This situation developed as a result of the Korean War. Because of the tremendous devastation in Korea, the U.S. government entered into a program of rebuilding the Korean economy. The midwestern manufacturer obtained orders from the government to supply a quantity of heavy machinery and equipment, the contract running into many millions of dollars.
In that period during and after the Korean War, there was a shortage of domestic steel. For that reason the manufacturer imported virtually all the steel used in the machinery manufactured for the Korean government. When he discovered that he was due a refund of duties, he obtained all his records over the past years, and submitted them to the government. These records were verified and the manufacturer was paid more than $1,500,000.
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The maze of tariff laws which has grown up over the years has developed some peculiar situations, and one of the oddest of these involves the Virgin Islands, the insular possession which has attracted many manufacturers in recent years.
One reason that the Virgin Islands is proving attractive to new industries is that under the present laws, manufacturers operating in the Virgin Islands pay an import duty of only 6 per cent on merchandise brought into the Islands for use in manufacturing. Their finished products are permitted into the mainland free of any duty—provided the foreign materials used are less than 50 per cent of the total value.
This quirk in the law has created extreme problems for some American industries, such as the watch industry. For example, a manufacturer in the Virgin Islands will import various watch parts from France or Japan and pay only a 6 per cent duty on these imports. The parts will be assembled into a finished watch, and if the watch meets the requirements fixed by law, then it enters the United States free. In other words, the manufacturer in the Virgin Islands pays a 6 per cent duty on watch parts on which the American manufacturer is required to pay a 50 per cent duty. And this variance extends to other fields of manufacturing.
There has been, in recent years, a growing opposition to the duty differential which is permitted manufacturers in the Virgin Islands. Discussing this situation before Congress in September, 1960, Representative Eugene J. McCarthy of Minnesota voiced the views of many when he said: “In recent months there has been a growing tendency for companies to establish themselves in U.S. insular possessions on a basis that results in their escaping the proper payment of duty on products they wish to import into the United States. Section 301 of the Tariff Act of 1930, as amended, was intended to promote the development of employment opportunities in our insular possessions.... (Instead, it) has become an avenue for the avoidance of very substantial amounts of duty....”
The McCarthy argument is disputed by the Virgin Island manufacturing interests, but nevertheless the situation underscores the complexity of the laws by which the Customs Bureau is bound.
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In the fourteenth and fifteenth centuries, free-trade zones were common throughout the world. There were no customs requirements, and merchandise moved through these ports with no restrictions. Gradually the free-trade ports disappeared as the various countries imposed tariffs on imports and exports for revenue and for protection purposes.