Preamble to the FTZ Board’s 2012 Regulations
Section 400.4 — Authority and Responsibilities of the Executive Secretary
Section 400.5 — Authority To Restrict or Prohibit Certain Zone Operations
Section 400.13 — General Conditions, Prohibitions and Restrictions Applicable to Authorized Zones
Section 400.14 — Production - Requirement for Prior Authorization; Restrictions
Section 400.16 — Exemption From State and Local Ad Valorem Taxation of Tangible Personal Property
Section 400.24 — Application for Expansion or Other Modification to Zone
- Section 400.26 — Criteria for Evaluation of Proposals, Including Expansions, Subzones or Other Modifications of Zones
- Section 400.27— Criteria Applicable to Evaluation of Applications for Production Authority
Section 400.31 — General Application Provisions and Pre-Docketing Review
Section 400.32 — Procedures for Docketing Applications and Commencement of Case Review
Section 400.33 — Examiner’s Review—Application To Establish or Modify a Zone
Section 400.34 — Examiner’s Review—Application for Production Authority
Sections 400.33 and 400.34 — Examiner’s Reviews of Applications
Section 400.38 — Procedure for Application for Minor Modification of Zone
Section 400.41 — General Operation of Zones; Requirements for Commencement of Operations
Section 400.45 — Complaints Related to Public Utility and Uniform Treatment
Section 400.49 — Monitoring and Reviews of Zone Operations and Activity
Section 400.62 — Fines, Penalties and Instructions To Suspend Activated Status
- Section 400.63 — Appeals to the Board of Decisions of the Assistant Secretary for Enforcement and Compliance and the Executive Secretary
- Other Comments
The Foreign-Trade Zones Board (the Board) hereby revises its regulations issued pursuant to the Foreign-Trade Zones (FTZ) Act of 1934, as amended (the Act), concerning the authorization and regulation of foreign-trade zones and zone activity in the United States. The rule is comprehensive and constitutes a complete revision, replacing the present version of 15 CFR part 400. The changes simplify many of the Board’s procedures, including those for users to obtain authority related to manufacturing and value-added activity, and include new rules designed to address compliance with the Act’s requirement for a grantee to provide uniform treatment for the users of a zone. The new rules improve flexibility for U.S.-based operations, including export- oriented activity; enhance clarity; and strengthen compliance and enforcement. The revisions also reorganize the regulations in the interest of ease-of-use and transparency.
DATES: Effective Date: April 30, 2012, except for Sec. Sec. 400.21- 400.23, 400.25 and 400.43(f) which contain information collection requirements that have not yet been submitted for OMB review. The Board will publish a document in the Federal Register announcing the effective date.
FOR FURTHER INFORMATION CONTACT: Andrew McGilvray, Executive Secretary, Foreign Trade Zones Board, International Trade Administration, U.S. Department of Commerce, 1401 Constitution Avenue NW., Room 2111, Washington, DC 20230, (202) 482-2862 or Matthew Walden, Senior Attorney, Office of Chief Counsel for Enforcement and Compliance, U.S. Department of Commerce, 1401 Constitution Avenue NW., Room 4610, Washington, DC 20230, (202) 482-2963.
Foreign-Trade Zones (FTZs or zones) are restricted-access sites in or near U.S. Customs and Border Protection (CBP) ports of entry. The zones are licensed by the Board and operated under the supervision of CBP (see 19 CFR part 146). Specifically, zones are physical areas into which foreign and domestic merchandise may be moved for operations involving storage, exhibition, assembly, manufacture or other processing not otherwise prohibited by law. Zone areas “activated” by CBP are considered outside of U.S. customs territory for purposes of CBP entry procedures. Therefore, the usual formal CBP entry procedure and payment of duties is not required on the foreign merchandise in FTZs unless and until it enters U.S. customs territory for U.S. domestic consumption. In fact, U.S. duties can be avoided on foreign merchandise re-exported from a FTZ, including after incorporation into a downstream product through activity in the FTZ. Zones have as their public policy objective the creation and maintenance of employment through the encouragement of operations in the United States which, for customs reasons, might otherwise have been carried on abroad.
Domestic goods moved into a zone for export may be considered exported upon entering the zone for purposes of excise tax rebates and drawback. “Subzones,” sites established for specific uses, are authorized by the Board through grantees of general-purpose zones, including where certain requirements, such as “adjacency” (distance/ driving time), for general-purpose zone sites cannot be met. Goods that are in a zone for a bona fide customs reason are exempt from State and local ad valorem taxes.
Zones and subzones are operated by corporations that have met certain regulatory criteria for submitting applications to the Board to operate zones. Under the FTZ Act, zones must be operated under public utility principles, and provide uniform treatment to all that apply to use the zone. The Board reviews and approves applications for authority to establish zone locations and to conduct certain activity within zones, and oversees zone grantees’ compliance with the Board’s regulations. The Board can limit or deny zone use on a case-by-case basis on public interest grounds. In response to applications and notifications, the Board can also provide the applicant with specific authority to choose whether to pay duties either on the original foreign material or on a downstream product incorporating the foreign material.
To receive approval to operate a zone, an applicant must demonstrate the need for zone services, a workable plan that includes suitable physical facilities for zone operations, and financing for the operation. Successful applicants are granted licenses to operate zones. License grantees’ sponsorship of specific sites for proposed FTZ designation is based on the grantees’ determinations regarding the sites’ appropriateness and potential for FTZ use, and a grantee may subsequently request removal of FTZ designation from a site based on factors such as the grantee’s determination that projected FTZ use has not occurred.
Through this action, the Board is updating and modifying the rules for FTZs. Continued interest in zones, on the part of both communities providing zone access as part of their economic development efforts and firms using zone procedures to help improve their international competitiveness, demonstrates zones’ importance to international trade and to investment in the domestic economy. These regulations generally simplify and clarify requirements pertaining to FTZ use, while also helping to ensure compliance with specific statutory and regulatory requirements. The regulations are also intended to improve access and flexibility for U.S. manufacturing and value-added operations, and to enhance safeguards in order to avoid potential negative economic consequences from certain zone activity.
In developing the final rule, the Board considered all of the comments received in response to its Federal Register notice of December 30, 2010 (75 FR 82340) proposing revisions to 15 CFR part 400. The comments received in response to the notice and the Board’s positions on the points raised in the comments are summarized below. The sections listed in the headings are those of the final rule, and references are made to the previous Federal Register notice when appropriate.
Discussion of Comments Received
Based on substantive changes made in response to comments submitted (as described below), a number of sections of the proposed regulations have been renumbered and certain section titles have been modified. Key changes to section numbers include: Adopted Sec. Sec. 400.14(b), (d) and (e) parallel proposed Sec. Sec. 400.14(c), (f) and (g), respectively; adopted Sec. Sec. 400.22 and 400.23 replace proposed Sec. 400.22(a); adopted Sec. 400.24 was renumbered from proposed Sec. 400.23; adopted Sec. 400.25 replaces proposed Sec. 400.22(b); adopted Sec. 400.26 replaces proposed Sec. Sec. 400.24 and 400.25(b); adopted Sec. 400.27 replaces proposed Sec. 400.25(a); adopted Sec. 400.41(b) replaces proposed Sec. 400.44; adopted Sec. Sec. 400.28, 400.29. 400.36, and 400.38 were renumbered from Sec. Sec. 400.26, 400.27, 400.35 and 400.36, respectively; adopted Sec. Sec. 400.44, 400.45, 400.46, 400.47, 400.48 and 400.49 were renumbered from proposed Sec. Sec. 400.45, 400.46, 400.47, 400.48, 400.49 and 400.38, respectively; and adopted Sec. 400.63 was renumbered from proposed Sec. 400.64.
Comment: One commenter proposed adding a sentence regarding the Board’s policy objective of encouraging activity in the United States that might otherwise be conducted abroad.
Board position: The policy objective in question is addressed in the Preamble. Duplication in this section is not warranted.
Comment: Numerous commenters proposed inserting language regarding the status of FTZs and zone merchandise relative to certain trade agreements and program(s), and deleting a phrase regarding production activity.
Board position: It is not necessary to address or describe in the Board’s regulations trade agreements and trade programs, which may change during the effective period of the regulations. The phrase regarding production activity has been retained because it clarifies that production activity is the mechanism through which a product emerging from a zone could differ from the material admitted to the zone. Retaining the phrase helps reinforce that production activity is subject to specific requirements in these regulations.
Comments: Numerous commenters proposed adding definitions for the following terms: Activation; administrator (to replace the term “agent”); alternative site framework (ASF); Board Order; domestic status; free trade agreement; general-purpose zone; inverted tariff; modification; NAFTA; non-privileged foreign status; privileged foreign status; service area; Special Tariff Treatment Program; traditional site framework; grantee; and zone restricted status. One or more commenters stated that the proposed definition of agent is or may be too broad, may potentially extend beyond the statutory reach of the Board, and appears to be focused on an agent of the grantee although there are other agency relationships in the FTZ program.
Board position: We have added definitions for the terms alternative site framework, Board Order, inverted tariff, modification, and service area in response to comments submitted. We have not defined either “agent” or “administrator.” We have not adopted the term “administrator” as a substitute for the proposed term “agent” because the final provisions of section 400.43 instead simply refer to a party that undertakes a function “on behalf of a grantee” (thereby eliminating the need to use or define any more specific term(s) such as agent or administrator). Regarding addition of a definition for “grantee,” the proposed regulations already contained a definition of “zone grantee.” We have retained that term and definition to help clarify that the zone grantee is the overall sponsor of the zone and recipient of the authority from the FTZ Board, and that zone participants are not also “grantees” of some sort.
The terms, activation, domestic status, non-privileged foreign status, privileged foreign status, and zone restricted status are defined in CBP’s FTZ regulations (19 CFR part 146), and CBP is the primary agency using these terms. Defining these terms in two agencies’ separate regulations would significantly complicate any potential refinement or redefinition of them that might prove necessary in the future. In addition, the commenters’ proposed definition of activation differs from the definition of that term in the FTZ regulations of CBP, the agency responsible for activation. For these reasons, we have not added definitions of the terms in question.
It is not clear we need to add definitions for the terms free trade agreement, NAFTA, and Special Tariff Treatment Program. These terms are not used elsewhere in the Board’s regulations. Further, these terms may be defined by other agencies that make use of the terms, so that any definition adopted by the Board could create a risk of inconsistency with the other agencies’ definitions. Therefore, we have not added definitions for these terms.
We have not added a definition for general-purpose zone because the specific use of this term is tied to comments submitted regarding the need to simplify the Board’s structure and processes for designating zone sites. In a subsequent rule, we intend to evaluate adding a definition of this term in concert with simplifying the parallel site- designation frameworks that currently exist, as noted in response to comments on Sec. 400.11. As a result of our intent to simplify the site-designation frameworks, the specific implications of a definition of traditional site framework might evolve. Therefore, at this point we have not added a definition of traditional site framework for this final rule.
Comments: Numerous commenters proposed revising the definitions for the following terms: Foreign-trade zone; grant of authority; person; port of entry; site; subzone; zone; zone operator; zone participant; zone project; zone site; and zone user. One commenter stated that the definition of zone operator should not be limited to an entity physically on-site at the zone or subzone.
Board position: We have modified the definitions of foreign-trade zone, grant of authority, and person in response to comments submitted. For the term “port of entry,” commenters proposed adding “customs station” to the definition, but did not explain the implications or impact of their proposed change. The term “port of entry” has long had a specific meaning, but the meaning of the proposed additional phrase is unclear and not explained by the commenters. In that context, we have left the definition of port of entry unchanged.
In response to comments submitted and taking into account changes adopted elsewhere in these regulations in response to comments (e.g., Sec. 400.24(c) allowing designation of general-purpose zone space as a subzone, where warranted), we have revised the definition of subzone. Our tying subzone designation to a specific use should provide some additional flexibility relative to commenters’ suggested language tying a subzone to a specific company. Our definition also reflects our agreement with commenters that a subzone can have multiple sites. The definition of a subzone may also be addressed in a subsequent rule simplifying the parallel site-designation frameworks that currently exist, as noted in response to comments on Sec. 400.11. In harmony with changes adopted elsewhere in these regulations (e.g., Sec. 400.36(f)), we have also adopted a definition of “activation limit.” Key implications of that term are examined in response to comments on Sec. 400.36.
For the terms “zone” and “zone user,” we have retained the definitions we proposed because changes suggested in comments did not, in our view, improve clarity or usability. For the term, “zone participant,” we have simplified the definition to improve clarity, in response to comments submitted. However, we have retained “property owners” within the definition because the provisions of these regulations in which the term “zone participant” is used have relevance to property owners as well as to operators and users. We have also replaced the definition of “zone project” with a definition of “zone plan” (a term previously referenced within the definition of zone project) based on the zone plan’s function as the benchmark that the Executive Secretary must use in gauging whether a modification is major or minor under Sec. 400.24(a)(2). Based on the comments received, we have combined the definitions of zone site and site under the former term, so that the two terms will be interchangeable. We have also adopted a suggested change to replace the phrase, “organized as an entity,” with the phrase, “organized and functioning as an integrated unit.” Based on comments submitted, we have also added “contiguous” to the definition but have modified it with “generally” to allow for unusual circumstances in which parcels are in close proximity to each other and appropriately constitute a single site, although they are not actually contiguous.
We have not added suggested language to the definition of zone operator because the language could have the unintended effect of reducing flexibility in local zone oversight and related arrangements at individual zones. However, given the elimination of proposed Sec. 400.43(b)’s requirement for agreements to be made directly with a zone’s grantee, we have modified the definition of zone operator to reflect that an operator’s activity could be under the terms of an agreement with a third party that acts on behalf of a grantee. With regard to the comment that a zone operator should not be limited to an entity physically on-site at the zone or subzone, the comment accurately characterizes the intent of the definition of zone operator for purposes of the Board’s regulations. Nothing in that definition should be construed as requiring a zone operator to be an entity physically on-site at the zone or subzone site being operated. Finally, we have modified the definition of private corporation (adding the words “operating and maintaining”) to parallel the statutory definition of that term.
Comments: Two commenters supported the proposed definition of production, while numerous commenters suggested various revisions to the proposed definition.
Board position: We have revised the definition of production based on comments submitted, including those expressing concerns about defining companies’ authorized production entirely on the basis of customs classifications. Our revised definition of production therefore incorporates language from the definition of manufacturing in the FTZ Board’s prior regulations but also includes language from our proposed definition of production and from comments submitted. This revised definition is intended to reinforce the fact that any operation engaged in manufacturing activity authorized under prior FTZ Board regulations would not need to request new authority based solely on this revised definition. Further, the requirements in other sections of these regulations pertaining to application and notification documents (e.g., Sec. Sec. 400.23 and 400.24) maintain the Board’s existing practice of requiring a description of materials, components, and finished products (accompanied by the 6-digit HTSUS category that constitutes the best match for the material, component, or finished product). Therefore, the changes reflected in this and other production-related provisions have no effect on a zone operation’s existing scope of authority in terms of materials, components, and their associated finished products described in a notification or application authorized by the Board. The Board may address through a subsequent notice-and-comment rulemaking process a further simplified definition of production.
Comment: One commenter requested clear definitions of capacity and fraudulent intent, and also asked whether convenience of commerce and public interest are interchangeable and whether it is possible to define one of those terms and apply it uniformly.
Board position: We have not added definitions of “capacity” and “fraudulent intent.” Capacity has a commonly understood meaning, and only one commenter requested addition of a specific definition to this section of the regulations. Further, our revised approach to production authority no longer incorporates capacity as an ordinary element of a production operation’s scope of authority. In this context, there is no need to include a definition of capacity. The sole use in the proposed regulations of the phrase “fraudulent intent” was in the section allowing for prior disclosure of violations. That section has been eliminated from these regulations for the reasons delineated in response to comments on Sec. 400.62, thereby eliminating any need to define fraudulent intent. The terms “convenience of commerce” and “public interest” appear in distinct contexts in the FTZ Act, and are by no means interchangeable. Public interest is a commonly used concept (i.e., it exists in many contexts outside the FTZ Act) that is associated with the well-being of the general public. Convenience of commerce is a distinct phrase in the FTZ Act that pertains to whether the needs of businesses engaged in international trade are adequately served by zones.
Section 400.3—Authority of the Board
Comment: Numerous commenters proposed adding a section stating that the Board has the authority to award the lowest available duty rate including trade agreement preferences and deleting language stating that Board decisions must be by unanimous vote and be recorded.
Board position: We have not made the proposed change pertaining to trade agreement preferences. The Board does not have the authority to “award” a duty rate. The Board may allow activity to occur in a zone that results in the entry of a finished product with a customs classification that is different than the customs classification of a component admitted to the zone. The applicability of duty rates specific to one or more particular trade agreements to entries from a zone is statutorily determined rather than a matter for decision by the Board. Finally, we have retained language stating that Board decisions must be by unanimous vote and be recorded. Recording Board votes is essential to proper record-keeping for the program. However, based on the comments submitted and in light of changes to other sections (such as the adoption of the process for notifications under Sec. 400.37), we have deleted the provision stating that Board decisions in proceedings will take the form of Board Orders.
Comment: One commenter stated that the authority to fulfill the Assistant Secretary for Enforcement and Compliance’s responsibilities when that position is vacant should be clarified.
Board position: The authority to carry out actions for the Assistant Secretary for Enforcement and Compliance is not a matter of Board policy, but rather of delegation carried out within the Department of Commerce. That delegation could be subject to change over time, and is not an appropriate matter for delineation within the FTZ Board’s regulations.
Section 400.4—Authority and Responsibilities of the Executive Secretary
Comment: Numerous commenters suggested adding a neutrality requirement and general authority to give temporary approvals pending Board action.
Board position: We have not adopted the specific suggested revisions which, in our view, would not improve the clarity or effectiveness of the regulations. However, the Board has given a relatively narrow authority to the Executive Secretary to allow production activity to occur on an interim basis in certain circumstances (see Sec. 400.37(d)).
Comment: One commenter proposed defining a process and timeline for issuance of forms and other documents pertaining to the submission of applications.
