By John Patterson
Foreign Trade Zone 137 turned 30 this year, and through decades of stimulating the region’s import-export business, it’s established a central yet little-known role in Loudoun’s economic development.
A Foreign Trade Zone is an area, typically centered around a port, that U.S. Customs and Border Protections exempts from tariffs. Because of this, firms can import and export goods from the zone without paying duties.
The local Foreign Trade Zone 137 is associated with Dulles Airport, and any company within a 60-mile radius of the airport can apply for Foreign Trade Zone status. Today, 137 has two tenants, who are both headquartered in Loudoun County: Belgian shipping company CDS Airfreight and Loudoun-based tableware company Fortessa Tableware Solutions.
Gene Rigoni, Fortessa’s chief operating officer, said the companies’ foreign competitiveness relies on importing products duty-free. “If we had received something and paid the tariff, then tried to export it again, it’s 33 percent more expensive than somebody could’ve gotten it directly from China, Germany, or somewhere else.”
For example, Fortessa can import flatware sets from a manufacturer in one country, and import fish knives from another country, then add the fish knives to the flatware sets at its Winchester operations center and then export the new set without paying any U.S. duty.
“All that flatware comes from a country into the U.S., we don’t pay a duty on it, and we export it out so it’s still at that lower cost,” Rigoni said.
According to Fortessa CEO Scott Hamberger, the money saved through the zone enables Fortessa to trade in international markets that would be impossible to compete in if it had to tack on a duty into its prices.
“If you can’t offer [international consumers] goods duty-free, they don’t buy,” he said.
Today, international sales make up about 15 percent of Fortessa’s business, and it exports to more than 30 countries.
This Fortessa is moving from its Sterling headquarters to a larger space at One Loudoun.
“The FTZ has created growth opportunities for our company,” Hamberger said. “We knew, absent the FTZ, we wouldn’t be able to capitalize on that growth opportunity.”
An Economic Carrot
Economic development agencies use foreign trade zones to attract businesses to their counties. The Washington Airports Task Force manages FTZ 137. Its president, retired U.S. Air Force Maj. Gen. Keith Meurlin, said its mission is to facilitate economic growth in Northern Virginia.
“The FTZ itself is a vehicle to spur economic activities within the counties. That’s what we’re really after,” he said. “This is more of a public service; this is not a profit center. The way we see the profit center is the benefit to the community and the county’s economic development.”
Foreign trade zones aren’t a rarity. FTZ 137 is one of five zones in Virginia, and every state has at least one. According to Meurlin, FTZ 137 helps the region compete with other areas with foreign trade zones.
“The idea is it puts Loudoun County, and it puts [Loudoun Economic Development Executive Director] Buddy Rizer and his economic development organization, on a level playing field with those people in Spartanburg, SC, and Huntsville, AL, and other places,” Meurlin said. Spartanburg and Huntsville are both foreign trade zones and major manufacturing towns for BMW and Toyota, respectively.
After “leveling the playing field” with places like these, “Then you can argue that we have the better environment, the better schools, the better employees, the better tax environment for them,” Meurlin said.
Bob McCollar, international business development manager of Loudoun’s department of economic development, uses this exact strategy. He tells international businesses about FTZ 137 on every single one of his recruiting trips.
“The two questions I’m asked about from pretty much everyone internationally are [about] the Dulles Airport and our public schools,” he said.
Its Role Evolving
Why then, given Loudoun’s booming international market, does FTZ 137 only have two tenants?
“We’re [Loudoun County] very dependent on government contracting,” Hamberger said. “There aren’t many companies that sell products.”
The county’s largest industry is government. Of the county’s 161,643 jobs, 24,081 are in the local, state, or federal government, according to the Virginia Labor Market Information’s 2017 Community Profile of Loudoun. That’s a hair less than 15 percent of the workforce.
“We’re on the consuming side right now here. We’re trying to … convert the area from a federal-centered economy to a more commercial one, and we’re getting more business in the area,” Muerlin said.
Predictions about the future of the zone’s role in the county economy are mixed.
Meurlin sees the region undergoing a “transition to more of a commerce-based economy” because of the recent political trend toward tightening federal government spending.
“As the federal government keeps shrinking, it’ll be less and less of the economic driver,” he said. “Our action as a facilitator of economic growth and activity I think will increase.”
McCollar has a different view. “I don’t see it changing,” he said. “So far even with the new [presidential] administration there’s been no decrease or new interest in the foreign trade zone.”
The zone has the potential to benefit many more Northern Virginia companies that import materials. The trick is clarifying the costs and benefits of the zone.
Two of Loudoun’s large high-tech manufacturing firms—EIT and K2M, both based in Leesburg, do not participate in the FTZ even though both operate internationally.
“It would be of interest to us,” EIT founder Joe T. May said. “If we can gain any sort of advantage by using it, maybe it would be desirable to have the people who administer the zone to come and talk to the companies individually because it’s absolutely possible that we’re missing a good bet and just don’t know it.”
However, the expenses of maintaining zone status, including stringent security requirements, can daunt potential companies.
“There might be some minor advantage, but the administrative cost would consume it,” May said. “If there’s something we don’t understand about it, I would be delighted to be reviewed by the people who sponsor the free trade zone.”
Fortessa’s operators aren’t concerned about their number of “neighbors” increasing in the FTZ.
“We believe in prosperity. We’re happy to have as many people as possible (using the FTZ),” Hamberger said, “As long as they’re not in the tableware business.”
Fortessa’s niche seems to be safe. According to county reports, the Department of Economic Development is more focused on attracting international firms working in industries that are emerging in the county economy: life sciences, health information technology, cyber security and big data.
Of those, life sciences seem to be the most promising to be incorporated into the FTZ.
“I’ve got to assume that in the near future we’re going to have a lot more activity in bringing medicines in, repackaging, altering, shipping them out. You would think the FTZ would be a benefit for them,” Muerlin said. “We’ll do whatever we can to help them. If they can save money on the manufacturing and the logistics of it, hopefully it will be reflected in the cost of the medicine.”
Just last month, Fairfax County snagged a $35 million-dollar investment from Indian pharmaceutical company Granules India Ltd. to expand the manufacturing and R&D of its wholly-owned subsidiary Granules Pharmaceuticals Inc. in the county. The contract is expected to provide 102 new jobs. No word yet on whether they plan to use the FTZ.
Whether FTZ 137 sees an influx of tenants or not, both Meurlin and McCollar agree that the zone deserves more credit for fostering economic growth within the county.
“The Germans have an expression, ‘hidden champions,’ businesses and organizations that a lot of people don’t know about, but yet they are champions of the economy,” McCollar said. “In my opinion, the Foreign Trade Zone is one of our hidden champions.”
John Patterson is an intern with Loudoun Now. He is studying English and economics at the University of Virginia.