March 24, 1969
Page 7255
FOREIGN TRADE ZONES
Mr. MUSKIE. Mr. President, I would like to call the attention of the Senate to an article by Mr. Stephen M. Aug in the Washington Star, Sunday, March 9, 1969. The article, "Foreign Trade Zones Spark Lively Controversy," presents an unbiased and highly informative account of the purpose and history of foreign trade zones. It is especially useful for the light it sheds on the controversy over the proposed foreign trade zone at Machiasport, Maine.
Mr. Aug's article is a fine example of balanced reporting. I commend it to any Senator who would increase his understanding of the issue.
Mr. President, I ask unanimous consent that the text of the article be printed in the RECORD at this point.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
FOREIGN TRADE ZONES SPARK LIVELY CONTROVERSY
(By Stephen M. Aug)
This country's business map is dotted with small business enclaves which have a peculiar status in the trading world. They are known as "foreign trade zones" and a new one is currently the center of one of the liveliest controversies in years.
These little Hong Kongs – they aren't new, as a matter of fact they date back to 1937 – work something like this:
In one in Toledo, Ohio, a businessman imports foreign trucks and turns them into campers for sale in the U.S. He uses American labor and parts, and the conversion from trucks to passenger vehicles allows him to import at lower duties: 5 percent for passenger cars as opposed to 25 percent for trucks. He also reduces gold outflow by doing the conversion here rather than ordering from abroad.
In New York a pharmaceutical firm imports raw materials – mostly chemicals – and makes pharmaceutical products. It then exports these with a respected "Made in USA" label. Thus, it pays no import taxes and can compete more effectively with foreign drug firms in foreign markets. At the same time it uses American labor, some domestic materials, and standard U.S. quality control.
A growing number of American businesses – more than 1,000 last year – are utilizing these zones. They are scattered over seven cities. Only when the goods move from the zone – generally a fenced-in area which includes warehouses and frequently factories – into the U.S. proper is duty charged.
THEY'RE INTERNATIONAL
Such zones offer the advantages of U.S. based operations, and at the same time many advantages usually credited to overseas locations.
Among the advantages are: Manufacturing here for export items which include foreign materials which otherwise would be subject to import taxes or quota restrictions.
Reducing the outflow of gold because raw materials are imported rather than finished goods, and domestic labor can produce the finished product.
Lower customs duties on goods produced in the zone. This can result from lower duties on parts rather than higher duties on flnished products.
There are such zones all over the world – but in this country they were made possible under a 1934 law. The first was set up in 1937 in New York City, and still is operating. Others are at New Orleans, San Francisco, Seattle, Toledo, Honolulu and Mayaguez, P.R. Zones have been authorized also for Bay County, Michigan; Bayonne, N.J., and subzones at Taft, La., and New Orleans.
Each zone must be approved by the Commerce Department's Foreign Trade Zone Board – perhaps the government's smallest regulatory agency. The three-member board consists of the Secretary of Commerce, who is chairman, and secretaries of the Treasury and Army.
Applications are pending for new zones or subzones at Portland and Machiasport, Maine; Honolulu and Savannah, Ga. The Honolulu, Savannah and Machiasport installations would include oil processing facilities as a way of circumventing oil import quotas.
The use of these zones has increased slowly over the years – but they had not aroused
much controversy until last September when Maine applied to the board for a new zone at Portland. Included would be a subzone at Machiasport, a small southeastern Maine community that achieved a moment of fame in 1775 when a British ship was captured nearby in what is considered the first naval battle of the American Revolution.
The latest war, however, is with the major oil companies. For Maine has an agreement with Occidental Petroleum Corp. to place a $145 million refinery at Machiasport capable of producing 300,000 barrels of petroleum products, gasoline and heating oil dally. It would be the first trade zone in this country to have an oil refinery – and Occidental's only U.S. refinery.
The major oil producers have mounted a sufficiently powerful campaign not only to stop immediate consideration of the Zone by the board, but also to force President Nixon to announce a full White House review of oil import policies. The President last month also took from the Interior Department direct control over oil import policies until completion of the study.
The Occidental plan is a source of grief to the oil companies for principally two reasons:
The companies believe that if the zone is approved others will follow. The result, they fear, will be to wreck the present oil import quota policy. At least one estimate has it that imported oil is a source of about $500 million worth of additional profits to the oil industry annually.
The major companies serving New England feel Occidental may cut prices so low on the products it refines at Machiasport as to make their marketing problems immense. Occidental has promised a 10 percent lower price on heating oil. One oil industry source estimates the New England petroleum market at about 300,000 barrels of products a day into which Occidental would pump at least 100,000 from Machiasport. The same source estimates the market to be worth $15 million dally in gross receipts.
REAL PROBLEMS
Both problems could be very real. Most major companies remember that Hess Oil and Chemical Co. has a quota for only 15,000 barrels a day from its Virgin Islands refinery – the islands are essentially a free trade zone. Some of these products are sold here at prices much lower than those of major companies.
