Vol. 56 No. 195 Tuesday, October 8, 1991 p 50790 (Rule) ========================================================= DEPARTMENT OF COMMERCE Foreign-Trade Zones Board 15 CFR Part 400 [Order No. 530; Docket No. 21222-1208] RIN 0625-AA04 Foreign-Trade Zones in the United States AGENCY: Foreign-Trade Zones Board, International Trade Administration, Department of Commerce. ACTION: Final rule. SUMMARY: 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 major changes involve the adoption of definitive criteria and procedures for reviewing activity that results in changes in Customs tariff classifications. Many of the changes amount to a codification of practices which have evolved through interpretations and decisions of the Board and the Customs Service under the Act and the existing regulations. The new regulations are designed for efficient administration of the zone program in the dynamic trade environment that has evolved since enactment of the Act. They acknowledge the role zones have come to play in helping public agencies and communities improve their local services for international trade-related activity and, at the same time, they recognize the need for effective reviews and monitoring because of the increased use of zones for manufacturing and processing operations. Zone activity is addressed both from the standpoint of firms that use zones to help improve their international competitiveness and those that are concerned about the effects of certain types of imports on domestic industry. The regulations are designed to make zone procedures reasonably accessible to qualified zone users without resulting in harmful consequences that are detrimental to the public interest. EFFECTIVE DATE: The effective date of this part 400 is November 7, 1991, except that in regard to shipments of merchandise admitted to zones approved and activated prior to the foregoing effective date, the effective date for §§400.28(a)(2), 400.28(a)(3), and 400.33(b)(2) is March 9, 1992. FOR FURTHER INFORMATION CONTACT: John J. Da Ponte, Jr., Executive Secretary, Foreign-Trade Zones Board, room 3716, U.S. Department of Commerce, Pennsylvania Avenue and 14th Street NW., Washington, DC 20230 (202/377-2862). SUPPLEMENTARY INFORMATION: Regulatory Flexility Act The General Counsel of the Department of Commerce certified to the Chief Counsel for Advocacy of the Small Business Administration that these regulations will not have a significant economic impact on a substantial number of small entities pursuant to sections 603 and 604 of title 5, United States Code, added by the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). There are some 170 zone grantees and less than 100 firms operating all or parts of zone facilities for grantees. Of some 2,200 firms using zones, about 600 use them on a full time basis. It is estimated that fewer than 100 small entities are included among the total number of firms using zones for manufacturing and processing activity. The revised regulations to a great extent codify existing practices and interpretations. Their overall impact should, in any case, be favorable because they clarify the process for reviewing zone activity by providing more details on criteria and procedures. Executive Order 12291 This is not a major rule as defined in section 1(b) of E.O. 12291, because it involves changes to existing regulations that are not likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions; or, (3) significant adverse effects on competition, employment, investment, productivity, innovation or on the ability of U.S.-based enterprises to compete with foreign-based enterprises in domestic or export markets. Executive Order 12612. The revised regulations do not contain policies with Federalism implications sufficient to warrant preparation of a Federalism assessment under Executive Order 12612. Paperwork Reduction Act This rule contains information collection activities subject to the Paperwork Reduction Act of 1980 (44 U.S.C. 3501 et seq.). It imposes no additional reporting or record keeping burden on the public. Existing requirements for zone applicants, grantees, operators, and users (the main parties affected by the rule) are simplified through the codification of and clarification of practice and procedure (OMB Control Nos. 0625-0139 and 0625- 0109). Explanation for Separate Effective Date for Certain Sections The reason for the separate effective date for §§400.28(a)(2), 400.28(a)(3), and 400.33(b)(2) is to provide a reasonable transition period during which firms presently using zones in conformance with the Act and existing regulations may, if necessary, adapt their practices without disrupting their manufacturing and processing activity. Background Foreign-trade zones (zones) are restricted-access sites in or near ports of entry, which are licensed by the Board and operated under the supervision of the Customs Service (see, 19 CFR part 146). Authority for establishing these facilities is granted to qualified corporations. Applications submitted to the Board for grants of authority must show the need for zone services and a workable plan that includes suitable facilities and financing. Zones are operated under public utility principles. Grantees usually contract with private firms to operate facilities and provide services to zone users. 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. The objective is furthered particularly when zones assist exporters and reexporters, and usually when goods arrive from abroad in an unfinished condition for processing here rather than overseas. Foreign and domestic merchandise may be moved into zones for operations not otherwise prohibited by law involving storage, exhibition, assembly, manufacture or other processing. The usual formal Customs entry procedure and payment of duties is not required on the foreign merchandise unless and until it enters Customs territory for domestic consumption, in which case the importer ordinarily has a choice of paying duties either on the original foreign material or the finished product. Quota restrictions do not normally apply to foreign goods stored in zones, but the Board can limit or deny zone use in specific cases on public interest grounds. 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" are a special-purpose type of ancillary zone authorized by the Board, through grantees of public zones, for operations by individual firms that cannot be accommodated within an existing zone when it can be demonstrated that the activity will result in a significant public benefit and is in the public interest. Goods in a zone for a bona fide Customs reason are exempt from state and local ad valorem taxes. Since 1970, the number of ports of entry with zone projects has increased from 10 to 170, and the value of goods entering zones and subzones has increased from just over $100 million to over $75 billion. The use of zones for manufacturing activity has increased dramatically during the past decade. It now represents about 85 percent of zone activity. About 75 percent of goods currently entering zones is of domestic origin and some $11 billion of the goods shipped from zones is exported. The heightened interest in zones, both on the part of communities providing zone services as part of their economic development efforts and firms using zone procedures to help improve their international competitiveness, is related to the increasing importance of international trade and investment to the domestic economy. While there has been little public controversy concerning the establishment of general-purpose zones, there is growing concern about manufacturing activity in zones and subzones. Firms interested in using zones for manufacturing seek greater access and flexibility in zone procedures to help them compete against imports of finished goods and increase their exports. Those opposing zone manufacturing operations contend that zone procedures should be more restrictive for non-export operations, especially when inverted tariffs (actual or effective lower duty rate on finished product) are involved. In developing the revised regulations, the Board took into account the testimony and reports from the 1989 Congressional hearings on the zone program (House Subcommittee on Trade of the Committee on Ways and Means, October 24, 1989; Subcommittee on Commerce, Consumer, and Monetary Affairs of House Government Operations Committee, March 7, 1989). It also considered the reports prepared on the zone program in recent years for the House Committee on Ways and Means by the General Accounting Office and the International Trade Commission (GAO/GGD-84-52, March 2, 1984; GAO/NSIAD-89-85, February 7, 1989; USITC Publication 1496, February 1984; USITC Publication 2059, February 1988). Comments. The Board, in developing the final rule, has considered all of the comments received in response to its two Federal Register notices which were published on January 26, 1990 (55 FR 2760) and November 20, 1990 (55 FR 48446) regarding proposed revisions to 15 CFR part 400. The first of these notices contained the proposed revisions in full, the second contained further revisions to seven sections based on the first round of comments, as well as a new section on application fees. The comments received in response to both notices and the Board's position 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 notices when appropriate. Section 400.1 Comment: A few commenters noted the absence of a statement which sets forth the purposes of the zone program, and others noted the absence of provisions to engage the Board in decisions regarding the Customs aspects of zone activity. Board Position: Paragraph (a) has been expanded to include a general statement on the purpose of the program under the Act. Paragraph (b) cites the Customs regulations applicable to that agency's role in supervising zones. The Board's regulations cover the areas within its jurisdiction, and they have been written in conformance with section 8 of the Act (19 U.S.C. 81h), which provides that the Board's regulations must be consistent with the regulations issued by the Secretary of the Treasury. Section 400.1(c) Comment: A number of parties opposed the provision as written in the January 1990 notice because it included language that would have required that "zone restricted" status be elected for domestic merchandise seeking state/local ad valorem tax exemptions. Also, objection was made to the provision in the November 1990 notice requiring that normal entries be made on articles consumed in zones. Board Position: Section 400.1(c) contains a general statement as to the scope of special procedures applicable in zones. The proposed requirement that "zone restricted" status be elected on domestic goods exempt from state/local ad valorem taxes was intended to assist the Board in enforcing the statement in the House report accompanying Public Law 98-873, 10/30/84, indicating that this exemption should apply only to goods in zones for bona fide Customs reasons. Commenters noted that the election of "zone restricted" status is not mandated by statute and that requiring the election of such status is, therefore, beyond the Board's authority. While there is no clear answer to this question in light of the Board's broad discretionary authority, it has been decided to delete the proposed requirement. This means that more vigilance will be required from State/local tax officials with regard to items seeking the exemption based on their being in zones for eventual exportation. The statement that normal entries must be made on articles consumed in zones is based upon a long-standing interpretation of the statute and its legislative history by Treasury and the Board. Thus, such reference is considered a restatement of what the Board considers to be the law. Because it is not necessary, however, the statement has been deleted. Section 400.2(i) Comment: Numerous parties objected to the definition of manufacturing proposed in the January 1990 notice, contending that it is broader than any generally accepted definition of the term. Most argued that the definition should cover only situations where there is substantial transformation of merchandise, and one party noted that the definition would complicate changes due to the new Harmonized Tariff Schedule. A number of parties recommended that the scope of the definition include even that type of manufacturing which does not involve a change in tariff classification. Board Position: There is no definition for the term "manufacturing" in the existing regulations. In recent years, it has been the practice to consider all activity reviewable that entails changes in tariff classification to incoming articles. The reason the Board proposed a broad definition of the term in the January 1990 notice was to codify this practice and encompass all activity that should be subject to the review process called for in §400.31. After consideration of the many comments objecting to the definition as originally proposed, the Board has adopted a revised definition for manufacturing, based on the definition used by the Customs Service. It views substantial transformation as the fundamental characteristic of the term. However, because public interest issues can arise in regard to activity involving changes in classification that would not be considered manufacturing under this definition, the Board has included the term "processing" in §400.2, to cover other types of activity that would remain subject to review (§400.2(1)). Various sections of the regulations dealing with manufacturing and processing provide procedures that differ slightly depending upon which of these two types of activity is involved, but the substantive factors considered in reviews of manufacturing are essentially the same as for processing when the latter activity involves items subject to quotas or inverted tariffs. Section 400.2(p) Comment: Several parties contended that in the definition of "subzone" (§400.2(o), Jan. 1990 notice) a distinction should be made for distribution facilities, so that parties seeking authority for such activity should not have to go through application procedures required of a manufacturing subzone applicant. Board Position: The definition as written incorporates the main characteristic of subzones, i.e, they are single-user adjuncts to general-purpose zones, the latter being multi-user sites. The definition does not itself determine application requirements. Applications for non-manufacturing sites usually involve less complex issues, and therefore the application process for these cases could be simpler. Whatever the type of subzone, however, applicants have the burden of demonstrating a significant public benefit (§400.31(c)(3)). Sections 400.11(a)(6) and 400.11(a)(7) Comment: A few parties suggested that these provisions should be clarified to state that the Board's authority to inspect zone operations and accounts, and to require reports, should be limited to activated zone facilities. Board Position: The provisions are essentially a restatement of the Board's existing regulations (§400.200(g)). They apply to activated zone areas. Thus, they are limited to the supervision of activity, records, and accounts to the extent necessary to carry out Board responsibilities. The supervision is normally conducted by Customs officials. Section 400.12(v) Comment: A few parties suggested that the Executive Secretary's authority to permit the return of zone-restricted merchandise for entry into U.S. Customs territory should be extended to cover goods valued up to 1,000,000 dollars, instead of the 100,000 dollars initially proposed (§§400.12(f) and 400.44(c)(3), Jan. 1990 notice). Board Position: The responsibilities of the Board's Executive Secretary are summarized in §400.12 of the revised regulations (§400.1301 of the existing regulations). The authority to permit the return of zone-restricted merchandise is a new delegation of authority intended to simplify the decision process in these cases, which involve a determination whether the return to Customs territory of goods originally destined for export is in the public interest. The local District Director of Customs' recommendation