Board position: As noted in response to a comment on Sec. 400.21, in these regulations, the Board has allowed an application format to remain in use for a period of one year after it has been superseded by a revised format. That period provides zone users with significantly more time to adapt than the 30-day period proposed by the commenter. Further, as originally proposed, any revised application format would be published in the Federal Register. That requirement should provide the written notice sought by the commenter.
Section 400.5 — Authority To Restrict or Prohibit Certain Zone Operations
Comments: Numerous commenters proposed changing the order of this section’s two subsections, as well as changing one word within one subsection. One commenter suggested adding a word to clarify that the section would only apply to “zone” operations in a zone.
Board position: We have reordered the content of the subsections, added the word “zone” as proposed, and combined the subsections.
Section 400.7—CBP Officials as Board Representatives
Comment: Numerous commenters proposed adding a section explaining the CBP port director’s role as the Board’s representative, including timeframes for the port director’s response to a request from the Board and for activation of a zone operation that the Board has expedited for public policy reasons. Those commenters also proposed revising the definition in these regulations of the term “port director.”
Board position: We have adopted the commenters’ proposal for a separate section specifically concerning CBP’s role as the Board’s representative. This section substantively parallels and replaces the content of the sentence in Sec. 400.41 of the proposed regulations pertaining to the role of the CBP port director. We have revised the language proposed by the commenters for this section (and made adjustments to other sections which had references to the port director) to reflect the fact that the specific official within CBP with responsibility for a particular matter may vary over time for CBP operational reasons. Therefore, we have adopted language making a general reference to CBP, and we have eliminated from these regulations a definition of port director. We have not incorporated into the section commenters’ proposed timeframes. Timeframes for responses to requests for FTZ authority are already addressed in the application- specific sections of the regulations. Details of the activation process are addressed by the customs regulations, and therefore are not appropriate for inclusion in the FTZ Board’s regulations.
Comment: Numerous commenters proposed changing the word “ability” to “authority” in the title of Subpart B.
Board position: We have not adopted the proposed change. Subpart B addresses matters pertaining to whether parties are able to apply to establish a zone or subzone. Therefore, the word “ability” is appropriate for the title.
Section 400.11—Number and Location of Zones and Subzones
Comment: Numerous commenters proposed that adjacency-related measurements be conducted by the grantee or zone participant with the concurrence of the CBP port director.
Board position: Based on the comments received, we have modified the language of this section to allow the CBP official with oversight authority to concur on a measurement of adjacency.
Comments: One commenter suggested eliminating the distinct concept of subzone and allowing the adjacency standard specifically proposed for subzones to be applied to any zone site. Another commenter proposed eliminating the term “subzone,” and treating authority for production activity as a distinct matter from designation of a site. In response to a comment submitted, one commenter objected to the idea of eliminating the subzone concept, because of potential CBP operational advantages for subzones and the dependence of a number of grantees on the subzone mechanism so long as those grantees remain under the traditional site framework. One commenter stated that both subzones and ASF usage-driven sites should be treated equally in a manner that minimizes burden and facilitates administration of the facilities in question.
Board position: The Board received several comments pertaining to various sections of the regulations indicating that current distinctions between types of zone sites may not constitute the most efficient and effective mechanism for facilitating zone use. Given those considerations and the importance of adopting the least burdensome mechanism to accomplish the Board’s regulatory objectives, the Board plans to simplify the parallel site-designation frameworks in a subsequent rule. Further, recognizing the overall functional equivalence between subzones and ASF usage-driven sites, and the importance of enabling zone users to maximize operational efficiencies, we have changed the minor modification provision (Sec. 400.24(c)) so that an existing or potential usage-driven site could be designated as a subzone if such designation would better meet the needs of the zone grantee and zone participant(s).
Section 400.12—Eligible Applicants
Comment: Numerous commenters proposed modifying the standard for applications to be “not inconsistent” with the applicant’s charter or organizational papers rather than “consistent.”
Board position: We have made the proposed change to state that applications must be “not inconsistent” with the charter or organizational papers. This language reflects the reality that many grantees’ charters or organizational papers provide for broad powers; a requirement to demonstrate consistency would be excessively burdensome in that context.
Section 400.13—General Conditions, Prohibitions and Restrictions Applicable to Authorized Zones
Comments: Numerous commenters proposed the following revisions to this section: changing the order of certain subsections; removing the concurrence of the CBP port director from the subsection pertaining to erection of buildings; applying the five-year lapse provision on a site-specific basis; requiring expedited review of any application to reestablish designation at a lapsed zone; stating that private ownership is allowed of a zone “site” rather than zone “land;” adding evidentiary standards for Board actions to prohibit or restrict activity; and adding a paragraph allowing certain activities to take place at an operator’s site under the operator’s responsibility. One commenter stated that the five-year lapse provision does not take into account the three-year “sunset lapse” for usage-driven sites designated under the ASF.
Board position: Based on comments received, we have reordered certain of the subsections and modified the reference to the CBP port director to clarify that concurrence only applies to activated zone space. We have not adopted the proposal to expedite reviews of applications to reestablish FTZ designation at lapsed zones because it is appropriate for the Board to evaluate the individual circumstances prior to determining whether to give priority to a particular application to reestablish a zone that has lapsed. However, we have added a specific reference to Board Order 849, which addresses conditions for “reinstatement” of FTZ authority. We have made minor language changes pertaining to the procedures and the standards for Board actions to prohibit or restrict activity, including to reflect the revised approach to production authority adopted in Sec. 400.14(a). However, we have not accepted most of the proposed changes because the statutory authority is broad and the proposed language could inappropriately preclude the Board from addressing future situations in circumstances that no one can currently foresee.
We have not accepted the proposed substitution of the word “site” for the word “land,” because we want to emphasize that no one may own the FTZ designation associated with a particular parcel of land. The FTZ Act states that zone designation is a privilege that the Board authorizes. The Board’s authorization of designation for a piece of land, therefore, belongs to no one. The regulatory provision at issue simply clarifies that FTZ designation may be authorized for privately owned land under certain conditions.
The Board plans in a subsequent rule to simplify the lapse provision, which commenters proposed be applied on a site-specific basis, and that one commenter claims fails to take into account the three-year “sunset lapse” for usage-driven sites under the ASF. This simplification is expected to encompass questions of lapse and sunset provisions. Until we issue a final rule on that issue, the lapse provision will continue to apply as it has since its institution in 1991 to a zone (or individual subzone) based on activation. The lapse provision that applies to an overall zone (or individual subzone) on a one-time basis is distinct from the “sunset” time limits that the Board has commonly imposed via Board Order as a site-specific condition on approval of new sites of a zone. A sunset limit automatically removes zone designation from a site at the end of the sunset period if the site has not been used for zone activity during the period.
Finally, for activity that does not require specific Board authorization, questions of whether the activity may be conducted at an operator’s site under the operator’s responsibility fall within the jurisdiction of CBP. Therefore, a provision pertaining to such activity would not be relevant for inclusion in the Board’s regulations.
Comment: One commenter stated that under the Board’s authority to review zone activity and prohibit or restrict activity found not to be in the public interest, an existing zone operation previously approved by the Board would be at risk of losing its authority.
Board position: Inherent in the Board’s ability to review and restrict or prohibit ongoing FTZ activity is the possibility that an existing zone operation approved by the Board could lose its authority. Given that it is impossible to foresee every type of circumstance at the time that the Board evaluates an application, it could be necessary at some later point in time for the Board to restrict or prohibit the activity in question. However, such circumstances have been extremely rare in the history of the FTZ program. Further, based on comments received on other sections of the proposed regulations, we have incorporated in certain sections of the regulations additional language designed to appropriately balance the interests of zone users and of parties that might be concerned about negative impacts from certain zone uses.
Section 400.14—Production—Requirement for Prior Authorization; Restrictions
Comments: We received a broader range of comments on this section than on any other. Commenters were concerned with numerous aspects of the production-related provisions and, as discussed below, we have significantly modified this section based on their comments. Although the comments are numerous and diverse, we summarize them all here because they are all related to Sec. 400.14.
Numerous commenters proposed a major overhaul of this section to require FTZ users apply for and the Board issue on an expedited basis approvals for production activity. Those commenters stated that applicants’ and FTZ users’ uncertainties should be minimized, and that advance approvals are necessary in most cases because use of zone procedures requires significant upfront investment. They proposed requiring that a Board Order approving production activity for export be issued within 30 days of the submission of an application, and that the Board Order be published within 15 days after issuance. Those commenters also proposed the following changes: authorizing the Executive Secretary to approve certain other production-related benefits on an interim basis pending Board action; eliminating the Board’s proposed provision for production changes; and delegating authority to the Executive Secretary to approve production activity when (1) the applicant demonstrates the activity could be conducted under CBP bonded procedures, (2) the sole benefit is for scrap/waste, or (3) the activity is the same in terms of intermediate/finished products as activity recently approved by the Board and similar in circumstances. One commenter supported authorizing the use of any components needed to make the intermediate or finished products approved by the Board unless certain categories of components are excluded by the Board, with the Board listing excluded components on its Web site for compliance by all operators/users. One commenter supported the proposed regulations’ approaches to advance approval requirements and authority to review and restrict activity.
Numerous commenters suggested shifting the proposed delegation of authority for certain approvals from the Assistant Secretary for Import Administration to the Executive Secretary, as well as adding a provision largely paralleling prior Sec. 400.32(b)(1)(i), which pertained to activity that is the same as activity recently approved by the Board. Three commenters indicated that, for interim approval of production authority, it is not necessary to have the CBP port director concur since the port director’s approval would be required for activation of the operation in question. One commenter specifically supported the interim authority provision as proposed. One commenter stated that companies will not make decisions to invest in production activity based on temporary or interim approvals from the Board, so the Board should shorten its docketing and review times for applications.
One commenter stated that the production-change provisions in proposed Sec. Sec. 400.14 and 400.37 seem unnecessarily complicated and difficult to administer. That commenter proposed simply allowing FTZ users to notify the Board of any component not subject to an AD/CVD or Section 337 order, and that deadlines should be the same for notifications of production changes and capacity increases. Numerous commenters proposed eliminating the proposed procedures for notifications and adopting a different approach to authority for production activity focused on intermediate and finished products (rather than specifying inputs to be used in production activity). Those commenters state that Sec. 400.37 as proposed would create a significant new burden both initially and quarterly. One commenter indicated that the proposed notification provision would be unmanageable and proposed that the Board focus production authority on end products. For any required notifications of a new input, the commenter proposed a de minimis standard tied to FTZ savings associated with the new input, with changes below the de minimis threshold reported to the Board in the zone’s annual report. One commenter stated that the requirement for prior approval of a 4- digit HTSUS list for use of the notification provision is not practical, and that the public comment period following any notifications would allow for adequate oversight. The commenter also expressed concern that the retrospective nature of the notifications would create uncertainty for FTZ manufacturers, given that there would be a real potential for denial of the FTZ benefits, and a possibility that duties would be applied retroactively. One commenter requested clarification of the meaning of “production change,” and proposed shifting reporting from a quarterly basis to an annual basis. Several commenters stated that the requirements for the proposed annual reporting of production activity should be clarified and take into account that companies do not necessarily track foreign-sourced components that are in domestic (duty-paid) status.
Three commenters stated that requiring what they characterized as a one-time re-filing of a manufacturer’s scope of authority, and then quarterly reports thereafter, is excessively burdensome for users, especially because failing to re-file the scope would potentially subject users to fines. One commenter claimed that the proposed notification procedure for production changes would result in temporary/interim authorization, and that the procedure could only be used after the completion of a process that would subject all of the operation’s current activity to new public review and comment. One commenter stated that quarterly filings would add to workload and the retrospective nature of notifications would create uncertainty for users. The same commenter stated that, in the context of quarterly retrospective filings, the Board should only deny FTZ benefits prospectively. Another commenter stated that what it characterized as quarterly reports should not be required. As an alternative to quarterly retrospective reporting, one commenter proposed a provision similar to the prospective notification provision in the original Sec. 400.28(a)(3), but expanded to allow for new finished products. One commenter also proposed a notification procedure for all activity not requiring advance approval, with the Board issuing written confirmation of each notification. Another commenter stated that if a Board Order is not possible for export authority, the Board should increase certainty for users and for CBP by allowing a standardized submission from the company to the Board, and for a standard response from the Executive Secretary. One commenter stated that companies must be able to obtain written confirmation of authority from the Board for CBP and other purposes.
One commenter requested clarification whether advance approval is required for all production activity and, in the context of production activity already authorized by the Board, for new inputs used to produce an approved product, for new part numbers associated with a component under an approved HTSUS category, and for new inputs under HTSUS categories not already approved but used to produce an approved product. Several commenters stated that reliance on HTSUS numbers to track which components are authorized for a production operation is too burdensome or impractical. One commenter stated that even the use of 6- digit HTSUS categories is impractical. Another commenter proposed that the Board provide public access to a database of components and finished products for approved production operations.
Numerous commenters proposed eliminating the Board’s proposed provision concerning capacity increases and eliminating capacity as an element of production authority. One commenter proposed that, if capacity cannot be eliminated as a constraint on ongoing production activity, the Board should adopt an annual reporting requirement for capacity increased beyond a specific threshold. Another commenter proposed that capacity be reported to the Board annually. One commenter proposed including a clear statement that production only for export would generally not require application to and authorization by the Board. One commenter proposed including a provision concerning the Board’s temporary/interim manufacturing (T/IM) procedure.
One commenter proposed that foreign components subject to AD/CVD orders be exempt from the requirement for advance approval when they are used in production for export, maintaining that to do otherwise would run contrary to what the commenter claimed is longstanding Board policy that admission to zones of merchandise subject to AD/CVD orders is non-controversial. The commenter further stated that the Board’s proposed approach for production activity involving a component subject to an AD/CVD order will significantly complicate the Board’s proceedings, requiring more extensive factual records and decision documents, create additional burden for the Board, and substantially increase complexity and costs for zone users. One commenter stated that the Board should not require new approval due to changes in the HTSUS or due to imposition of an AD/CVD order on a component already approved by the Board. One commenter also questioned the practicality of requiring further Board approval when an AD/CVD order is imposed on a component already approved by the Board, and suggested that quarterly retrospective notifications may be adequate in such circumstances.
One commenter stated that because merchandise subject to an AD/CVD order must be admitted to a zone in privileged-foreign status, requiring an approval process for ongoing production involving such merchandise adds no benefit and is excessively burdensome. Another commenter stated that the Board’s prior regulations adequately provided for approval and ongoing oversight of changes in AD/CVD status of components already authorized or changes in duty rates and capacity, and that the proposed regulations could result in duplicative public comment processes and evaluating activity already approved by the Board. One commenter stated that the prior regulations’ requirement for election of privileged-foreign status on admission of merchandise subject to AD/CVD orders reflected an appropriate balance of avoiding circumvention of AD/CVD orders while enabling export-oriented activity to take place in FTZs. Another commenter stated that the privileged foreign-status requirement for merchandise subject to AD/CVD orders should be adequate to address potential concerns pertaining to ongoing activity, and proposed a blanket Board Order authorizing any production for export provided the components are placed in privileged-foreign status prior to the production activity.
Several commenters supported the proposed requirement for advance approval from the Board for any new production activity involving a component subject to an AD/CVD order. Those commenters also supported the proposed requirement that a production operation with existing authority obtain additional approval from the Board to use any component subject to an AD/CVD order that was not in effect at the time of the Board’s prior authorization action. One commenter proposed that the requirement for additional approval from the Board be extended to a component (1) not identified at all—or not identified as being subject to an AD/CVD order—in the production operation’s original application; or (2) identified but not sourced from a country subject to an AD/CVD order at the time of the application, and that will now be sourced from a country subject to an AD/CVD order. Several commenters also proposed requiring reporting and related procedures to ensure notice to affected parties. Certain commenters further proposed modifying practices to ensure compliance with authority approved by the Board. One commenter proposed requiring applicants for production authority involving a component subject to an AD/CVD order to demonstrate that the authority would not adversely affect the AD/CVD relief in place.
One commenter stated that provisions requiring further approval from the Board if a component already used by a zone manufacturing operation becomes subject to a new or increased rate of duty, a new AD/ CVD order, or a new order of the International Trade Commission pursuant to 19 U.S.C. 1337 (section 337), would be disruptive to current zone operations, and that there should be a transition rule. Another commenter indicated that notification should not be required as envisioned in Sec. 400.14(a)(4) for new AD/CVD or Section 337 orders and that, if necessary, zones’ annual reports could be used to report the information in question. One commenter stated that the absence of an advance approval process for production activity would mean the Board might be unaware of merchandise subject to certain Department of Agriculture requirements and be unable to alert the grantee or operator to those requirements.
In response to other comments submitted, one commenter supported only requiring advance approval for production activity involving inverted tariffs. That commenter also supported the provision for advance approval of a broad list of categories to enable future notifications, but opposed other commenters’ proposals to modify the application process to focus purely on intermediate and finished products. One commenter stated that a proposal from other commenters requiring the Board to issue an Order approving export activity within 30 days of receiving an application should not apply to activity involving a component subject to an AD/CVD order. That commenter stated that the Board has recognized that such activity may raise public- interest concerns and that the proposed 30-day process would eliminate all of the procedural safeguards in the proposed regulations. The commenter opposed another commenter’s proposal that no advance approval be required for production for export involving a component subject to an AD/CVD order, stating that the change would negate the Board’s ability to evaluate whether such activity would undermine trade relief measures in effect. That commenter also disagreed with another commenter’s claim that the Board’s proposed approach for production activity involving a component subject to AD/CVD order will significantly complicate proceedings, create additional burden for the Board and increase complexity and costs for zone users.
In response to other comments submitted, multiple commenters supported the requirement for advance approval for any production activity involving a component subject to an AD/CVD order, with one of those commenters supporting such a requirement when a component previously authorized for a zone production operation becomes newly subject to an AD/CVD order. One commenter stated that concerns expressed by only a few commenters should not lead the Board to adopt unduly burdensome processes for applications and management of ongoing operations. The commenter stated that the proposed processes would be detrimental to many program users, discourage overall FTZ use, discourage domestic manufacturing for both the U.S. and export markets, and also create significant burden for the Board’s staff. One commenter stated that there is no reason to impose additional conditions or restrictions on the use in production of material subject to AD/CVD orders beyond those already proposed by the Board. That commenter cited Executive Order 13563 as instructing agencies to achieve policy goals through the least burdensome means.
