FTZB Issues Final Rule Revising FTZ Regs (Part I – Production Approval)

The final rule, in response to comments received by the FTZB, contains many substantive changes from the proposed rule. Changes from the proposed rule include: (1) a new definition of production which, as in the proposed regulations, replaces the manufacturing/processing concepts from the prior regulations; (2) an entirely new two-stage advance approval process, instead of the proposed elimination of advance approval except in cases of tariff inversion, AD/CV & section 337 proceedings, and scrap or waste; (3) new separate processes for obtaining production and subzone authorities, as well as a simpler and quicker process for obtaining subzone authority; (4) changes to the public utility and uniform treatment provisions from the proposed rule; and (5) provisions for fines only in cases of late annual reports and uniform treatment violations (i.e., production-related violation fines will only be assessed by U.S. Customs and Border Protection and not FTZB).

This is Part I of a multi-part series of summaries of the final rule, and highlights the revised definition of "production" and the new, two-stage production approval consisting of a 120-day notification approval process followed by, in some cases, a year-long review similar to the application process prescribed by the prior regulations. (See future issues for additional summaries of the final rule.)

"Production" Concept Replaces Manufacturing & Processing Categories

The prior regulations divide activity where an imported component is combined with one or more other components to create a different finished product into two categories -- “manufacturing” or “processing.” Manufacturing² involves a substantial transformation of the component, while processing³ involves a change in customs classification or in its eligibility for entry for consumption (that does not amount to manufacturing).

The final rule eliminates the distinction between these two categories and instead applies a unified concept of “production” and a single set of procedures pertaining to production activities.

“Production” activity under 15 CFR 400.2(o) is defined as: “Activity involving the substantial transformation of a foreign article resulting in a new and different article having a different name, character, and use, or activity involving a change in the condition of the article which results in a change in the customs classification of the article or in its eligibility for entry for consumption.”

New Two Stage Advance Approval - Notification & Potential Further Review

The final rule implements a revised approach to authorizing production activity. The process begins with an ordinary 120-day “notification” process to receive approval in advance of any new production activity (including use of new materials/components at a previously approved production operation). The notification process reduces the information burden relative to the application process in the prior regulations. Interim approval is available for new production that is time-sensitive.

After 120 days, should the FTZB determine that further review is required, a more extensive application must be submitted. This section of proceedings is similar to the advance approval process in the prior regulations, including a 12-month processing time and a 60-day comment period.

(In the February 28, 2012 webinar on the new regulations, FTZB stated that applications filed according to the procedures of the prior regulations will be processed by FTZB under the prior regulations.)

According to the FTZB, the revised procedures balance the need for generally shorter timeframes for action on requests for production authority with the necessity that potentially affected parties be able to provide comments to the FTZB regarding the impact of proposed production activity. Specifically, the final rule states:

Notification Required for New Production Activity. New 15 CFR 400.14(a) states that production activity in zones shall not be conducted without prior authorization from the FTZB. To obtain authorization, “notification” must be provided to the FTZB, as well as CBP and the grantee of the zone, of any new production activity, entailing submission of: (1) the identity of the user and its location; (2) materials, components, and finished products associated with the proposed activity including 6-digit HTS numbers and tariff rates; and (3) information as to whether any material or component is subject to a trade-related measure or proceeding (e.g., AD/CV order or proceeding).¹

New 15 CFR 400.37 provides that the FTZB must notify whether further review is needed by 120 days after receipt of the notification. This 120-day period includes publication in the Federal Register of a notice initiating a 40-day public comment period on the notification.

Interim Approval Available through the FTZB. The final rule includes a provision at 15 CFR 400.37(d) for new production in the notification process to be authorized by FTZB on an interim basis. Such authorization will only be granted based on a showing that commencement of the activity is time-sensitive. Interim authorization does not apply to materials or components subject to an AD/CV order, and should the FTZB determine that a full review is warranted, interim authorization may be revoked.

(FTZB states that, unlike the prior process for granting temporary/interim manufacturing (T/IM) authority, the new provision is not constrained by a requirement that activity meet a specific standard for similarity to previous applications, and as a result, the adopted provision should be more flexible and useful.)