is a key factor in the determination, and full duties are due when such action is authorized. The Board agrees that, in the interest of improved efficiency in program administration, a higher figure than the one originally proposed would be a more realistic figure for this delegation of authority. Thus, it has increased the amount applicable to 500,000 dollars. Section 400.21 Comment: Many commenters contested the 35-mile restriction (in relation to Customs ports of entry) proposed for subzones in the January 1990 notice. When the section was revised in the November 1990 notice to retract the proposed subzone limit, attention turned to the general-purpose zone restriction, and a number of commenters requested that the 35-mile limit for this type of zone be extended to over 60 miles. The commenters in both instances argued that locational restrictions unduly deny access to zone procedures to communities and firms that could benefit from zones. Also, certain parties contended that the limits discriminate against rural communities and small businesses. On the other hand, numerous parties supported the proposed adjacency requirements. They suggested that, if the Board decides to revise the proposal as published, Customs should be required to conduct annual on-site inspections and audits. Board Position: The existing regulations do not contain specific geographic limits for either zones or subzones. They simply note the statutory requirement that zones must be in or adjacent to Customs ports of entry (§400.200(a) of the existing regulations). Under current practice in interpreting "adjacency", general- purpose zones may be authorized for sites within 35 miles of the outer limits of a Customs port of entry. There is no geographic limit for subzones, given their single occupancy and defined activity. In January 1990 the Board proposed that subzones be restricted to a 35-mile radius or one hour's driving time from the nearest Customs office (§400.21(b)(2), Jan. 1990 notice). The strong opposition expressed in response to the notice was reviewed, and after discussions with the Customs Service the proposed limit was deleted in the November 1990 notice (§400.21(b)(2)(ii)). It was recognized that, because subzone operators enter into agreements with Customs prescribing procedures for examination of shipments upon arrival from abroad and for an audit system, the locational relationship of the subzone to the port of entry is not an important factor. The November 1990 notice adopted current practice in regard to subzones. Accepting this change, commenters directed their opposition to the existing 35-mile limit for general-purpose zones. Upon consideration and discussions with Customs with regard to current audit methods used by Customs in its supervision of zones and, taking into account the greater significance of international trade and investment to our national economy, the Board has concluded that there is now a basis for extending the limits for general-purpose zones to 60 miles or 90 minute's driving time from the outer limits of port of entry boundaries. This will make more communities eligible to apply for authority to establish general-purpose zone programs as part of their development efforts. The new limit, however, does not exempt applicants from the requirement that applicants seeking additional zone projects in port of entry areas must demonstrate that the existing zone(s) will not adequately serve the convenience of commerce (see, §400.21(a)(2)). Section 400.22(d) Comment: A few commenters objected to the provisions of this section which allow the grantee of other than the closest general- purpose zone to sponsor a proposed subzone. Board Position: The provision essentially reflects current practice. It takes into account the interests of existing zone grantees, as well as subzone prospects and the public interest. While it provides options for subzone sponsorship, the provision requires that the sponsoring zone be in the same state as the subzone, thus protecting the role of state legislatures in determining the eligibility of applicants. It retains the practice of giving preference to the closest zone, but recognizes that proximity in location might not be the most significant relationship in certain situations. Under the new rule, current practice would be extended to permit state agencies to become subzone sponsors under certain circumstances, if so authorized by state legislatures. The complaint provision in §400.22(d)(2) provides a procedure for reviews when sponsorship is contested. Section 400.23(b) Comment: A number of parties argued that the process for subzones should involve criteria that require approval unless the proposed activity is "detrimental to the public interest, health, or safety," as provided for in the FTZ Act (19 U.S.C. 81o(c)), instead of applying a test calling for a positive finding that the activity is in the public interest. Board Position: The factors enumerated in §400.23(b) with regard to subzones are essentially a codification of current practice. This section must be read in conjunction with §400.31, which delineates the criteria considered in reviewing manufacturing and processing activity, and notes that applicants for subzones must also demonstrate that their proposals involve a significant public benefit. The section of the Act cited by the commenters has always been considered the underlying basis for the Board's authority, along with sections 3 and 7 of the Act (19 U.S.C. 81(c) and 81(g)), to restrict or prohibit zone activity it does not find to be in the public interest. (See, Armco Steel Corporation v. Stans, 431 F. 2d 779 (2nd Cir. 1970); Hawaiian Independent Refinery (HIRI) v. United States, 460 F. Supp. 1249 (Cust. Ct. 1978)). Authorization to conduct manufacturing activity in zones is a privilege, not a right, and in addition to viewing technical requirements, the Board must determine that zone activity is consistent with the public interest. Under Board practice, a review conducted from the perspective of determining whether activity is "in the public interest" does not differ substantively from one that determines whether activity is "detrimental to the public interest". The difference is procedural. An inquiry as to whether activity is in the public interest is generally considered appropriate when an application is involved and the question is whether proposed activity should be authorized, whereas the latter form of inquiry would be more appropriate when ongoing authorized activity is being reviewed in terms of changes either in external or internal circumstances. In the case of subzones, the application burden is greater. Subzones are single-user facilities, which are not structured to serve the public. It is their activity that has a public effect, and case law has recognized that the Board has broad discretionary authority to evaluate that effect in terms of the public interest (see, Armco and HIRI. supra). Section 400.25(a) Comment: Two comments were received that recommended requiring more information in subzone applications, one seeking a complete showing of the existing and potential impact on domestic industry competitors and their suppliers, the other calling for a complete statement of near and long-term sourcing plans. Board Position: The general requirements, as proposed and adopted, call for information on both these subjects. It provides interested parties with enough application information on which to form an opinion and present comments and evidence. There is also an opportunity to review comments and evidence submitted for the record in a case. The procedure for inviting public comment provides a 15-day period for rebuttal comments. This allows interested parties to review the comments submitted during the first phase of the comment period and to submit further material in response (§400.27(c)(2)). Also, §400.25(a)(6) authorizes the Executive Secretary to require additional information needed to permit a full review of issues presented by the proposal in question. The latter section also provides for the issuance of guidelines outlining the kind of detailed information needed in specific situations. Section 400.25(a)(viii) Comment: A number of parties requested deletion of the requirement calling for information as to whether alternative procedures have been considered as a means of obtaining the benefits sought under zone procedures. Board Position: A decision to use zone procedures should generally be made after consideration of other special procedures available under U.S. Customs law. This provision is included in the regulations to encourage zone managers and prospective users to select the most efficient procedural means available both from their standpoint and that of the Customs Service. The provision is hortatory, however, and is not intended to deny access to zone procedures merely because other procedures are available. Section 400.27 Comments: Many parties wrote in support of this section as it was revised in the November 1990 notice, with some suggesting further reduction in the time frames for Board decisions of ten months and one year. However, a number of parties objected to the provision in §400.27(d)(3)(vi), which makes specific reference to industry surveys by examiners in reviewing proposals involving manufacturing, and calls for the use of questionnaires when necessary. Board Position: This section on procedures for reviewing and processing applications was first drafted in outline form in the January 1990 version of the proposed regulations, which contained no deadlines. The provision, as adopted, is essentially the version published in November 1990, which describes procedures in more detail and includes a time frame calling for the completion of cases involving manufacturing within one year, and others within ten months. It serves as a guide for applicants as to the lead-time for submitting applications, but does not preclude consideration of requests for more expeditious decisions when urgency is involved. Section 400.27(d)(3) lists the steps taken by examiners in reviews of cases involving manufacturing and processing. The survey phase (§400.27(d)(3)(vi)) is usually an essential step in evaluating cases in which there is a question of industry impact, especially when opposition has been expressed by domestic industry. The survey can be based on existing data, and might involve phone contacts or site visits. It is a means of assessing and ascertaining information on record and in developing new information essential for a thorough review, including material on import competition and price sensitivity. The surveys envisioned in this section do not entail polling parties as to their views on the case under study. Their format is not predetermined and depends on the type of case and situation involved. The provision, as proposed in the November 1990 notice, contained reference to the use of questionnaires when necessary. This reference has been deleted in the final provision. How questions are communicated will be left up to the examiner or reviewer in a case and will depend on the nature of the case. Should a need arise for the use of form questionnaires, appropriate procedures will be followed by the Board, which would include obtaining OMB clearance when necessary. Sections 400.28(a)(2) and 400.28(a)(3) Comment: Numerous parties objected to these provisions as they were covered in paragraph (a)(2) of the January 1990 version of §400.28. The provision in question required approval of the Board or the Commerce Department's Assistant Secretary for Import Administration prior to the commencement of new manufacturing activity and for sourcing changes involving the use of new foreign articles subject to higher tariffs than the finished products in which they are included (§400.28(a)(2)(2), Jan. 1990 notice). Many critics contended that these requirements would seriously disrupt manufacturing activity without justification, since changes in a production process must often be made on short notice, and activity would have to be halted or curtailed while awaiting approval. They consider the provision unduly burdensome especially in regard to changes that occur in sourcing components, noting that it would have the effect of suspending or denying access to zone procedures even when there is no evidence of negative effects. The greatest impact would be on existing operations that are in full compliance with the law. On the other hand, many parties expressed support for this provision to ensure that there is evaluation and comment on changes in zone activity that might have an adverse effect on domestic industry. Board Position: The Board has a responsibility to evaluate zone activity in terms of the public interest, not only at the time applications are reviewed, but also on a continuing basis as circumstances change. The requirement that changes in the scope of manufacturing activity are subject to further approval has been a long-standing practice. It has been included as a proviso in zone grants issued since the early 1970's requiring notification for approval prior to the commencement of new manufacturing activity. The practice has involved notification to the Executive Secretary and either the approval of that official or the Board, depending upon the circumstances. After considering the comments on §400.28(a)(2) as it appeared in the January 1990 notice (no further change was proposed in the November 1990 notice), the section was revised by the Board. While an advance approval requirement was retained for changes in the scope of manufacturing (e.g., new end products, significant expansion of plant production capacity), such pre-clearance is required for new processing activity only when it involves products subject to quotas or inverted tariffs (§400.28(a)(2)). The procedure for these situations (§400.32) includes a delegation of fast-track decision authority to the Commerce Department's Assistant Secretary for Import Administration in the following situations: When there is a precedent for the new activity, when it is for export only, when no lower tariff rate is sought, or when the activity could be conducted under bonded warehouse procedures. The last of these circumstances was added in consideration of the comments. This delegation of authority from the Board is an extension of the practice mentioned above based on a proviso in zone grants. It designates the Commerce Assistant Secretary for Import Administration as the official for decisions in all fast-track cases, based on this official's role as the Board alternate for the Secretary of Commerce, As has been noted, the condition relating to changes in manufacturing and processing remains covered in §400.28(a)(2). However, the originally proposed requirement on sourcing changes has been revised and moved to paragraph (a)(3). The revision involves adoption of a notification procedure for changes in sourcing instead of a pre-clearance requirement. It recognizes that sourcing changes must often be implemented on short notice, and that it would be unduly disruptive to require advance approval of such changes when the end products remain those for which authority has been granted. Thus, when a change is limited to materials and components and does not involve new finished products, the requirement is limited to notification of the Executive Secretary (§400.28(a)(3)), who would conduct a preliminary review to determine whether the change could result in significant adverse effects. The Commerce Department's Assistant Secretary for Import Administration would then determine whether further review is necessary, taking into account the factors in §400.31. Restrictive action would be taken by the Board or the Commerce Department's Assistant Secretary for Import Administration (under §400.32) when appropriate. When restrictions are warranted, they frequently involve a requirement that foreign-privileged status (duty rate locked on incoming article-19 CFR 146.41) be elected on the items in question. Applicants can minimize the need for approvals and notifications under §§400.28(a)(2) and 400.28(a)(3) by including information in their applications to cover