One commenter opposed the proposal from other commenters requiring advance approval for production involving a component subject to an AD/ CVD order, and stated that the requirement for the election of privileged-foreign status at the time merchandise is admitted to a zone is adequate to ensure that AD/CVD duties are not circumvented. One commenter opposed any requirement for company-specific advance approval of production for export. That commenter also recommended the Board retain what the commenter claimed was the prior regulations’ presumption that production for export is in the public interest.
Board position: After considering all comments submitted and the importance of adopting the least burdensome mechanisms to accomplish the Board’s policy objectives, we have modified this section (with related changes in other sections, including Sec. Sec. 400.22 and 400.37) to implement a revised approach to authorizing production activity. The foundation for the revised approach is a simple notification process in advance of any new production activity (including use of new materials/components at a previously approved production operation). This approach also incorporates a more extensive application process for circumstances where the Board reviews a notification and determines that further review is warranted.
Among other considerations, the revised procedures balance the need expressed by many commenters for generally shorter timeframes for action on requests for production authority and the perspective emphasized by other commenters that potentially affected parties must be able to provide comments to the Board regarding the impact of proposed production activity. Although the FTZ Act does not require companies to obtain approval prior to conducting production (manufacturing) activity in zones, the Act authorizes the Board to prohibit activity that “in its judgment is detrimental to the public interest, health, or safety” (19 U.S.C. 81o(c)). Since 1972, the Board has required either notification or application in advance of the conduct of manufacturing activity (this type of requirement was first implemented through conditions of individual Board Orders and then adopted in the Board’s 1991 regulations). The revised approach continues to require zone users to obtain approval in advance from the Board before conducting manufacturing activity. Consistent with the many comments submitted regarding the need for simplified, expedited processes, our revised approach generally reduces both the burden associated with a company’s standard submission to the Board requesting authorization to conduct production activity and the standard timeframe for processing that request. This rule’s simple notification process is akin to that suggested in certain comments, and incorporates a standard 120-day timeframe for the Board to process notifications received. That timeframe cuts by two-thirds the one-year standard timeframe in both the prior regulations and the proposed regulations to process applications for manufacturing (production) authority. This revision also significantly reduces the information burden associated with authorizing production activity. As noted above, these regulations also include a detailed application process for cases that are determined to warrant further review as a result of the initial notification. Further, unlike the application process suggested by many commenters for certain categories of production activity, all notifications for production authority would be subject to a public comment period before any potential Board action to authorize the activity. Allowing public comments on all proposed production activity is the cornerstone of procedures designed to ensure that production activity conducted in FTZs is in the public interest. Recognizing the time-sensitive nature of some requests for authority to conduct production activity, we have also adopted a provision enabling authorization on an interim basis until the Board is able to complete its processing of a notification. Unlike the Board’s prior process for giving temporary/interim manufacturing (T/IM) authority, the new provision is not constrained by a requirement that activity meet a specific standard for similarity to previous applications; the adopted provision therefore should be more flexible and more useful than the T/ IM procedure.
The procedures adopted in this section are designed to simplify and increase certainty of the procedures for approving production authority. The prospective nature of the notification process—in contrast to the retrospective process delineated in the proposed regulations—enables the Board to eliminate the proposed requirement for advance approval of a list of 4-digit HTSUS headings within which future notifications would be made. In addition, the basic notification process for all production activity should generally enable zone users to obtain a formal decision on authorization of the activity within 120 days of requesting it, thereby accelerating certainty in order to better meet the needs of zone users. We have not made provision for extensions of comment periods on notifications because the review procedures are designed to allow the Board to determine within the 120- day timeframe which notifications warrant further review. (Further review requires submission of a detailed application and then a period for public comment on the application, which is subject to requests for extensions.) Therefore, if concerns about notifications arise— including as a result of comment submissions explaining why additional time is needed for public comment or for affected parties to assess the impact of proposed activity—the Board would be able to conduct further review and trigger the more extensive requirements for such a review.
By requiring FTZ users to provide us with information through the notification process, we can eliminate the reporting requirement we proposed in this section (although production activity will remain subject to the general requirements of Sec. 400.51). The requirement for prospective notifications and the associated publication of a Federal Register notice for each notification also effectively addresses the concern raised by one commenter that eliminating public notice could lead to compliance problems pertaining to certain Department of Agriculture requirements. Finally, it should be noted that the adopted procedures create no new requirements for activity approved under the prior regulations (i.e., approved activity that was the subject of prior applications and notifications remains authorized, as limited by any restrictions associated with the specific proceedings in question).
We have also added a subsection (Sec. 400.14(c)) mandating that information regarding authorized production operations be made available on the Board’s Web site. This provision will enhance the transparency of the FTZ program and enable parties to assess whether changed circumstances exist that would warrant review by the FTZ Board under Sec. 400.49(a). Requiring advance approval from the FTZ Board for authority to continue activity whenever certain circumstances have changed (such as proposed Sec. Sec. 400.14(a)(4)(i)-(iii)) is not the least burdensome means for the Board to accomplish its policy objectives of enhancing U.S. competitiveness through the availability of zone procedures, while ensuring that zone activity remains in the public interest. With regard to materials or components subject to AD/ CVD orders or proceedings, these regulations provide no special application-related procedures. We have determined that the standard procedures applicable to any material/component for which authorization is requested will allow the Board to address concerns about negative impacts from the proposed activity. Therefore, we have adopted neither (1) the approaches proposed by certain commenters to eliminate any advance approval process for export-oriented activity involving materials/components subject to AD/CVD orders/proceedings, or to make a presumption in favor of authorizing such activity, nor (2) provisions proposed by certain commenters to create new carve-outs from the general framework for production authority, with additional procedural burdens imposed with respect to those carve-outs. Under the new rule, materials/components cannot be used in a zone production operation without specific prior authorization through the notification process (and subsequent application process, where warranted), including publication of a notice in the Federal Register and invitation for public comment. The adopted procedure substantively parallels the requirements of the Board’s prior regulations, which did not permit any manufacturing activity without Board approval. The Board’s prior regulations also contained a standard provision for a public comment period on applications requesting manufacturing authority, so that the Board could evaluate the comments of potentially affected parties in determining whether to approve a given application. Practice has shown those types of requirements to be adequate to enable the Board to determine whether negative impacts would result from proposed zone activity.
Section 400.14(b)—Scope of Authority
Comments: Numerous commenters proposed focusing the scope of authority for a production operation on intermediate and finished products rather than the components used in the operation, with any component used to make an authorized intermediate or finished product considered within the scope of approved authority. One commenter proposed clarifying that this provision’s reference to inputs is limited to imported inputs. One commenter stated that the Board should not use HTSUS numbers to define a production operation’s scope of authority because HTSUS numbers are subject to change beyond the company’s control, with such changes potentially leading to non- compliance with approved scope and requiring further FTZ Board processes to rectify. Two commenters expressed concerns about other commenters’ proposals to focus applications for production authority on intermediate and finished products without specifying the components to be used in such production, stating that the change would defeat the purpose and undermine the effectiveness of the advance approval requirement.
Board position: We have not adopted commenters’ proposal to define a zone user’s authorized scope for production activity based on intermediate and finished products, with no delineation of the materials or components to be used in producing the intermediate or finished products. We agree with the commenters that stated that this change would defeat the purpose and undermine the effectiveness of the advance approval requirement. As a general matter, the potential impact of proposed production activity on U.S. producers of materials or components is tied to the identities of the specific foreign-status materials/components that would receive the benefits of zone use. Identifying only the intermediate or finished products would not allow affected parties or the Board to assess the impact of the proposed zone activity, because the component or input materials would be unknown.
Based on comments received, we have clarified that this section only applies to imported materials or components admitted in foreign status for a production operation in a zone. With regard to the use of HTSUS numbers to define scope of authority, these regulations focus scope of authority first on the written descriptions of the materials, components and finished products, with HTSUS numbers primarily serving to supplement the written descriptions. This approach continues the Board’s existing practice and reflects our recognition of the practical difficulties that shifting to an HTSUS-driven approach would create for zone users.
Based on the comments submitted, we have eliminated the provision on notification of increases in production capacity (as well as inclusion of production capacity as a standard element of scope of authority). Since 1991, FTZ users have had to obtain the Board’s prior authorization to manufacture beyond the level of capacity already approved by the Board for the operation in question. However, in the twenty years that the requirement has been in effect, actual increases in capacity have not proven to be controversial or to result in negative impacts. Consequently, there is no justification for requiring companies ordinarily to provide a capacity level to the Board for authorization, and then requiring additional authorization for subsequent activity at higher capacity levels. If zone activity ultimately raises public interest concerns, the Board retains the ability to conduct reviews pursuant to Sec. 400.49. Section 400.14(e)—Restrictions on Items Subject to Antidumping and Countervailing Duty Actions
Comments: Numerous commenters proposed adding a requirement that the Board approve production activity for exports of products incorporating components subject to antidumping duty or countervailing duty (AD/CVD) orders whenever it finds that there would be a positive impact on U.S. competitiveness, and that similar activities are authorized in other countries. Two commenters stated that the additional language proposed for this section by certain commenters would undercut the Board’s policy of preventing the use of zones to circumvent AD/CVD orders and negate the standards the Board applies in determining whether proposed zone activity is in the public interest.
Board position: We have not adopted the suggested additional language for this section, which could result in applications involving components that are subject to AD/CVD orders benefiting from an evaluative standard more favorable than the standards applied to all other types of cases involving production activity. The proponents of that approach have not presented a substantive justification for giving preferential treatment to activity involving components subject to AD/ CVD duties.
Section 400.15—Production Equipment
Comments: Numerous commenters proposed modifying this section to apply to all zone activity (rather than only production activity) for reasons of the Congressional intent claimed by the commenters. One commenter stated that such a modification would result in all zone operators being treated uniformly. Numerous commenters proposed adding a subsection providing for expedited temporary approvals of zone designation to enable use of the production equipment benefit (with zone designation to be terminated once entry is made on the production equipment). One commenter supported the proposed provision as published.
Board position: We have not adopted the changes proposed in these comments. In September 2010, the Executive Secretary examined the applicability of the production equipment provision in depth, and issued a memorandum to FTZ grantees detailing the analysis and findings. The memo has been available on the Board’s Web site since its issuance. No arguments have been presented to alter the memorandum’s fundamental findings that the clearest indications based on the record associated with the passage of the statutory provision are that Congress intended the provision to apply to equipment used in production (as the term is commonly understood) in zones. Further, the proposed provision to allow expedited temporary zone designations to enable use of the production equipment provision appears to envision obtaining FTZ benefits on the assembly of equipment that will then be used for non-zone activity. Our position is that the statutory provision is intended to provide benefits solely on equipment that will be used in zone activity.
Section 400.16—Exemption From State and Local Ad Valorem Taxation of Tangible Personal Property
Comments: Numerous commenters proposed revising this provision to simply repeat the statutory provision. Two commenters suggested reviewing this provision based on a concern that the meaning could be more restrictive than the statutory provision, and potentially confuse affected parties. Two commenters proposed specific revised language for this section to clearly harmonize its meaning with Sec. 400.1(c) of the prior regulations and eliminate any confusion.
Board position: Given the concerns raised in comments, we have modified this section to use the statutory language verbatim.
Section 400.21—Application to Establish a Zone
Comments: Numerous commenters proposed changes that: characterize the section as applying only to the establishment of new general- purpose zones; indicate that applications will conform to instructions and guidelines set out in the regulations; require application letters and resolutions to be dated no more than six months prior to submission of the application; remove language specific to explanation of the degree to which a proposed site duplicates types of facilities at other sites, to environmentally sensitive areas, and to encouraging submission of draft applications; and add certain language pertaining to the ASF. Several commenters stated that the ASF should be detailed in the regulations. One commenter stated that the requirements and distinctions of the ASF relative to the traditional site framework should be delineated in the regulations and that both frameworks should be maintained. One commenter agreed that applications should comply with instructions and related documents published in the Federal Register and made available on the Board’s Web site, but suggested requiring a 30-day minimum written notice before implementing such changes in cases where notice in the Federal Register is not warranted. One commenter stated that full information about the ASF should be included in the regulations, that application processes should be defined, and that there should be some control on the web-based application guidelines developed by the Board.
Board position: This section establishes general requirements for applications to the Board, with variations specific to certain types of authority described in subsequent sections. Based on the comments received, we have made several changes to this section. In reference to the dating of the application letter and the resolution, we replaced the words “currently” or “current” with language allowing for the documents to be dated up to six months prior to submission of the application.
We have also added basic references to key concepts under the ASF in recognition of the certainty that grantees and program users seek as they consider or use the ASF. However, given that the ASF had only recently become part of the Board’s practice at the time that the proposed regulations were drafted, no attempt was made to incorporate the details of the ASF in the proposal. Comments have not only proposed that the regulations include details of the ASF and contrast the ASF with the traditional site framework (TSF), but have also proposed simplifying the parallel ASF and TSF approaches within the Board’s practice. As noted in response to comments on Sec. 400.11, recognizing that codifying the intricacies of current practice in regulations may not be the least burdensome means to accomplish the Board’s policy goals, the Board plans to propose simplifying the site-designation frameworks in a subsequent rule. We have retained the proposed approach of having the Executive Secretary develop formats for individual types of applications based on the regulations’ requirements. This provision is specifically designed to enable us to adopt user-friendly question- and-answer formats while also allowing occasional adjustments to those formats if certain questions prove unsuccessful in eliciting the needed information from applicants. Recognizing potential concerns about transparency and parties’ need to ensure that a particular application format will be accepted by the Board, the provision also stated that application formats will be published both in the Federal Register and on the Board’s Web site. The provision for publication in the Federal Register was specifically designed to maximize transparency. However, based on one comment noted above, and to ensure that changes in formats do not impose undue burdens on applicants, we have specifically stated that the Board will continue to accept applications for a period of one year after a given format has been superseded; this is a significantly longer period than the 30 days suggested by a commenter, and should provide zone users with ample time to adapt to any format revision. We also have not made suggested changes that would have further burdened applicants by adding elements to the requirements for application letters or application contents. Finally, we have not followed suggestions that we remove language specific to explanations of the extent to which facilities at a proposed site duplicate the types of facilities at other sites, to environmentally sensitive areas, and to encouraging submission of draft applications. Except for sites designed to serve specific, existing tenants, any proposal to add a new site to a zone should include a justification of the need for the site when there are already sites authorized for the zone. There are a significant number of entirely unused FTZ sites nationwide. Such sites appear to constitute a large majority of all FTZ sites. Given that each such site was approved by the FTZ Board based on information from the grantee that the site was needed to serve trade-related needs, it is entirely appropriate for the FTZ Board to require that a proposal for a new site explain the services or amenities to be provided by the new site that are not provided by the grantee’s existing sites. Separately, given the commercial and industrial uses that FTZs serve, there appears to be no need to make allowance for the inclusion of environmentally sensitive areas within designated FTZs. Finally, submitting a draft application can be a useful tool for any organization that is preparing an application, and it is appropriate for the regulations to provide for that tool.
Section 400.23—Application for Production Authority
Comments: Numerous commenters proposed establishing a stand-alone section concerning applications for production authority. Those commenters proposed replacing most of the proposed Sec. 400.22 with the Board’s current application format for establishing manufacturing subzones and for obtaining manufacturing authority for existing zone space. Addressing the requirement in proposed Sec. 400.22 for certain information regarding products or materials/components, one commenter proposed that zone users be allowed to notify the Board of the HTSUS chapters within which new products or components fall. For any application for production authority involving a component subject to an AD/CVD order, one commenter supported requiring that the application state that the proposed authority involves a component subject to an AD/CVD order. That commenter also proposed requiring that the applicant demonstrate that its requested authority would not reduce the effectiveness of the AD/CVD remedy.
Board position: In response to comments received, we have created new Sec. Sec. 400.22 and 400.23 specifically setting forth requirements for notifications and applications for production authority (distinct from requirements for subzone applications in Sec. 400.25, which only pertain to approving FTZ designation for a specific location without addressing the separate matter of production authority). As with Sec. 400.25, we have not incorporated in this section questions from the current application format for manufacturing subzones, in part for the reasons noted in our response to comments on Sec. Sec. 400.21 and 400.25. We have not adopted the proposed change to notifications of new products or components because comments submitted have led us to adopt a revised approach to the application process for production authority. Finally, for both notifications and applications for production authority under revised Sec. 400.14, we have maintained the requirement that the applicant state whether any component is subject to an AD/CVD order. We have not adopted the proposed requirement that the applicant address whether its proposed activity under FTZ procedures would reduce the effectiveness of the AD/ CVD remedy because that requirement would increase the burden on applicants even in situations where the activity may not be of concern to an AD/CVD petitioner. The Board would be able to assess the potential impact on AD/CVD remedies if public comments in response to a notification or application for production authority raise concerns about proposed FTZ production activity.
Section 400.24—Application for Expansion or Other Modification to Zone
Comment: Numerous commenters indicated that they proposed significant changes to this section (which those commenters also proposed renumbering to become Sec. 400.25); however, the proposed text provided by those commenters was in fact identical to the text proposed by the Board, with the sole exception of the deletion of the original Federal Register citations for the Board’s adoption of the ASF. As noted above regarding Sec. 400.11, one commenter indicated that there are potential CBP operational advantages for subzones relative to usage-driven sites (which are most commonly designated through a minor-modification process). One commenter stated that the Board should clarify that there is no functional distinction between subzones and usage-driven sites under the ASF. Another commenter stated that both subzones and ASF usage-driven sites should be treated in an equal manner that minimizes burden and facilitates administration of the facilities in question.
