Foreign Trade Zones: What they mean to North Texas

SMU business Professor Michael Davis explains the impact of Foreign Trade Zones on the Texas economy.

By By Kevin Reece

MIDLOTHIAN — We were asked a simple question. Why were so many cars coming and going, arriving by train, leaving on trucks from a 600-acre former wheat field on the north side of Midlothian? Why so many and why here?

"Those are all Nissans there. And those are all Kias over there," L. Randall Denton said on a tour of the 20,000-plus cars parked on the grounds of his MidTexas International Center, Inc., a Midlothian car distribution site since the early 1980's.

And its existence is, at least in part, thanks to a couple of old politicians -- Sen. Reed Smoot and his cohort Congressman Willis C. Hawley.

The year was 1930 and the Smoot-Hawley Act put huge tariffs or taxes on imports to the United States. The lawmakers had good intentions. They wanted to protect American manufacturers from a flood of cheap foreign goods. But all these decades later most economists agree it made the Great Depression even worse.

The solution, the creation of Foreign Trade Zones, came a few years later.

What if, when an import, a car, for example, arrived in the U.S., it didn't get charged a tariff, at least not immediately? That's where all these cars in Midlothian come in. . . . 

For example, if a fully loaded, top of the line car arrives in the United States and the tariff charged to the car-maker is 2.5 percent, on a $40,000 vehicle that $1,000. But if a $30,000 stripped-down version of that same car is shipped to the Foreign Trade Zone instead, and American workers in Midlothian install all the extras the fully-loaded car had and use American parts, when that car leaves Midlothian that 2.5 percent tariff on that vehicle is just $750.

"You might just say it's a few hundred dollars here and a few hundred dollars there. But the volume of trade is enormous, and so that really adds up," said economist and SMU professor Michael Davis. "It sounds very mundane, but to a business like your local car dealership, the ability to delay making really major cash outlays until you get cash coming in, that's a very big deal."

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