proposed activity in a broader scope that includes near and mid-term projections. While provisions of §400.28 apply to both past and future grants of authority, the foregoing sections apply only to new changes to ongoing activity. Section 400.28(a)(5) Comment: There was some opposition to a provision that appeared in the January 1990 notice (§400.28(a)(4)) which would invalidate outstanding grants of authority not activated within five years of adoption of the revised regulations or, in regard to new zones, five years after approval. Board Position: The Board has adopted the provision (redesignated as §400.28(a)(5)). There is presently no sunset provision in the Act or regulations. The Board's current practice is to retire inactive zone grants on request. Since zone grants have always been issued subject to the condition that activation must occur within a reasonable time, current practice leaves open the question of the status of non-activated grants. The Board has been liberal in accepting explanations for delays, but an automatic suspension provision is needed for long-term delays in the interest of efficient program administration. The provision gives grantees ample time within which to activate projects. It applies both to grants for zones and subzones, and the language in the final rule has been revised to clarify this fact. The provision does not preclude consideration of requests for reinstatement. Section 400.28(a)(8) Comment: Several parties objected to this provision as written in the 1990 notice (§400.28(a)(7)), which they interpreted as prohibiting all sales of zone sites or facilities under terms which included consideration of zone status. Board Position: Section 17 of the FTZ Act (19 U.S.C. 81q) prohibits the sale or assignment of zone grants. Zone projects have become more complex and now include industrial parks with private owners. The provision has been clarified to reflect the position that when property with zone status is sold, it is the Board's concern that the transaction should not violate the spirit of section 17 of the Act. This does not preclude the recovery of development costs and expenses as well as those incurred in obtaining and maintaining zone status. Section 400.28(c) Comment: This section appeared as §400.29 in the January 1990 notice, which contained a provision (§400.29(d)) proposing a special procedure for the revocation of subzone grants of authority based on non-compliance with special conditions. Several parties objected to such a provision, arguing that the Board must follow the same revocation procedures for subzone grants as they do for general-purpose zone grants (§§400. 29(a) and 400.29(b), Jan. 1990 notice). Board Position: Upon consideration, the Board has decided not to adopt a special procedure for the revocation of subzone grants. Thus, the procedure for such revocations will be the same as for general-purpose zones, which is covered in §400.28(c) of the final rule (see, FTZ Act section 18, 19 U.S.C. 81r). In reaching this decision, the Board notes that §§400.31(d) and 400.43 provide a means for taking action to prohibit or restrict the use of zone procedures, should there be a finding that special conditions applicable to zones or subzones are not being met. In addition, section 19 of the Act (19 U.S.C. 81s) authorizes the Board to impose fines for violations of the Act or the regulations (§400.11(a)(10)). Section 400.29 Comment: Numerous comments were received in opposition to the provision for application fees which was incorporated in the November 1990 notice, setting forth a schedule of fees for applications for new general-purpose zones and subzones, and for expansions to zones, as well as for manufacturing review and boundary modifications (§400.30, Nov. 1990 notice). The commenters contended that the proposed fees are inconsistent with the FTZ Act, and with Congressional intent that zone procedures help firms reduce operating costs. They argued that the fees violate the Paperwork Reduction Act and the Regulatory Flexibility Act. Commenters also noted that the fees are too high and would serve as a disincentive for small business and discourage participation by small communities. Some objected to the fact that the fees would not be used to improve program administration because they must be deposited into the general Treasury receipts account. Board Position: The statutory basis for such fees is 31 U.S.C. 9701, which provides that federal agencies should recover, to the extent possible, direct and indirect costs for activities which convey special benefits to recipients above and beyond those accruing to the public at large. Concurrence for the fees was received by the Department of Commerce from OMB in connection with the FY 1991 budget package of the Department of Commerce. The statute requires that the fees collected be deposited in the general Treasury receipts account. The original proposed schedule was based on average staff costs attributable to the types of applications listed, taking into account the fact that some 80 percent of FTZ staff time is dedicated to the processing of applications. It was noted that the possibility of fees for reviews of ongoing zone activity remained under consideration. After considering the comments in opposition, the Board has decided to revise the fee schedule to reduce the scope and amounts of the fees. While the Board recognizes the positive public effects of zone activity cited by the commenters, it must also take into account the private zone benefits which accrue to zone users and operators. Thus, the changes reflect a balancing of the purposes of the FTZ Act against those of the general user fee statute. Accordingly, the fees charged represent the recovery of administrative costs associated with the conferring of private benefits associated with the zone program. The proposed fees for the first zone project in a port of entry area are eliminated in light of the fact that the FTZ Act indicates that ports of entry are entitled to a zone upon meeting technical criteria. Also eliminated, at least for the time being, are the proposed fees for reviews of changes to ongoing activity, because the new procedures for such reviews are not yet tested. While there is a basis to retain fees for subzones because of the private nature of these facilities, two categories have been adopted to provide a reduction in the fee for subzones which do not involve manufacturing/processing or when less than three products are involved. The fees apply to applications received after the effective date of the regulations. They do not apply to applications submitted before that date in final form and in full compliance with the filing requirements in effect at the time of submission. Section 400.31 Comment: There were numerous comments on this section as published in both the January 1990 and November 1990 notices. Most welcomed having a provision which delineates the criteria considered by the Board in its reviews of manufacturing activity, but there was disagreement on many of the specific provisions in the section. Sponsors and users of existing zones contended that many provisions exceed statutory requirements, imposing an excessive burden on zones and zone applicants. On the other hand, parties representing some domestic industries complained that the January 1990 version of the section was weakened in the November 1990 revised version. The comments are discussed below in more detail under the specific paragraph in question. Board Position: Section 400.31 is a keystone provision of the new regulations, in conjunction with §§400.28 and 400.32. It sets forth the criteria for evaluation of manufacturing and processing activity either as part of new proposals or in the review of ongoing activity, and is also a reference for reviews on other matters involving public interest questions. Its statutory underpinning is the public interest provision of the Act (19 U.S.C. 81o(c); see also, 19 U.S.C. 81(c) and 81(g)), and paragraph (b) of the section enumerates the factors which provide the standard for defining what "public interest" means for purposes of administering the statute in regard to the evaluation of zone activity (see also, 19 U.S.C. 81(g)). The Board's broad discretionary authority in regard to public interest determinations was recognized in Armco v. Stans, supra at 785, in which the Court stated that the Act gives "the Board wide discretion to determine what activity may be pursued by trade zone manufacturers subject only to the legislative standard that a zone serve this country's interests in foreign trade, both export and import" (see also, HIRI v. United States, supra, "the Board may impose any condition which it deems advisable upon * * * the operation * * * of the subzone"). The comments and the Board's position are covered in the discussions of various subsections of §400.31 that follow. Section 400.31(b) Comment: Numerous comments were received on this provision as it appeared in both FR notices. Many parties argued that the two-step process, especially the threshold provision (§400.31(b)(1)), unreasonably precludes the opportunity for the consideration of the economic factors in paragraph (b)(2). They maintained that the Act requires consideration of economic factors even when there are policy issues. Further, these critics contended that paragraphs (b)(1)(i) and (b)(1)(ii) are too vague, especially the latter. Commenters also argued that paragraph (b)(1)(iii) appears to earmark imports as being inherently negative and can be read to preclude consideration of items imported as components of products in determining whether there is an overall increase in imports. Some commenters suggested that the economic factors enumerated in paragraph (b)(2) should include other factors such as import displacement, import penetration, investment effects, domestic industry competitiveness effects, technology transfers, and consumer effects. Several argued that, in considering impact on domestic industry (paragraph (b)(2)), only significant injury to relevant domestic industries should be considered. The parties that tend to support the two-step process and threshold test asserted that it should not be weakened, that the economic factors should be weighted, and that the consideration of impact on domestic industry should include suppliers of components. Board Position: The Board has adopted the provision as it appeared in the November 1990 notice, with some minor clarifying and procedural revisions. It retains the two-step evaluation process with a threshold provision (§400.31(b)(1)) because it has been determined that such a procedure is needed for a more efficient decision-making process when there are valid policy reasons for denying or restricting certain activity. The threshold step in the review process is intended as a preliminary phase of the review during which there is an assessment to determine whether there are significant policy impediments. The review in this phase is conducted in the depth that is called for under the circumstances, and no discrete formal determination is required when a final decision is not to be made based on the threshold factors alone and the review proceeds to consideration of the phase-two economic factors. Applicants do not have the burden of demonstrating the absence of paragraph (b)(1) issues, but they and interested parties may submit comments and evidence. The threshold test would preclude consideration of step-two economic factors (other than those found by the Board to be relative to paragraph (b)(1)(iii)) when the threshold issue presents a compelling basis for a decision, and consideration of the economic factors enumerated in paragraph (b)(2) would simply prolong and delay the decision to no purpose. Thus, paragraph (b)(1) embodies a long-standing Board practice of making decisions that are consistent with U.S. economic and trade policy, and it improves the practice by acknowledging the primacy of policy considerations and the possibility that the findings made at this phase of a review may be dispositive. When they are not, the consideration of policy matters would carry over into the second phase of the review (paragraph (b)(2)), depending upon the circumstances. The Board has decided to retain paragraph (b)(1)(ii), but has clarified the paragraph to indicate that it would apply only when a zone manufacturing issue is related to important trade and tariff negotiations, or other initiatives even in their developmental stages. It is recognized that there must be special overriding circumstances before a decision is made based on this paragraph. Paragraph (b)(1)(iii) was revised in the November 1990 notice, and has been further revised to clarify that this provision is intended only to cover situations in which there is a direct casual link between the use of zone procedures and the creation of imports that would not have occurred, but for zone procedures, i.e., "zone-created imports." The statement that the imports in question would be considered "both as individual items and as components of imported products", which was added in the November 1990 version, indicated that consideration will be given to relevant economic factors such as the fact that an item might be or might have been imported as a component of a finished product. Also, the provision is not intended to cover foreign shipments arriving as a result of growth in production and demand. In such situations, an import would not be considered to have been caused by zone procedures, and step two of the review process would provide a broader evaluation of economic factors. A reason for including this paragraph in the threshold provision is that it reflects a practice that has the standing of Board policy, i.e., that it is not in the public interest to allow zones to generate imports that "but for" zone procedures would not otherwise exist. The provision applies only to situations involving quota restrictions or inverted tariffs and does not apply to products to be reexported. The concerns expressed about reference to quotas and inverted tariffs in this paragraph appear to be misplaced because it actually narrows its scope. The process associated with the threshold test includes a significant procedural step (paragraph (c)(1)) that gives applicants and affected parties an opportunity to submit further evidence on threshold factors before a decision is made. An examiner or reviewer making a negative finding must notify the applicant pursuant to §400.27(d)(3)(vii)(A). This pre-decisional step is concerned with fair process and allows applicants to address policy issues of which they might not have been aware. It is especially important in providing an opportunity for the submission of evidence on factors in paragraphs (b)(1)(ii) and (b)(1)(iii). The final regulations have been revised to clarify the fact that this procedural step also applies to reviews of ongoing operations (§400.31(c)(1)). The factors adopted by the Board in paragraph (b)(2) include consideration of the points made by interested parties, and specific reference has been made to technology transfers and investment effects to clarify that these are among the factors considered. It is not considered appropriate to adopt weighted values for individual factors, as their relative importance depends on the circumstances of individual cases. This does not imply a lack of recognition of the importance of zones in regard to exports and reexports. The potential for export and reexport will remain a major factor in Board decisions. Section 400.31(c) Comment: A number of comments were received on various provisions of this section (the original January 1990 version was revised in the November 1990 notice). The main objections to the original version were that it imposed a burden of proof that is contrary to the Act, that it conflicted with trade policy in referring to transplant activity, and that the paragraphs on economic effect and inverted tariffs established standards that exceed the Board's authority. Concern was expressed by several parties to revisions to the paragraph on burden of proof in the November 1990 version, including elimination of reference to a