No Longer Dockside, Sub-Zones Extend Trade Zone Reach

WHEN Polaroid decided that Inner City Inc., its job training subsidiary in Boston, could increase its revenues by operating as a sub-zone of the city's duty-free foreign trade zone, it was simply adding to a growing national trend.

Sub-zones, which move trade zones beyond traditional port areas into local factories, currently account for more than 90 percent of foreign trade zone activity, according to the United States Foreign Trade Zone Board (FTZB). Sub-zones have become ``the tail that wags the dog'' of the trade zone program, says Steve Beckman, an economist with the United Auto Workers union.

Goods imported into foreign trade zones are still considered to be overseas for customs purposes. Duties are paid only when products leave the zones to enter the United States market.

Cost-conscious companies of all sizes use the foreign trade zone program, says Riad Ajami, professor of international business at the Rochester Institute of Technology, though big firms are generally ``more sophisticated users of zones.'' Obvious beneficiaries of the program are firms facing inverted tariffs, where components are charged a higher duty than the finished product.

The pharmaceutical division of Miles Inc., based in West Haven, Conn., created a manufacturing sub-zone in June 1991 shortly after some new inverted tariffs came into effect, says Ronald Kohut, a materials manager for Miles.

By manufacturing a type of tablet in a trade zone, Miles lowered the duty on imported pharmaceutical ingredients from the 8.1 percent raw materials rate to the 6.3 percent assessed on finished products, Mr. Kohut says.

The new General Agreement on Tariffs and Trade (GATT), which will phase out pharmaceutical tariffs over a number of years, will have no immediate impact on Miles's trade zone operations, Kohut says. Foreign-trade-zone status costs the company only a few thousand dollars a year and will probably be used until tariffs on its products are ``totally eliminated,'' he says.

Inner City uses its zone designation to capture new business for its plant. Polaroid set up the facility in 1968 to create ``a training vehicle for inner city residents,'' says Rod Schonland, trade and regulations manager for Polaroid.

Last year, Inner City had $29.4 million in sales. Thirty employees now work five days a week ``de-manufacturing'' defective German-made computer data cartridges, says Maureen Roper, financial manager for Inner City. Trade-zone status allows discarded material to be certified for customs refunds on-site, eliminating the need for a customs official to travel to a landfill, Mr. Schonland says. Operating in a zone can also allow quicker duty drawbacks, says John DaPonte, executive secretary of the FTZB.

Inner City hopes to win contracts from local athletic shoe manufacturers, Ms. Roper says. Trainees spend seven hours at work and one hour in the classroom to ``develop work orientation, job preparation skills, and job search training.''

Inner City has placed 2,400 graduates of the program, which lasts up to one year, in full-time jobs since 1968.

``They're creating new employment by training people there,'' says Andrew Bendheim, director of trade development for the Massachusetts Port Authority. And they're using sub-zone status to be competitive, he adds.

In the auto industry, the use of foreign trade zones has been controversial. Critics argue that the zones undercut US jobs. A 1988 report by the US International Trade Commission estimated that auto assembly sub-zones encouraged imports of parts previously produced in the US, resulting in the loss of more than 10,000 jobs. But the National Association of Foreign Trade Zones argues that zones actually encourage US and foreign auto companies to expand production at US plants. Either way, auto manufacturers are the biggest beneficiaries. They have reduced the average 4 percent duty on imported auto parts to 2.5 percent by shipping them into zones for assembly, according to a General Accounting Office report. The new GATT agreement, however, will eventually reduce duty on imported parts to 2.5 percent.