Members of Congress have demonstrated their interest in the U.S. Foreign-Trade Zone (FTZ) system through hearings and legislation over the past seven decades. The program may enhance the competitiveness of U.S. businesses, support employment opportunities, and impact U.S. tariff revenues. Balancing these potential gains, others argue that the program may also be trade distorting, and may play a role in misallocating resources in the economy as a whole. This report provides a general perspective on the U.S. FTZ system. It is divided into three parts. As background, the first section discusses free trade zones worldwide. The second section focuses on the U.S. FTZ program—its history, administrative mechanism, structure, growth and industry concentration, and benefits and costs. The third section focuses on current issues for Congress relating to the U.S. FTZ program. Foreign-trade zones (FTZs) are the U.S. version of free trade zones scattered around the world. Zones elsewhere are called by many different names (See Text Box 1 .) Free trade zones are a specific type of restricted access (e.g., fenced-in) industrial park housing concentrations of production facilities and related infrastructure. They are typically located at or near sea, air, or land ports. Free trade zones have become a substantial part of the structure underpinning the global supply chain. Together, these roughly 3,500 zones in 135 countries, including the United States (see Figure 1 ), form a web that frees producers from most customs procedures and offer duty savings, thus facilitating intricate international co-production operations. Although the rules vary by country, the general mechanism that makes them function together in international co-production is that while zones are located inside the geographic boundaries of countries, they are generally declared to be outside of these countries for customs purposes. Thus, components may be shipped into a zone—and sometimes shifted around the world from zone to zone on their way to becoming a finished product—without concern for tariffs, quotas, and detailed customs procedures, until they finally exit the zone system. Only then are tariffs payable, quotas honored, and full customs procedures applicable. (See Text Box 2 for examples of the use of one or more zones in a production chain.) Some analysts argue that free trade zones, in bypassing many of the complexities of individual country tariff assessments and customs procedures, have been one factor facilitating global supply chains. Today, free trade zones employ at least 66 million workers worldwide, including 370,000 in the United States. Most zones are located in developing countries, and most, but not all, of their workers are in manufacturing. Although these workers represent a substantial percentage of the worldwide manufacturing population, their exact share is difficult to estimate. Figure 1 shows worldwide employment apportionment across zones by geographic region in 2006, the most recent data available. It shows that China accounted for more than 60% (40 million) of world employment in zones; the rest of Asia accounted for 22% (15 million); Mexico and Central America for 8% (5.3 million); and the Middle East/North Africa for 3% (1.7 million); while the United States accounted for 0.5% (320,000). Free trade zones around the world are similar in the way they function to facilitate trade. They differ, however, in size, economic development purposes, physical characteristics, government incentives, and the final dispensation of their products. They may represent large shares of the country's manufacturing employment and occupy huge geographic areas, as with special economic zones in China; or they may be small enclaves housing a few businesses. In developing countries with little infrastructure, they may be self-sufficient city-like industrial complexes with housing, dining, and banking, as well as production and/or transport. In developed countries, on the other hand, with extensive infrastructure and modern facilities, they are more narrowly limited to production and/or transport. In the United States, instead of being tied to a specific physical location near port facilities, FTZ designation can quickly and simply be brought to a company, wherever it may be located. All zones typically include streamlined customs procedures and exemption or deferral of tariffs and quotas on stored inventory. Those in developing countries are more likely to have additional incentives such as subsidies, more flexible labor market regulations, and additional tax exemptions. While developing countries typically produce for export, as countries develop, they are increasingly likely to consume ("import") substantial shares of products made in their free trade zones. Elements common to many free trade zones can be seen in Figure 2 , below. They include container ships, which can often hold 1,000 to 1,500 containers each, and their automated loading operations; liquid storage tanks (for oil or chemicals, for example); and facilities for transferring individual containers to trucks or to railroad cars. The growth of zone use over time has resulted from a combination of factors including an initial conceptual design that has stood the test of time; an international mechanism for teaching governments how to establish zones that would attract foreign investors; and major advancements in technology that have supported the globalization of production. Figure 3 shows the rate at which these factors combined to explode zone use in the past 20 years. Modern day zone growth began with an "experiment" in 1959, for reuse of the Shannon, Ireland, airport. Designed as a job creation program, it proved so successful that an entrepreneur from the Shannon project was asked to help promote the concept through the United Nations. As an advisor to the UN Industrial Development Organization (UNIDO), he reportedly both prepared a manual on zone creation and took part in a number of zone-establishing missions in various countries. The United States government reportedly helped spread the concept of world processing zones when, between 1983 and 1995, five U.S. agencies provided loans and investment support for zone development: the U.S. Agency for International Development (USAID); the Overseas Private Investment Corporation (OPIC); the Export-Import Bank; the Department of State; and the Department of Commerce. Technological developments, including a worldwide telephone/computer/data processing network and advancements in container shipping and other types of transportation encouraged and supported the growth of zones worldwide. Other forces responsible for the proliferation of free trade zones, as identified by the OECD, include the increasing emphasis on both export-oriented and foreign direct investment-oriented growth, the transfer of production of labor intensive industries from developed to developing countries, and the growing international division of labor and incidence of global production networks. The U.S. FTZ Program was created by the U.S. Foreign-Trade Zones Act in 1934 (P.L. 73-397, 19 U.S.C. 81[a]-81[u]), in the midst of the Great Depression. It was designed to accelerate U.S. trade in the wake of the restrictive impact of the Smoot-Hawley Tariff Act of 1930, which raised U.S. tariffs on imported goods as high as 53%. It created the FTZ Board, which was given the power to approve applications for zone status. The act, fewer than six pages in length, also entitled each U.S. port of entry to at least one zone, and prescribed physical conditions and standards for each zone, activities permissible in zones, the applicability of all U.S. laws to zones, and requirements for zone operation and recordkeeping. The FTZ program started slowly. By the time the Shannon experiment was underway 25 years later in 1959, it was still quite small. Gradually, several factors accelerated zone use, including both internal changes to the program itself and external world factors. Internally, four major things happened. The first and likely the most significant of these factors was changing the program to allow for manufacturing. When the FTZ Act was passed in 1934, it prohibited manufacturing in zones because some feared it would promote imports of cheaper components to be used in the U.S. manufacturing process. At the time, it was argued that U.S. manufacturers of domestic components would be put at risk. That model, however, failed to attract many users. Then, in 1950, Congress amended the FTZ Act to permit manufacturing in zones. Two years later, in 1952, the FTZ Board took that amendment one step further and issued new regulations, which allowed FTZ sites to be designated at a company's facility. It was a way to take zones to the businesses. Additional FTZ growth was encouraged by two U.S. Treasury Department administrative decisions in 1980 and 1982. These clarified that manufacturers need not pay duty on either value-added or brokerage or transportation fees connected with imported goods. External factors that accelerated FTZ use by U.S and foreign multinational corporations included (1) increased international price competition that led U.S. businesses to seek new ways of saving costs; (2) greater education of businesses in the ways in which they could save money through zone use; and (3) advancements in technology which made cooperative global production possible. Today, the bulk of U.S. FTZ activity occurs in manufacturing operations. The zone can be brought directly to a company's facility, and may be used for manufacturing or warehousing. Across the United States, there were 174 FTZs active during the year, with a total of 276 active manufacturing/production operations. See Table A-1 for a summary of zone and subzone activity. All states have at least one zone. Hence, every state has some involvement in the zone system in which foreign and domestic status inputs are combined to make other products. The majority of inputs into zones are of domestic origin (58% or $429 billion) with the remaining inputs (42% or $304 billion) coming from foreign sources.