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).

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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.

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      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.

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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.

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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.

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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)).

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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.

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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.

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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)).

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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.

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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).

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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.

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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.

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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.

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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.

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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.

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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.

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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)).

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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.

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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.

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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.

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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).

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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.

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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.

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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.

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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)).

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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.

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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.

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