Foreign-Trade Zones: Board Should Document Consideration of All Required Criteria When Evaluating Applications

FTZs allow companies to reduce, eliminate, or defer duty payments on foreign goods imported into FTZs for distribution or as components of other products before transferring the finished goods into U.S. commerce or exporting them overseas. The value of foreign and domestic goods admitted to FTZs in 2016 exceeded $610 billion. Responsibilities of the Board, consisting of officials from the Departments of Commerce (Commerce) and the Treasury, include evaluating production notifications and applications on the basis of factors such as the proposed activity's net effect on the U.S. economy. Federal regulations set forth requirements, pursuant to the Foreign-Trade Zones Act of 1934, for these evaluations.

GAO was asked to review the Board's evaluation processes. This report examines the extent to which the Board has established and followed procedures aligned with regulations for evaluating (1) notifications and (2) applications. GAO analyzed the Board's regulations and procedures and interviewed Commerce, Treasury, and U.S. Customs and Border Protection officials. GAO also analyzed a nongeneralizable sample of 59 of 293 notifications the Board evaluated from April 2012 through September 2017, which GAO selected to include a range of Board decisions and exclude pending decisions. GAO also analyzed all three applications the Board issued decisions on during that period.

The U.S. Foreign-Trade Zones Board (the Board) has procedures that generally align with its regulations for evaluating production notifications and followed these procedures for all 59 notifications GAO reviewed. Notifications are filed by companies proposing to bring foreign components into a foreign-trade zone (FTZ) for use in manufacturing finished products, among other purposes. GAO found, for example, that, following Board procedures, Board staff evaluating the notifications collected and considered comments from the general public, industry specialists, and U.S. Customs and Border Protection and recommended to the Board whether to authorize companies' proposed activities. Of the 59 notifications GAO reviewed for seven industry categories, 49 notifications either were approved or were approved with restrictions—for example, the proposed activity was authorized for a limited time period or certain duty benefits were denied for one or more foreign components. Ten notifications were denied for reasons such as new or complex policy issues that required further review.

The Board also has procedures that generally align with its regulations for evaluating production applications and followed these procedures for the three applications GAO reviewed. The applications were submitted by three of the companies whose notifications were denied. According to Board staff, if a notification is not approved or is approved with restrictions, a company may submit an application with additional details. Following Board procedures, Board staff, for example, collected and considered comments and recommended to the Board whether to authorize the proposed activities. Two of the applications were approved with restrictions, and the third was not approved. While the regulations require consideration of a number of criteria—for example, consistency with U.S. trade and tariff law—Board staff did not document consideration of all required criteria for two of the three applications, and the procedures do not require such documentation. Board staff said they document only the most relevant criteria in their reports. Standards for Internal Control in the Federal Government states that management should document its rationale for determining a criterion is not relevant and make this documentation readily available for examination. Without such documentation, the Board lacks an institutional record that all required criteria were considered and also lacks assurance that its decisions comply with U.S. trade and tariff law and public policy.

Commerce should require Board staff to document consideration of all criteria required in the regulations when evaluating production applications. Commerce concurred with this recommendation.

Foreign-trade zones (FTZ) are secure areas throughout the United States  that, for the purpose of customs entry procedures—including payment of  duties—are generally treated as being outside U.S. customs territory.  Congress authorized the Foreign-Trade Zones program in 1934 to  expedite and encourage foreign commerce. Companies authorized to  operate in FTZs are able to import foreign-source components for use in  manufacturing finished goods without paying customs duties or fees until  the goods are transferred from the FTZs into U.S. commerce.  Under the  program, authorized companies operating in FTZs may be allowed, in  certain circumstances, to reduce, eliminate, or defer payment of customs  duties or fees for goods manufactured or stored in FTZs and pay no  duties or fees for goods exported directly from the FTZs to other  countries. In 2016, the value of foreign- and domestic-source components  admitted into FTZs exceeded $610 billion, of which $108 billion—almost  18 percent—represented foreign components to be used in the  production of finished goods in the zone. The value of goods exported  from FTZs to other countries in 2016 was approximately $76 billion.