Board position: We have retained the ASF-related Federal Register citations because, as detailed in response to comments on Sec. 400.21, we have not attempted to incorporate details of the ASF in these regulations given the need that has emerged for the Board to simplify the site-designation frameworks in a subsequent rule. However, as noted in response to comments on Sec. 400.11, we have modified Sec. 400.24(c) to allow an actual or potential usage-driven site to be designated as a subzone if such designation would better meet the needs of the zone grantee and zone participants. The modification recognizes the overall functional equivalence between subzones and ASF usage- driven sites and the importance of enabling zone users to maximize operational efficiencies. However, for the reasons described in response to comments on Sec. 400.36, allowance for designation of a usage-driven site as a subzone is contingent on the subzone’s remaining subject to the Board-established, zone-wide activation limit that applied to the usage-driven site.
Section 400.25—Application for Subzone Designation
Comments: Numerous commenters suggested limiting proposed Sec. 400.22 to applications for subzones and establishing a separate section for applications for production authority. Those commenters suggested removing most of the language proposed by the Board and instead incorporating language from the Board’s current application format for establishing manufacturing subzones and for obtaining manufacturing authority for existing zone space. One commenter proposed simplifying application requirements for subzones that would not be used for production activity based on what that commenter characterized as a dissimilar treatment under the proposed regulations for similar types of operations in subzones versus general-purpose zone sites.
Board position: In response to comments submitted and in recognition of the complete separation of production authority from subzone designation under these regulations, we have limited this section to subzone applications and have further simplified the application requirements. We have also made minor changes in other sections in order to implement this section properly. New Sec. Sec. 400.22 and 400.23 are specific to the separate requirements for notifications and applications for production authority, as described in our response to comments on Sec. 400.14. We have not incorporated into this section questions from the current application format for manufacturing subzones for the reasons noted in our response to comments on Sec. 400.21, in part. A number of those questions pertain only to applications involving manufacturing (production) activity and therefore would be irrelevant to the many subzones that are used solely for distribution-related activities. Finally, several of those questions duplicate the requirements set forth in Sec. 400.21. We have opted to include such requirements by reference rather than repeat the language in full.
Section 400.26—Criteria for Evaluation of Proposals, Including Expansions, Subzones or Other Modifications of Zones
Comments: Numerous commenters proposed the following changes: Eliminating reference to the port of entry area in proposed Sec. 400.24(a); eliminating reference to compatibility with a master plan or economic development goals in proposed Sec. 400.24(d); modifying proposed Sec. 400.24(e) to consider views of those materially affected by FTZ benefits; and renumbering the section to become Sec. 400.26. Those commenters also proposed replacing the separate criteria for subzone proposals in proposed Sec. 400.25(b) with the criteria in proposed Sec. 400.24, which would apply to both zone and subzone proposals that do not involve production activity. One commenter proposed modifying the criteria applicable to subzones (other than proposals involving production) to focus on disapproval if the proposed activity were not permissible under the FTZ Act, U.S. law, or a specific Board Order. Two commenters recommended that the Board no longer consider in evaluating subzone proposals whether the activity could be accommodated in multi-purpose FTZ facilities serving the area.
Board position: Based on the comments received, we have eliminated the separate criteria for evaluating subzone proposals (including whether activity could be accommodated in multi-purpose FTZ facilities serving the area). This change reflects a recognition that the types of distribution activities conducted in non-production subzones are indistinguishable from the types of activities that can be conducted in general-purpose sites (separate criteria will apply to applications for authority involving production activity). The separate criteria proposed for evaluation of subzone proposals did not represent the least burdensome means to accomplish the Board’s policy objective of facilitating FTZ use in order to maximize the creation and retention of domestic economic activity and employment.
With regard to the specific text of proposed Sec. 400.24, we have retained the reference to the port of entry area because the establishment of a zone under the FTZ Act is tied to the proposed zone’s adjacency to a port of entry. We have also retained the reference to compatibility with master plans or economic development goals because it is relevant for the Board to consider the degree to which a zone proposal is linked to, and consistent with, official documents pertaining to a community’s economic development planning. We have adopted the substance of the proposed change to consider the views of those “materially affected” rather than those merely “affected” by a proposal because the original, lower standard would potentially impose a burden on applicants to respond to comments from any person claiming to be affected by an application regardless of whether there would be a material impact on that person. We have also made a minor modification to the section’s title to improve clarity.
Section 400.27—Criteria Applicable to Evaluation of Applications for Production Authority
Comments: Numerous commenters stated that proposed Sec. 400.25 (which they would renumber to become Sec. 400.24) should apply only to production activity. Those commenters proposed requiring the Board to consider companies’ ability to conduct the same activity offshore, the precedential effect of prior Board decisions, and the effect on the U.S. economy, as well as revising the statement of Board policy to include reference to promoting U.S. competitiveness. Those commenters also proposed deleting a reference to ongoing activity in Sec. 400.25(a)(1) and deleting the word “significant” from Sec. 400.25(a)(3). One commenter stated that the Board should equalize tariff treatment for U.S. manufacturing operations relative to offshore alternatives, and should not give differential treatment to competitors within an industry or else potential users may no longer view the FTZ program as a viable option. That commenter also stated that U.S.-based manufacturing and exports are inherently in the public interest and should be treated as such, absent direct evidence of a net negative economic effect.
Board position: In response to comments received, we have limited this section to criteria for evaluating applications involving production activity and have required the Board to take into account companies’ ability to conduct the same activity offshore and the effect on the U.S. economy. We have also added references to analyses carried out in connection with prior Board actions. We have not referred to the precedential effect of prior Board actions because such language could, inter alia, create a mistaken impression that the situation within a given industry inherently remains static over time. We have not modified the statement of Board policy to include a reference to promoting U.S. competitiveness, because the focus of the section is emphasizing that the Board’s actions are consistent with broader trade- related public policy. For similar reasons, we have retained the statement that Board policy applies to “ongoing” activity in addition to proposed activity. We also have not modified the requirement that an application for production authority demonstrate a “significant public benefit.” However, the significance of the public benefit may be relative, depending on the size and employment level of the facility involved, so this standard is not inherently discriminatory against smaller facilities.
With regard to other comments received, the FTZ program can be used to equalize tariff treatment relative to offshore alternatives. However, obtaining authority for a given FTZ production use cannot be guaranteed. Rather, the Board’s function continues to be ensuring that zone activity is in the public interest; assessing a range of factors is appropriate in making that determination. As for differential treatment for competitors in a given industry, the Board naturally seeks to avoid such differential treatment. However, one factor that some observers may fail to take into appropriate account is the cumulative effect of FTZ applications from multiple participants in a given industry, which could differ from the effect of an application from a single participant. The Board must continue to base its decisions on the facts and circumstances present at the time that a given decision is made.
Finally, while the changes to the production-related sections of these regulations should dramatically simplify and expedite the process of obtaining Board authorization for production authority in most cases, the regulations maintain appropriate procedures to ensure that the activity conducted is in the public interest. The Board does not need to shift presumptions about production activity for there to be an appropriately simplified and expedited process, as noted above.
Section 400.28—Burden of Proof
Comments: Numerous commenters proposed dividing this section into three subsections (general, comments, and rebuttal), requiring opponents of FTZ activity to demonstrate standing and submit evidence that would meet a specific standard that closely resembles the standard for applicants’ responses to opponents’ submissions, and eliminating the word “significant” preceding “public benefit.” One commenter stated that, for applications involving manufacturing or exports, the burden of proof should be shifted to any opponents.
Board position: As a result of the comments received, we have divided this section into four subsections: in general; comments on applications; requests for extensions of comment periods; and, responses to comments on applications. We have stated that parties submitting comments on FTZ applications should submit evidence that meets a standard closely resembling the standard for applicants’ responses to such submissions. However, we have not adopted the suggested requirement that parties opposing FTZ applications demonstrate standing. Although the suggested standing requirement involved the addition of only a few words, the requirement could significantly complicate the processing of FTZ applications, and would appear to add more complexity and burden than can be justified based on the procedural benefits it might bring. We also have retained the full phrase “significant public benefit” to mirror the standard retained in Sec. 400.27; that standard was addressed in response to comments on that section. Finally, the definitive wording of this section reflects a balancing of the standards applicable to both applicants and parties submitting comments on applications. It would not be appropriate to abandon that evenhanded approach for certain types of applications.
Section 400.31—General Application Provisions and Pre-Docketing Review
Comments: Numerous commenters proposed reducing standard timeframes to require the Board ordinarily complete its action on applications involving production authority within six months, and that Board action on other applications ordinarily be completed within five months. Those commenters also proposed the following changes: 30-day periods for responses from zone participants contacted by the Executive Secretary, and for the Executive Secretary to complete pre-docketing review after receiving additional information from an applicant; and returning pre- docketing applications to the applicant rather than discarding the application if noted deficiencies have not been corrected within 30 days. In response to other comments, two commenters stated that the suggestion to reduce timeframes for Board action was unreasonable. Those commenters stated that the reduced timeframes would impede potentially affected parties from receiving proper notice or having an adequate opportunity to comment, and would also prevent the Board from adequately developing a factual record, analyzing comments, and performing a thorough analysis of the application in question.
Board position: Based on the comments received and recognizing the need to provide expedited processing of requests, we have made a number of changes to procedures and timeframes. As noted in comments on Sec. 400.14, we have adopted a revised approach to requests for authority to conduct production activity that incorporates a standard notification process designed to take no more than 120 days (including a 40-day comment period). However, the revised approach also retains the full application process delineated in the proposed regulations, which would apply to any notification that is determined to require further review, as set forth in Sec. 400.37. Given that such applications will tend to involve complex or controversial circumstances, we have retained in this section an ordinary 12-month timeframe to process such applications.
Based on changes to the subzone application requirements in response to comments received, we have also significantly modified the procedures for processing subzone applications. Those modified procedures are delineated in Sec. 400.35. Based on the inherently less complex analysis associated with a single-user subzone proposal as compared with proposals to establish or expand general-purpose zones, Sec. 400.35 sets forth simplified procedures designed to facilitate expedited processing of subzone applications. Expedited processing for subzone applications, like notifications for production authority, focuses on operations in existence or under construction that are or will be engaged in international trade-related activities. Establishing and reorganizing zones under the ASF similarly enables grantees to gain quick, simple access to FTZ procedures for operations actually engaged in such activities. In contrast, evidence indicates that other types of applications tend to be more speculative with regard to actual zone use. The procedures and timeframes contained in these regulations prioritize resources toward actual trade-related operations in order to maximize their positive competitiveness and employment impacts.
We have not made other changes to this section to reflect comments received because the changes proposed would not improve the efficiency of the overall application process. In particular, we have retained the provision for discarding an application if corrections are not made within the allotted timeframe, because it is appropriate to eliminate the burden associated with returning applications as one element of optimizing resource use towards rapid processing of docketed applications.
Section 400.32—Procedures for Docketing Applications and Commencement of Case Review
Comments: Numerous commenters proposed changes which would: Provide that untimely comments would not be considered; limit the number of parties that may submit rebuttals; broaden references to the applicant to include zone participants; limit the timeframe within which hearings could be arranged to 60 days after the end of the initial comment period on an application; and modify the timeframe for CBP’s input on a pending application. One commenter proposed a reduction in the standard comment period for applications to either 15 days or 30 days, while another commenter proposed eliminating the public comment period for subzone applications. For any application for production authority involving a component subject to an AD/CVD order, one commenter proposed requiring the component be identified in the notice announcing review of the application, and that the applicant provide the names and addresses of each known U.S. producer of the component and send notice of the application to each such U.S. producer. Another commenter proposed that Federal Register notices announcing applications for production authority indicate the grantee of the zone and the nature of the activity but omit the identity of the zone user.
Board position: As a result of the comments received, we have added a requirement that a Federal Register notice announcing an application for production authority include information regarding any component subject to a trade-related measure or proceeding (such as an AD/CVD order). However, we have not adopted the proposed requirement that applicants provide the names and addresses of each known U.S. producer of the component in question and to send notice of the application to each such U.S. producer. This approach creates transparency through the enhanced requirement for information in Federal Register notices without imposing the potentially significant new burdens associated with the other proposed requirements. We also have not adopted the proposal that Federal Register notices of proposed production authority omit the identity of the zone user because such identifying information can be useful to other parties that wish to gauge the potential competitive impacts of the proposed authority.
We have not eliminated the public comment period on subzone applications, as proposed by one commenter. The ordinary procedure to designate a subzone, therefore, will differ in this regard from the procedure to designate usage-driven sites under the ASF (with the exception of situations under Sec. 400.24(c) in which a site clearly eligible for usage-driven designation is instead being designated as a subzone based on the circumstances presented). Usage-driven sites can only be designated within a specific service area already authorized for the zone grantee through a Board process that includes a public comment period. However, in response to another comment, we have reduced the standard length of the comment period for subzone applications from 60 days to 40 days (the same duration as comment periods on notifications for production authority pursuant to Sec. 400.37). The standard length of comment periods on other types of applications remains 60 days. The shorter comment period for subzone applications reflects the fact that these applications focus solely on designating the zone space needed for a single operation. Other types of applications inherently are broader in focus and, therefore, it is appropriate to allow additional time for the public to develop comments on such applications. In response to comments submitted, we have set the standard deadline for CBP comments on an application to match the end of the period for public comment; however, the wording of this provision reflects a recognition that additional time may be needed in exceptional circumstances.
To help ensure the proper balance between the interests of applicants and the interests of parties potentially opposed to applications, we have not adopted the proposed limit on the types of parties that may submit rebuttal comments. For the same reason, we have revised this section to refer to the standard that applies to submitted comments under Sec. 400.27(b), and to further clarify that new evidence, new factual information, and written arguments submitted by parties, other than the applicant, after the comment period will not be considered. As noted in this section, new evidence or information submitted by the applicant could trigger the (re)opening of a comment period. We also have not imposed a limit on the period of time during which a hearing may be arranged. Although the need for such a hearing is generally rare, it is appropriate for the Board to clearly retain the flexibility to arrange a hearing at any point in time regarding any matter pending before the Board.
We have not adopted the proposed changes that would broaden references to the applicant to include zone participants. Such changes would inappropriately shift the emphasis away from the applicant. Further, for a given application, the number of zone participants could be significant (for example, if the zone operator that is the subject of the application has a significant number of users). Therefore, the number of parties that would be involved in the process as a result of the proposed changes could represent an exponential increase in burden on the Board staff without necessarily leading to an improved outcome. Any applicant remains free to coordinate with zone participants on the matters addressed in this section.
Section 400.33—Examiner’s Review—Application To Establish or Modify a Zone
Comments: Numerous commenters proposed reducing the timeframe for an examiner’s development of a report and recommendations from 120 days to 60 days after the close of the comment period and removing explicit allowance for further comments from the CBP port director, when necessary.
Board position: In general, we have not adopted the proposed reduction in the timeframe for an examiner to develop a report and recommendations. Rather, in concert with changes to the timeframes for action on applications involving production authority, we have set the timeframe for development of the examiner’s report/recommendations at 150 days (with the exception of reorganizations of zones under the ASF, for which we are setting the timeframe at 75 days in recognition of the generally simpler analysis involved and the greater potential for direct positive effects resulting from approval). The overall impact of adjustments to this section is to generally maintain the prior overall 10-month standard timeframe to process the cases subject to this section (with a general 75-day reduction in that timeframe for ASF reorganizations). As noted above in response to comments on Sec. 400.31, this approach reflects a necessary prioritization of overall resources towards cases involving production authority and subzone designation, or which would facilitate future usage-driven designations, all of which tend to involve more significant direct positive competitiveness and employment effects.
We have retained explicit allowance for further comments from CBP because such a step may be warranted in certain cases. In that context, we believe that it is important to include a specific provision addressing that procedure (although the Board’s broad, general authority would allow for such a step to be taken, when necessary, even in the absence of a specific regulatory provision).
Section 400.34—Examiner’s Review—Application for Production Authority
Comments: Numerous commenters proposed the following changes to Sec. 400.34(a): Reducing the general timeframe for an examiner’s development of a report and recommendations from 150 days to 75 days after the close of the comment period; adding language regarding taking into account consistency with prior decisions; and replacing provision for industry surveys with language regarding conduct of independent and objective research. For Sec. 400.34(b), those commenters proposed the following changes: Deleting the reference to ongoing activity in Sec. 400.34(b)(1); adding a sentence from prior regulations regarding the process by which the net economic effect is determined; and adding language stating the objective of preventing competitive disadvantages between companies in the same industry as a result of Board actions. One commenter stated that the Board should reject changes proposed by other commenters that would skew the application process in favor of applicants for production authority.
Board position: We have not reduced the general timeframe for development of an examiner’s report and recommendations consistent with the revised approach to proposed production authority established in Sec. 400.14(a). Under that approach, applications subject to this section will involve circumstances that have been determined to warrant further review. Such applications will tend to be complex or controversial in nature. In that context, reducing our proposed standard timeframes would be inappropriate. Further, we have explicitly noted that certain circumstances (such as when the applicant or another party has obtained a time extension for a particular procedural step) may result in the processing of the application extending beyond the ordinary timeframe.
We have revised the provision on requests to parties for additional information to emphasize its broad potential reach, depending on the circumstances of an individual case. We have also broadened the provision to allow both industry surveys and industry research to be used as tools in evaluating potential impacts of proposed production activity. We have not stated that research or surveys would be independent and objective, because those qualities inherently are objectives for all of the work carried out by the Board and its staff. Nor have we referenced consistency with prior Board decisions, because such language could create a mistaken impression that the situation within a given industry inherently remains static over time. For similar reasons, we have not referred to potential competitive disadvantages as a result of Board actions, because the language of the proposed rule already contains an adequate provision establishing that prior decisions would be considered. We have retained the reference to “ongoing activity” because the provisions of this section may at times be used for reviews of ongoing activity. Finally, we have not adopted the suggested reinsertion of a sentence from the prior regulations regarding the process of determining the net economic effect. That sentence was intentionally removed in the proposed rule because we believe that weighing positive and negative effects is inherent in the definition of a “net” economic effect, thereby rendering the suggested sentence superfluous.
Sections 400.33 and 400.34—Examiner’s Reviews of Applications
Comments: For both Sec. Sec. 400.33 and 400.34, numerous commenters proposed the following changes: Broadening references to the applicant to include zone participants; allowing requests to extend the period for response to a preliminary negative recommendation, with such an extension not unreasonably withheld; and removing explicit allowance for notice and public comment on preliminary recommendations.
