ELKTON, Va.—This story ends down in America’s Deep South, with a report on how a $3.7 billion foreign investment in Alabama that will create thousands of American jobs has sparked vigorous complaints from the US steel industry and the Steelworkers union that it is “unfair.” But it begins quietly on another note here in this pretty little Virginia community (pop. 2,212) nestled in the Shenandoah Valley nearly 100 miles southwest of Washington, D.C. Together, the two otherwise unrelated parts of this article illustrate that while trade liberalization — especially when tariffs are slashed in so-called US Foreign Trade Zones — is clearly beneficial to the US economy, free trade remains politically controversial.

At first glance, Elkton hardly suggests a shining success story that illustrates the benefits of international trade. The deep economic recession has (alas) come to the Blue Ridge mountains; Elkton’s local Chevy Pontiac dealership closed last month, for instance. But business here seems to be great for Merck & Co., the pharmaceutical giant that produces vaccines and medicines in 31 plants in 25 countries. Merck’s sprawling Elkton factory consists of more than 80 buildings that are scattered throughout 1,330 acres out on Route 340 South, about a mile and a half from downtown. It may look nondescript, but this is one of the company’s most important manufacturing locations anywhere. (Just past the plant is a Deer Crossing sign that is riddled with bullet holes, a reminder that folks here in America’s Bible Belt take their guns seriously.)

Merck first set up shop in Elkton in 1941, and now employs some 700 people who make medicines aimed at treating all sorts of evils: HIV, river blindness, Parkinson’s Disease, high cholesterol, glaucoma, and simple pain. There is a $250 million expansion going on, which is expected to add 70 people, possibly many more, to Merck’s roughly $60 million Elkton payroll. The expansion will boost Merck’s production of Gardasil, a cervical cancer vaccine, and is already boosting the fortunes of a long list of workers — some local, others who have come from places like Greenville, South Carolina — who are engaged in the construction: electrical suppliers, painters, carpenters, and so on. If you are looking for a successful American manufacturing plant, this is it.

And if you are looking for an example of how slashing tariffs helps create American jobs by reducing unnecessary costs of production, come to Elkton. Merck pays no US tariffs on the imported raw materials it brings in here through a so-called Foreign Trade Zone. Merck depends upon its duty-free imported chemicals to make its medicines.

So why would Merck executives — the plant manager here in Elkton, Merck’s lobbyists in Washington, D.C., and even one of the company’s official spokeswoman in Merck’s New Jersey headquarters — refuse repeated requests to talk about their success story? If free trade works to enhance your company’s international competitiveness, why not spread the word?

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Talk about publicity shyness. Merck’s plant manager in Elkton refused this reporter’s repeated requests to visit the factory, or provide any information as to what sorts of manufacturing the plant is engaged in. Four detailed voice-mail messages left with Merck’s government affairs office in Washington, D.C. were not returned. Even one of the company’s official PR spokeswomen in Merck’s Whitehouse Station, NJ, headquarters did not return a telephone call asking about Merck’s Elkton plant. [The descriptions of Merck’s Elkton operations in this article come from an exhaustive search of Merck’s own documents that are scattered around in various public-records, some local newspaper reports, and an unauthorized drive-through inspection of the Elkton property itself on this past Sunday morning, when the usual stringent security apparatus appeared to be somewhat relaxed.]

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Merck’s duty-free privileges for its imported raw materials stem from its affiliation with one of the nearly 500 Foreign Trade Zones that operate in the United States. Technically speaking, in late 1993 the federal government was asked by the Chamber of Commerce of adjacent Culpeper County, some 40 miles away, to designate Merck’s Elkton plant as a “special-purpose foreign trade subzone.” The Culpeper chamber processed the paperwork, and Merck does the actual work in Elkton.

After the U.S. Foreign-Trade Zones Board (a federal body essentially run out of the US Commerce Department, and including US Treasury Dept. representatives) cleared the voluminous paperwork that the Culpeper chamber submitted, Merck was able to import its raw materials without paying tariffs. The actual imports — various chemicals, chlorides, gums, resins, herbicides, and such — come in through a US Customs free-port of entry at Front Royal, Va., which is 50 miles to the north. (It is possible that some of the raw materials also come through a similar duty-free foreign trade zone in the Washington/Dulles International Airport, according to a Culpeper chamber official who said he had been asked by Merck not to be more precise.)

