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(FTZ) is a special enclosed area within or adjacent to ports of entry, usually located at industrial parks or in terminal warehouse facilities. Although operated under the supervision and enforcement of the Customs Service, they are considered outside the customs territory of the United States for purposes of customs entry procedures. With certain exceptions, any foreign or domestic merchandise may be brought into a foreign trade zone for storage, sale, exhibition, breaking up, repacking, distribution, mixing with foreign or domestic merchandise, assembly, manufacturing, or other processing. Foreign merchandise imported into an FTZ is not subject to duty, formal entry procedures or quotas unless and until it is subsequently imported into U.S. customs territory.

The framework that governs the establishment and operation of FTZS has three principal components. First, the Foreign-Trade Zones Act of 1934 (the Act) authorizes the establishment of FTZS and, as amended in 1950, allows manufacturing in FTZs. 55 Second, regulations, promulgated by both the Customs Service 56 and the Department of Commerce, 57 expand on the Act. A 1952 amendment to the regulations provided for the establishment of "sub-zones" in addition to general purpose zones. Third, the decision in Armco Steel Corp. v. Stans in 1970 validated the use of zone manufacturing to avoid customs duties and interpreted several key provisions of the Act. 58

Although legislation providing for foreign trade zones had been introduced as early as 1894, the first such statute was not enacted until 1934. Hearings on foreign-trade zone bills were held in 1934 by both the House and Senate.59 The Committee on Ways and Means reported a bill with amendments 60 which passed the House May 9, 1934. The Senate debated, amended, and passed legislation inserting the text of its own bill. Following a conference, the Foreign Trade Zone Act was approved June 18, 1934.

The original purpose of the Act was to expedite and encourage foreign commerce. Initially, FTZs were little more than transshipment or consignment centers for the storage, repackaging, or light processing of foreign goods pending re-exportation. The 1934 Act prohibited the manufacture and exhibition of goods in FTZs. In 1950, however, Congress removed this prohibition by passing the so-called Boggs amendment (named after Mr. Boggs of Louisiana). The amendment added manufacturing to the list of activities permitted and authorized exhibition in zones.

The amendment to the FTZ regulations in 1952 that provided for the establishment of subzones is important to manufacturing and assembly operations in zones. The essential distinction between the two types of zones is that individual subzones are generally used by only one firm, whereas there is no limitation on the number of firms that can operate in a general-purpose zone. Subzones were es

55 Boggs amendment of 1959, ch. 296, 64 Stat. 246, 19 U.S.C. 81c.

56 19 CFR 146.0-48 (1980).

57 15 CFR 400.100-1406 (1980).

58 431 F.2d 779 (2d Cir. 1970), aff g 303 F. Supp. 262 (S.D.N.Y. 1969).

59 Foreign Trade Zones: Hearings on H.R. 3657 Before a Subcomm. of the House Comm. on Ways and Means. 73d Cong., 2d Sess. (1934); Foreign Trade Zones: Hearings on S. 1319 and S. 2001 Before a Subcomm. of the Senate Comm. on Commerce, 73d Cong., 2d Sess. (1934).

60 House Report 1521.

tablished to assist companies which were unable to relocate to or take advantage of an existing general-purpose zone.61 Under the regulations, only a grantee of a previously approved general zone may apply to establish a subzone.

Authority for establishing these facilities is granted to qualified corporations, or political subdivisions, who must submit applications to the Department of Commerce's Foreign Trade Zones Board, comprised of the Secretary of Commerce (Chair), the Secretary of the Treasury, and the Secretary of the Army 62 The Board's regulations set forth the basic requirements for applying and qualifying for a FTZ. The statute provides that every officially designated port of entry is entitled to at least one FTZ. Public hearings are often held by the Board staff in the locale involved. While most applications are noncontroversial, occasionally domestic industries or labor that are sensitive to imports will oppose a subzone application. The sharp growth of manufacturing in subzones, particularly by the automobile industry, has led to increased criticism of the practice by U.S. parts producers, who are concerned that the practice may reduce their effective tariff protection.

Section 3, which contains the basic substantive provisions of the Act, allows merchandise to be imported into FTZs without being subject to U.S. customs laws. The section regulates the tariff treatment of FTZ merchandise according to its status as foreign or domestic, and as privileged or nonprivileged.

One may apply for privileged status for foreign merchandise in an FTZ that has not yet been manipulated or manufactured so as to effect a change in its tariff classification. Foreign merchandise that is not privileged, recovered waste, and merchandise that was originally domestic but can no longer be identified as such are deemed to be nonprivileged foreign merchandise. Domestic merchandise that would otherwise have been eligible for privileged status but for which no application was made is nonprivileged merchandise.

The status of merchandise becomes signficant when it enters U.S. customs territory. Customs appraises and classifies privileged foreign merchandise to determine the taxes and duties owed according to the condition of the merchandise when it enters a FTZ. The importer pays the previously determined taxes and duties when bringing the merchandise into U.S. customs territory regardJess of any manufacturing or manipulation of the goods with other foreign or domestic privileged merchandise.

In contrast, merchandise that is composed entirely of or derived entirely from nonprivileged merchandise, either foreign or domestic, or of a combination of privileged and nonprivileged merchandise, is appraised and classified according to its condition when constructively transferred out of a FTZ and into U.S. customs territory. Thus, the duty and taxes payable on nonprivileged or combined merchandise are those applicable to its classification and value when it enters U.S. customs territory and not when it enters

61 15 CFR 400.304 (1983).

62 19 U.S.C. 81a(b) (1976). The jurisdiction and authority of the Board are set forth in 15 CFR 400.200-203 (1980).

the zone. This distinction is an important potential advantage of zone-based operations.