substantial evidence standard. Board Position: The Board has essentially adopted the November 1990 version. The provision on burden of proof (§400.31(c)(3), Nov. 1990 notice) is revised and clarified to reflect the Board's view that an applicant should not have the evidentiary burden of proving both the existence of positive factors and absence of negative ones. This does not change the general requirement that applicants normally have the burden of presenting probative and substantial evidence to establish the basis for their requests. In the case of manufacturing or processing, this includes providing evidence which addresses the economic factors enumerated in §400.31(b)(2) that are relevant in demonstrating that the activity is in the public interest. The purpose of the provision is not weakened by the change made in the November 1990 version. It reflects current practice in requiring that applicants for subzones must also demonstrate a significant public benefit (§400.31(b), being a yardstick). This special requirement stems from the nature of subzones as single-user facilities which do not provide general zone services to the public (see, discussion under §400.23(b)). The provisions referring to inverted tariffs and transplant manufacturing which appeared in the January 1990 version of paragraph (c) were misinterpreted by many parties. The substantive coverage on these points is included within the provisions of paragraph (b), and, because they are so subsumed, this reference has been deleted from paragraph (c). Section 400.31(d) Comment: Many parties submitted comments expressing opposition to this provision, which was identical in both the January 1990 and November 1990 notices. Some were concerned that it creates unnecessary, costly reviews without prior evidence of a problem, thus creating uncertainty that could affect business decisions. There was concern that reviews could be triggered by unfounded complaints from parties not having a legitimate interest. On the other hand, a number of parties argued that all manufacturing should be subject at least to periodic five-year reviews. Board Position: This section, which has been revised for clarification in the final version, is intended to establish a more structured approach to zone monitoring. It is based on the long-standing view that all zone activity remains subject to review in terms of its being in the public interest under changing circumstances. It provides a means for periodic checks to ensure that grant conditions are being met and that the public benefits projected in applications and proposals are being realized, e.g., shifts to domestic sourcing. It is not intended to become a means of restricting the continued use of zone procedures unless there is a clearly justifiable reason for doing so. The reviews will focus on areas of concern and should not disrupt ongoing activity. The reference to requests for reviews from outside parties has been clarified to indicate that they must be directly affected parties and show good cause. An example of a directly affected party would be one that produces a competing or like product, or a producer of components for such products. To show "good cause", parties would have to present evidence as to the circumstances that provide a basis for the review. Section 400.32 Comment: A number of commenters expressed concern that the procedures of this section are too broad and burdensome in requiring Board approvals for minor changes in activity. On the other hand, others supported the provision so long as public notice is given and the opportunity for public comment and hearings is provided. Most of the negative comments reiterated the concerns that were expressed in regard to §400.28, which is the underlying basis for the procedures covered in this section. Board Position: This section is designed primarily to provide procedures for implementing the requirements set forth in §§400.28(a)(2) relating to changes in manufacturing and processing that occur after initial approval. It includes a fast track procedure under which the Commerce Department's Assistant Secretary for Import Administration can make final decisions when the activity: (1) Is the same as that previously approved for other zones; (2) is for export only; (3) does not involve election of a lower Customs tariff rate; or, (4) could be conducted under Customs bonded warehouse procedures. In consideration of the comments, the latter situation has been added to the final rule, as has a provision (paragraph (c)) delegating to the Executive Secretary authority to determine questions of scope. In those cases where there is a significant change warranting a full review, the procedure outlined in paragraph (b)(2) would apply. Section 400.33 Comment: There were numerous comments received both for and against paragraph (b) of this section. A number of parties favored the provision, maintaining that it should not be weakened. Some contended that it should be extended to exports. The opponents argued that the Board should not abdicate its authority to review cases involving antidumping (AD) and countervailing (CVD) duty orders on a case-by-case basis. They maintained that the provision conflicts with the Act, which allows Customs entries to be made on finished products leaving zones unless there is a public interest reason for denying this option. Reference was made to the anti-circumvention provision of the AD/CVD regulations as a more appropriate remedy. Board Position: It has been the general policy of the Board that zone procedures should not be used to circumvent AD/CVD orders. During the early part of the past decade, this policy was reflected in case-by-case reviews with parties having an opportunity to present evidence as to why they should be allowed to make entries on the finished products leaving zones. In recent years, it became a general practice to require that privileged- foreign status (item classified in its original condition) be elected on items that are subject to AD/CVD orders upon admission to zones, with exceptions possible only on public interest grounds. The new rule goes a step further and precludes exceptions. It adopts an absolute requirement making all shipments of items covered by AD/CVD orders, or items which would be otherwise subject to suspension of liquidation under AD/CVD procedures if they entered U.S. Customs territory, subject to the privileged- foreign status requirement. The provision recognizes the special nature of AD/CVD duties as a remedy for unfair trade practices. In precluding relief from the effects of AD/CVD orders under zone procedures for goods other than exports, the Board notes that the AD/CVD statute itself prescribes situations and procedures under which it is appropriate to make exceptions to AD/CVD orders. The Board cannot agree with the argument that the anti-circumvention provisions of the AD/CVD statute adequately address the zone issue. Those provisions mainly involve procedures that make it possible to include within the scope of AD/CVD orders items on which minor alterations are made. They do not cover items that are subject to such orders when they arrive in zones, but are substantially transformed prior to formal Customs entry. Section 400.41 Comment: A number of parties expressed concern about the potential liability of zone grantees for infractions committed by zone operators or zone users when there has been no involvement by the grantee. Board Position: This section recognizes that zones operate under the aegis of the grantees, even when the actual operation of zone facilities is contracted to other parties. The provision notes the general oversight responsibility of grantees to ensure that the reasonable needs of the business community are served by their zone projects. Grantees cannot delegate or assign their oversight role in operating contracts. However, the Board does not believe it is in the public interest to discourage public entities from zone sponsorship because of concern about liability without fault. Grantees should not be liable for the acts or violations of operators or users in which they share no fault. The regulations address this concern, indicating that grants of authority will not be construed to make grantees automatically liable for violations by others (§400.28(a)(9)). Grantees should discuss with Customs officials the potential for liability based upon the type of operation plan that has been adopted for the zone. The matter of potential liability can be discussed when grantees seek the concurrence of Customs in the designation of zone operators (§400.2(s)). Section 400.43 Comment: A few parties expressed concern about the broad authority encompassed in this provision, and suggested that it be clarified to indicate that the Board or the Executive Secretary has discretion under this provision not to initiate a review. Board Position: This provision is intended as a statement of the Board's general authority under section 15(c) of the Act (19 U.S.C. 81o(d)) to prohibit or restrict activity which it finds detrimental to the public interest, health, or safety. It is consistent with current practice, and is intended to cover situations not otherwise provided for in the regulations where the foregoing section of the Act is directly applicable. The section could, for example, be the basis for Board action in response to findings that special conditions of subzone grants have not been met. As it appeared in the January 1990 notice, the provision included a delegation to the Executive Secretary so that the action could be taken immediately by this official when necessary, subject to Board review. Upon review, it has been concluded that full Board decisions can be expedited in such cases when necessary, so the final version adopted by the Board does not include the foregoing delegation of authority. However, the authority of the Executive Secretary to conduct reviews is retained as a means of providing the Board with recommendations when needed. Section 400.45 Comment: A few parties contended that the District Director is not the appropriate party to determine whether activity is "retail trade" subject to this provision. Board Position: This section is intended in implement the provision of the Act (19 U.S.C. 81o(d)) which provides that "no retail trade shall be conducted within a zone except under permits issued by the grantee and approved by the Board." The first question posed in these cases is whether activity is "retail trade." The District Director is considered the most appropriate official to make this determination, but a provision has been added in the final rule allowing grantees to seek Board review of such determinations. 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, D.C., this 24th day of September, 1991. Eric I. Garfinkel, Assistant Secretary of Commerce for Import Administration, Chairman, Committee of Alternates, Foreign-Trade Zones Board. For the reasons set forth in the preamble, 15 CFR part 400 is revised to read as follows: PART 400-REGULATIONS OF THE FOREIGN-TRADE ZONES BOARD Subpart A-Scope and Definitions Sec. 400.1 Scope. 400.2 Definitions. Subpart B-Foreign-Trade Zones Board 400.11 Authority of the Board. 400.12 Responsibilities and authority of the Executive Secretary. 400.13 Board headquarters. Subpart C-Establishment and Modification of Zone Projects 400.21 Number and location of zones and subzones. 400.22 Eligible applicants. 400.23 Criteria for grants of authority for zones and subzones. 400.24 Application for zone. 400.25 Application for subzone. 400.26 Application for expansion or other modification to zone project. 400.27 Procedure for processing application. 400.28 Conditions, prohibitions and restrictions applicable to grants of authority. 400.29 Application fees. Subpart D-Manufacturing and Processing Activity-Reviews 400.31 Manufacturing and processing activity; criteria. 400.32 Procedure for review of request for approval of manufacturing or processing. 400.33 Restrictions on manufacturing and processing activity. Subpart E-Zone Operations and Administrative Requirements 400.41 Zone operations; general. 400.42 Requirements for commencement of operations in a zone project. 400.43 Restriction and prohibition of certain zone operations. 400.44 Zone-restricted merchandise. 400.45 Retail trade. 400.46 Accounts, records and reports. 400.47 Appeals to the Board from decisions of the Assistant Secretary for Import Administration and the Executive Secretary. Subpart F-Notice, Hearings, Record and Information 400.51 Notice and hearings. 400.52 Official record; public access. 400.53 Information. Authority: Foreign-Trade Zones Act of June 18, 1934, as amended (Pub. L. 397, 73rd Congress, 48 Stat. 998-1003 (19 U.S.C. 81a- 81u)). Subpart A-Scope and Definitions §400.1 Scope. (a) This part sets forth the regulations, including the rules of practice and procedure, of the Foreign-Trade Zones Board with regard to foreign-trade zones in the United States pursuant to the Foreign-Trade Zones Act of 1934, as amended (19 U.S.C. 81a-81u). It includes the substantive and procedural rules for the authorization of zones and the regulation of zone activity. The purpose of zones as stated in the Act is to "expedite and encourage foreign commerce, and other purposes." The regulations provide the legal framework for accomplishing this purpose in the context of evolving U.S. economic and trade policy, and economic factors relating to international competition. (b) Part 146 of the regulations of the United States Customs Service (19 CFR part 146) governs zone operations, including the admission of merchandise into zones, zone activity involving such merchandise, and the transfer of merchandise from zones. (c) To the extent "activated" under Customs procedures in 19 CFR part 146, and only for the purposes specified in the Act (19 U.S.C. 81c), zones are treated for purposes of the tariff laws and Customs entry procedures as being outside the Customs territory of the United States. Under zone procedures, foreign and domestic merchandise may be admitted into zones for operations such as storage, exhibition, assembly, manufacture and processing, without being subject to formal Customs entry procedures and payment of duties, unless and until the foreign merchandise enters Customs territory for domestic consumption. At that time, the importer ordinarily has a choice of paying duties either at the rate applicable to the foreign material in its condition as admitted into a zone, or if used in manufacturing or processing, to the emerging product. Quota restrictions do not normally apply to foreign goods in zones. The Board can deny or limit the use of zone procedures in specific cases on public interest grounds. Merchandise moved into zones for export (zone-restricted status) may be considered exported for purposes such as federal excise tax rebates and Customs drawback. Foreign merchandise (tangible personal property) admitted to a zone and domestic merchandise held in a zone for exportation are exempt for certain state and local ad valorem taxes (19 U.S.C. 81o(e)). Articles admitted into zones for purposes not specified in the Act shall be subject to the tariff laws and regular entry procedures, including the payment of applicable duties, taxes, and fees. §400.2 Definitions. (a) Act means the Foreign-Trade Zones Act of 1934, as amended (19 U.S.C. 81a-81u). (b) Board means the Foreign-Trade Zones Board, which consists of the Secretary of the Department of Commerce (chairman), the Secretary of the Treasury, and the Secretary of the Army, or their designated alternates. (c) Customs Service means the United States Customs Service of the Department of the Treasury. (d) District Director is the director of Customs for the Customs district in which a zone or proposed zone is located. (e) District Engineer is the engineer of the Department of the Army in whose district a zone or proposed zone is located. (f) Executive Secretary is the Executive Secretary of the Foreign-Trade Zones Board. (g) Foreign-trade zone is a restricted-access site, in or adjacent to a Customs port of entry, operated pursuant to public utility principles under the sponsorship of a corporation