The bottom line: Thanks to its participation in the foreign-trade zone program, Merck doesn’t have to pay duties averaging in the 3% to 6% range for the imports it needs to hire the Americans who keep its factory in Elkton humming. This is tangible evidence that slashing tariffs and lowering any company’s costs of production produces results in real jobs, even in remote nooks and crannies of the Blue Ridge Mountains. If free trade works, why wouldn’t any corporation be eager to spread the word?

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Of course, there could be other reasons why Merck doesn’t want to say anything about what it does in Elkton. Some corporations — Raytheon, Emerson Electric, Wilson Sporting Goods, Target & Wal-Mart come immediately to this reporter’s mind — routinely treat pesky reporters with thinly-veiled disdain, as does the Business Roundtable. Or it could be that Merck doesn’t want its competitors who have not been savvy enough to put their own operations in free ports to see how it can be done. But inquiries to knowledgeable authorities who are familiar with the operations of foreign trade zones suggest that the most plausible explanation is rooted in political sensitivities. For some reason, many firms that benefit from the duty-free privileges associated with foreign trade zones seem to feel somehow tainted, as if they are getting away with something. They shouldn’t feel that way, as the results of the tariff cutting pay off in investments that result in real American jobs.

But any journalist who starts poking into these FTZs soon learns that protectionist politics are never far from the surface. True, local communities in places like Elkton love foreign trade zones because they attract investments and jobs. But other domestic competitors who don’t enjoy the zero tariffs seem to prefer attacking their rivals who operate inside foreign trade zones — instead of getting into their own.

To see how this works, let’s leave Virginia’s Shenandoah Valley and take a look at the opposition to ThyssenKrupp’s multi-billion dollar new steel mill in the Mobile, Alabama area.
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Headquartered in Germany, ThyssenKrupp is one of the world’s largest steelmakers. The giant multinational has nearly 200,000 employees, some 24,000 of which work in more than 400 locations in the United States that turn in annual sales of some $9.5 billion.

ThyssenKrupp Steel North America ought to be popular in the US; it operates a steel processing center that employs 145 workers in economically depressed Detroit, to cite just one example that the company touts on its website. And in Calvert, Alabama, some 50 miles north of Mobile, ThyssenKrupp is developing a new $3.7 billion state-of-the-art plant that will make hot-strip steel from slabs of semi-finished steel imported from Brazil. It will also produce stainless steel from ferroalloys, some 19 types of which mainly come from outside the United States, in countries like India, Kazakhstan and South Africa.

The steel slabs come in duty free anyway, as the US has no tariffs on them. But the 19 ferroalloys that ThyssenKrupp will need to run its Alabama plant are subject to duties collectible by US Customs officials upon their entry into the United States — 2.3% tariffs for ferromanganese; 1.9% to 3.1% for ferrochromium; 5% for ferroniobium, and so on. The city of Mobile has applied to the federal Foreign Trade Zones Board to establish the ThyssenKrupp facility in Calvert as a Foreign Trade Subzone (the same process that the Chamber of Commerce in Culpeper, Va. utilized to establish Merck’s Elkton pharmaceutical plant as a duty-free subzone).

ThyssenKrupp has retained Kristine Price, a New York-based principal in Ernst & Young’s customs and international trade practice, to represent it before the Foreign Trade Zones Board. In a 16-page analysis (supplemented with various attachments) that was submitted to the board on Jan. 8, 2009, Price maintained that her client’s Alabama investment will have “a significant positive impact” upon the US economy: “$3.7 billion invested, 29,000 multi-year construction jobs, 2,500 – 2,700 permanent jobs at the facility once operational, representing $130 million in annual payroll.” The Ernst & Young principal added: “The public benefits are staggering.”

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The point may seem obvious, but not to AK Steel Corp. and the United Steelworkers of America. AK Steel employs some 6,500 Americans in seven plants in Ohio, Kentucky, Indiana, and Pennsylvania, of which more than 5,000 are union members, according to a Dec. 8, 2008 filing with the Foreign Trade zones Board by veteran Washington, D.C. lawyer Joe Dorn. Like ThyssenKrupp, AK Steel makes both flat-rolled carbon steel products, and also specialty stainless steels. The King & Spalding trade lawyer contended that the ThyssenKrupp application was not “in the public interest.”

Dorn cited several objections, beginning with the fact that ThyssenKrupp has received subsidies. “The State of Alabama committed $811 million worth of tax breaks, infrastructure, and other incentives to persuade Thyssen to build the plant in Alabama,” the AK Steel advocate’s filing notes. ThyssenKrupp’s Alabama facility, which is expected to become operational in October, doesn’t deserve any more government-induced competitive advantages, Dorn stressed.

