MIDLOTHIAN, TEXAS - 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, Texas? 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 - Senator 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.
"Most people, including me when I started, have no idea what something like this is," Denton said. He was in the real estate appraisal business when he was asked to find a suitable site with easy access to rail and road transportation.
Denton is the president of what is also U.S. Foreign Trade Zone #113. It's a place where all these cars arriving from Germany, Korea, and Japan sit as if they are still on foreign soil. The manufacturer isn't charged a tariff on individual vehicles until they leave the trade zone for a dealer. The vehicles temporarily stored in Midlothian go to car dealerships in Texas, Oklahoma, Arkansas, Louisiana, and Mississippi.
"When we have a high inventory," Denton said, "I'm often asked, 'What are you doing with all those cars?'"
What they do, as a Foreign Trade Zone is designed to do, is save those manufacturers money and create American jobs at the same time.
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%, 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% 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, Ph.D. "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."
"Plus, it encourages manufacturers to use American labor to put on parts," said Denton.
At any given time there have been as many as 35,000 vehicles parked at the Midlothian site. But remember, this is just one Foreign Trade Zone. There are now 250 Foreign Trade Zones across the United States and 500 "subzones" operating under the same rules.
DFW Airport has been at this competitive game even longer. It was approved as Foreign Trade Zone #39 back in 1979, helping dozens of aerospace and high-tech companies in a 7-county area benefit from delaying that import tax until American parts and American labor can be part of a variety of North Texas manufactured products too.
"If this wasn't available in our region, we would have a definite competitive disadvantage against the rest of the country because this is what encourages foreign trade," said John Terrell, Vice President Commercial Development at DFW International Airport. "They're not going to build very large warehouses and employ all the number of people in this region if we didn't have the Foreign Trade Zone advantages," he said of companies like Hitachi, Airbus Helicopters, NEC and DHL who operate within the DFW Foreign Trade Zone framework. "They would go to those regions around the country that do."
DFW also helped introduce a much faster approval process to obtain FTZ designation, offering the idea of an Alternative Site Framework to the Foreign Trade Zone Board. The modern approval method now means that an FTZ application can be approved in as little as 30-days and $15,000. The older process could last as long as two years and cost upwards of $200,000.
"The Alternative Site Framework allows you to do the Foreign Trade Zone for a specific company and narrow it down to the acreage that applies to that one company," Terrell said.
Of the 250 FTZ's in the United States, 31 of them are in the state of Texas. And Texas, with FTZ's that also include major oil and gas hubs like the Port of Houston, consistently leads the nation in FTZ volume.
"We're here in Dallas, and we love our friends in Houston," said SMU's Michael Davis. "But we want to out-compete them. And one way we can out compete them is to have a foreign trade zone."
"It has a giant economic impact for the region," said Terrell.
And that's the simple answer to an intricate economic model. Dollars saved and American jobs created, one DFW, one Midlothian at a time.
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