granted authority by the Board and under supervision of the Customs Service. (h) Grant of authority is a document issued by the Board which authorizes a zone grantee to establish, operate and maintain a zone project or a subzone, subject to limitations and conditions specified in this part and in 19 CFR part 146. The authority to establish a zone includes the authority to operate and the responsibility to maintain it. (i) Manufacturing, as used in this part, means activity involving the substantial transformation of a foreign article resulting in a new and different article having a different name, character, and use. (j) Port of entry means a port of entry in the United States, as defined by part 101 of the regulations of the Customs Service (19 CFR part 101), or a user fee airport authorized under 19 U.S.C. 58b and listed in part 122 of the regulations of the Customs Service (19 CFR part 122). (k) Private corporation means any corporation, other than a public corporation, which is organized for the purpose of establishing a zone project and which is chartered for this purpose under a law of the state in which the zone is located. (l) Processing, when referring to zone activity, means any activity involving a change in condition of merchandise, other than manufacturing, which results in a change in the Customs classification of an article or in its eligibility for entry for consumption. (m) Public corporation means a state, a political subdivision (including a municipality) or public agency thereof, or a corporate municipal instrumentality of one or more states. (n) Regional Commissioner is the Regional Commissioner of Customs for the Customs region in which the zone is located. (o) State includes any state of the United States, the District of Columbia, and Puerto Rico. (p) Subzone means a special-purpose zone established as an adjunct to a zone project for a limited purpose. (q) Zone means a foreign-trade zone established under the provisions of the Act and these regulations. Where used in this part, the term also includes subzones, unless the context indicates otherwise. (r) Zone grantee is the corporate recipient of a grant of authority for a zone project. Where used in this part, the term "grantee" means "zone grantee" unless otherwise indicated. (s) Zone operator is a corporation, partnership, or person that operates a zone or subzone under the terms of an agreement with the zone grantee or an intermediary entity, with the concurrence of the District Director. (t) Zone project means the zone plan, including all of the zone and subzone sites that the Board authorizes a single grantee to establish. (u) Zone site means the physical location of a zone or subzone. (v) Zone user is a party using a zone under agreement with the zone grantee or operator. Subpart B-Foreign-Trade Zones Board §400.11 Authority of the board. (a) In general. In accordance with the Act and procedures of this part, the Board has authority to: (1) Prescribe rules and regulations concerning zones; (2) Issue grants of authority for zones and subzones, and approve modifications to the original zone project; (3) Approve manufacturing and processing activity in zones and subzones as described in subpart D of this part; (4) Make determinations on matters requiring Board decisions under this part; (5) Decide appeals in regard to certain decisions of the Commerce Department's Assistant Secretary for Import Administration or the Executive Secretary; (6) Inspect the premises, operations and accounts of zone grantees and operators; (7) Require zone grantees to report on zone operations; (8) Report annually to the Congress on zone operations; (9) Restrict or prohibit zone operations; (10) Impose fines for violations of the Act and this part; (11) Revoke grants of authority for cause; and (12) Determine, as appropriate, whether zone activity is or would be in the public interest or detrimental to the public interest. (b) Authority of the Chairman of the Board. The Chairman of the Board (Secretary of the Department of Commerce) has the authority to: (1) Appoint the Executive Secretary of the Board; (2) Call meetings of the Board, with reasonable notice given to each member; and (3) Submit to the Congress the Board's annual report as prepared by the Executive Secretary. (c) Alternates. Each member of the Board will designate an alternate with authority to act in an official capacity for that member. (d) Determinations of the Board. (1) The determinations of the Board will be based on the majority vote of the members (or alternate members) of the Board, provided that a quorum, composed of the Secretaries of the Departments of Commerce and Treasury (or their alternates), is voting. (2) All votes will be recorded. (3) The Board will issue its determination in proceedings under the regulations in the form of a Board order. §400.12 Responsibilities and authority of the Executive Secretary. The Executive Secretary has the following responsibilities and authority: (a) Represent the Board in administrative, regulatory, operational, and public affairs matters; (b) Serve as director of the Commerce Department's Foreign- Trade Zones staff; (c) Execute and implement orders of the Board; (d) Arrange meetings and direct circulation of action documents for the Board; (e) Arrange with other sections of the Department of Commerce, Board agencies and other governmental agencies for studies and comments on zone issues and proposals; (f) Maintain custody of the seal, records, files and correspondence of the Board, with disposition subject to the regulations of the Department of Commerce; (g) Issue notices on zone matters for publication in the Federal Register; (h) Determine subzone sponsorship questions as provided in §400.22(d); (i) Determine whether additional information is needed for evaluation of applications and other requests for decisions under this part, as provided for in various sections of this part, including §§400.24, 400.25, and 400.26; (j) Issue guidelines on information required for subzone applications under §400.25(a)(6); (k) Determine whether proposed modifications involve major changes under §400.26(a)(2); (l) Determine whether applications meet prefiling requirements under §400.27(b); (m) Direct processing of applications, including designation of examiners and scheduling of hearings under §§400.27 and 400.32; (n) Authorize minor modifications to zone projects under §400.27(f); (o) Review changes in sourcing under §400.28(a)(3); (p) Direct monitoring of zone activity under §400.31(d); (q) Direct reviews and make recommendations on requests for manufacturing/processing approvals under §400.32(b); (r) Determine questions of scope under §400.32(c); (s) Accept rate schedules and determine their sufficiency under §400.42(b)(3); (t) Review and decide zone rate complaints cases under §400.42(b)(5); (u) Make recommendations in cases involving questions as to whether zone activity should be prohibited or restricted for public interest reasons, including reviews under §400.43; (v) Authorize under certain circumstances the return of "zone- restricted merchandise" for entry into Customs territory under §400.44; (w) Authorize certain duty-paid retail trade under §400.45; (x) Determine the format for the annual reports of zone grantees to the Board and direct preparation of an annual report to Congress from the Board under §400.46(d); and (y) Designate an acting Executive Secretary. §400.13 Board headquarters. The headquarters of the Board is located within the U.S. Department of Commerce (Herbert C. Hoover Building), Pennsylvania Avenue and 14th Street, NW., Washington, DC 20230, as part of the office of the Foreign-Trade Zones staff. Subpart C-Establishment and Modification of Zone Projects §400.21 Number and location of zones and subzones. (a) Number of zone projects-port of entry entitlement. (1) Provided that the other requirements of this subpart are met: (i) Each port of entry is entitled to at least one zone project; (ii) If a port of entry is located in more than one state, each of the states in which the port of entry is located is entitled to a zone project; and (iii) If a port of entry is defined to include more than one city separated by a navigable waterway, each of the cities is entitled to a zone project. (2) Zone projects in addition to those approved under the entitlement provision of paragraph (a)(1) of this section may be authorized by the Board if it determines that existing project(s) will not adequately serve the public interest (convenience of commerce). (b) Location of zones and subzones-port of entry adjacency requirements. (1) The Act provides that the Board may approve "zones in or adjacent to ports of entry" (19 U.S.C. 81b). (2) The "adjacency" requirement is satisfied if: (i) A general-purpose zone is located within 60 statute miles or 90 minutes' driving time from the outer limits of a port of entry; (ii) A subzone meets the following requirements relating to Customs supervision: (A) Proper Customs oversight can be accomplished with physical and electronic means; and (B) All electronically produced records are maintained in a format compatible with the requirements of the U.S. Customs Service for the duration of the record period; and (C) The grantee/operator agrees to present merchandise for examination at a Customs site selected by Customs when requested, and further agrees to present all necessary documents directly to the Customs oversight office. §400.22 Eligible applicants. (a) In general. Subject to the other provisions of this section, public or private corporations may apply for a grant of authority to establish a zone project. The board will give preference to public corporations. (b) Public and non-profit corporations. The eligibility of public and non-profit corporations to apply for a grant of authority shall be supported by a enabling legislation of the legislature of the state in which the zone is to be located, indicating that the corporation, individually or as part of a class, is authorized to so apply. (c) Private for-profit corporations. The eligibility of private for-profit corporations to apply for a grant of authority shall be supported by a special act of the state legislature naming the applicant corporation and by evidence indicating that the corporation is chartered for the purpose of establishing a zone. (d) Applicants for subzones-(1) Eligibility. The following entities are eligible to apply for a grant of authority to establish a subzone: (i) The zone grantee of the closest zone project in the same state; (ii) The zone grantee of another zone in the same state, which is a public corporation, if the Board, or the Executive Secretary, finds that such sponsorship better serves the public interest; or (iii) A state agency specifically authorized to submit such an application by an act of the state legislature. (2) Complaints. If an application is submitted under paragraph (d)(1) (ii) or (iii) of this section, the Executive Secretary will: (i) Notify, in writing, the grantee specified in paragraph (d)(1)(i) of this section, who may, within 30 days, object to such sponsorship, in writing, with supporting information as to why the public interest would be better served by its acting as sponsor; (ii) Review such objections prior to filing the application to determine whether the proposed sponsorship is in the public interest, taking into account: (A) The complaining zone's structure and operation; (B) The views of State and local public agencies; and (C) The views of the proposed subzone operator; (iii) Notify the applicant and complainants in writing of the Executive Secretary's determination; (iv) If the Executive Secretary determines that the proposed sponsorship is in the public interest, file the application (see §400.47 regarding appeals to decisions of the Executive Secretary). §400.23 Criteria for grants of authority for zones and subzones. (a) Zones. The Board will consider the following factors in determining whether to issue a grant of authority for a zone project: (1) The need for zone services in the port of entry area, taking into account existing as well as projected international trade related activities and employment impact; (2) The adequacy of the operational and financial plans and the suitability of the proposed sites and facilities, with justification for duplicative sites; (3) The extent of state and local government support, as indicated by the compatibility of the zone project with the community's master plan or stated goals for economic development and the views of State and local public officials involved in economic development. Such officials shall avoid commitments that anticipate outcome of Board decisions; (4) The views of persons and firms likely to be affected by proposed zone activity; and (5) If the proposal involves manufacturing or processing activity, the criteria in §400.31. (b) Subzones. In reviewing proposals for subzones the Board will also consider: (1) Whether the operation could be located in or otherwise accommodated by the multi-purpose facilities of the zone project serving the area; (2) The specific zone benefits sought and the significant public benefit(s) involved supported by evidence to meet the requirement in §400.31(c); and (3) Whether the proposed activity is in the public interest, taking into account the criteria in §400.31. §400.24 Application for zone. (a) In general. An application for a grant of authority to establish a zone project shall consist of a transmittal letter, an executive summary and five exhibits. (b) Letter of transmittal. The transmittal letter shall be currently dated and signed by an authorized officer of the corporation and bear the corporate seal. (c) Executive summary. The executive summary shall describe: (1) The corporation's legal authority to apply; (2) The type of authority requested from the Board; (3) The proposed zone site and facilities and the larger project of which the zone is a part; (4) The project background, including surveys and studies; (5) The relationship of the project to the community's and state's overall economic development plans and objectives; (6) The plans for operating and financing the project; and (7) Any additional pertinent information needed for a complete summary description of the proposal. (d) Exhibits. (1) Exhibit One (Legal Authority for the Application) shall consist of: (i) A certified copy of the state enabling legislation described in §400.22; (ii) A copy of pertinent sections of the applicant's charter or organization papers; and (iii) A certified copy of the resolution of the governing body of the corporation authorizing the official signing the application. (2) Exhibit Two (Site Description) shall consist of: (i) A detailed description of the zone site, including size, location, address, and a legal description of the area proposed for approval; a table with site designations shall be included when more than one site is involved; (ii) A summary description of the larger project of which the zone is a part, including type, size, location and address; (iii) A statement as to whether the zone is within or adjacent to a customs port of entry; (iv) A description of zone facilities and services, including dimensions and types of existing and proposed structures; (v) A description of existing or proposed site qualifications including: land-use zoning, relationship to flood-plain, infrastructure, utilities, security, and access to transportation services; (vi) A description of current activities carried on in or contiguous to the project; (vii) If part of a port facility, a summary of port and transportation services and facilities; if not, a summary description of transportation systems indicating connections from local and regional points of arrival to the zone; and (viii) A statement as to the possibilities and plans for zone expansion. (3) Exhibit Three (Operation and Financing) shall consist of: (i) A statement as to site ownership (if not owned by the applicant or proposed operator, evidence as to their legal right to use the site); (ii) A discussion of the operational plan (if the zone or a portion thereof is to be operated by other than the grantee, a summary of