Proposed Regulations (published 12/30/10)

1. U.S. Foreign-Trade Zones Board Proposed Regulations (published 12/30/10)

2. Schedule for Presentation • (ask questions at any point ) • Overview • Manufacturing and Processing • Break • Public Utility and Uniform Treatment • Fines and Penalties • Other Key Proposed Changes

3. Note: The content of this presentation relies on abbreviated language to summarize certain provisions of the FTZ Board’s proposed regulations for discussion purposes. The proposed regulations as published in the Federal Register should be consulted for definitive reference.

4. Overview

5. What Is a Foreign-Trade Zone (FTZ)? • Under FTZ Act (enacted in 1934), FTZ is designated location in U.S. where special customs procedures can be used under CBP supervision. All federal, state and local laws apply to FTZs. No one can reside in a FTZ. • FTZ procedures encourage U.S. activity and value added – in competition with foreign alternatives – by allowing delayed or reduced duty payments on foreign merchandise, as well as other savings. • Before use, FTZ sites must be “activated” with CBP.

6. Who’s Who in FTZs • FTZ Board – comprised of Commerce (chair) and Treasury departments. Most FTZ Board authority at Commerce delegated to Assistant Secretary for Import Administration (AS/IA). FTZ Board authority at Treasury delegated to Deputy Assistant Secretary for Tax, Trade, and Tariff Policy. • Customs and Border Protection (CBP) – oversees FTZ activity through local port personnel. Advises FTZ Board on CBP-related aspects of Board matters.

7. Who’s Who in FTZs (cont.) • Grantee – recipient of grant of authority from FTZ Board to establish and operate zone project. Generally public agency (port/airport authority, city, county). Sometimes will be private non-profit organization. • Operator – company that operates one or more zone or subzone sites (with CBP “activation” authorization) under terms of agreement with the zone grantee. • User – party using a zone under agreement with the zone grantee or operator.

8. What Are Possible FTZ Benefits? • Duty Exemption. No duties on or quota charges on re-exports. • Duty Deferral. Customs duties and federal excise tax deferred on imports. • Inverted Tariff. Where FTZ manufacturing results in finished product with lower duty rate than the rate on foreign input (inverted tariff), finished product may be entered at the duty rate that applies to its condition as it leaves the zone – if approved by FTZ Board.

9. What Are Possible FTZ Benefits? (cont.) • Logistical Benefits. Companies using FTZ procedures may have access to streamlined customs procedures (e.g., "weekly entry" or "direct delivery"). • Scrap/Waste. Duty may be reduced on foreign articles that become scrap/waste through FTZ activity. • Other Benefits. Foreign goods and domestic goods held for export are exempt from state/local inventory taxes. FTZ status may also make a site eligible for state/local benefits which are unrelated to the FTZ Act.

10. Foreign-Status Mdse. Categories • (elected upon admission to FTZ) • Privileged Foreign (PF) Status = Merchandise maintains status based on condition when admitted. If the merchandise is later entered for consumption, it is evaluated by CBP based on the time-of-admission condition even if it had been transformed in the zone. • Non-Privileged Foreign (NPF) Status = Merchandise is evaluated by CBP based on its condition at the time it is entered for consumption.

11. FTZ Application Process • For authority to be granted by the FTZ Board, the application process generally involves: • - “Docketing” of application once deemed sufficient • - Notice in Federal Register opening 60-day comment period • - Report by Commerce examiner assigned to case after comment period closes

12. FTZ Application Process • - Interagency (CBP HQ, Treasury) concurrence process on examiner’s recommendations. • - Final action by Commerce. • Certain types of requests (e.g., minor boundary modifications) can be approved by the FTZ Board’s Executive Secretary through simplified, administrative processes.

13. Current FTZ Board Regulations • Developed during 1980’s. • Published as proposed rule in Jan. 1990. • After receipt of public comments on proposed rule, published revised proposed rule in Dec. 1990. • After receipt of public comments on revised proposed rule, published final rule in Nov. 1991.

14. Larger Context for Proposed Regulations • In 20 years since current regulations published, pace of business and corporate decision-making has accelerated dramatically. • As always, government should operate as efficiently and responsively as possible. • Alternative Site Framework (ASF) adopted by FTZ Board in 2008 can allow simple, rapid FTZ designations for users.

