BILL ANALYSIS                                                                                                                                                                                                    Ó



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       Date of Hearing:  April 21, 2015


          ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY


                                Eduardo Garcia, Chair


       AB 1444  
       (Eduardo Garcia) - As Introduced February 27, 2015


       SUBJECT:  Foreign-trade zones


       SUMMARY:  Expands the type of applicants California law recognizes  
       under the federal Foreign Trade Zone Act of 1934 to include  
       applications submitted by a federally recognized tribal government.     



       EXISTING FEDERAL LAW, the Foreign-Trade Zones (FTZ) Act of 1934,  
       establishes a process for a public corporation and a private  
       corporation to become designated as a FTZ.  The implementing federal  
       regulations require, among other things, that the eligibility of grant  
       applicants be supported by enabling legislation from the state in  
       which the FTZ is to be located, indicating that the applicant,  
       individually or as part of a class, is authorized to apply.   


       EXISTING STATE LAW authorizes public and private corporations to apply  
       for a FTZ designation.  A public corporation is defined as the state,  
       any political subdivision thereof, any incorporated municipality  
       therein, or any corporate municipal instrumentality of the state, or  
       of this state and one or more other states.  Private corporations must  
       be formed for the specific purpose of establishing, operating, and  
       maintaining a FTZ. 









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       FISCAL EFFECT:  None


       POLICY ISSUE FRAME: 


       This bill proposes to change state law to more clearly reflect the  
       sovereignty of tribal governments relative to their application for  
       FTZ designation.  By practice, the FTZ Board has approved a number of  
       FTZ designations involving tribal government applicants by using the  
       public corporation category.  Multiple models have been used,  
       including direct designation authority, as seen in Washington and  
       Oregon, and having the FTZ located on tribal lands with another entity  
       having the operational responsibility, as in Oklahoma.   


       While a tribal government is a public entity, a tribal government is a  
       separate public entity from the state or states in which their lands  
       are surrounded.  Existing state law says that the public corporation  
       applicant must be the State of California, a political subdivision of  
       the state or a municipality.  AB 1444 establishes a second public  
       entity category, which more accurately reflects tribal government  
       sovereignty.


       The Comments section of the analysis includes the author's statement,  
       information on FTZ, the importance of foreign trade to the California  
       economy, and related legislation.


       COMMENTS:  


       1)Author's Purpose:  According to the author's statement, "By  
         practice, the FTZ Board has approved FTZ designations that have been  
         applied for by tribal governments using the public corporation  
         category.  Multiple models have been approved by the FTZ Board,  
         including direct designation authority, as seen in Washington and  








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         Oregon, and having the FTZ being located on tribal lands with  
         another entity having the operational responsibility, as in  
         Oklahoma.   Tribal governments are, however, not a political  
         subdivision of the state nor municipality.  AB 1444 updates  
         California's law to reflect the sovereignty of tribal governments."



       2)Background on FTZs: The FTZ program is a federal economic  
         development tool, which is used to attract manufacturing and product  
         assembly that may otherwise be undertaken in a foreign country.  In  
         addition, FTZs strengthen the competitiveness of U.S. companies to  
         participate within global supply chains.
         Businesses benefit from special FTZ custom procedures, which allow  
         domestic activity involving foreign items to take place prior to its  
         official entry into U.S. Customs.  Among other advantages, duty-free  
         treatment is accorded items that are re-exported and duty payment is  
         deferred on items sold in the U.S. market.   When merchandise is  
         manufactured in zones, users have the option of paying duties at the  
         finished product rate.  





         Another FTZ advantage is the exemption from state and local ad  
         valorem taxes.  This applies to tangible personal property imported  
         from outside the U.S. and held in a zone for the purpose of storage,  
         sale, exhibition, repackaging, assembly, distribution, sorting,  
         grading, cleaning, mixing, display, manufacturing, or processing,  
         and tangible personal property produced in the U.S. and held in a  
         zone for exportation, either in its original form or as altered by  
         any of the above processes.





         Taken together, the FTZ custom treatment and state and local tax  








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         provisions are designed to help offset advantages available to  
         overseas producers who compete with producers located in the U.S..   
         There are 250 FTZ in the U.S. with 16 located in California. 



       3)Application Procedures:  Each zone is managed locally by the  
         "grantee" organization, which is generally a public or non-profit  
         organization focused on trade or economic development.   Designation  
         authority is awarded by the Foreign-Trade Zone Board (Board), which  
         is comprised of the U.S. Secretary of the Treasury and the U.S.  
         Department of Commerce, who serves as chair.

         Among other evaluation criteria, the Board is required to base its  
         evaluation on such factors as market conditions, price sensitivity,  
         degree and nature of foreign competition, intra-industry and  
         intra-firm trade, effect on exports and imports, ability to conduct  
         the proposed activity outside the U.S., and net effect on U.S.  
         employment and the U.S. economy.  

         Once the FTZ authority is granted by the Board, the grantee must  
         submit an application to the U.S. Customs and Border Protection  
         which is responsible for overseeing the local port of entry.  This  
         second process is referred to the FTZ activation process and  
         generally includes steps such as background checks, a written  
         procedures manual, posting a bond with the U.S. Customs and Border  
         Protection, as well as a review of the security of the site(s) and  
         the proposed inventory control methods.  On a day-to-day basis, the  
         U.S. Customs and Border Protection is responsible for overseeing  
         activities within the FTZ.