Board position: We have modified Sec. Sec. 400.33 and 400.34 to allow an applicant to request extensions of the period of time to respond to a preliminary negative recommendation, with such extensions not unreasonably withheld. We have continued to allow notice and public comment on preliminary recommendations because such a step may be warranted in certain cases. In that context, we believe that it is important to include specific provisions addressing such allowance (although the Board’s broad, general authority would allow for such a step to be taken, when necessary, even in the absence of specific regulatory provisions).
We have not adopted the proposed changes that would broaden references to the applicant to include zone participants. Such changes would inappropriately shift the emphasis away from the applicant. Further, for a given application, the number of zone participants could be significant (for example, if an affected zone operator has a significant number of users). Therefore, the number of parties that would be involved in the process as a result of the proposed changes could represent an exponential increase that would create new burden without necessarily providing for an improved outcome. Any applicant remains free to coordinate with zone participants on the matters addressed in this section.
Section 400.36—Completion of Case Review
Comments: Numerous commenters proposed the following changes: Adding a deadline for CBP headquarters to concur with proposed Board actions, and to assume concurrence if it is not received by the deadline; notifying the grantee and directly affected zone participants and allowing for a meeting request if a Board decision is not favorable, or if the Board is not able to reach a unanimous decision; adding a reference to affected zone participant for failure to timely provide necessary information; allowing an extension of the period to provide necessary information when requested by the applicant or an affected zone participant, with such an extension not unreasonably withheld; deleting the provision allowing for termination of review if the Board is unable to reach a unanimous decision; when circumstances presented in an application are no longer applicable, limiting termination to situations where the applicant or an affected zone participant has notified the Board; and confirming termination of review in writing to the applicant and affected zone participant. Several commenters indicated that the applicant should always be notified (in writing) of the intent to terminate a review, with 30 days allowed for a response from the applicant. One commenter also stated that the term “material change” should either be defined or deleted. One commenter indicated that it did not understand the reason for allowing the review of an application to be terminated and, in particular, where the Board is unable to reach a unanimous decision.
Board position: In response to these comments, we have added a specific timeframe for CBP headquarters to provide its comments on applications to the Board. We have not adopted the proposal for CBP headquarters’ concurrence to be assumed after 30 days have elapsed. There is no evidence of any actual need for that suggested provision.
The Board may only approve an application for Board action on a unanimous decision of the Board’s members. If the Board is unable to reach a unanimous decision, approval is not possible. In those circumstances, it is more appropriate to terminate the review of the application than to maintain the application as technically pending before the Board. Similarly, if the overall circumstances presented in an application no longer exist as a result of a material change (e.g., when the zone participant on whose behalf the application was submitted has subsequently vacated the facility), it would not be appropriate for the Board to consider approving the application. Therefore, if the applicant does not opt to withdraw the application, it would be appropriate to terminate the review of the application. For these reasons we have maintained the proposed provisions pertaining to such termination actions, but we have adopted certain changes to the language of this section in response to comments submitted.
Based on comments submitted, we have included a provision requiring notification to the applicant and allowing for a meeting at the request of the applicant if the Board is not able to reach a unanimous decision. That provision accords basic procedural rights in such a circumstance. However, we have not extended that provision to cover unfavorable decisions by the Board because Sec. Sec. 400.33-400.35 already include procedural rights for the applicant in that circumstance (i.e., when a case examiner has made an unfavorable recommendation on which the Board will be basing a decision). We have also retained the requirement that an applicant be notified of the Board’s intent to terminate a review, clarified that such notification would be in writing, and continued to allow a 30-day period for a response. We also have adopted the substance of suggested changes pertaining to allowances for extending the period to provide necessary information and for confirming termination of a review in writing to the applicant.
We have not extended the provisions of this section to apply to zone participants because, as noted in response to comments on Sec. 400.33, such changes would inappropriately shift the emphasis of the Board’s procedures away from the applicant. Further, for a given application, the number of zone participants could be significant. Therefore, the number of parties that would be involved in the process as a result of the proposed changes could increase exponentially and create substantial new burden without necessarily providing for an improved outcome. Any applicant remains free to coordinate with zone participants on the matters addressed in this section.
Based on a public comment, we have also delegated authority to the Executive Secretary to approve applications for subzone designation. However, we have limited that delegation to the circumstance where an approved subzone will be subject to the overall activation limit for the sponsoring zone as established by prior Board action (with certain language also added to Sec. 400.24(d) specific to the establishment or modification of such activation limits). That limitation reflects the FTZ Act’s requirement that “[a]ny expansion of the area of an established zone shall be made and approved in the same manner as an original application.” The meaning of the term “zone” in the FTZ Act is the physical space in which zone procedures are in use. For example, “[f]oreign and domestic merchandise * * * may, without being subject to the customs laws of the United States * * * be brought into a zone and may be stored * * * and be exported, destroyed, or sent into customs territory of the United States therefrom * * * but when foreign merchandise is so sent from a zone into customs territory of the United States it shall be subject to the laws and regulations of the United States affecting imported merchandise” (section 3 of the Act, 19 U.S.C. 81c). Given the separation in the 1970s of the FTZ Board zone- site designation process from the U.S. Customs Service (now CBP) process of activating portions of designated zone sites, the term “zone” as used in the FTZ Act now only applies to physical space that has been both designated and activated. In that context, designating a subzone would only require action by the Board if the subzone were not subject to an existing Board limit on the amount of space that could be activated (i.e., used as a “zone” under the FTZ Act) within the zone in question. It should be noted that a similar analysis of the significance of the term “zone” in the FTZ Act was a basis for the FTZ Board’s adoption of the ASF in 2008. The ASF allows designation of additional sites for specific operators/users without Board action provided that the additional sites will remain subject to a specific limit set by the Board on the overall amount of space that can be activated (thereby preserving the Board-approved “area” that functions as a “zone”).
Finally, the Board received a number of comments pertaining to various sections of the regulations indicating that existing processes and distinctions between types of zone sites may not constitute the most efficient and effective mechanism for facilitating zone use. As noted in our response to comments on Sec. 400.11, a streamlining of the existing site- designation frameworks is a matter that the Board plans to address in a subsequent proposed rule.
Section 400.38—Procedure for Application for Minor Modification of Zone
Comments: Numerous commenters proposed that, when the CBP port director’s concurrence does not accompany a request for a minor modification, the Executive Secretary should notify the port director of the request, and 15 days should be allowed for the port director’s concurrence. One commenter stated that the 20-day timeframe for CBP port directors’ reports provided in the prior regulations (15 CFR 400.27(f)(2)) should be maintained.
Board position: In response to these comments, we have incorporated a specific timeframe for CBP input on requests (i.e., the 20-day period provided in the prior regulations). In addition, in this section and similar sections, we have used the general term “comments” in place of the more specific terms “concurrence” or “report” to reflect that any CBP input pertaining to a request may vary in nature and scope depending on the type of request and the specific circumstances involved.
Section 400.41—General Operation of Zones; Requirements for Commencement of Operations
Comments: Numerous commenters proposed the following revisions to this section: Changing the requirement for a grantee’s approval for activation to a requirement for the grantee’s concurrence; removing the reference to the grantee from the requirement that permits be obtained from governmental authorities; adding a reference to administrators; and removing the reference to CBP port directors due to those commenters’ proposed creation of a separate section specific to the port director’s role as a representative of the Board.
Board position: This section now combines proposed Sec. 400.41 (“Operation of zones; general”) and proposed Sec. 400.44 (“Requirements for commencement of operations in a zone”). Combining the two sections does not affect the substance of the provisions contained therein. Regarding changes proposed by commenters, we have not added a reference to administrators in this section. Although a grantee may engage a third party to conduct certain functions on its behalf, it remains the grantee’s responsibility to ensure that the reasonable zone needs of the business community are served by the grantee’s zone. We have modified this section to indicate that a grantee may either approve or concur on activation. That change is consistent with other regulations pertaining to the activation process. We have eliminated the reference to the grantee’s obtaining permits because meeting any requirements concerning activity in a given zone operation should be the direct responsibility of the operator. We have retained the reference to the role of CBP because it usefully reinforces the language of new Sec. 400.7.
Section 400.42—Operation as Public Utility
Comments: Numerous commenters expressed concerns about what they characterize as significant new requirements in proposed Sec. 400.42, indicating that the requirements would demand additional staffing and funding at grantee organizations at a time when such resources are scarce, and that the requirements could lead to grantees’ relinquishing their roles due to the added burden. Those commenters proposed the following specific changes: using the phrase “public utility principles” to clarify that zones are not public utilities; deleting the word “agent” in general; adding the word “administrator” in several contexts; removing language indicating that grantees’ fees recover costs incurred by those grantees; removing a requirement that any cost passed on to a zone participant based on a function that a grantee contracts to a third party must be based on going rates for such a function; and removing a requirement for fees to be paid directly to grantees (or public entities).
One commenter indicated that greater specificity on the public utility requirement was overdue and essential. One commenter agreed that rates and charges should be fair and reasonable and based on costs incurred by the grantee in the administration of the zone. One commenter stated that return on investment should be able to take into account past subsidies that an economic development organization provided to keep a zone active and viable.
One commenter stated that proposed Sec. 400.42 appears to impose excessive burden and give rise to an inordinate amount of scrutiny over the internal management of a zone, and that each grantee should be allowed to operate in a way that best suits its zone. Another commenter stated that the regulations cite public utility as the basis for proposed changes, but that the FTZ program today is very different from the time when Congress originally envisioned the program (when the public utility concept made sense). The commenter stated that the proposed section takes away from grantees the authority to develop zone financing plans, that the Board should not try to take such authority away from grantees, and that a zone should be paid for by its users. That commenter also stated that the proposed regulations assume that zone users themselves must be allowed to act as operators, but that the assumption is not balanced against the interests of the grantee.
Addressing the proposed requirement that fees and penalties related to grantee functions be payable only to a zone’s grantee (or a public agency under contractual arrangement), certain commenters stated that the provision should allow payment to private non-profit organizations under contractual arrangement, or to an “administrator” engaged by a grantee. Addressing the payment of fees and penalties to a zone’s administrator, certain commenters stated that such an arrangement reduces a grantee’s burden, provides incentive to the zone’s administrator, and allows for provision of technical help to users. Those commenters concluded that precluding the payment of fees and penalties to an administrator needlessly intrudes on a grantee’s management of its zone. One commenter stated that the changes proposed in Sec. 400.42 would do more harm than good.
Additionally, one commenter proposed stating that each zone be operated as a public utility, and that the referenced rates and charges are specific to zone use and must be uniform. The same commenter indicated that there are many formulas that a grantee should be able to use to develop its fees, that basing fees on the benefits derived by a user should be an acceptable formula, and that there is no basis for authorizing the Board to decide which formula(s) are correct.
One commenter disagreed with the proposed approach in Sec. 400.42, stating that it is contrary to Executive Order 12866, which requires agencies to assess available alternatives to regulations, and that the proposal would require grantees to establish rates based only on costs without taking into account funding sources available. The commenter stated that the provision would reduce a grantee’s flexibility to set up an independent rate structure based on the area’s economic development strategy. That commenter recommended giving grantees the flexibility to establish rate structures allowing distinct rates for pilot projects, target industries, or differing types of zone operations.
Regarding a grantee’s development of its fees, one commenter suggested that the Board provide clearer guidance on the time period over which costs could be recovered and how often the grantee would need to recalculate its fees. It specifically suggested allowing the grantee to recalculate fees at five-year intervals. The commenter proposed applying the “going rate” standard only to administrative service contracts due to difficulties in determining going rates for occasional, more specialized activities or functions. That commenter also sought Board guidance on acceptable methods for apportioning costs across users, noting that various grantees currently appear to use differing methods. The same commenter proposed that a grantee be allowed to discount its fees based on a range of circumstances, as long as the criteria for such discounts were published in the grantee’s zone schedule and applied uniformly.
In response to other comments, one commenter stated that technical or other services are sometimes included or bundled into the fees paid by a zone user, that such services carry a real cost and that zone users should not, in effect, be required to contract with a particular technical expert in order to be able to operate within a zone.
Board position: We have made a number of revisions to this section based on public comments. We have retained the language stating that “each zone shall be operated as a public utility” because that language was drawn verbatim from the FTZ Act. We have also slightly modified the remainder of the sentence following the reference to the public utility requirement, so it now is also drawn verbatim from the FTZ Act.
In addition, in response to comments on uniform treatment and related issues, and the comment that zone users should not effectively be required to contract with a particular technical expert, we have stated that users may not be required to use or pay for a particular provider’s zone-related products or services. Any effective requirement for a user to pay for additional products or services in order to be permitted to use the zone would be inconsistent with the principles associated with the Act’s public utility requirement. This bar extends both to a direct requirement to procure a product or service and to an indirect requirement for such procurement (e.g., through including costs associated with the availability of technical expertise as part of the zone’s mandatory fees, or through favorable treatment given by, or on behalf of, the grantee to purchasers of a product/service from a particular vendor).
In response to the comment claiming that the evolution of the FTZ program has made the public utility concept less relevant, it is important to emphasize that the law continues to require that “[e]ach zone shall be operated as a public utility” (section 14 of the Act, 19 U.S.C. 81n); the Board has no discretion to authorize the operation of the program in a manner inconsistent with that requirement. The Board has never been a “rate making” agency (i.e., it does not try to set specific fees of individual grantees). However, given the public utility requirement of the Act and grantees’ specific requests for guidance on the implications of that requirement, it is appropriate to delineate in the regulations the general principles embodied in the requirement. We have modified the provision on recovery of costs through fees to clarify that fees may be imposed to recover costs, but that a grantee is not obligated to impose fees to recover its costs. The public utility requirement has the effect of setting a ceiling on grantees’ fees at a general level that allows for recovery of costs associated with the grantee function plus a reasonable return on investment but not monopoly profit-taking (by the grantee or by a party contracted by the grantee for a zone-related function). The public utility requirement in no way mandates that a grantee collect fees for all or part of the costs associated with the grantee function if the grantee would prefer to subsidize that function or has alternate funding sources available to defray those costs.
Because cost recovery is at the heart of the public utility concept, we have retained the prohibition on a grantee’s basing its fees on the benefits derived by those who make use of the zone. The public utility concept is inherently driven by the sponsoring organization’s being able to recover the costs it incurs in making the zone available to users through fees paid by those users. Basing users fees on the level of benefit those users derive from the program is an entirely different model that is not inherently cost-based, and that is inconsistent with the Act’s public utility requirement.
Certain commenters raised the issue of acceptable methods for a grantee to apportion costs to different categories of users. The Act’s requirement that a grantee afford users uniform treatment under like conditions can also have implications for the apportionment of costs. Based on the public utility and uniform treatment requirements, a grantee may legitimately establish different levels of fees for (i.e., apportion costs differently to) different categories of zone participants based on certain criteria (e.g., an operator’s square footage of activated FTZ space, the value of the operator’s merchandise admitted to the zone in a given year, whether the operator qualifies as a small business under Small Business Administration (SBA) criteria, or whether the operator is in an industry sector targeted for attraction based on community economic development plans) so long as the criteria are applied uniformly to each zone participant, and the resulting fee structure is published in the grantee’s zone schedule (see Sec. 400.44). However, consistent with the provision that “zone participants shall not be required (either directly or indirectly) to utilize or pay for a particular provider’s zone-related products or services,” different fees may not be applied to zone participants by (or on behalf of) a grantee based on whether a given zone participant has engaged a particular third party to provide FTZ-related services. Applying different fees on that basis would effectively require zone participants to procure products or services from a particular third party in order to qualify for a lower fee imposed by (or on behalf of) the grantee, which would be inconsistent with the principles established in section 3 of the Act (19 U.S.C. 81n). Within a legitimately differentiated category of zone participants (e.g., those that qualify as small businesses under SBA criteria), a single level of fee(s) must be applied.
In response to comments, we have removed references to “agent” in this section but have not incorporated certain commenters’ proposed references to “administrator.” Instead, where appropriate, we have simply mentioned that certain actions can be performed “on behalf of” a grantee. We also have removed both the requirement that third party costs passed on to zone participants be based on going rates, and the requirement for fees to be paid directly to grantees (or public entities). Both of those requirements were intended to bolster enforcement of the public utility requirement, but they do not represent the least burdensome means to accomplish the Board’s policy goals. Combined with provisions such as Sec. 400.45, which allows complaints pertaining to public utility, this section should be sufficient to ensure compliance with that the Act’s public utility requirement.
We agree with commenters that return on investment may take into account past subsidies that a grantee provided to sustain its zone. It does not seem appropriate to delineate a specific maximum period of time for cost recovery. Only one comment suggested a specific time period, and specifying a period in a regulation could affect a large number of grantees (the vast majority of which have not addressed this point). However, the five-year interval proposed by one grantee for recalculating its fees (which could include recapturing prior subsidies by the grantee to sustain the zone over that five-year period) is one reasonable approach. The fees in the resulting zone schedule could incorporate the recovery of costs incurred over the five-year period in question.
Finally, contrary to one commenter’s assertion, the proposed regulations were not based on an assumption that zone users must be allowed to operate for themselves (rather than leaving the possibility open for the grantee to serve as operator). However, multiple comments on Sec. 400.43 proposed providing potential and existing users the right to operate their own zone sites directly or through one or more contractors. We believe that this issue is properly within the realm of the Act’s public utility requirement but, because it was not directly addressed in the proposed rule and is of potential interest to numerous parties, the Board intends to address it through a subsequent rule.