15. Goals for Revising Regulations • Improve clarity and predictability in general. • For manufacturing, improve responsiveness and flexibility (esp. for exporters), esp. in sync with ASF processes. Focus resources on types of situations that experience has shown have real potential for controversy and negative public-interest impacts. • Optimize access to program for full range of users.

16. Process for Revising Regulations • Ground-up rethink of “what” and “why,” but only change language where needed to actually improve functioning of program. • Public forums during comment period allow for explanation and questions on proposed regulations. • To be considered by FTZ Board, all comments must be submitted through the formal comment process (current deadline is April 8, 2011). See details on FTZ Board’s website – www.trade.gov/ftz.

17. Key Proposed Changes • Manufacturing – simplify procedures and shift away from advance approval requirement (where possible). • New provisions stemming from statutory “public utility” and “uniform treatment” requirements. • More specific provisions on fines (plus mitigation of fines and prior disclosure of violations).

18. Questions on Overview?

19. Manufacturing and Processing

20. New Definition • “Production” (replaces “manufacturing” and “processing”) = any activity which results in a change in the customs classification of an article or in its eligibility for entry for consumption, regardless of whether U.S. customs entry actually is ultimately made on the article resulting from the production activity.

21. Production-related Procedures

22. Production-related Procedures (cont.)

23. Production for Export

24. Production for Export (cont.)

25. Production for U.S. Market

26. Production for U.S. Market (cont.)

27. Predictability and Responsiveness • Eliminate need to determine whether activity constitutes manufacturing or processing. • For virtually all export activity, eliminate advance approval requirement. • Allow applicants to request interim approvals from Commerce’s Assistant Secretary for Import Administration in situations requiring advance approval. (Effectively replaces Temporary/Interim Manufacturing procedure adopted in 2004 and modified in 2006.)

28. Predictability and Responsiveness (cont.) • Allow notification of new components or new finished products. Limit such notifications to HTSUS headings (4-digit) authorized for the specific producer through public application process. • Allow notification of increases in production capacity (versus current requirement for advance approval). • Clearly defined scope of authority for a given approved production operation.

29. Monitoring/Reviews of Ongoing Activity • Revised procedures for reviewing FTZ activity on public-interest basis and for compliance with law, regulations and authority granted by the FTZ Board. • Activity may be restricted if finding is made that activity is no longer in the public interest. • Depending on circumstances, restriction may be imposed after preliminary review pending completion of full review.

30. Questions on Manufacturing and Processing?

31. Public Utility and Uniform Treatment

32. Context for Public Utility and Uniform Treatment Requirements • Under FTZ Act, zone grantee generally has a monopoly in its region on access to the federal privilege of use of FTZ procedures. • For that reason, Congress through the FTZ Act attached specific requirements to grantee’s authority.

33. Public Utility Requirement (FTZ Act) • FTZ Act requires that each zone “be operated as a public utility, and all rates and charges for all services or privileges within the zone shall be fair and reasonable” (19 U.S.C. 81n). • Familiar example of public utility: Electric company – as monopoly, must base its prices on its costs. • Several new regulatory provisions in Section 400.42(a) intended to provide clear guidance for grantees on implications of public utility requirement.

34. Public Utility Provisions • Delayed compliance date = 2 years from publication of final regulations. • Fees charged by grantee must be based on costs incurred by the grantee and be directly related to the service provided by the grantee (for which the fee recovers costs incurred). • Grantees’ fees may incorporate a reasonable return on investment, but may not be tied to the level of benefits derived by zone users.

35. Public Utility Provisions (cont.) • For any functions a grantee contracts to third parties for which costs are passed on through fees, the costs must reflect going rates for performance of such contracted functions. • Any fees related to grantee functions must be paid directly to the grantee (or, where applicable, to another public entity that has a legal/contractual relationship with the grantee).

36. New Definitions • Agent = an individual or entity acting on behalf of, or under agreement with, the zone grantee in zone-related matters. • Zone participant = zone operator, zone user, property owner, or other person participating or seeking to participate in, or to make use of, the zone project.

37. Uniform Treatment Requirement (FTZ Act) • FTZ Act requires that each zone “grantee shall afford to all who may apply for the use of the zone and its facilities and appurtenances uniform treatment under like conditions” (19 U.S.C. 81n). • FTZ Board Federal Register notice (9/21/07): “Concerns have been raised to the FTZ Board related to uniform treatment in local access (including possible conflicts of interest) where a third-party agent of the grantee(s) may effectively control access to FTZ procedures in a particular community or region.”