       4)Magnet Sites and Subzones:  As initially implemented, the boundaries  
         of most FTZs included seaports or airports, as well as some  
         industrial parks.  The FTZ operated as a magnet site which could be  
         used by multiple businesses. Subzones were developed as unique  
         usage-driven sites, which are approved for a specific company.   
         Designations of a subzone may also include the use of an  
         "Alternative Site Framework," which is described by the Board as  








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         being a quicker and simpler process for designating a subzone at a  
         specific company's facility, usually a manufacturing or processing  
         plant. 



         In addition to the 250 FTZs, there are 500 subzones in the U.S.  The  
         largest industry subsector currently using zone procedures is the  
         petroleum refining industry. Significant zone manufacturing also  
         occurs in the automotive, electronic, and pharmaceutical product  
         areas.  California's 16 FTZs have 37 related subzones operated by  
         the following companies:  Chevron, Hewlett-Packard, National RV,  
         Skechers USA, LLC, Sony Electronics, Inc., and Valero Refining  
         Company-California





       5)Importance of Trade to the California Economy:  A key driver of  
         California's $2.2 trillion economy is trade is the production and  
         delivery of goods and services within an expanding global  
         marketplace.  California's 2013 GDP places it as the eighth largest  
         economy in the world.  When the 2014 GDP numbers are formally  
         released by the California Department of Finance in June 2015, some  
         anticipate that California will rank seventh.  



         In 2014 California exported $174 billion in products as compared to  
         $168 billion in 2013 and $162 billion in 2012.  Mexico remained  
         California's largest export market, where the value of exports  
         totaled $25.4 billion in 2014. After Mexico, California's top export  
         markets in 2014 were: Canada ($18.2 billion); China ($16.0 billion);  
         Japan ($12.3 billion); South Korea ($8.6 billion); Hong Kong ($8.5  
         billion); Taiwan ($7.5 billion); Germany ($5.4 billion); the  
         Netherlands ($5.4 billion); and India ($5.3 billion).  










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         California's top five exports in 2014 were: Computer & Electronic  
         Products ($42.7 billion); Transportation Equipment ($18.7 billion);  
         Machinery, Except Electrical ($14.9 billion); Miscellaneous  
         Manufactured Commodities ($14.6 billion); and Chemicals ($14  
         billion).  It is important to note that significant portions of  
         these five export categories include parts and semi-assembled  
         products, which underlies both California's importance within and  
         dependence on global supply chains.  





         Another important component of global supply chains are the ability  
         of states to import products quickly and efficiently.  China is the  
         largest source of imports into California.  The 2014 value of  
         Chinese imports was $137.7 billion, followed by Mexico ($41.3  
         billion); Japan ($38.3 billion); and Canada ($27.9 billion).





       6)Related Legislation:  Below is a list of bills from the current and  
         prior sessions.



          a)   AB 311 (V. Manuel Pérez) I-Bank California-Mexico Border  
            Assistance:  This bill would have expanded the role of the I-Bank  
            to include facilitating infrastructure and economic development  
            financing activities within the California and Mexico border  
            region.  Status:  Died in the Assembly Committee on  
            Appropriations, 2014.

          b)   AB 337 (Allen) Economic Development: International Trade and  








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            Investment Strategy:  This bill adds specificity to the  
            development and content of the state international trade and  
            investment strategy (ITI Strategy), which is an existing report  
            requirement of the Governor's Office of Business and Economic  
            Development (GO-Biz).  This bill requires the ITI Strategy to be  
            based on current and emerging market conditions and the needs of  
            investors, businesses, and workers.  Specific new content  
            requirements include the addition of a framework, which can be  
            used by GO-Biz to evaluate the changing needs of business during  
            the five-year term of the ITI Strategy.   Status:  Signed by the  
            Governor, Chapter 776, Statutes of 2014. 
       
          c)   AB 886 (Allen and Ian Calderon) Importer-Exporter Tax Credit:   
            This bill would have authorized a five-year $500 million tax  
            credit program for importers and exporters that increase cargo  
            through in-state airports and seaports, hire additional staff, or  
            incur capital costs at a California cargo facility.  Status:   
            Held on the Suspense File of the Assembly Committee on  
            Appropriations, 2013.
       
          d)   AB 1137 (V. Manuel Pérez) Small Business Assistance and  
            Attracting Private Investment:  This bill would have facilitated  
            local economic development and job creation by assisting small  
            businesses to access new export markets for their goods and  
            services, updating the law relating to FTZs, and authorizing the  
            use of new federal funds under the Small Business Jobs Act of  
            2010.  Status:  Held in Senate Committee on Appropriations, 2012.  
              

          e)   AB 1400 (Assembly Committee on Jobs, Economic Development, and  
            the Economy) Export Document Certificates:  This bill modifies  
            the state's Export Document Program to accept requests  
            electronically, expedite approval of existing labels, and extend  
            the term of the export labels from 180 days to 365 days, in order  
            to alleviate backlog of exports of food, drugs, and medical  
            devices.  Status:  Signed by the Governor, Chapter 539, Statutes  
            of 2013.     
       









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          f)   AB 2012 (John A. Pérez) Economic Development Reorganization:   
            This bill transfers the authority for undertaking international  
            trade and foreign investment activities from the Business,  
            Transportation and Housing Agency to the Governor's Office of  
            Business and Economic Development.  Status:  Signed by the  
            Governor, Chapter 294, Statutes of 2012.
       REGISTERED SUPPORT / OPPOSITION:


       Support
       None received


       Opposition
       None received


       


       Analysis Prepared by:Toni Symonds / J., E.D., & E. / (916) 319-2090