On behalf of the Steelworkers, the union’s legislative director, Holly Hart, argued in the USW’s own Dec., 2008 filing that the union “believes that it is not in the public interest of the United States to give a single mill a competitive advantage to the detriment of other mills in the United States.” Holly added: “The USW submits that this is no time to be providing a substantial competitive advantage to a single, non-unionized steel mill when the rest of the industry is already suffering from a major economic downturn, and idled U.S. steel capacity.”

Moreover, Hart added, Thyssen is an “unfair” foreign trader, and has been subject to numerous US anti-dumping actions. “The US government should not be picking winners and losers in the US steel sector,” Holly maintained.

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A neutral observer would be advised to treat such assertions skeptically. After all, the American steel industry itself has enjoyed lavish government subsidies since at least the 1860s, when a Buy American law prohibited foreign steel from being used to build the Transcontinental Railroad. The domestic industry still benefits from Buy American laws that exclude foreigners from bidding on various federal transportation construction projects.

For US steelmakers to complain that foreign steel is subsidized is akin to Madonna complaining that Britney is no longer a virgin. In the last three-plus decades the American steel industry has raked in perhaps as much as $25 billion in US federal, state, and local subsidies, according to published estimates. AK Steel, to cite just one example, has benefited from a tax advantage of unknown value that Kentucky gave to boost a $65 million modernization project at its Ashland.
The accusation that ThyssenKrupp is an “unfair” trafficker in “dumped” steel is easily brushed aside by anyone who understands that the US antidumping regime is thinly disguised protectionism that is regarded with disdain in respectable economic circles. Meanwhile, AK Steel itself is currently defending itself from an (absurd) accusation by Chinese authorities that it has “unfairly” dumped steel in China.

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There is one factual assertion in their complaints against ThyssenKrupp’s Alabama plant, however, where AK Steel and the USW raise an important point: If ThyssenKrupp is allowed to import its ferroalloys into the US duty free, that would seem to leave AK Steel, which has to pay duties for its own imports, with a competitive disadvantage. So what, if anything, should be done about that?

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AK Steel and the Steelworkers would simply deny the duty-free privileges to a competitor like ThyssenKrupp. But there could be other alternatives. Why couldn’t AK Steel simply emulate the savvy ThyssenKrupp and file its own application to take advantages of foreign trade zones?

AK Steel executives declined to answer that question. Perhaps that answer might not be so simple. When I visited the Culpeper County Chamber of Commerce to inquire about the chamber’s application to put Merck into a foreign trade subzone, officials told me that filing such applications entails a tremendous amount of paperwork. It could be that while ThyssenKrupp’s Alabama venture has had the foresight to file its application early on in the construction process, for AK Steel to do so years after its operations have been running would cost more than the paperwork would be worth. So AK Steel could be paying the price for its own lack of foresight.

Possible paperwork burdens aside, it would seem that AK Steel has other viable economic alternatives to opposing ThyssenKrupp’s application.

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“These foreign trade zones serve a legitimate, rational economic purpose because of the irrational US tariffs,” explains Dave Phelps, the president of the American Institute for International Steel, whose members import steel products. The US duties on ferroalloys are irrational, Phelps reasons, because the these essential raw materials are not available in sufficient quantities within the United States to be commercially viable.

AK Steel and other US integrated steelmakers have successfully lobbied for zero tariffs for the imported slabs that they need for their business operations, Phelps notes. The domestic steel industry also has persuaded Congress to eliminate tariffs for the iron ore that it needs to import (much to the displeasure of the iron ore industry in Minnesota). “So AK Steel should go to Congress requesting that these duties on ferroalloys be eliminated,” Phelps concludes.

More broadly, if free trade in steel slabs, iron ore, and ferroalloys is good for companies like ThyssenKrupp and AK Steel, why not expand it? Since eliminating tariffs demonstrably results in lowering the costs of production and creating jobs in specially designated free-trade zones, shouldn’t the entire US become a free port?

This could be done unilaterally — as Singapore, Hong Kong, Australia, and New Zealand have famously demonstrated by tearing down their tariff walls. India’s recent economic growth is directly attributed to its own unilateral tariff cutting. Or tariff cutting could be accomplished — at least in part, and far more slowly — through the World Trade Organization’s ongoing Doha Round of tariff- and subsidy slashing. Either way, countries that insist upon keeping their own tariff barriers are putting themselves at a competitive disadvantage.

Citing the economic advantages that would stem from the United States taking the lead to establish such a zero-tariff world is easy. It’s the politics that remain so difficult.