FTZB May Determine that Further Review is Warranted. In considering submitted notification, the FTZB may determine that further review, and a more extensive “application”, is required for the FTZB to evaluate the proposed activity.¹

According to FTZB, the application and review process substantively parallels the prior regulations in that it maintains an ordinary 12-month processing time and a 60-day comment period. The application, in addition to the information requirements of the notification, requires information on, among other things, the economic impact of the new production activity on the area, value added by imported inputs, domestic inputs, and plant, and production capacity.

Capacity Limit on Approved Production Authority Removed

Production capacity has been removed as an ordinary element of production scope of authority^4, and therefore the new rule eliminates the provision on notification of increases in production capacity. According to FTZB, in the twenty years that the capacity increase notification requirement has been in effect, actual increases in capacity have not proven to be controversial or to result in negative impact. However, FTZB states that if zone activity ultimately raises public interest concerns, FTZB retains the ability to conduct reviews pursuant to 15 CFR 400.49.

Specifically, new 15 CFR 400.14(b) states that production activity that may be conducted in a particular zone is limited to the specific foreign-status materials and components and specific finished products described in notifications and applications that have been authorized, including any applicable prohibitions or restrictions.

Information on Authorized Production Available on FTZB Website

New 15 CFR 400.14(c) states that the FTZB shall make available via its website information regarding the materials, components, and finished products associated with authorized individual production operations.

Scope Determinations and AD/CV Restrictions

New 15 CFR 400.14(d) on "scope determinations" and 15 CFR 400.14(e) on restrictions on items subject to AD/CV actions largely mirror the old regulations. New 15 CFR 400.14(d) states that determinations may be made by the Executive Secretary of the FTZB as to whether changes in activity are within the scope of the production activity already authorized.

New 15 CFR 400.14(e) states that zone procedures shall not be used to circumvent AD and CV actions. In addition, admission of items subject to AD/CV actions, that would be otherwise subject to suspension of liquidation under AD/CV procedures if they entered U.S. customs territory, will be placed in privileged foreign status upon admission to a zone or subzone. Upon entry for consumption, such items will be subject to duties under AD/CV orders or to suspension of liquidation, as appropriate.

¹While the final rule is effective April 30, 2012, sections 400.21-400.23 (Application to establish a zone, Notification for production authority, and Application for production authority, respectively), 400.25 (Application for subzone designation) and 400.43(f) (certain waivers regarding uniform treatment), which contain information collection requirements that have not yet been submitted for OMB review, will be effective at a later date. In addition, the final rule has certain sections (e.g., regarding uniform treatment) where compliance must occur no later than two years after the April 30, 2012 effective date of the final rule.

²"Manufacturing" is currently defined under 15 CFR 400.2(g) as "activity involving the substantial transformation of a foreign article resulting in a new and different article having a different name, character, and use."

³"Processing" is currently defined under 15 CFR 400.2(k) as "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."

⁴i.e., the production authorized by FTZB, beyond which any other production will be considered “new” and require a separate authorization.

(See ITT’s Online Archives 12022730 for summary of FTZB issuance of final rule and webinar series to provide education on the new regulations.

See ITT’s Online Archives 12022109 for initial summary of FTZB final rule. See ITT’s Online Archives 12021744 for summary of OMB approving this final rule, just two days after extending its review.

See ITT’s Online Archives 10123022 (part I), 11010325 (part II), and 11010630 (part III) for multi-part series of summaries of proposed FTZ rule. See also ITT’s Online Archives 11071819 for summary of trade’s comments on the proposed regulations, which supported the underlying goals of the revisions but stated that the proposed rule must be revised, clarified, and made less burdensome.)

FTZB’s unofficial summary of key provisions of the revised regulations, full text of the revised regulations, as well as side-by-side comparison of the final, proposed, and prior regulations are available here.

FTZB contact - Andrew McGilvray (202) 482-2862

ITA Contact - Matthew Walden (202) 482-2963