Tariffs deferred within FTZs have positive cash flow effects. Also, if the item is transformed within the FTZ and is subject to a lower tariff there is the added effect of lowering trade costs. By securing FTZ space for its customers, DHL alleviates them from having to negotiate lease space with airports. DHL’s aggregated import flows from a range of customers would likely better utilize scarce FTZ space for its intended purpose. Any of DHL’s customers that are involved in retail packaging, cross-docking (i.e., combining other products into sets), and value-added manufacturing (i.e., product transformation) would find FTZs advantageous.      

It is instructive that the word “reciprocity” is an old-fashioned form of the term “free trade.” But when it comes to FTZs and bilateral air agreements across countries, it is the lack of reciprocity that international shippers and carriers need to watch out for. This is why these arrangements are not indicators of free trade. Also, if a country offers FTZ benefits they need not match those found in a U.S. FTZ. Regulations can differ. There are over 100 bilateral air agreements between the U.S. and other countries which offer “open skies” and these, as well, need not involve the same range of options. Bilateral negotiations are not the same as multilateral ones. With this in mind international shippers and carriers may not have all the answers when they wish to expand into a different country but they can start by asking the right questions.