Section 400.43—Uniform Treatment
Comments: Numerous commenters supported the general concept of uniform treatment delineated in Sec. 400.43, but expressed concerns about negative impacts that would result from specific provisions (especially the preclusion of conflicts of interest in Sec. 400.43(e)). They perceived, inter alia, that grantees’ ability to obtain needed zone-related advice and services would be adversely affected. Those commenters proposed an alternative approach that would require conflicted parties to disclose the conflict of interest and recuse themselves from decisions. The same commenters also proposed the following range of changes: adding the term “administrator” accompanying “grantee;” stating that zone participants include only operators and users, with property owners treated as a distinct category; including the right to modify standard contractual terms and stating that those terms should be specific to zone participation; replacing the requirement for standard contractual provisions to be included in a grantee’s zone schedule with a requirement that standard provisions be provided to the public and the Board on request; modifying the provision on neutral criteria to be applied by grantees in evaluating proposals for FTZ sponsorship; adding that users may not be required to use or pay for zone-related products or services that they do not elect to procure; and allowing potential and existing users the right to operate their own zone sites directly or through one or more contractors. Two commenters stated that a grantee should not be forced to sponsor any project proposed for its zone. One commenter indicated a need for authority or a directive to require modification of operators’ agreements that would be non-compliant under proposed Sec. 400.43.
One commenter stated that regulations directing how a grantee manages services associated with its zone are likely to be counterproductive at both the local and national level. That commenter proposed revisions including that, in a given zone, there could not be a requirement that zone participants purchase zone-related services (such as inventory control systems, application preparation, or customs-related brokerage or consulting) from the zone’s administrator or any other specific party. Another commenter stated that proposed Sec. 400.43 appears to impose excessive burden and create inordinate scrutiny of the internal management of a zone, and that each grantee should be allowed to operate in a way that best suits its zone.
Two commenters stated that the regulations should continue to allow operator’s agreements between the operator and the zone’s administrator, with one commenter indicating that this existing type of arrangement can be more responsive to operators’ needs when the grantee is a public agency with inherently time-consuming internal processes. One commenter indicated that the regulations should not preclude payment of fees to the zone’s administrator rather than the grantee, stating that a public agency may prefer not to mingle zone-related fees with broader public finances.
One commenter stated that the Board’s approach in Sec. 400.43 reflects a failure to enforce existing law and punish wrongdoers, with the Board instead proposing to deny numerous rights and protections embodied in law and equity through an approach that is discriminatory, arbitrary and capricious. The commenter further states that Sec. 400.43 contravenes the FTZ Act, claiming that the FTZ Act requires the Board to provide “uniform treatment” to those who “participate in” a zone. The commenter also states that the proposed provision would have a negative impact on the entire FTZ program.
One commenter stated that the proposed approach to uniform treatment ignores the positive role that third-party expertise has played in the success of various zones, and instead proposes all- encompassing mandates that would cripple grantees’ abilities to adjust to local circumstances. Another commenter proposed to address uniform treatment by simply requiring contracts include a stipulation that all participants will be treated fairly and equally under the uniform treatment and public utility requirements of the FTZ Act.
One commenter stated that many grantees may not currently have evaluation criteria for reviewing FTZ proposals, and that the subsection on neutral criteria for evaluating proposals would seem to require grantees to develop such criteria, creating a burden that is unnecessary given other protections proposed in Sec. 400.43, and also creating potential additional risks or liability for grantees.
One commenter supported the enhanced enforcement provisions proposed in this section but stated that the Board should not limit the conflict-of-interest preclusion to the proposed list of grantee functions.
Board position: The FTZ Act establishes a core requirement that a zone grantee afford “uniform treatment under like conditions” to zone participants. Therefore, a grantee may not manage its zone in any manner that it chooses. Management of a zone is constrained by the uniform treatment requirement (as well as other requirements of the Act, such as to operate the zone as a public utility). Given that grantees must comply with the law, it is beneficial to grantees for the Board’s regulations to provide detail regarding the operational implications of the FTZ Act’s requirements. Nevertheless, in response to comments submitted, we have simplified this section and removed several provisions. This section establishes requirements for (1) the application of uniform treatment in the evaluation of proposals from zone participants by grantees (and other parties acting on behalf of grantees, where applicable), in Sec. 400.43(b), and (2) justification for any differing treatment afforded, in Sec. 400.43(c). The range of functions targeted in proposed Sec. 400.43(e) has been narrowed, and the provision has also been supplemented by allowing the Board to authorize waivers (see discussion below specific to adopted Sec. 400.43(d) and in response to several additional comments). Therefore, as adopted, this section substantively addresses the concerns expressed about potential impacts on the ability of grantees or zone participants to procure zone-related services while maintaining safeguards to ensure the integrity of the FTZ program.
In response to multiple commenters’ proposals that the regulations state that users may not be required to use or pay for zone-related products or services that they do not elect to procure, we have inserted a new final sentence in Sec. 400.42(a). We have also reinforced that principle by stating that treatment of a zone participant may not vary depending on whether the zone participant has procured any particular product or service, including from a particular supplier. In response to a comment, we have eliminated the requirement that a grantee apply neutral criteria in evaluating proposals from zone participants. The requirement seemed to imply that each grantee must establish such criteria, but many grantees in fact may not currently have specific criteria they apply. Developing those criteria would create a significant burden for grantees. Rather than impose such a new requirement on grantees, our revised approach focuses on gauging performance rather than dictating behavior.
We also have eliminated the requirement that agreements be made solely with the zone’s grantee. That proposed provision would have affected a number of existing contractual arrangements and increased burden on a number of zone grantees. The provision did not represent the least burdensome means to accomplishing the Board’s policy objectives. In concert with changes made elsewhere in these regulations, we also have substituted a reference to “any person undertaking a zone-related function(s) on behalf of the grantee” for the term “agent” in Sec. 400.43(h).
We have retained the requirements for agreements to be made in writing. Evidence indicates that the vast majority of agreements between zone grantees and zone participants are already in writing, but a limited number of examples of purely oral agreements exist. The Board’s ability to gauge the uniformity of treatment afforded by a grantee depends on agreements being in writing. This provision as adopted will also establish a foundation for enabling the Board to consider proposing in a subsequent rule a requirement that a grantee disclose to a zone participant contractual provisions concluded with other zone participants that differ from the provisions in effect or being offered to the zone participant in question.
As requested, we have retained the statement in Sec. 400.43(b) that uniform treatment does not require acceptance of all proposals by zone participants. That subsection also requires that the bases for a grantee’s decision on a proposal must be consistent with the uniform treatment requirement. However, we have not adopted in this section and in the definition section (at Sec. 400.2(x)) commenters’ proposed limitation of the term zone participant to exclude property owners. Given the role of the grantee (and other party acting on behalf of the grantee, where applicable) in evaluating proposals from property owners for participation in a zone, uniformity of treatment under like conditions should not be limited to zone operators and zone users.
Comment: Regarding the proposed requirement for a grantee to have standard contractual provisions that if offers to zone participants, one commenter stated that a grantee should have some limited latitude to change standard contract provisions through negotiation with individual zone participants and should make all participants aware of the provisions for which the grantee is willing to make changes. The commenter also stated that Board guidance would be helpful regarding which types of provisions should not be subject to negotiation.
Board position: We have eliminated the requirement for a grantee to have standard contractual provisions because of the new burden that it could create for a number of grantees. Further, grantee negotiations with zone participants regarding contractual provisions are commonplace, with the provisions of actual contracts often diverging in some manner from the standard provisions offered to zone participants. That divergence reflects the reality of the business environment, but also renders pointless a requirement for grantees to offer standard contractual provisions. As noted above, the Board will instead consider proposing in a subsequent rule a requirement that grantees disclose to zone participants contractual provisions concluded with other zone participants that differ from the provisions in effect or being offered to the zone participant in question. That requirement would be targeted directly to the disclosure of actual differences in treatment afforded to zone participants, thereby enabling them to evaluate whether a grantee’s contracting practices violate the uniform treatment requirements of the FTZ Act and of these regulations. 400.43(d)—Avoidance of Non-Uniform Treatment
Comments: Numerous commenters opposed the proposed provisions in Sec. 400.43(e) (“preclusion of conflicts of interest”) for reasons including: Likely reduction or elimination of grantees’ ability to obtain needed professional advice and assistance; causing more harm than good; the Board should establish principles rather than attempt “one-size-fits-all” solutions; zone users are capable of defending their own interests without government interference in the guise of protection that is not actually needed; the provisions would limit freedom of choice for users and have a negative impact on grantees’ operational costs and efficiencies; and the most talented and experienced experts would find representing users more lucrative than representing grantees, leaving grantees with either lower quality representation or higher costs to obtain quality representation. Certain commenters recommended that the Board find an alternative approach to ensuring uniform treatment. One of these commenters stated that legitimate concerns about uniform treatment should be addressed by stating clear performance objectives, with grantees and contractors given discretion as to how they meet those objectives. One commenter stated that this provision is not consistent with the basic regulatory philosophy and principles expressed in Executive Order 12866, which requires consideration of the costs to grantees and users, a focus on performance objectives rather than specific behavior, and narrow tailoring to impose the least burden.
One commenter indicated that Sec. 400.43(e) was drafted too broadly and proposed an alternative approach in which the Board could review situations believed to be problematic and, after notice and appropriate due process, potentially restrict identified activities on a case-by-case basis. The commenter provided specific language that could be used to implement its approach. Another commenter stated that it generally supports the concept of preventing conflicts of interest, but expressed concern about the proposed provision’s putting grantees at a competitive disadvantage in obtaining needed professional services. The commenter recommended modifying this provision either to define the targeted conflicts of interest more precisely or to limit the provision’s effect to zones that have demonstrated actual uniform treatment problems (with the Board potentially reviewing zones’ performance of key functions to determine whether non-uniform treatment exists). Another commenter stated that the proposed preclusion of conflicts of interest would unintentionally restrict business relationships that are not actually of concern to the Board. This commenter proposed a revised provision that would allow the Board to review situations that may be problematic, gather relevant facts after notice and appropriate due process, and then restrict particular activities on a case-by-case basis as warranted.
One commenter stated that this provision appears to be overreaching and inconsistent with rules pertaining to conflicts of interest that already apply to attorneys, and could interfere with a party’s right to select counsel of its choice. The commenter proposed a replacement provision based on the principle of informed consent by both parties. Another commenter stated that this provision as written, in combination with the proposed definition of agent in Sec. 400.2(b), could unintentionally preclude zone operators from providing zone-related services (such as handling of merchandise or inventory management) to zone participants. Another commenter stated that the proposed provision precluding conflicts of interest is excessive and would deny operators freedom of choice in contracting for outside services.
In response to comments submitted, one commenter stated that zone users should not be forced, or feel implied pressure, to pay for consulting or expert services as a condition of participating in the federal FTZ program.
Board position: In response to comments, we have removed from this subsection one of the originally targeted functions (“collecting/ evaluating annual report data from zone participants”) and narrowed the focus of another of the targeted functions (now limited to “taking action on behalf of a grantee, or making recommendations to a grantee, regarding the disposition of proposals or requests by zone participants pertaining to FTZ authority or activity (including activation by CBP)”). To counterbalance the elimination of proposed Sec. 400.43(b)’s requirement for agreements to be made directly with grantees, we have added to this subsection the additional key function of “approving, or being a party to, a zone participant’s agreement with the grantee (or person acting on behalf of the grantee) pertaining to FTZ authority or activity (including activation by CBP).”
Finally, in response to comments received, we have added new Sec. 400.43(f) that will allow the Board to issue case-by-case waivers of the provision in Sec. 400.43(d) that bars certain categories of persons from performing certain key functions. This approach strikes an appropriate balance in order to avoid the types of broad, negative impacts projected by commenters while continuing to reflect the fact that a zone grantee often has a monopoly in its region for valuable access to the federal privilege of FTZ use (with zone participants reluctant to make uniform treatment-related complaints to the FTZ Board because of a perceived risk of jeopardizing key relationships with grantees or with third parties undertaking key functions on behalf of grantees). The adopted provision reflects the Board’s intended use of a standard format for applications for waivers, but also recognizes that the Board may need to ask follow-up questions before deciding on a given application (depending on the circumstances presented in the application). In considering whether to approve an individual application for a waiver, the Board will take into account the specific circumstances presented, and the Board will also impose conditions on individual waivers, as warranted. As raised by one commenter, a key factor the Board will consider is whether a grantee’s specific arrangement presents a significant risk that zone users will experience implied pressure to procure a particular private party’s services as a condition of obtaining access to the federal FTZ program. In total, the adopted provisions will allow the Board to respond to individual circumstances, and should avoid the “one-size-fits-all” impact about which some commenters expressed concern.
Comments: Numerous commenters proposed the following revisions to this section: Eliminating the requirement for the zone schedule to be submitted to the CBP port director; including references to a zone’s administrator (where applicable); removing the name of the preparer from the zone schedule; eliminating the requirement for a grantee to make its zone schedule available on its Web site; and not allowing the Board to amend the requirements of this section by Board Order, if warranted.
One commenter stated that the zone schedule should be required to include a summary of the grantee’s standard contractual provisions, but not to contain the grantee’s contract document(s). A number of commenters proposed eliminating the requirement for zone operators’ fees to be included in the zone schedule. One commenter recommended that grantees instead retain copies of their operators’ rates, charges and procedures and make them available to users on request. One commenter stated that a grantee’s fees for zone operations should be included in the zone schedule if the grantee is the operator of the zone.
Another commenter expressed a concern about the potential impacts of requiring publication of zone schedules on the Internet. One commenter stated that it would be fair and reasonable for the Board to post all zone schedules on the Board’s Web site. One commenter supported both the requirement for a grantee to post its zone schedule on the grantee’s Web site and the provision for the Board to make zone schedules available on the Board’s Web site.
Board position: We have eliminated the proposed requirement for a zone schedule to include a grantee’s standard contractual provisions, which was intended to help ensure that zone participants receive uniform treatment. These regulations adopt other measures designed to ensure uniform treatment that will not increase burden for all grantees (see, e.g., Sec. 400.43), unlike the proposed requirement. We also have eliminated the requirement that a grantee make its zone schedule available on its Web site. The Board will instead make zone schedules available on its Web site, which should create transparency without placing a burden on each grantee to place its zone schedule on its own Web site.
In response to the comments, we have eliminated the requirement for the zone schedule to be submitted to CBP. Any CBP official will be able to request a copy of a grantee’s zone schedule or access that zone schedule via the Internet, as needed. We have also eliminated the requirement to include the name of the preparer and have modified this section to allow for a zone schedule to contain information about any party that acts on behalf of the zone’s grantee. We have not included the proposed requirement that a zone schedule’s title page name a zone’s administrator. The list of required elements for the title page in no way prevents a grantee from including other information on the title page. The decision regarding whether additional information is appropriate for inclusion on the title page is left to the grantee’s judgment.
We have retained the provision allowing the Board to amend the requirements of this section via Board Order, if warranted. Although it currently appears unlikely that the Board would need to amend the requirements, it is important for the Board to have the ability to do so more quickly than the rulemaking processes would allow, should the need arise. At the same time, the Board intends that any such amendment would only be made after an appropriate opportunity for the public to comment. Separately, we have added a phrase to Sec. 400.44(a) further clarifying that amendments to zone schedules will not be effective until submitted to the Executive Secretary.
Finally, in response to a comment pertaining to the requirement for standard contractual provisions in proposed Sec. 400.43, the Board intends to address through a subsequent rule potential mechanisms for a grantee to disclose to a zone participant substantive variations in contracted provisions. Such a provision would provide transparency in order to enable zone participants to assess whether uniform treatment had been afforded by the grantee, and should do so in manner that is less potentially problematic and burdensome than the proposed requirement that standard contractual provisions be published in zone schedules.
Section 400.45—Complaints Related to Public Utility and Uniform Treatment
Comments: Numerous commenters proposed requiring that affected grantees (and the grantee’s administrator, as applicable) receive information in a complaint and have an opportunity to respond. Those commenters also proposed adding a provision for the Board or the Executive Secretary to initiate a review for cause based on a claim that no such provision existed in the proposed regulations. The same commenters also proposed revising the first factor for reviews of fairness and reasonableness by replacing the reference to actual costs incurred with a reference to the methodology supporting the rates and charges. One commenter recommended that the Board not apply the second factor for reviews of fairness and reasonableness, which cites the rates at like zone operations at similarly situated zones, until (1) the Board has classified zones into categories that enable grantees to determine which other zones are similarly situated, and (2) grantees are able to review other grantees’ zone schedules once those schedules are made available on the Board’s Web site.
One commenter stated that the right to due process requires that a complaint be disclosed to a party before any fine or “other consequence” could be imposed on that party as a result of the complaint. One commenter stated that allowing confidential complaints could lead to incorrect or misleading information being submitted to the Board without the affected grantee being able to counterbalance it or to prevent prejudicial conclusions from being reached. That commenter stated that the provision could lead to lawsuits or undermine transparency that the Board might be seeking to create. In response to other comments, one commenter expressed concern about allowing submission of confidential complaints and stated that due process should require that the target of a complaint be able to address the complaint before being subject to an unfavorable action.
Board position: We have retained the proposed provision allowing for confidential complaints and have not added any requirement for the disclosure of such complaints. Given the monopoly that a zone grantee generally has on access to FTZ benefits in the region served by the grantee, zone participants may fear direct repercussions from submitting a complaint to the FTZ Board pertaining to a grantee’s compliance with law and regulations. To help ensure the integrity of the operation of the FTZ program, it is important for zone participants to have the ability to submit such complaints without fear of less favorable treatment or even retribution. However, commenters also have raised valid concerns about due process if a grantee or other party were to be subject to penalties based on complaints that remained confidential (i.e., unavailable for review and response). Recognizing those concerns, the Board simply intends to use confidential complaints as a basis for determining whether the actions of a particular grantee or other party should be examined in more detail. Such an examination would enable the Board to gather information in a process transparent to the grantee (or other affected party) and then use the information gathered through that process to evaluate what further action(s) by the Board might be warranted. The Board would only use information gathered through the transparent investigation process as a basis for further Board action or restriction; information that is unknown to the affected party would not be used.
Regarding reviews of fairness and reasonableness, we have not replaced the reference to actual costs incurred. Numerous commenters proposed we reference the methodology supporting the rates and charges. The Board would indeed examine the methodology a grantee used to develop its rates and charges as part of any examination that might occur. However, the fairness and reasonableness of a rate or charge are questions that must be addressed under the public utility requirement of the FTZ Act. As described in response to comments on Sec. 400.42, the public utility concept is fundamentally based on cost recovery. As such, the actual costs incurred are appropriate for the Board to consider in evaluating whether a rate or charge is fair and reasonable. In response to comments, we have eliminated the proposed second factor for reviews of fairness and reasonableness. We have instead incorporated language enabling the Board, where applicable, to examine if a fee a party charges to a grantee for undertaking a function on the grantee’s behalf (passed on by the grantee to zone participants through the grantee’s fees) represents a form of monopoly rent-seeking that would be inconsistent with the statutory public utility requirement.