According to the General Accounting Office (GAO) and the U.S. International Trade Commission (ITC), the number of zones and the dollar value of their business activities have increased dramatically in recent years. FTZs grew from only 7 general purpose zones and 3 subzones in 1970 to 138 general purpose zones and 101 subzones by 1987.63 GAO and the ITC attributed the increase in part to a 1980 Treasury ruling holding that the dutiable value of finished products processed in the zone would be only the value attributable to the foreign components used and not the value added.

Finally, because section 3 of the Act allows an importer to elect to pay duty on either components and raw materials or on the completed article, the importer may reduce his tariff liability by manufacturing or assembling higher duty components into a lower duty product. This so-called inverted tariff, which is commonly characteristic of high technology merchandise, is also responsible for the recent growth in zone-based manufacturing and assembly of high value products, such as machinery, transportation equipment, electronics and chemicals.

There have been a number of recent statutory changes affecting foreign trade zones. The United States-Canada Free-Trade Agreement Implementation Act 64 amended section 3(a) of the Foreign Zones Act to implement the obligations under Article 404 providing that, with the exception of "drawback eligible goods," goods withdrawn from a foreign trade zone shall be subject to duty on exportation to Canada as of January 1, 1994 (or a later date agreed to with Canada and proclaimed by the President subject to the consultation/lay-over requirements), to the same extent as if the product were destined for consumption in the United States.

Secondly, an amendment to section 3 with respect to the calculation of relative values in the operations of petroleum refineries in a foreign trade zone was enacted in section 9002 of the Technical and Miscellaneous Revenue Act of 1988.65

The Customs and Trade Act of 1990 66 contained two amendments to the Act. Section 481 amended section 3(b) by extending through December 31, 1992, a prohibition on FTZ duty reductions applicable to bicycle parts not reexported outside the United States. Section 484F amended section 3(c) to enable denatured distilled spirits to be processed under FTZ rules and to be eligible for drawback under Internal Revenue Service rules.

Congressional hearings on the operation of the FTZ program were held in 1989. A subcommittee of the House Committee on Government Operations held a hearing on March 7, 1989; the full committee subsequently issued a report calling for restructuring of the program.67 On October 24, 1989, the House Ways and Means

63 Report to the Chairman, Committee on Ways and Means by the U.S. General Accounting Office, GAO/NSIAD-89-85, February 7, 1989; and Report to the Committee on Ways and Means, U.S. House of Representatives, on Investigation No. 332-248 under section 332(g) of the Tariff Act of 1930, USITC Publication 2059, February 1988.

64 Public Law 100-449, approved September 28, 1988.

65 Public Law 100-647, approved November 10, 1988. 66 Public Law 101-382, approved August 20, 1990.

67 "Foreign-Trade Zones [FTZ] Program Needs Restructuring"; November 16, 1989; House Report 101-363.

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Subcommittee on Trade also held a hearing on the FTZ program. In response to public comment received during the hearing, the subcommittee called upon the Department of Commerce to update and revise its regulations on the FTZ program in order to improve the administration of the program.

Final revised regulations—the first changes to those regulations since 1980-were issued by the FTZ Board on October 8, 1991 (15 CFR Part 400) clarifying criteria for the establishment and review of FTZ (including subzone) operations. Among other provisions, the revised regulations authorize the review of zone and subzone operations to determine whether these operations provide a net economic benefit to the United States.

68 "Operation of the Foreign-Trade Zones Program of the United States and Its Implications

for the U.S. Economy and U.S. International Trade"; October 24, 1989; Serial 101-56.

Chapter 2: TRADE REMEDY LAWS

Countervailing Duty (CVD) Law

The Tariff Act of 1930, as amended, provides for the imposition of additional duties whenever a subsidy is bestowed by a foreign country upon the manufacture or production for export of any article which is subsequently imported into the United States. There are currently two separate provisions of the Tariff Act which govern the imposition of countervailing duties. Subtitle A of title VII of the Tariff Act of 1930, as added by the Trade Agreements Act of 1979 and amended by the Trade and Tariff Act of 1984 and the Omnibus Trade and Competitiveness Act of 1988,1 applies to imports from countries which are signatories to the General Agreement on Tariffs and Trade (GATT) Agreement Relating to Subsidies and Countervailing Measures, 2 commonly referred to as the Subsidies Code, or which have assumed obligations sustantially equivalent to those of the Code. For imports from these countries, an injury test is required prior to imposition of countervailing duties. Imports from countries which have not signed the Subsidies Code or assumed substantially equivalent obligations are subject to the provisions of section 303 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979,3 and are generally not afforded an injury test in countervailing duty cases. Other than the requirement of an injury test, however, the provisions of the countervailing duty law under the two separate sections are generally the same.

The purpose of the countervailing duty law is to offset any unfair competitive advantage that foreign manufacturers or exporters might enjoy over U.S. producers as a result of foreign subsidies. Countervailing duties equal to the net amount of the subsidies are imposed upon importation of the subsidized goods into the United States.

BACKGROUND

The first U.S. statute dealing with unfair trade practices was a countervailing duty law passed in 1897. The provisions of the 1897 statute remained substantially the same until 1979, when the U.S. countervailing duty law was changed to conform with the agreement reached in the Tokyo Round of multilateral trade negotiations.

The law prior to 1979 required the Secretary of the Treasury to assess countervailing duties on imported dutiable merchandise ben

119 U.S.C. 1671.

2 Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General Agreement on Tariffs and Trade (relating to subsidies and countervailing measures), MTN/ NTM/W/236, reprinted in House Doc. No. 98-153, pt. I at 257.

3 19 U.S.C. 1303.

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