Further, the Steuart Petroleum Co. wants to establish a zone at Piney Point, Md., for a $40 million refinery. This would produce. among other things, low sulphur-content oil for power plants. Low sulphur oil does not pollute the air when burned as much as high sulphur oil – and federal standards now require oil to be desulphurized. The cost of this process is about 40 cents a barrel.
The Steuart facility would refine a low-grade oil into a so-called residual oil, which is used for power plants and heating large buildings. Residual oil – the finished product – may be imported on a consumption basis, virtually with no quota. But the crude from which it is made requires a quota. Since residual oil is too inexpensive to justify carrying it great distances it is generally unloaded close to where it is consumed.
Any oil that is produced domestically must be transported in U.S. flag vessels. Such transportation charges are considerably higher than for transportation in foreign vessels.
As a result, dealers like Steuart, forced to seek lower-priced desulphurized oil, are soon going to be hard put to compete with new foreign refineries being built close by. One, a 300,000-barrel-a -day facility, is being built by New England Refining Co. at Freeport in the Bahama Islands.
New England Refining has already begun soliciting business for its low-sulphur Libyan residual oil among domestic consumers along the East Coast. Those solicited include Potomac Electric Power Co. which consumes about one million barrels a year.
Proponents of the foreign trade zone idea for oil refineries list two supporting reasons: National security. If foreign oil sources were suddenly shut off – as they were briefly during the 1967 Arab-Israeli war – the nation would have added refinery capacity to process domestic crude oil,
Balance of payments. The zones would not import all of their oil into this country, but would process some of it for export using U.S. labor. Further, there would be less need to import finished petroleum products.
NEEDS REFINERY
Maine says it needs the Machiasport refinery because there are no refineries in New England. As a result fuel costs – for both electric power plants and home heating – are high. One effect is that industry has not located in New England because it doesn't want to pay high electric power costs.
The Gulf Oil Corp. which has about 8 percent of the New England market, has been one of the most vocal opponents. It contends that sending oil from Machiasport to Providence, R.I., for example, would cost as much as sending oil from existing Gulf refineries at New York and Philadelphia to Providence, and therefore Occidental could not serve New England any more economically than could Gulf.
Gulf contends also that prices dealers pay in New England for home heating oil have been lower than the U.S. average five out of the past six years – they were higher in 1968. But consumer prices have consistently been higher than the U.S. average at least since 1961. In 1968 they were about 6 percent higher.
The price of home heating oil is vital in New England where winters are cold and long.
Occidental's output would include 90,000 barrels of heating oil daily and 10,000 of gasoline.
The proponents of the project also contend that having the trade zone at Machiasport could open the way for industrial development by providing a convenient source of low-sulphur fuel for new electric plants and factories.
For its part, Occidental needs a refinery in this country as well as a hefty import quota if it is to market here its big find of very low sulphur content oil in the Libyan desert.
Occidental's problem, therefore, is a product without a U.S. market – unless it sells the oil to another producer. It has two refineries in Germany and one in Belgium producing a total of 100,000 barrels a day.
Under the complicated system of oil import quotas in this country, any refinery is entitled to import 19.5 percent of the first 10,000 barrels of its refinery capacity, 11 percent of the next 20,000, 7 percent of the next 70,000 and 3 percent of everything over 100,000. On this basis Occidental's quota would be 15,050 barrels a day. That's not much to keep a 300,000 barrel-a-day plant going. Additional crude oil would have to be bought domestically.
TWO QUOTA TYPES
Under the trade zone proposal, Occidental would seek Interior Department permission to import 100,000 barrels a day from the zone into New England. Of the other 200,000 barrels, about 110,000 would be refined and exported to foreign markets and 90,000 barrels of residual oil would go to satellite power plants and other factories which could process it into chemicals.
Under present policies there are two types of quotas: one for crude oil and one for finished products such as gasoline, kerosene, jet fuel and the like. Residual oil may be imported on the basis of consumption.
Gulf, for example, imports 40,000 barrels a day of crude and unfinished products and 1,900 barrels of finished products.
East of the Rocky Mountains about 122 companies share in what amounts to a quota
of about 600,000 barrels of crude a day. The Machiasport plant would consume 100,000 barrels of this which would have to come out of everybody else's quota. This assumes the Interior Department would approve the 100,000-barrel requested quota which some say is unlikely.
The loss of 100,000 barrels a day from the import quota would mean the loss of about $45.6 million a year to other companies. That's figured on $1.25 a barrel – the price differential by which domestic crude is that much more costly than foreign crude.
The reasons for the higher cost include more expensive transportation for domestic oil in U.S. ships, state restrictions on well flow, and the vast number of wells dotting U.S. oilfields. Middle eastern fields have fewer wells that flow at greater levels.
Last year, according to the Independent Petroleum Association of America, oil imports, mostly on the East Coast, totaled 463,550,000 barrels of crude. At $1.25 a barrel that's a $579,437,500 saving for the oil companies over the cost of domestic oil.