Section 400.46—Grantee Liability
Comments: Numerous commenters proposed eliminating the word “ordinarily” and separately adding the term “administrator” to this section. One commenter supported this section as providing welcome clarification for public sector grantees. One commenter stated that the limitations on grantee liability in this section are obscured by penalty provisions in Sec. 400.62, with the addition of penalties and the lack of clarity regarding grantee obligations leading to concern among grantees. One commenter stated that some degree of liability in specific situations is an appropriate tool to promote compliance, but did not elaborate on what those specific situations would be. One commenter stated that a grantee must be afforded the opportunity to oversee a zone user in order to protect the grantee and other zone users. One commenter stated that the regulations need to define more clearly which oversight activities are “detailed” and which are not.
One commenter stated that the proposed provision would do more harm to grantees than to operators or users that commit violations. The commenter recommended revising this section to state that a grantee should only be liable as an operator if the grantee acts as operator under its own CBP bond and under a user agreement with the grantee’s customer. The commenter distinguished that situation from one where a grantee has signed an operator’s agreement with a company that acts as its own operator and operates under its own CBP bond, in which case the company should be held liable for any violations attributed to the company’s actions.
Board position: We have modified this section based on these comments. Specifically, we have eliminated the word “ordinarily” and added language to clarify the circumstances in which the actions of a grantee (or a grantee’s administrator, where applicable) could create liability that would not otherwise exist. Specifically, a grantee could create liability where it does not otherwise exist if it undertakes detailed operational oversight of or direction to zone participants. Detailed operational oversight of zone participants would place the grantee in a position to be aware of specific violations (with an obligation to ensure the violations are corrected, and liability if the violations are not), while detailed operational direction to zone participants (e.g., dictating specific operational procedures) would make the grantee responsible for ensuring that the direction did not result in violations. We have included in this rule key examples of detailed operational oversight or direction, such as review of an operator’s inventory-control or record-keeping systems and specifying requirements for such a system to be used by an operator.
Comments: Numerous commenters proposed replacing the concurrence of the CBP port director with notification to the port director, and adding statements that the retail trade provision only applies to activated zone space and does not apply to order fulfillment. One commenter proposed that the regulations define “retail trade” based on the activity covered by the North American Industry Classification System subsections pertaining to “store based retail trade.” One commenter stated that if CBP will no longer issue binding rulings pertaining to retail trade, the Executive Secretary should follow precedent established by existing CBP decisions, with the principles contained in binding rulings remaining authoritative unless modified or revoked pursuant to 19 CFR 177.12 (e.g., subject to notice requirements). The commenter also recommended that the Executive Secretary’s decisions on retail trade be made available to the public. That commenter also stated that order fulfillment should not be considered retail trade.
Board position: The specific concerns raised by commenters about order fulfillment are significant. Therefore, the Board intends to propose a revised section specifically addressing order fulfillment in a subsequent rule. In the interim, we have adopted this section with changes and additions to language based on public comments. In particular, we have included language regarding the ongoing effect of decisions made by CBP and the type of procedures to be followed for any determination that might affect the impact of prior decisions. We have also provided that determinations made pursuant to this section will be available on the Board’s Web site.
Section 400.49—Monitoring and Reviews of Zone Operations and Activity
Comments: Numerous commenters proposed moving this section to subpart E of the regulations, which pertains to zone operations. Those commenters proposed the following additional changes: Adding a significant public detriment standard for reviews; notifying the grantee and affected zone participants and allowing them to submit evidence in response when threshold factors result in a negative recommendation; requiring parties requesting reviews to provide evidence that is probative and substantial; requiring decisions be based on evidence on the record if the decision would be inconsistent with the original examiner’s report for the operation in question; requiring negative determinations be supported by evidence on the record of direct negative impact on a U.S. manufacturer; allowing an affected zone participant to meet with the Board upon request prior to issuance of a negative Board decision; removing the ability to impose a restriction after a preliminary review; and removing the Assistant Secretary for Enforcement and Compliance’s authority to impose restrictions.
One commenter stated that a party’s request for a review should be disclosed to the affected zone participant prior to initiation of the review. The commenter also stated that reviews should be subject to the notice and hearing requirements of Sec. 400.52. That commenter further proposed eliminating allowing restrictions to be imposed after a preliminary review or, in the alternative, making restrictions contingent on a showing that: (1) the requesting party had a substantial likelihood of obtaining a restriction following full review; (2) the requesting party would suffer irreparable injury without the preliminary restriction; (3) the preliminary restriction would not substantially harm the zone participant or other parties, and (4) the preliminary restriction would further the public interest, with the burden of proof on the party requesting the review. Finally, that commenter stated that a zone participant should be entitled to a refund of duties or fees paid as a result of the restriction imposed based on a preliminary review if the restriction is not maintained after full review by the Board.
Board position: In response to these comments, we have moved this section to Subpart E, as Sec. 400.49. In addition, we have modified subsection (b) to indicate that a party requesting a review should provide information that is “probative and substantial in addressing the matter in issue.” This standard mirrors the standard applied both to comments submitted on applications and to responses to those comments. We also have added a sentence to subsection (c) indicating specific procedures to be followed (i.e., notification to the zone grantee and a time period for response) prior to any final action to impose a prohibition or restriction under this section. These changes are responsive to specific comments submitted, although the actual approach or language adopted may differ from those proposed by commenters.
We have not adopted other changes proposed by commenters. The added provision described above provides a basic procedural right to the grantee of an affected zone to provide a response to the Board regarding proposed final action to impose a prohibition or restriction. The additional changes proposed by commenters would either dilute the effectiveness and utility of the provision or add significant complexity. Additional complexity is contrary to the Board’s and multiple commenters’ desire to simplify these regulations. Further, reviews under the corresponding provision in the prior regulations (Sec. 400.31(d)) have been very rare, and there is no evidence indicating that such reviews are likely to become more common in the future. Therefore, there does not appear to be a need to include significant additional procedural requirements.
Section 400.51—Accounts, Records and Reports
Comments: Numerous commenters proposed deleting the reference to generally accepted accounting principles for zone accounts. For the annual report provision, those commenters proposed the following revisions: Changing the proposed 90-day filing period to the 120-day period that has been the Board’s recent practice; allowing the Executive Secretary to extend the filing period; directing grantees to submit timely reports (with such reports noting whether any zone participants have not timely provided their data for inclusion in the reports); and stating that data submitted by zone participants will be treated as “business proprietary.” Those commenters stated that the Board’s annual report to Congress should not provide company-specific data. One commenter proposed a 90-day timeframe for a zone user to submit its data to the zone grantee, with the grantee allowed an additional 30 days for submission of its report to the Board. Alternatively, the commenter proposed allowing a user or a grantee to obtain a 30-day extension.
One commenter stated that the format for zones’ annual reports should be revised to take domestic material, labor, overhead and profit into account for export figures. One commenter stated that the Board should require annual reports to include information about admission of merchandise subject to AD/CVD orders for production activity, any production activity involving a foreign article subject to an AD/CVD order and approval of such activity by the Board, or a certification that no production activity occurred involving a foreign article subject to an AD/CVD order. The commenter stated that the Board should obtain data from CBP annually on admission of merchandise subject to AD/CVD orders into zones or subzones with production authority. That commenter also stated that the Board should publish a report each year summarizing data obtained from grantees and from CBP to enable parties to identify discrepancies that should be examined by the Board.
Board position: In response to these comments, we have made a number of revisions to this section. We have deleted the reference to generally accepted accounting principles in favor of simply stating that zone records must comply with the requirements of governmental agencies with appropriate jurisdiction. Regarding the annual report provisions, we have retained our proposed 90-day timeframe for grantees’ reports to the Board, but have specifically allowed requests for time extensions, indicating factors for the Executive Secretary to consider in evaluating such requests. In addition, we have allowed a grantee to submit a timely report to the Board without information from an operator that has failed to timely provide information to the grantee. With regard to the specific format and contents of reports to the Board or of reports produced by the Board, as well as the treatment of specific information provided in reports to the Board, these are administrative matters that appropriately should continue to be handled as part of the ordinary functioning of the Board and its staff.
Section 400.52—Notices and Hearings
Comments: Numerous commenters proposed the following revisions to this section: Limiting invitation for public comment to specific identified situations; eliminating the requirement for local public notice to be published in a manner that allows at least 30 days for submission of public comments; limiting a determination on the need for a hearing initiated by the Board to a period ending 60 days after the end of the initial public comment period in a proceeding; establishing a “materially impacted” standard for any party requesting a hearing; requiring the Board to allow any party to present at a hearing, provided the party has given seven days advance notice; requiring the Executive Secretary to notify the grantee and affected zone participants of all parties that will be presenting at a hearing; and requiring that the applicant and its witnesses be allowed to present first and rebut last at any hearing.
Board position: Based on public comments, we are requiring that local public notice allow at least 15 days for public comment on an application submitted to the Board (rather than the 30 days in the proposed rule). We also have narrowed the standard for parties that may request public hearings by stating that only parties that may be materially affected may make such a request. We have not adopted other suggested revisions to this section. It is not appropriate to limit the types of situations in which the Board may invite public comment or the timeframe during which a determination may be made to hold a hearing. Given that certain Board proceedings may result in the development of an extensive record over a significant period of time, the Board must maintain the ability to invite comment or hold a hearing whenever the need to do so presents itself. The remaining changes suggested for this section have not been adopted because they would not improve the effectiveness of processes in question and, in the case of the order of presentations at a hearing, would create the appearance of an unbalanced process.
Section 400.53—Official Records; Public Access
Comments: Numerous commenters proposed adding the word “confidential” immediately before the word “proprietary” in the final sentence of this section.
Board position: We have not made the change proposed by commenters because the term “confidential” has a specific significance as an official classification action by government agencies. The information subject to this provision would not have been classified by a government agency, but rather would be considered by an outside entity to be “business proprietary” in nature. Therefore, the continued application of the terminology from the proposed regulations, which has been in use in the prior regulations since 1991, is appropriate.
Comments: Numerous commenters proposed allowing submission of business proprietary information in applications and stated that data submitted in annual reports shall generally be considered “business proprietary.”
Board position: We have not made these changes. The FTZ Board’s application process is inherently a public process, and includes publishing notices of applications in the Federal Register and inviting comments. Therefore, it is appropriate for the FTZ Board to focus the application process on submission of information that will be available for public review. With regard to data submitted in annual reports, some of those data may well be considered “business proprietary” by the zone operators/users that submit the data through their zones’ grantees. However, the FTZ Board cannot assume that all data submitted are indeed business proprietary. Rather, the Board has been implementing a new system for submission of annual report data that specifically allows an individual operator/user to indicate whether it considers its data business proprietary, in which case only a ranged version of the data would be reported publicly.
Section 400.61—Revocation of Authority
Comments: Numerous commenters proposed adding the phrase “in whole or in part” to Sec. 400.61(b)(4) and requiring notice to zone or subzone operators. One commenter stated that Sec. 400.61(b)(3) should specify the adjudicative standard that will govern the hearing and that the grantee or operator will be able to call and cross examine witnesses.
Board position: We have added language pertaining to notification of any known operators to Sec. 400.61(b)(1), and added the phrase “in whole or in part” to Sec. 400.61(b)(4) to enhance clarity. We have not included additional procedural provisions or details (such as the adjudicative standard that would apply to hearings) because the need for such additional details—with their attendant increase in complexity—is unclear given that actual use of the revocation provision has been very rare. If additional procedural details become necessary, they could be implemented through a future rulemaking action.
Section 400.62—Fines, Penalties and Instructions To Suspend Activated Status
Comments: Numerous commenters stated that this section would likely have a chilling effect on the FTZ program, particularly at a time of dwindling resources of both grantees and operators. Those commenters proposed the following specific revisions: deleting the inflation- adjustment provision and related references because it is not provided for in the FTZ Act and does not act as a deterrent to violations; adding references to “administrators” and changing references of “operators” to “zone participants;” stating that the $1,000 per day maximum for fines would include any CBP fines, penalties or liquidated damages for the same violations; stating that filing and obtaining approval of a “voluntary disclosure” would eliminate or reduce any penalty; modifying the production-related language to bring it in line with changes proposed by those commenters for other sections of the regulations; stating that a grantee would not be subject to a fine under the annual report-related provision so long as the grantee had filed a timely report identifying any operators that have not submitted complete or timely information to the grantee; stating that requests for extensions of the periods to provide responses or mitigating evidence will not be unreasonably withheld; changing the delegation of certain fine-imposition authority to the Assistant Secretary for Import Administration (from the Executive Secretary); inserting references to affected parties for actions pertaining to suspension of activated status; and stating that the Board will give due consideration for allowing transfers of affected merchandise from a site for which a determination has been made to suspend activated status.
Two commenters proposed that the Board clarify that operational activities within zones are within the sole purview of CBP, limit penalties under this section to specifically defined violations, and state normal ranges for penalties for each type of defined violation. Two commenters requested that the regulations explicitly preclude both the Board and the CBP from imposing fines on the same party resulting from the same offense. One commenter proposed that the Board: confine suspensions of activated status and processing of requests solely to the specific non-compliant operations; clarify who the responsible parties are for certain violations, to eliminate the potential for double fines for a single violation; eliminate ambiguity regarding the timeframe for operators to submit their annual reports to grantees; clarify the meaning of “conflict of interest;” for responses to notifications of violations, allow parties 30 days and two extensions of 30 days each if requested in writing; and treat “inaccurate written advice provided by a Board staff member” as binding on the government rather than as a mitigating factor.
One commenter opposed adopting the proposed section, proposing instead that the Board retain the existing penalties provision and insert a brief provision addressing fine amounts for violations involving production, annual reports and conflicts of interest. The commenter also stated that penalties should only be assessed pursuant to a transparent process. Two commenters stated that the Board should notify a zone’s grantee of any penalty action initiated against an operator within the zone. One commenter stated that the regulations should clearly define circumstances that could lead to penalties. Another commenter supported this proposed section as rectifying an omission in the Board’s oversight and monitoring of zone activity. That commenter proposed that the Board expand this section to include details of the judicial review process, provide more comprehensive explanation of decisions, and consider a formal, adjudicative process for dispute resolution.
One commenter expressed concern that the detailed section pertaining to fines changes the Board’s focus from gatekeeper of zone access to policing agent over day-to-day zone management. Another commenter stated that this section as proposed obscures the limitations on liability expressed in Sec. 400.46. One commenter asked that the Board clarify whether a confidentiality clause in a grantee’s contract with a zone participant can be relied on by that participant to prevent a grantee from disclosing to the Board a potential violation pertaining to that participant, such as the untimeliness of an operator’s annual report to the grantee. One commenter stated that the Board should not accept other commenters’ proposed changes that would reduce the impact of the penalty provisions.
One commenter stated that this section should be reviewed carefully to ensure conformity with 19 U.S.C. 81s. That commenter also stated that the regulations should clarify the approach to be taken when multiple parties may be subject to penalty for the same violation; specify the adjudicative standard that will govern any hearing and that the grantee or operator will be able to call and cross examine witnesses; and state a clear limitations period on enforcement of any fine, penalty or sanction.
One commenter stated that fines should not be imposed on any party for an offense that is not the result of the party’s negligence (for example, clerical error or a grantee’s inability to collect information from an operator for the grantee’s annual report).
Board position: It is appropriate for these regulations to contain detailed procedures for imposing penalties authorized by the FTZ Act. Delineating such procedures provides important clarity and predictability for all potentially affected parties. The provisions of this section target key areas for which the potential imposition of penalties is an important compliance tool.
In response to the public’s comments, we have narrowed the focus of fining actions pursuant to this section to two specific types of violations: untimely submissions of annual reports and failure to afford uniform treatment under like conditions to parties using (or seeking to use) a zone. We have specifically excluded violations for production activity because such violations are already subject to fines by CBP and we want to avoid subjecting a zone participant to fines from two different agencies for a single action.
Further, the proposal to include fines pertaining to production activity created a need for the proposed separate section allowing “prior disclosure” of violations in order to encourage disclosure and rectification of any non-compliant activity. However, the effect of implementing the proposed sections would have been to require zone operators to disclose violations to two separate agencies under two distinct sets of procedures. Doubling the disclosure burden on zone operators would have tended to discourage zone use (with resulting negative impacts on U.S. competitiveness) without contributing to improved compliance.
Based on the narrowed focus on Sec. 400.62, we have eliminated the proposed prior disclosure provision from the regulations. As a consequence, we have not addressed detailed comments pertaining to the proposed section allowing for prior disclosure (Sec. 400.63). Although a number of commenters supported the inclusion of this type of provision, the provision was relevant to violations involving production activity, which are no longer targeted in Sec. 400.62. The remaining types of violations targeted in Sec. 400.62 are not of a nature for which prior disclosure would be relevant or appropriate.
Because the Board is not adopting the prior disclosure provision, we do not need to address comments pertaining to the interaction of the provisions of Sec. 400.62 with the prior disclosure provision. Similarly, given that production activity is no longer targeted by Sec. 400.62, we do not need to consider changes to the language of this section that would flow from changes related to production in other sections of the regulations. Based on the narrower focus of this revised section, we have also eliminated “inaccurate written advice provided by a Board staff member” as a mitigating factor, because it is irrelevant to the types of violations that are now targeted by this section.
The revisions to this section should help to ensure that a fine is only imposed on the party(ies) with direct responsibility for the violation that results in the fine. Based on the comments, we have added language to this section indicating that a grantee will not be subject to a fine for an untimely annual report if the grantee has filed a timely report identifying any operator that has not submitted complete or timely information to the grantee. The range of changes we have made to this section should also provide clarity and be in harmony with the limitations on grantee liability explained in Sec. 400.46.