the selection process used or to be used, the type of operation agreement and, if available, the name and qualifications of the proposed operator); (iii) A brief explanation of the plans for providing facilities, physical security, and for satisfying the requirements for Customs automated systems; (iv) A summary of the plans for financing capital and operating costs, including a statement as to the source and use of funds; and (v) The estimated time schedule for construction and activation. (4) Exhibit Four (Economic Justification) shall include: (i) A statement of the community's overall economic goals and strategies in relation to those of the region and state; (ii) A reference to the plan or plans on which the goals are based and how they relate to the zone project; (iii) An economic profile of the community including identification and discussion of dominant sectors in terms of percentage of employment or income, area resources and problems, economic imbalances, unemployment rates, area foreign trade statistics, and area port facilities and transportation networks; (iv) A statement as to the role and objective of the zone project, and a justification for each of the proposed sites; (v) A discussion of the anticipated economic impact, direct and indirect, of the zone project, including references to public costs and benefits, employment, U.S. international trade, and environmental impact; (vi) A statement as to the need for zone services in the community, with information on surveys of business, and specific expressions of interest from proposed zone users, with letters of intent from those firms that are considered prime prospects; and (vii) A description of proposed manufacturing and processing operations, if applicable, with information covering the factors described in §400.31(b), including the nature and scope of the operation and production process, materials and components used, items to be foreign sourced with relevant tariff information, zone benefits anticipated and how they will affect the firm's plans, and the economic impact of the operation on the community and on related domestic industries. (5) Exhibit Five (Maps) shall consist of: (i) The following maps and drawings: (A) State and county maps showing the general location of the zone in terms of the area's transportation network; (B) A U.S. Geodetic Survey map or the equivalent showing in red the location of the proposed zone; and (C) A detailed blueprint of the zone or subzone area showing zone boundaries in red, with dimensions and metes and bounds, or other legal description, and showing existing and proposed structures. (ii) Proposals involving existing zones shall include a drawing showing existing zone sites and the proposed changes. (e) Additional information. The Board or the Executive Secretary may require additional information needed to adequately evaluate a proposal. (f) Amendment of application. The Board or the Executive Secretary may allow amendment of the application. (g) Drafts. Applicants may submit a draft application to the Executive Secretary for review. (h) Format and number of copies. Unless the Executive Secretary alters the requirements of this paragraph, submit an original and 12 copies of the application on 8 1/2" x 11" (216 x 279 mm) paper. Exhibit Five of the original application shall contain full-sized maps, and copies shall contain letter-sized reductions. (i) Where to file. Address and mail the application to the Secretary of Commerce, Attention: Executive Secretary, Foreign- Trade Zones Board, U.S. Department of Commerce, Pennsylvania Avenue and 14th Street, NW., Washington, DC 20230. (Approved by the Office of Management and Budget under control number 0625-0139) §400.25 Application for subzone. (a) In general. An application to establish a subzone as part of a proposed or existing zone shall be submitted in accordance with the format in §400.24, except that the focus of the information provided in Exhibit Four shall be on the specific activity involved and its net economic effect. The information submitted in Exhibit Four shall include: (1) A summary as to the reasons for the subzone and an explanation of its anticipated economic effects; (2) Identity of the subzone user and its corporate affiliation; (3) Description of the proposed activity, including: (i) Products; (ii) Materials and Components; (iii) Sourcing plans (domestic/foreign); (iv) Tariff rates and other import requirements or restrictions; (v) Information to assist the Board in making a determination under §§400.31(b)(1)(iii) and 400.31(b)(2); (vi) Benefits to subzone user; (vii) Information required in §400.24(d)(4)(vii); (viii) Information as to whether alternative procedures have been considered as a means of obtaining the benefits sought; (ix) Information on the industry involved and extent of international competition; and (x) Economic impact of the operation on the area; (4) Reason operation cannot be conducted within a general- purpose zone; (5) Statement as to environmental impact; and (6) Any additional information requested by the Board or the Executive Secretary in order to conduct the review. The Executive Secretary may issue guidelines as to the kind of detailed information needed for various types of subzone cases. (b) Burden of proof. An applicant for a subzone must demonstrate to the Board that the proposed operation meets the criteria in §400.23(b). (Approved by the Office of Management and Budget under control number 0625-0139) §400.26 Application for expansion or other modification to zone project. (a) In general. (1) A grantee may apply to the Board for authority to expand or otherwise modify its zone project. (2) The Executive Secretary, in consultation with the District Director, will determine whether the proposed modification involves a major change in the zone plan and is thus subject to paragraph (b) of this section, or is minor and subject to paragraph (c) of this section. In making this determination the Executive Secretary will consider the extent to which the proposed modification would: (i) Substantially modify the plan originally approved by the Board; or (ii) Expand the physical dimensions of the approved zone area as related to the scope of operations envisioned in the original plan. (b) Major modification to zone project. An application for a major modification to an approved zone project shall be submitted in accordance with the format in §400.24, except that: (1) Reference may be made to current information in an application from the same applicant on file with the Board; and (2) The content of Exhibit Four shall relate specifically to the proposed change. (c) Minor modification to zone project. Other applications or requests under this subpart, including those for minor revisions of zone boundaries, grant of authority transfers, or time extensions, shall be submitted in letter form with information and documentation necessary for analysis, as determined by the Executive Secretary, who shall determine whether the proposed change is a minor one subject to this paragraph (c) instead of paragraph (b) of this section (see, §400.27(f)). (d) Applications for other revisions to grants of authority. Applications or requests for revisions to grants of authority, such as restriction modifications, shall be submitted in letter form with information and documentation necessary for analysis, as determined by the Executive Secretary. If the change involves removal or significant modification of a restriction included by the Board in a grant of authority, the review procedures of §400.32 shall apply. If not, the procedure set forth in §400.27(f) shall apply. (Approved by the Office of Management and Budget under control number 0625-0139) §400.27 Procedure for processing application. (a) In general. This section outlines the procedure followed in processing applications submitted under §§400.24-400.26. In addition, it sets forth the time schedules which will normally be applied in processing applications. The schedules will provide guidance to applicants with respect to the time frames for each of the procedural steps involved in the Board's review. Under these schedules, applications involving manufacturing or processing activity would be processed within 1 year, and those not involving such activity, within 10 months. While the schedules set forth a standard time frame, the Board may determine that it requires additional time based on special circumstances, such as when the public comment period must be reopened pursuant to paragraphs (d)(2)(v)(B) and (d)(3)(vi)(B) of this section. (b) Prefiling review. Applications subject to §400.29 shall be accompanied with a check in accordance with that section, and will be dated upon receipt at the headquarters of the Board. The Executive Secretary will determine whether the application satisfies the requirements of §§400.22-400.24, 400.25, 400.26, 400.32, and other applicable provisions of this part. (1) If the application is deficient, the Executive Secretary will notify the applicant within 20 days of receipt of the application, specifying the deficiencies. The applicant shall correct the deficiencies and submit the correct application within 30 days of notification. Otherwise, the application (original) will be returned. (2) If the application is sufficient, the Executive Secretary will within 45 days of receipt of the application: (i) Formally file the application, thereby initiating the proceeding or review; (ii) Assign a case docket number in cases requiring a Board order; and (iii) Notify the applicant. (c) Procedure-Executive Secretary responsibilities. After initiating a proceeding based on an application under §§400.24- 400.25, or 400.26(b), the Executive Secretary will: (1) Designate an examiner to conduct a review and prepare a report with recommendations for the Board; (2) Publish in the Federal Register a notice of the formal filing of the application and initiation of the review which includes the name of the applicant, a description of the zone project, information as to any hearing scheduled at the outset, and an invitation for public comment, including a time period during which the public may submit evidence, factual information, and written arguments. Normally, the comment period will close 60 days after the date the notice appears, except that, if a hearing is held (see, §400.51), the period will not close prior to 15 days after the date of the hearing. The closing date for general comment will ordinarily be followed by an additional 15-day period for rebuttal comments; (3) Send copies of the filing and initiation notice and the application to: (i) The Commissioner of Customs and the Regional Commissioner, or a designee; and (ii) The Resident Member, Board of Engineers for Rivers and Harbors, Department of the Army, and the District Engineer; (4) Arrange for hearings, as appropriate; (5) Transmit the reports and recommendations of the examiner and of the officials identified in paragraph (c)(3) of this section to the Board for appropriate action; and (6) Notify the applicant in writing and publish notice in the Federal Register of the Board's determination. (d) Case reviews-procedure and time schedule-(1) Customs and army engineer review. The Regional Commissioner (Customs), or a designee, and the District Engineer (Army), in accordance with the regulations and directives of their respective agencies, will submit their technical reports to the Executive Secretary within 45 days of the conclusion of the public comment period described in paragraph (c)(2) of this section. (2) Examiners reviews-non-manufacturing/processing. Examiners assigned to cases not involving manufacturing or processing activity shall conduct a review taking into account the factors enumerated in §400.23 and other appropriate sections of this part, which shall include: (i) Conducting or participating in necessary hearings scheduled by the Executive Secretary; (ii) Reviewing case records, including public comments; (iii) Requesting information and evidence from parties of record; (iv) Developing information and evidence necessary for evaluation and analysis of the application in accordance with the criteria of the Act and this part; (v) Preparing a report with recommendations to the Board and submitting it to the Executive Secretary within 120 days of the close of the period for public comment (see, paragraph (c)(2) of this section). (A) If the report is unfavorable to the applicant, it shall be considered a preliminary report and the applicant shall be notified within 5 days (in writing or by phone) and given 30 days from the date of notification in which to respond to the report and submit additional evidence. (B) If the response contains new evidence on which there has not been an opportunity for public comment, the Executive Secretary will publish notice in the Federal Register after completion of the review of the response. The new material will be made available for public inspection and the Federal Register notice will invite further public comment for 30 days, with an additional 15-day period for rebuttal comments. (C) The Customs and District Engineer (Army) advisers shall be notified when necessary for their further comments, which shall be submitted within 45 days after their notification. (D) The examiners report in a situation under paragraph (d)(2)(v)(A) of this section shall be completed and submitted to the Executive Secretary within 30 days after receipt of additional evidence or notice from the applicant that there will be none; except that, if paragraph (d)(2)(v)(B) of this section applies, the report will be submitted within 30 days of the close of the period for public comment. (3) Examiners reviews-cases involving manufacturing or processing activity. Examiners shall conduct a review taking into account the factors enumerated in §400.23, §400.31, and other appropriate sections of this part, which shall include: (i) Conducting or participating in hearings scheduled by the Executive Secretary; (ii) Reviewing case records, including public comments; (iii) Requesting information and evidence from parties of record; (iv) Developing information and evidence necessary for analysis of the threshold factors and the economic factors enumerated in §400.31; (v) Conducting an analysis to include: (A) An evaluation of policy considerations pursuant to §§400.31(b)(1)(i) and 400.31(b)(1)(ii); (B) An evaluation of the economic factors enumerated in §§400.31(b)(1)(iii) and 400.31(b)(2), which shall include an evaluation of the economic impact on domestic industry, considering both producers of like products and producers of components/materials used in the manufacture/processing or assembly of the products. The evaluation will take into account such factors as market conditions, price sensitivity, degree and nature of foreign competition, effect on exports and imports, and the net effect on U.S. employment; (vi) Conducting appropriate industry surveys when necessary; and (vii) Preparing a report with recommendations to the Board and submitting it to the Executive Secretary within 150 days of the close of the period for public comment: (A) If the report is unfavorable to the applicant, it shall be considered a preliminary report and the applicant shall be notified (in writing or by phone) and given 45 days from the date of notification in which to respond to the report and submit additional evidence pertinent to the factors considered in the report. (B) If the response contains new evidence on which there has not been an opportunity for public comment, the Executive Secretary will publish notice in the Federal Register after completion of the review of the response. The new material will be made available for public inspection and the Federal Register notice will invite further public comment for 30 days, with an additional 15-day period for rebuttal comments. (e) Procedure-Completion of review-(1) The Executive Secretary will circulate the examiners report with recommendations to Board members for their review and votes (by resolution). (2) The Treasury and Army Board members will return their votes to the Executive Secretary within 30 days, unless a formal meeting is