38. Uniform Treatment Requirement (cont.) • “Potential conflicts of interest may be linked to the non-grantee entity also engaging in business – in competition with other private firms – to provide various FTZ-related services to potential users of the zone. In this context, we believe that it is appropriate for the FTZ Board to gather information and various parties' views related to potential conflicts of interest in local access to FTZ procedures, including regarding practices that parties believe may be inconsistent with the FTZ Act or the FTZ Board's regulations.”

39. Example of Scenario • Grantee (public agency) outsources all management of its zone to private contractor. • The contractor acts on behalf of the grantee in dealing with zone participants. • The contractor also provides or offers zone-related consulting services to zone participants.

40. Example of Scenario (cont.) • The contractor’s role in acting on behalf of the grantee creates an ability for it to exert leverage over zone participants (through which the contractor can encourage the purchase of its zone-related consulting services). A clear conflict of interest exists. • Concerns have been raised about this type of conflict of interest. The concerns can relate to the contractor’s perceived differential treatment of different zone participants based on factors like whether the participant had purchased the contractor’s consulting services.

41. Example of Scenario (cont.) • There are also indications that companies perceiving non-uniform treatment are often reluctant to complain to the FTZ Board. • There can be varied reasons for such reluctance, but the reality would be that potential violations of the FTZ Act’s uniform treatment requirement would go unchecked. • Trend towards outsourcing of public-agency functions may lead to more such concerns arising in future in the absence of a proactive approach.

42. Uniform Treatment Provisions • Several new regulatory provisions in Section 400.43 intended to provide clear guidance on implications of uniform treatment requirement. • Delayed compliance date = 2 years from publication of final regulations. • Grantee must offer standard contractual provisions, which must be included in grantee’s “zone schedule.”

43. Uniform Treatment Provisions (cont.) • Any agreement related to a grantee function must be in writing between grantee and zone participant (that is, not between agent and zone participant). • In evaluating proposals from potential zone participants, grantee must apply criteria that are neutral and public-interest based. The bases for a grantee’s decision on a proposal must be consistent with its evaluation criteria.

44. Uniform Treatment Provisions (cont.) • For any instance of non-uniform treatment, grantee must be able to document (upon request from FTZ Board Exec. Secretary) the specific dissimilarity of conditions that justifies the difference in treatment. • To avoid non-uniform treatment of zone participants, proposed regulations seek to preclude conflicts of interest in agents’ performance of certain specific zone-related grantee functions.

45. Uniform Treatment Provisions (cont.) • The specific targeted grantee functions are: • - reviewing, making recommendations regarding or concurring on proposals/requests by zone participants pertaining to FTZ authority or activation by CBP • - any oversight of zone participants’ operations within the zone project • - collecting/evaluating annual report data from zone participants.

46. Uniform Treatment Provisions (cont.) • None of those zone-related grantee functions could be undertaken by: • A) A third party (or person on behalf of a third party) that – in the grantee’s zone project – currently engages in, or which has during the prior two years engaged in, offering/providing a zone-related product/service to or representing a zone participant

47. Uniform Treatment Provisions (cont.) • B) Any person that stands to gain from a specific third party’s offer/provision of a zone-related product/service to, or representation of, a zone participant in the zone project • C) Any person related, as defined in 400.43(f), to a third party/person that represents/offers services to zone participants, or that stands to gain from such representation/offer of services.

48. Uniform Treatment Provisions (cont.) • A grantee or other party may request a determination from the FTZ Board’s Exec. Secretary regarding an actual or potential arrangement’s consistency with the regulatory provisions on uniform treatment. • A grantee may be required to identify any agent that has performed one of the identified zone-related grantee functions during a specified period of time.

49. Zone Schedule • Must include zone grantee’s rules and policies, including standard contractual provisions offered to zone participants. • Zone schedule must be freely available for public inspection at offices of grantee and any operator offering FTZ services to user community. • Zone schedule must be on grantee’s website. FTZ Board may also make zone schedules available on its own website.

50. Complaints (Public Utility, Unif. Treatment) • Parties may submit to FTZ Board’s Exec. Secretary complaints about conditions/treatment allegedly inconsistent with statutory and regulatory public utility and uniform treatment requirements. • Complaints may be confidential if necessary. A grantee may not enter into or enforce contractual provisions requiring a zone participant to disclose to the grantee (or agent) the participant’s confidential communications with the FTZ Board under the complaint provision.