We have not deleted the inflation-adjustment provision and related references because Congress mandated the adjustment of these types of penalties in the Federal Civil Penalties Inflation Adjustment Act of 1990 (Pub. L. 101-410), as amended by the Debt Collection Improvement Act of 1996 (Pub. L. 104-134). Based on public comments, we have added language to notify the zone’s grantee, in addition to the parties responsible for a violation.
We have added certain references to an “administrator” as an example of a “person undertaking one or more functions on behalf of the grantee” in concert with changes made to Sec. 400.43. We have also indicated that parties at a hearing may call and cross examine witnesses, and that requests for extensions of the periods to provide responses or mitigating evidence will not be unreasonably withheld. We have not changed certain references from “zone operators” to “zone participants” because, apart from grantees and persons undertaking functions on behalf of grantees (such as administrators), zone operators are the only other category of party relevant to the specific types of violations now targeted by this section. We also have not changed the delegation of certain fine-imposition authority from the Executive Secretary to the Assistant Secretary for Import Administration because the authority in question is for relatively minor offenses.
In light of the narrowed focus of the fining provision, we have broadened the potential reach of suspension of activated status to encompass any “repeated and willful failure to comply with a requirement of the FTZ Act or the Board’s regulations.” Given the “repeated and willful” standard, we do not anticipate frequent use of this provision, but it will be available as an enforcement mechanism, if needed. We have not added the proposed additional references to “affected parties” for actions pertaining to suspension of activated status. We have instead added references to the grantee of a zone. A zone’s grantee would be in a position to notify affected parties. The FTZ Board would not necessarily have information regarding the range of parties that might be affected by suspension of activated status.We have added that the Board will give due consideration to and make allowance for the transfer of merchandise prior to the suspension of activated status, because such consideration is appropriate. We have not included additional procedural provisions or details (such as the adjudicative standard that would apply to hearings) because the proposed provisions already provide a significant increase in the level of procedural detail pertaining to penalty actions. The Board should develop a practice under the procedural details provided in these regulations before deciding whether to adopt additional provisions or details.
We have added language clarifying that suspensions of activated status and processing of requests will be targeted to the specific non- compliant operations. We have also clarified who will be the responsible parties for specific violations, so that there should be no potential for a violator’s being subject to double fines for a single violation.
In response to comments, we have modified Sec. 400.51 to specify a timeframe for operators’ submission of annual reports to grantees. That change should clarify various parties’ potential liabilities for untimely reports. We have also modified this section and Sec. 400.51 in response to comments to require that grantees disclose to the FTZ Board whether each of the grantee’s operators has submitted the information required for the Board’s report to Congress. Such required disclosure could not be avoided by an agreement between an operator and a grantee.
In light of modifications made to Sec. 400.43, we have made harmonizing changes to Sec. 400.62(c). Those changes, in combination with elimination of use of the term “agent,” should help to clarify the specific types of parties that would be subject to Sec. 400.62(c).
The provisions of this section would apply equally to any party with responsibility for a violation. Therefore, it is possible that multiple parties could be penalized for the same violation. However, given that the provisions of this section are now focused narrowly on failures to submit annual reports on time and on violations of the uniform treatment requirements, the number of parties potentially affected by this section is dramatically reduced relative to the proposed rule. Further, an untimely annual report is likely to be the fault of a single party. Therefore, the sole category of violation for which multiple parties are potentially likely to share responsibility is the uniform treatment requirements. Given the importance of enforcing compliance with the statutory uniform treatment requirement, it would be appropriate to fine any parties that share responsibility for such a violation. Finally, we have not adopted a limitations period for fines or penalties. Given that this section is new, and the potential variation in circumstances for which fines or penalties prove to be appropriate, it is not feasible at this time to provide a single limitations period for enforcement. However, the Board’s focus in applying this section will be to encourage compliance rather than to penalize past actions for which corrective action has already been taken.
Section 400.63—Appeals to the Board of Decisions of the Assistant Secretary for Enforcement and Compliance and the Executive Secretary
Comments: Numerous commenters proposed providing an opportunity for input by the affected grantee and zone participant, issuing a report regarding the Board’s decision, and identifying the court to which judicial appeal could be made.
Board position: The suggested procedural changes in this section fail to take into account the nature of the section. Additional opportunity for input by an affected grantee or zone participant is unnecessary because this provision is limited to appeals to the Board by such parties, who will be able to include all desired input in the appeal documents they present for the Board’s consideration. For similar reasons, no additional procedures are needed stemming from the Board’s decision regarding the appeal. The regulations already contain substantial procedural requirements pertaining to potential actions by, or on behalf of, the Board. Finally, we have not included language identifying the court to which judicial appeal could be made because the Board does not have the authority to confer, limit, or otherwise delineate the jurisdiction of Federal courts.
Comments: Numerous commenters suggested edits to individual sections that were minor or essentially non-substantive.
Board position: We have adopted suggested edits where they would improve the clarity or effectiveness of the provisions in question. Given their minor or essentially non-substantive nature, we have not addressed such edits individually in this summary.
Comments: Multiple commenters expressed concern about complexity or additional burden that they perceived the proposed regulations would create.
Board position: Concerns about complexity and additional burden have been considered in the development of these regulations and have resulted in our making changes, including significantly simplifying the process and requirements for notifications to request production authority. Other changes that reduce complexity or burden include eliminating potential FTZ Board penalties pertaining to production activity, and eliminating certain provisions and substantially modifying others pertaining to uniform treatment (Sec. 400.43). Although these regulations contain additional detail on certain topics, that detail provides guidance and clarity for grantees and zone participants in a manner that should ultimately facilitate those parties’ participation in the FTZ program.
Comments: Numerous commenters stated that the two sentences from the Preamble to the prior regulations regarding the public policy objective of the FTZ program should be included in the Preamble of any future Board regulations. One commenter proposed that one of those sentences be included within Sec. 400.1 of the regulations.
Board position: The Preamble of the proposed regulations already contained the primary sentence that is the focus of the comments in question. We have retained that sentence in the Preamble for these regulations. We have not included in the Preamble the second sentence that certain commenters proposed because it could be misread as implying we would apply different evaluative or procedural standards than the ones contained in these regulations.
Comment: Numerous commenters proposed adding a new section with language designating certain offices of the U.S. Commercial Service as representatives of the Board for export promotion activities and stating that the Board and its representatives will act in a manner that prioritizes government export promotion objectives.
Board position: We have not adopted this proposal. The proposed section deals with matters beyond the statutory authority of the Board.
Comment: Numerous commenters proposed adding a new section stating that the Board will mandate the development of updated, written procedures by agencies that require reporting pertaining to zone activity.
Board position: We have not added the proposed new section. The proposed section could affect the policies and procedures of a range of government agencies that fall outside the scope of the FTZ Act, and the Board cannot require other agencies or bureaus to act.
Comment: One commenter proposed redefining what constitutes a foreign-trade zone, as well as zone, general-purpose zone and subzone, to focus on conferring a status rather than designating a geographic location.
Board position: We have not adopted the type of revisions proposed by this commenter because the FTZ Act is focused on the designation of geographic locations as foreign-trade zone sites, and because the commenter’s submission does not indicate a clear advantage to an approach based on status. However, as noted in our response to comments on Sec. 400.11, we intend to address through a subsequent rule simplifying the parallel site-designation frameworks that currently exist. The intended effect of this change is to enhance the ability of the FTZ program to improve the competitiveness of U.S. facilities.
Comments: One commenter stated that grantees may be unwilling to jeopardize the “permanent” status of current sites through a transition to the ASF, which has standard “sunset” periods that can be too short. The commenter proposed grandfathering existing permanent sites into the ASF. That commenter also proposed changing the process for designating usage-driven sites to an automatic designation once CBP had approved activation for a location, with the Board simply notified of that designation.
Board position: As noted in responses to certain other comments, the Board intends to address through a subsequent rule simplifying the parallel site-designation frameworks that currently exist. In that process, the Board will be able to evaluate provisions affecting existing zone sites. We have not established an automatic mechanism for designating usage-driven sites based on CBP approval for activation. That change would effectively shift authority to designate sites from the Board and its staff to CBP officials at various ports nationwide, with a range of potential policy implications for both the Board and CBP. Given the quick, simple process already available for designating usage-driven sites, it is not clear that a need exists for the shift in authority proposed by the commenter.
Comment: One commenter expressed concern that the proposed regulations concentrate more power in the hands of the Executive Secretary and Board staff to intrude on zone operations and policy decisions made by grantees and users.
Board position: These regulations reflect the same fundamental assignment of responsibilities as the prior regulations. They include sections providing new specificity regarding compliance with the FTZ Act’s requirements that a zone operate as a public utility and afford uniform treatment to zone participants. Inherent in the functioning of some of the specific provisions is a greater role for the Board’s Executive Secretary and the Board’s staff. In practice, the adopted provisions do not constitute “intrusion” on grantees or users but, rather, reflect balanced measures designed to ensure that zones comply with the requirements established by Congress through the FTZ Act.
Comment: One commenter requested a process by which the Board would obtain feedback before publication of further notice pertaining to this rulemaking.
Board position: The Administrative Procedure Act (APA), 5 U.S.C. 553, provides the procedural basis for this action. Accordingly, we provided interested persons with notice of the proposed rule and almost 150 days to participate in the rulemaking by commenting on it during the comment period. Further, the public comment period exceeded the requirements of the APA. In addition, during the public comment period, the Board staff held detailed public seminars at eight regional hubs across the United States, as well as in Washington, DC, at which numerous parties received extensive explanations of the intent of proposed provisions and answers to their questions. The Board staff also made such information available interactively via the Internet. In addition to the lengthy comment period on the proposed regulations, the Board allowed parties a subsequent 32-day period to submit comments responding to other parties’ comments that had been submitted during the initial comment period. More than 100 parties submitted comments on the proposed regulations.
These regulations include key changes that provide dramatically simplified and expedited procedures designed to boost the competiveness of U.S. manufacturers and exporters. It is important for those changes to be implemented as soon as possible. Given the extensive comment process to date, it is unclear that an additional notice and comment/ consultative process would yield benefits that would offset losses due to delayed implementation of the key changes made through these regulations. Therefore, we are not seeking additional comment/ consultation prior to publishing these regulations.
Comment: One commenter stated that the application and approval process is susceptible to undue influence that can result in unfair advantages to certain parties, and that the Board must limit the influence of certain parties to ensure that zone status results in positive economic effects.
Board position: These regulations contain extensive provisions aimed at establishing neutral, balanced procedures for evaluating applications received by the FTZ Board. The commenter presented no evidence of unfair advantages for any parties resulting from the Board’s processes. In the absence of such evidence, we have found that the provisions of these regulations are sufficient to ensure that the Board’s processes are fair and equitable.
Comments: One commenter stated that Board decisions should be fair and reasonable, that a need exists for uniform treatment from the FTZ Board given what the commenter characterized as frequent changes in the ASF structure and different application of territorial standards in different regions, and that the primary intended constituency of the proposed regulations appears to be grantees rather than the companies that use the FTZ program.
Board position: Decisions of the Board and its staff consistently reflect high standards of fairness and reasonableness. The commenter has provided no examples to support its claims but, as a general matter, a party’s disagreement with a Board decision does not imply that the decision was unfair or unreasonable. Similarly, a party may perceive a Board decision on an ASF-related matter—such as pertaining to the service area for a zone—as inconsistent with other Board decisions. However, a party to a particular Board case generally is unfamiliar with the details of other cases decided by the Board. In that context, what may appear to one party as inconsistent or non- uniform treatment is more likely to be consistent application of policy to circumstances that are superficially similar but that actually differ substantively. Given that the Board has only adopted a single set of modifications (November 2010) since its adoption of the ASF in 2008, a claim of frequent changes in the ASF structure would also appear to reflect a lack of adequate familiarity with the Board’s ASF practice. Finally, the statement that the primary intended constituency of the proposed regulations seems to be grantees would appear not to reflect a substantive assessment. The proposed regulations contain certain provisions that focus on grantees and on enhancing their abilities to perform their functions because 1) the FTZ Act provides for the Board to grant authority to zone grantees, not to other zone participants, and 2) the grantee, as a local agency or organization engaged in promoting trade and economic development, is in the best position to enable firms in the region it serves to reap the competitiveness benefits available through the FTZ program.
Comment: One commenter proposed allowing companies engaged in FTZ production to temporarily remove merchandise under the FTZ operator’s bond for special processing in the United States that cannot be accommodated in the FTZ.
Board position: The type of procedure proposed by the commenter is properly in the realm of CBP. CBP’s regulations govern FTZ operations and contain detailed provisions concerning the movement of merchandise into and out of FTZs.
Changes From Proposed Rule
In addition to the substantive changes mentioned above that we have made in response to comments, we have made various grammatical and similar changes to the rule from its proposed form, to increase clarity and accuracy and reduce potential public confusion.
Executive Orders 12866 and 13563
This rule has been determined to be significant for purposes of Executive Order 12866. Consistent with Executive Order 13563, we held public seminars across the country to help maximize public participation in the rulemaking process (as cited above in response to a comment), and we adopted approaches designed to impose the least burden on society while attaining the regulatory objectives (see e.g., the responses to comments on Sec. Sec. 400.14, 400.26, 400.42, 400.43 and 400.62).
This rule is also consistent with section 5 of EO 12866, which instructs agencies to “periodically review their significant regulations to determine whether any such regulations should be modified or eliminated * * * to make the agency’s regulatory program more effective,” and section 6 of EO 13563, which instructs agencies to “consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.” This final rule replaces FTZ regulations that have not changed since 1991, and reflects the FTZ Board’s view, following a review of those regulations, that modifying the 1991 rules will help to ensure that FTZs remain competitive, efficient, and flexible in the modern, 21st Century global economy.
Regulatory Flexibility Act
At the proposed rule stage of this rulemaking, the Acting Chief Counsel for Regulation of the Department of Commerce certified to the Chief Counsel for Advocacy of the Small Business Administration that this rule will not have a significant economic impact on a substantial number of small entities. (5 U.S.C. 605(b)). The factual basis for the certification was published in the proposed regulations and is not repeated here. We did not receive any public comments on the certification. As a result, a regulatory flexibility analysis was not required, and none was prepared.
Executive Order 13132
This final rule does not contain policies with Federalism implications sufficient to warrant preparation of a Federalism assessment under Executive Order 13132.
Paperwork Reduction Act
This rule contains information collection activities subject to the Paperwork Reduction Act. The overall burden on the public is reduced significantly as a result of the provisions adopted in this rule.
There is no impact on the collection that falls under the Office of Management and Budget (OMB) Control No. 0625-0109 (Annual Report to Foreign-Trade Zones Board). This rule amends the collection under OMB Control No. 0625-0139 (Application to Foreign-Trade Zones Board). Under this rule, the application requirements associated with the latter collection for zone applicants, grantees, operators, and users are significantly simplified, and there is a large overall reduction of the burden on those parties. The Board will be seeking OMB approval of these changes, and will notify the public when these amendments have been approved. After publication of the proposed rule, the FTZ Board renewed its OMB information-collection authority and reduced the overall burden estimate for applications from 6,651 to 4,969 hours based on recent simplifications to the Board’s practice. The changes in this rule will further reduce burden by shifting future production (manufacturing) applications to a simple notification as an initial stage. A more detailed application will only need to be submitted if review of the notification results in a determination that the additional application step is necessary. We estimate that the average annual number of notifications will be 33 (an increase from 25 manufacturing applications under the prior regulations), with 5 of those notifications requiring the additional application stage. Shifting applications for production authority to the notification process (with few applications needed as a subsequent step) is expected to reduce the total annual burden associated with requesting production authority from 850 to 351.5 hours (a reduction of 498.5 hours). As a result of this significantly reduced burden, the FTZ program should be much more accessible to all companies involved in production activity.
In addition to changes pertaining directly to production activity, the rule also specifically adopts the alternative site framework (ASF) authorized by the FTZ Board in December 2008. The ASF procedures reduce the time and complexity involved in designating FTZ sites for many companies. With increased use of the ASF by zones, there is expected to be a decline in the number of expansion applications in favor of a significant number of much simpler minor boundary modifications. The annual number of expansion applications over time should decline by half (from 20 to 10) which, combined with some simplified requirements in this rule, will reduce the burden from 1,980 to 990 hours. We project an annual average of 120 minor boundary modifications (simple “administrative” cases that can be approved by the Board’s staff), with an annual burden of 420 hours.
This rule includes also radically simplifies application requirements for subzone designation so that the average annual burden for the estimated 15 subzone applications should fall from 1,695 to 67.5 hours. We note that, unlike the prior rule, this rule entirely separates the procedures for production authority and subzone designation. As a result, some applicants which only needed to meet the subzone application requirements under the prior rule will need to meet both the subzone and production application requirements under this rule. Nonetheless, the combined application burden for subzone and production (manufacturing) notifications/applications should fall from 2,545 hours under the prior rule to 419 hours.
This rule also allows parties to apply pursuant to Sec. 400.43(f) for a waiver from the effect of Sec. 400.43(d)), which bars parties that provide products/services to zone users from performing key functions associated with the zone-grantee role. We estimate that the average annual number of applications for waivers will be 25, with an average burden of one hour per application, for a total of 25 burden hours annually associated with the waiver provision.
Finally, the burden-hours estimate for applications for new zones is unaffected by this rule, with three applications projected to result in 444 burden hours annually. The total burden of the various applications subject to this rule is 2,298 hours (the sum of 444 for new zones, 990 for expansions, 67.5 for subzones, 351.5 for production notifications and applications, 420 for minor boundary modifications, and 25 for waivers pursuant to Sec. 400.43(f)). In sum, there is a net reduction of 2,671 application-related burden hours annually (from 4,969 to 2,298 hours) through the provisions adopted in this rule.
List of Subjects in 15 CFR Part 400
Administrative practice and procedure, Confidential business information, Customs duties and inspection, Foreign-trade zones, Harbors, Imports, Reporting and recordkeeping requirements.
By order of the Board, Washington, DC, this 16th day of February 2012.
Assistant Secretary of Commerce for Enforcement and Compliance, Alternate Chairman, Foreign-Trade Zones Board.