requested (see, §400.11(d)). (3) The Commerce Department will complete the decision process within 15 days of receiving the votes of both other Board members, and the Executive Secretary will publish the Board decision. (f) Procedure-Application for minor modification of zone project. (1) The Executive Secretary, with the concurrence of the District Director, will make a determination in cases under §400.26(c) involving minor changes to zone projects that do not require a Board order, such as boundary modifications, including certain relocations, and will notify the applicant in writing of the decision within 30 days of the determination that the application or request can be processed under §400.26(c). (2) The District Director shall provide the decision as to concurrence within 20 days after being notified of the request or application. §400.28 Conditions, prohibitions and restrictions applicable to grants of authority. (a) In general. Grants of authority issued by the Board for the establishment of zones or subzones, including those already issued, are subject to the Act and this part and the following general conditions or limitations: (1) Approvals from the grantee and the District Director, pursuant to 19 CFR part 146, are required prior to the activation of any portion of an approved zone project; and (2) Approval of the Board or the Commerce Department's Assistant Secretary for Import Administration pursuant to subpart D of this part is required prior to the commencement of manufacturing beyond the scope of that approved as part of the application or pursuant to reviews under this part (e.g., new end products, significant expansions of plant production capacity), and of similar changes in processing activity which involves foreign articles subject to quantitative import controls (quotas) or results in articles subject to a lower (actual or effective) duty rate (inverted tariff) than any of their foreign components. (3) Sourcing changes-(i) Notification requirement. The grantee or operator of a zone or subzone shall notify the Executive Secretary when there is a change in sourcing for authorized manufacturing or processing activity which involves the use of new foreign articles subject to quotas or inverted tariffs, unless- (A) Entries for consumption are not to be made at the lower duty rate; or (B) The product in which the foreign articles are to be incorporated is being produced for exportation. (ii) Notification procedure. Notification shall be given prior to the commencement of the activity, when possible, otherwise at the time the new foreign articles arrive in the zone or are withdrawn from inventory for use in production. Requests may be made to the Executive Secretary for authority to submit notification of sourcing changes on a quarterly federal fiscal year basis covering changes in the previous quarter. (iii) Reviews (A) Upon notification of a sourcing change under paragraph (a)(3)(i) of this section, within 30 days, the Executive Secretary will conduct a preliminary review of the changes in relation to the approved activity to determine whether they could have significant adverse effects, taking into account the factors enumerated in §400.31(b), and will submit a report and recommendation to the Commerce Department's Assistant Secretary for Import Administration, who shall determine whether review is necessary. The procedures of §400.32(b) shall be used in these situations when appropriate. (B) The Board or the Commerce Department's Assistant Secretary for Import Administration may, based on public interest grounds, prohibit or restrict the use of zone procedures in regard to the change in sourcing, including requiring that items be placed in privileged foreign status (19 CFR 146.41) upon admission to a zone or subzone. (C) The Executive Secretary shall direct reviews necessary to ensure that activity involved in these situations continues to be in the public interest. (4) Prior to activation of a zone, the zone grantee or operator shall obtain all necessary permits from federal, state and local authorities, and except as otherwise specified in the Act or this part, shall comply with the requirements of those authorities. (5) A grant of authority for a zone or a subzone shall lapse unless the zone project (in case of subzones, the subzone facility) is activated, pursuant to 19 CFR part 146, and in operation not later than five years from: (i) A Board order (authorizing the zone or subzone) issued after November 7, 1991; or (ii) November 7, 1991. (6) A grant of authority approved under this subpart includes authority for the grantee to permit the erection of buildings necessary to carry out the approved zone project subject to concurrence of the District Director. (7) Zone grantees, operators, and users shall permit federal government officials acting in an official capacity to have access to the zone project and records during normal business hours and under other reasonable circumstances. (8) A grant of authority may not be sold, conveyed, transferred, set over, or assigned (FTZ Act, section 7; 19 U.S.C. 81q). Private ownership of zone land and facilities is permitted provided the zone grantee retains the control necessary to implement the approved zone project. Should title to land or facilities be transferred after a grant of authority is issued, the zone grantee must retain, by agreement with the new owner, a level of control which allows the grantee to carry out its responsibilities as grantee. The sale of a zone site or facility for more than its fair market value without zone status could, depending on the circumstances, be subject to section 7 of the Act. (9) A grant of authority will not be construed to make the zone grantee automatically liable for violations by operators, users, or other parties. (b) Additional conditions, prohibitions and restrictions. Other requirements, conditions or restrictions under Federal, State or local law may apply to the zone or subzone authorized by the grant of authority. (c) Revocation of grants of authority. (1) In general. As provided in this section, the Board can revoke in whole or in part a grant of authority for a zone or subzone whenever it determines that the zone grantee or, in the case of subzones, the subzone operator, has violated, repeatedly and willfully, the provisions of the Act. (2) Procedure. When the Board has reason to believe that the conditions for revocation, as described in paragraph (a) of this section, are met, the Board will: (i) Notify the zone or subzone grantee in writing stating the nature of the alleged violations, and provide the grantee an opportunity to request a hearing on the proposed revocation; (ii) Conduct a hearing, if requested or otherwise if appropriate; (iii) Make a determination on the record of the proceeding not earlier than 4 months after providing notice to the zone grantee under paragraph (b)(1) of this section; and (iv) If the Board's determination is affirmative, publish notice of revocation of the grant of authority in the Federal Register. (3) As provided in section 18 of the Act (19 U.S.C. 81r(c)), the zone or subzone grantee may appeal an order of the Board revoking the grant of authority. §400.29 Application fees. (a) In general. This section sets forth a uniform system of charges in the form of fees to recover some costs incurred by the Foreign-Trade Zones staff of the Department of Commerce in processing the applications listed in paragraph (b) of this section. The legal authority for the fees is 31 U.S.C. 9701, which provides for the collection of user fees by agencies of the Federal Government. (b) Uniform system of user fee charges. The following graduated fee schedule establishes fees for certain types of applications and requests for authority based on their average processing time. Applications combining requests for more than one type of approval are subject to the fee for each category. (1) Additional general-purpose zones (§400.24; §400.21(a)(2)) ..... $3,200 (2) Special-purpose subzones (§400.25): (i) Non-manufacturing/processing or less than three products ..... 4,000 (ii) Manufacturing/processing-three or more products ............. 6,500 (3) Expansions (§400.26(b)) ....................................... 1,600 (c) Applications submitted to the Board shall include a check drawn on a national or state bank or trust company of the United States or Puerto Rico in the amount called for in paragraph (b) of this section. Uncertified checks must be acceptable for deposit by a Federal Reserve bank or branch. (d) Applicants shall make their checks payable to the U.S. Department of Commerce ITA. The checks will be deposited by ITA into the Treasury receipts account. If applications are found deficient under §400.27(b)(1), or withdrawn by applicants prior to formal filing, refunds will be made. Subpart D-Manufacturing and Processing Activity-Reviews §400.31 Manufacturing and processing activity; criteria. (a) In general. Pursuant to section 15(c) of the Act (19 U.S.C. 810(c)), the Board has authority to restrict or prohibit zone activity "that in its judgment is detrimental to the public interest." When evaluating zone and subzone manufacturing and processing activity, either as proposed in an application, in a request for manufacturing/processing approval, or as part of a review of an ongoing operation, the Board shall determine whether the activity is in the public interest by reviewing it in relation to the evaluation criteria contained in paragraph (b) of this section. With regard to processing activity, this section shall apply only when the activity involves foreign articles subject to quantitative import controls (quotas) or results in articles subject to a lower duty rate (inverted tariff) than any of their foreign components. Such a review involves consideration of whether the activity is consistent with trade policy and programs, and whether its net economic effect is positive. (b) Evaluation criteria-(1) Threshold factors. It is the policy of the Board to authorize zone activity only when it is consistent with public policy and, in regard to activity involving foreign merchandise subject to quotas or inverted tariffs, when zone procedures are not the sole determining cause of imports. Thus, without undertaking a review of the economic factors enumerated in §400.31(b)(2), the Board shall deny or restrict authority for proposed or ongoing activity if it determines that: (i) The activity is inconsistent with U.S. trade and tariff law, or policy which has been formally adopted by the Executive branch; (ii) Board approval of the activity under review would seriously prejudice U.S. tariff and trade negotiations or other initiatives; or (iii) The activity involves items subject to quantitative import controls or inverted tariffs, and the use of zone procedures would be the direct and sole cause of imports that, but for such procedures, would not likely otherwise have occurred, taking into account imports both as individual items and as components of imported products. (2) Economic factors. After its review of threshold factors, if there is a basis for further consideration, the Board shall consider the following factors in determiing the net economic effect of the activity of proposed activity: (i) Overall employment impact; (ii) Exports and reexports; (iii) Retention or creation of manufacturing or processing activity; (iv) Extent of value-added activity; (v) Overall effect on import levels of relevant products, including import displacement; (vi) Extent and nature of foreign competition in relevant products; (vii) Impact on related domestic industry, taking into account market conditions; and (viii) Other relevant information relating to public interest and net economic impact considerations, including technology transfers and investment effects. (c) Methodology and evidence-(1)(i) The first phase (§400.31(b)) involves consideration of threshold factors. If an examiner or reviewer makes a negative finding on any of the factors in paragraph (b)(1) of this section in the course of a review, the applicant shall be informed pursuant to §400.27(d)(3)(vii)(A). When threshold factors are the basis for a negative recommendation in a review of ongoing activity, the zone grantee and directly affected party shall be notified and given an opportunity to submit evidence pursuant to §400.27(d)(3)(vii)(A). If the Board determines in the negative any of the factors in paragraph (b)(1) of this section, it shall deny or restrict authority for the proposed or ongoing activity. (ii) The process for paragraph (b)(2) of this section involves consideration of the enumerated economic factors, taking into account their relative weight and significance under the circumstances. Previous evaluations in similar cases are considered. The net effect is arrived at by balancing the positive and negative factors and arriving at a net economic effect. (2) Contributory effect. In assessing the significance of the economic effect of the zone activity as part of the consideration of economic factors, and in consideration of whether there is a significant public benefit, the Board may consider the contributory effect zone savings have as an incremental part of cost effectiveness programs adopted by companies to improve their international competitiveness. (3) Burden of proof. Applicants for subzones shall have the burden of submitting evidence establishing that the activity does or would result in a significant public benefit, taking into account the factors in paragraph (b) of this section. Applicants for approval of manufacturing or processing in general-purpose zones shall submit evidence regarding the positive economic effects that would result from activity within the zone and may submit evidence and comments as to policy considerations. Both types of applicants are expected to submit information in response to evidence of adverse economic effects during the public comment period. Parties should submit evidence that is probative and substantial in addressing the matter in issue. (d) Monitoring and post-approval reviews-(1) Ongoing zone activity may be reviewed at anytime to determine whether it is in compliance with the Act and regulations, as well as the authority granted by the Board. Reviews may also be conducted to determine whether there are changed circumstances that raise questions as to whether the activity is detrimental to the public interest, taking into account the factors enumerated in §400.31. The Board may prescribe special monitoring requirements in its decisions when appropriate. (2) Reviews may be initiated by the Board, the Commerce Department's Assistant Secretary for Import Administration, or the Executive Secretary; or, they may be undertaken in response to requests from parties directly affected by the activity in question and showing good cause. (3) Upon review, if the Board finds that zone activity is no longer in the public interest, taking into account the provisions of §400.31, it may restrict the activity in question. The appropriateness of a delayed effective date will be considered in such cases. §400.32 Procedure for review of request for approval of manufacturing or processing. (a) Request as part of application for grant of authority. A request for approval of proposed manufacturing or processing activity may be submitted as part of an application under §§400.24- 400.26(a). The Board will review the request taking into account the criteria in §400.31(b). (b) Request for manufacturing/processing in approved zone or subzone. Prior to the commencement of manufacturing in a zone or subzone involving activity beyond the scope of that which has been previously authorized at the facility (i.e., new end products, significant expansions of plant production capacity), and of similar changes in processing activity that involves foreign articles subject to quotas or inverted tariffs, zone grantees or operators shall request the determination referred to in §400.31(a) by submitting a request in writing to the Executive Secretary (§400.28(a)(2)). Such requests shall include the information required by §§400.24(d)(4)(vii) and 400.25. (1) The Commerce Department's Assistant Secretary