The US Commerce Department’s Foreign Trade Zone Board ushered in 2011 by proposing significant revisions to the Foreign-Trade Zone (FTZ) regulations. These proposed changes, published on December 30, 2010, are intended to facilitate greater use of FTZs by US manufacturers and enhance their competitiveness by reducing delays associated with obtaining approvals from the FTZ Board. The proposed changes would simplify the approval process and operating procedures for certain FTZ activity, create duty benefits for capital equipment deployed in FTZ manufacturing activity, implement enforcement authority, and create a prior disclosure process for zone violations.

By way of background, FTZ’s are restricted–access sites in or near US Customs and Border Protection (CBP) ports of entry. The zones are licensed by the FTZ Board and operated under the supervision of CBP. FTZ’s are physical areas into which foreign and domestic merchandise may be moved for operations involving storage, assembly, manufacture or other processing. These zones are considered outside the US customs territory for purposes of CBP entry procedures. The usual formal CBP entry procedure and payment of duties is not required on the foreign merchandise in FTZ’s unless and until it enters US Customs territory for US domestic consumption. Thus, foreign merchandise imported into an FTZ can avoid US duties entirely if re-exported, including after incorporation into a downstream product through activity in the FTZ.

The following briefly describes several of the more significant aspects of the FTZ Board’s proposed rule:

Production Activity

The proposed regulations would eliminate the distinction between “manufacturing” and “processing” and create a single concept of “production.” The rules would limit the scope of production activities that are subject to advance approval by the FTZ Board. Specifically, advance approval would be required when a production input is subject to an antidumping/countervailing duty order, an order of the International Trade Commission pursuant to Section 337 of the Trade Act (IP enforcement), or quantitative restriction (quota). In addition, advance approval would be required for production for the US market when a lower duty rate would be applied to the component through its incorporation into a downstream product (i.e., an inverted tariff) or when the production activity will result in duty avoidance on scrap/waste.

When advanced approval is required, there would be a streamlined process by which the Commerce Department’s Assistant Secretary for Import Administration may approve the activity on an interim basis pending the completion of a full review by the board. This streamlined process would be more flexible and apply to a wider range of products than that which is currently subject to the existing temporary/interim manufacturing (T/IM) procedure.

The changes also provide greater flexibility to accommodate changes in production at previously approved FTZ operations. Previously, FTZ grantees or zone operators were required to notify the FTZ Board of new components and seek advance approval for new finished products to be manufactured in the zone. Under the new rules, only retrospective notification would be required for new finished products and for new inputs that are used that result in inverted tariff benefits.

Production Equipment

The proposed regulations would allow importers to defer customs duties on production equipment used in an FTZ until it is completely assembled, installed, tested, and used in the production for which it was admitted into the zone. This is intended to encourage new capital expenditure in the United States.

Grantee Obligations – “Public Utility”

If adopted, the FTZ Board proposed regulations would also provide practical guidance for FTZ grantees in fulfilling their role of overseeing and managing zone projects, including approving applications for use by zone participants (i.e., importers). This stems from the requirement that each zone be operated as a “public utility.” For example, fees imposed by a grantee on zone participants must be based on costs incurred by the grantee, directly related to the service provided by the grantee. Grantees would not be able to tie fees to levels of benefits derived by zone participants. Grantees would also be required to afford uniform treatment to FTZ participants, including offering standard contractual provisions to all zone participants and to apply neutral criteria in evaluating proposals from zone participants.

Fines, Penalties, and Prior Disclosure

The proposed rules also implement existing statutory authority to issue fines for violations of the FTZ Act or the board’s regulations. A maximum fine up to $1,000 may be imposed for such violations, with each day during which a violation continues constituting a separate offense subject to fines. These provisions are intended to compel compliance with requirements to submit annual reports, seek advance approval, and/or submit notifications of changes to zone activities. In addition, the proposed regulations contain a new provision allowing for the “prior disclosure” of violations of FTZ rules. Disclosure of a violation to the FTZ Board prior to its discovery by the board would generally limit the potential total fine for the violation to $1,000.

In an effort to educate the public on the proposed changes, the FTZ Board is planning forums for the general public. These include a general forum in Washington, DC (February 7), Newark (February 16), Detroit (February 23), Houston (February 28 – tentative), Atlanta (March 2 – tentative), and Miami (March 4 - tentative). Public comments on the proposed rule changes are due on or before April 8, 2011. Arent Fox will continue to monitor these developments.