Foreign Trade Zones Board Proposes Changes to FTZ Regulations

On December 30, 2010, the Foreign-Trade Zones Board (FTZ Board) issued a proposed rule in the Federal Register to amend the substantive and procedural rules for the authorization of Foreign Trade Zones (FTZs) and the regulation of zone activity. 

The revisions encompass changes related to manufacturing and value-added activities, as well as new rules designed to address compliance with the Foreign Trade Zones Act's (FTZ Act) requirement for a grantee to provide uniform treatment for the users of a zone. 

Specifically, the proposed changes are as follows: 

The proposed regulations would eliminate the general requirement for advance approval from the FTZ Board for all manufacturing (i.e., substantial transformation) activity. As proposed, advanced approval for production activity would only be required under specific circumstances (e.g., if a lower U.S. duty rate will be applied to the component through its incorporation into a downstream product in the FTZ) (see 15 C.F.R. Sec. 400.14(a)).

In circumstances where advance approval is required for specific production activity, the proposed rule would delegate authority to the Commerce Department's Assistant Secretary for Import Administration to approve the activity on an interim basis pending completion of the full 
FTZ Board's review of the request, which would significantly decrease the time a company must wait for approval (see 15 C.F.R. Sec.  400.14(d)(3)). This new provision would replace and will be significantly more flexible than the temporary/interim manufacturing (T/IM) procedure, which had not yet been the subject of specific regulations. The T/IM procedure was limited to activity similar to that approved by the FTZ Board in the preceding five years. The new provision for interim approvals contains no requirement for similarity to recently approved activity.

The proposed regulations also provide improved flexibility to accommodate changes in production at previously approved FTZ operations through retrospective notifications to the FTZ Board (see Sec. Sec.  400.14(e)(1) and 400.37). The current regulations allow grantees or zone operators to notify the FTZ Board of new components but require advance approval for any new finished products. The proposed regulations would allow grantees or zone operators to notify the Board of new finished products as well as new components. However, in order to preserve the public process long associated with FTZ Board evaluation of new "manufacturing'' activity, the proposed regulations would also require that a production operation obtain advance FTZ Board approval - after a public comment period on the proposal - for the list of broad categories of components or finished products within which specific new components or finished products would be identified. In addition, the proposed regulations would provide for a public comment period on all notifications submitted to the FTZ Board, as well as procedures to review any such notifications and to impose restrictions on notified changes when warranted.

Two other areas of change in the proposed regulations pertain to the statutory requirements that each zone be operated as a public utility and provide uniform treatment to all that apply to use the zone. The current regulations do not provide grantees guidance on the practical implementation of these requirements. The proposed regulations would provide such guidance and would establish specific standards for compliance with those requirements (see Secs. 400.42 and 400.43). FTZ Board plans that explicit standards regarding uniform treatment would help to ensure that the broadest range of U.S.-based operations can use zones to maximize their global competitiveness.

Additionally, the proposed regulations would implement the statutory authority to issue fines for violations of the FTZ Act or the Board's regulations through specific provisions targeting certain types of violations (see Sec.  400.62). The current regulations contain no provisions pertaining to the statutory fining authority. The fining provisions are supplemented by provisions through which the Board or the Commerce Department's Assistant Secretary for Import Administration may order the suspension of the activated status of a zone operation in response to a violation. The proposed regulations' fining and suspension-of-activation provisions would help to ensure compliance with the statutory or regulatory requirements that zones submit annual reports to the FTZ Board, obtain advance approval (or submit notification) for certain production activity, and avoid certain conflicts of interest inconsistent with the statutory uniform treatment requirement.

Finally, the proposed regulations contain a new provision allowing for the ``prior disclosure'' of violations of the FTZ Act or the Board's regulations (see Sec.  400.63). Disclosure of a violation to the FTZ Board prior to its discovery by the Board would generally result in the potential total fine for the violation (or series of offenses stemming from a continuing violation) being reduced to $1,000.

In addition to the overview of changes above, the rule contains a detailed explanation of proposed changes by section. Comments on the proposed rule are due on April 8, 2011.