for Import Administration may make determinations in these cases based upon a review by the FTZ staff and the recommendation of the Executive Secretary, when: (i) The proposed activity is the same, in terms of products involved, to activity recently approved by the Board and similar in circumstances; or (ii) The activity is for export only; or (iii) The zone benefits sought do not involve the election of non-privileged foreign status (19 CFR 146.42) on items involving inverted tariffs; or (iv) The District Director determines that the activity could otherwise be conducted under Customs bonded procedures. (2) When the informal procedure in paragraph (b)(1) of this section is not appropriate- (i) The Executive Secretary will: (A) Assign a case docket number and give notice in the Federal Register inviting public comment; (B) Arrange a public hearing, if appropriate; (C) Appoint an examiner, if appropriate, to conduct a review and prepare a report with recommendations for the Board; and (D) Prepare and transmit a report with recommendations, or transmit the examiners report, to the Board for appropriate action; and (ii) The Board will make a determination on the requests, and the Executive Secretary will notify the grantee in writing of the Board's determination, and will publish notice of the determination in the Federal Register. (c) Scope determinations. Determinations shall be made by the Executive Secretary as to whether changes in activity are within the scope of related activity already approved for the facility involved under this part. When warranted, the procedures of paragraph (b)(2) of this section will be followed. §400.33 Restrictions on manufacturing and processing activity. (a) In general. In approving manufacturing or processing activity for a zone or subzone the Board may adopt restrictions to protect the public interest, health, or safety. The Commerce Department's Assistant Secretary for Import Administration may similarly adopt restrictions in exercising authority under §400.32(b)(1). (b) Restrictions on items subject to antidumping and countervailing duty actions-(1) Board policy. Zone procedures shall not be used to circumvent antidumping (AD) and countervailing duty (CVD) actions under 19 CFR parts 353 and 355. (2) Admission of items subject to AD/CVD actions. Items subject to AD/CVD orders or items which would be otherwise subject to suspension of liquidation under AD/CVD procedures, if they entered U.S. Customs territory, shall be placed in privileged foreign status (19 CFR 146.41) upon admission to a zone or subzone. Upon entry for consumption, such items shall be subject to duties under AD/CVD orders or to suspension of liquidation, as appropriate, under 19 CFR parts 353 and 355. Subpart E-Zone Operations and Administrative Requirements §400.41 Zone operations; general. Zones shall be operated by or under the contractual oversight of zone grantees, subject to the requirements of the Act and this part, as well as those of other federal, state and local agencies having jurisdiction over the site and operation. Zone grantees shall ensure that the reasonable zone needs of the business community are served by their zone projects. The District Director represents the Board with regard to the zone projects in the district and is responsible for enforcement, including physical security and access requirements, as provided in 19 CFR part 146. §400.42 Requirements for commencement of operations in a zone project. (a) In general. The following actions are required before operations in a zone may commence: (1) Approval by the District Director of an application for activation is required as provided in 19 CFR part 146; and (2) The Executive Secretary will review proposed manufacturing or processing, pursuant to §400.32, and a zone schedule as provided in this section. (b) Zone schedule. (1) The zone grantee shall submit to the Executive Secretary and to the District Director a zone schedule which sets forth: (i) Internal rules and regulations for the zone; and (ii) A statement of the rates and charges (fees) applicable to zone users. (2) A zone schedule shall consist of typed, loose-leaf, numbered, letter-sized pages, enclosed in covers, and shall contain: (i) A title page, with information to include: (A) The name of the zone grantee and operator(s); (B) Schedule identification; (C) Site description; (D) Date of original schedule; and (E) Name of the preparer; (ii) A table of contents; (iii) Administrative information; (iv) A statement of zone operating policy, rules and regulations, including uniform procedures regarding the construction of buildings and facilities; and (v) A section listing rates and charges for zones and subzones with information sufficient for the Board or the Executive Secretary to determine whether the rates and charges are reasonable based on other like operations in the port of entry area, and whether there is uniform treatment under like circumstances among zone users. (3) The Executive Secretary will review the schedule to determine whether it contains sufficient information for users concerning the operation of the facility and a statement of rates and charges as provided in paragraph (b)(2) of this section. If the Executive Secretary determines that the schedule satisfies these requirements, the Executive Secretary will notify the zone grantee, unless there is a basis for review under paragraph (b)(5) of this section. A copy of the schedule shall be available for public inspection at the offices of the zone grantee and operator. The zone grantee shall send a copy to the District Director, who may submit comments to the Executive Secretary. (4) Amendments to the schedule shall be prepared and submitted in the manner described in paragraphs (b)(1) through (b)(3) of this section, and listed in the concluding section of the schedule, with dates. (5) A zone user or prospective user showing good cause may object to the zone or subzone fee on the basis that it is not reasonable, fair and uniform, by submitting to the Executive Secretary a complaint in writing with supporting information. The Executive Secretary will review the complaint and issue a report and decision, which will be final unless appealed to the Board within 30 days. The Board or the Executive Secretary may otherwise initiate a review for cause. The factors considered in reviewing reasonableness and fairness, will include: (i) The going-rates and charges for like operations in the area and the extra costs of operating a zone, including return on investment; and (ii) In the case of subzones, the value of actual services rendered by the zone grantee or operator, and reasonable out- of-pocket expenses. §400.43 Restriction and prohibition of certain zone operations. (a) In general. After review, the Board may restrict or prohibit any admission of merchandise into a zone project or operation in a zone project when it determines that such activity is detrimental to the public interest, health or safety. (b) Initiation of review. The Board may conduct a proceeding, or the Executive Secretary a review, to consider a restriction or prohibition under paragraph (a) of this section either self- initiated, or in response to a complaint made to the Board by a party directly affected by the activity in question and showing good cause. §400.44 Zone-restricted merchandise. (a) In general. Merchandise which has been given export status by Customs officials ("zone-restricted merchandise"-19 CFR 146.44) may be returned to the Customs Territory of the United States only when the Board determines that the return would be in the public interest. Such returns are subject to the Customs laws and the payment of applicable duties and excise taxes (19 U.S.C. 81c, 4th proviso). (b) Criteria. In making the determination described in paragraph (a) of this section, the Board will consider: (1) The intent of the parties; (2) Why the goods cannot be exported; (3) The public benefit involved in allowing their return; and (4) The recommendation of the District Director. (c) Procedure. (1) A request for authority to return "zone- restricted" merchandise into Customs territory shall be made to the Executive Secretary in letter form by the zone grantee or operator of the zone in which the merchandise is located, with supporting information and documentation. (2) The Executive Secretary will investigate the request and prepare a report for the Board. (3) The Executive Secretary may act for the Board under this section in cases involving merchandise valued at 500,000 dollars or less, provided requests are accompanied with a letter of concurrence from the District Director. §400.45 Retail trade. (a) In general. Retail is prohibited in zones, except that sales or other commercial activity involving domestic, duty- paid, and duty-free goods may be conducted within an activated zone project under permits issued by the zone grantee and approved by the Board, with the further exception that no permits shall be necessary for sales involving domestic, duty-paid or duty- free food and non-alcoholic beverage products sold within the zone or subzone for consumption on premises by persons working therein. The District Director will determine whether an activity is retail trade, subject to review by the Board when the zone grantee requests such a review with a good cause. (b) Procedure. Requests for Board approval under this section shall be submitted in letter form, with supporting documentation, to the District Director, who is authorized to act for the Board in these cases, subject to the concurrence of the Executive Secretary. (c) Criteria. In evaluating requests under this section, the District Director and the Executive Secretary will consider: (1) Whether any public benefits would result from approval; and (2) The economic effect such activity would have on the retail trade outside the zone in the port of entry area. §400.46 Accounts, records and reports. (a) Zone accounts. Zone accounts shall be maintained in accordance with generally accepted accounting principles, and in compliance with the requirements of federal, state or local agencies having jurisdiction over the site or operation. (b) Records and forms. Zone records and forms shall be prepared and maintained in accordance with the requirements of the Customs Service and the Board, and the zone grantee shall retain copies of applications it submits to the Board. (c) Maps and drawings. Zone grantees or operators, and District Directors, shall keep current layout drawings of approved sites as described in §400.24(d)(5), showing activated portions, and a file showing required approvals. The zone grantee shall furnish necessary maps to the District Director. (d) Annual reports (1) Zone grantees shall submit annual reports to the Board at the time and in the format prescribed by the Executive Secretary, for use by the Executive Secretary in the preparation of the Board's annual report to the Congress. (2) The Board shall submit an annual report to the Congress. (Approved by the Office of Management and Budget under control number (0625-0109) §400.47 Appeals to the Board from decisions of the Assistant Secretary for Import Administration and the Executive Secretary. (a) In general. Decisions of the Assistant Secretary for Import Administration and the Executive Secretary made pursuant to §§400.22(d)(2)(ii), 400.32(b)(1), 400.44(c)(3), and 400.45(b)(2) may be appealed to the Board by adversely affected parties showing good cause. (b) Procedures. Parties appealing a decision under paragraph (a) of this section shall submit a request for review to the Board in writing, stating the basis for the request, and attaching a copy of the decision in question, as well as supporting information and documentation. After a review, the Board will notify the complaining party of its decision in writing. Subpart F-Notice, Hearings, Record and Information §400.51 Notice and hearings. (a) In general. The Executive Secretary will publish notice in the Federal Register inviting public comment on applications docketed for Board action (see, §400.27(c)), and with regard to other reviews or matters considered under this part when public comment is necessary. Applicants shall give appropriate notice of their proposals in local newspapers. The Board, the Secretary, the Commerce Department's Assistant Secretary for Import Administration, or the Executive Secretary, as appropriate, may schedule and/or hold hearings during any proceedings or reviews conducted under this part whenever necessary or appropriate. (b) Requests for hearings-(1) A directly affected party showing good cause may request a hearing during a proceeding or review. (2) The request must be made within 30 days of the beginning of the period for public comment (see, §400.27) and must be accompanied by information establishing the need for the hearing and the basis for the requesting party's interest in the matter. (3) A determination as to the need for the hearing will be made by the Commerce Department's Assistant Secretary for Import Administration within 15 days after the receipt of such a request. (c) Procedure for public hearings. The Board will publish notice in the Federal Register of the date, time and location of a hearing. All participants shall have the opportunity to make a presentation. Applicants and their witnesses shall ordinarily appear first. The presiding officer may adopt time limits for individual presentations. §400.52 Official record; public access. (a) Content. The Executive Secretary will maintain at the location stated in §400.53(d) an official record of each proceeding within the Board's jurisdiction. The Executive Secretary will include in the official record all factual information, written argument, and other material developed by, presented to, or obtained by the Board in connection with the proceeding. The official record will contain material that is public, business proprietary, privileged, and classified. While there is no requirement that a verbatim record shall be kept of public hearings, the proceedings of such hearings shall ordinarily be recorded and transcribed when significant opposition is involved. (b) Opening and closing of official record. The official record opens on the date the Executive Secretary files an application or receives a request that satisfies the applicable requirements of this part and closes on the date of the final determination in the proceeding or review, as applicable. (c) Protection of the official record. Unless otherwise ordered in a particular case by the Executive Secretary, the official record will not be removed from the Department of Commerce. A certified copy of the record will be made available to any court before which any aspect of a proceeding is under review, with appropriate safeguards to prevent disclosure of proprietary or privileged information. §400.53 Information. (a) Request for information. The Board may request submission of any information, including business proprietary information, and written argument necessary or appropriate to the proceeding. (b) Public information. Except as provided in paragraph (c) of this section, the Board will consider all information submitted in a proceeding to be public information. If the person submitting the information does not agree to its public disclosure, the Board will return the information and not consider it in the proceeding. (c) Business proprietary information. Persons submitting business proprietary information and requesting protection from public disclosure shall mark the cover page "business proprietary," as well as the top of each page on which such information appears. (d) Disclosure of information. Disclosure of public information will be governed by 15 CFR part 4. Public information in the official record will be available for inspection and copying at the Office of the Executive Secretary, Foreign-Trade Zones Board, U.S. Department of Commerce Building, Pennsylvania Avenue and 14th Street, NW., Washington, DC 20230. [FR Doc. 91-24130 Filed 10-3-91; 3:50 pm] BILLING CODE 3510-DS-M The Contents entry for this article reads as follows: Foreign-Trade Zones Board RULES Foreign-trade zones in United States, 50790