The U.S. Foreign-Trade Zones Board (the Board), consisting of the  Secretaries of Commerce and the Treasury, is responsible for, among  other things, authorizing the establishment of FTZs and reviewing  companies’ production notifications and applications. A company seeking  production authority—that is, permission to conduct proposed production  activities in an FTZ—must first file a production notification with the Board  that summarizes the proposed activity. If the notification is approved with  restrictions or not approved, the company may choose to file a more  detailed production application to provide additional evidence for the  Board’s consideration. In reviewing production notifications and  applications, the Board is responsible for taking into account a range of  criteria that include the net economic effect on the U.S. economy, such as  U.S employment. The Department of Homeland Security’s Customs and  Border Protection (CBP) is responsible for oversight and enforcement in  FTZs, including collecting revenue and assessing risk of noncompliance  with U.S. laws and regulations. According to Board officials, the Board  issued updated and modified regulations for FTZs in February 2012 to  simplify the application process and expedite the review of applications  when possible.

You asked us to review the Board’s processes for evaluating production  notifications and applications. This report examines (1) the extent to  which the Board has established and followed procedures aligned with its  regulations for evaluating production notifications and (2) the extent to  which the Board has established and followed procedures aligned with its  regulations for evaluating production applications.

To examine the extent to which the Board has established procedures  aligned with its regulations for evaluating production notifications and  applications, we analyzed the Board’s regulations and procedures and  interviewed cognizant officials of the Department of Commerce  (Commerce), the Department of the Treasury (Treasury), and CBP. To  determine the extent to which the Board has followed any procedures it  established, we selected and analyzed a nongeneralizable sample of  case records for 59 of the 293 production notifications submitted to the  Board from April 2012 through September 2017. We also analyzed the  three applications that the Board reviewed and rendered final decisions  on during this period. We determined that these case records, which we  obtained from the Board’s case tracking system, were sufficiently reliable  for our purposes of understanding the universe of notifications and  applications submitted for production authority and reviewing a sample  from that universe.  To make this determination, we took steps that  included reviewing related guidance for the Board’s case records tracking  system; interviewing knowledgeable agency officials; and reviewing a  sample of cases with a data collection instrument, which confirmed  information included in the case tracking system data.

The 59 notifications we reviewed comprised all notifications submitted  during this period for the following seven industry categories— silicones/polysilicon, textiles/footwear, oil refineries/petrochemical  facilities, other energy, chemicals, medical supplies and devices, and  miscellaneous. We selected these industry categories because the  notifications that the Board did not approve were all submitted by  companies in these categories. The 59 notifications we reviewed  included 34 that were approved, 15 that were approved with restrictions,  and 10 that were not approved, and they excluded any notifications for  which the Board’s decisions were pending as of September 2017. The  three applications we reviewed were submitted, respectively, by three  companies that had each submitted 1 of the 59 notifications in our  sample. See appendix I for additional information about our objectives,  scope, and methodology.

We conducted this performance audit from July 2017 to November 2018  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Example of Foreign-Trade Zones  (FTZ)  Benefits   The FTZ Board might authorize an automobile  manufacturer that imports foreign-source  components, such as engines and  transmissions into an FTZ, to pay the customs  duty rate on the value of the finished vehicles  (2.5 percent) instead of the sum of the duties  owed for certain imported components. Duty  rates for those components generally range  from 0 percent to approximately 10 percent.   As a result, the company would pay lower  custom duties to manufacture automobiles in  an FTZ than it would pay outside the FTZ.

To encourage companies to maintain and expand their operations in the  United States, the FTZ program offers a range of benefits, including the  possible reduction or elimination of duties on certain imported goods. For  example, a company operating in an FTZ that manufactures products  using foreign materials or components can pay lower overall duties by  electing to pay the duty rate for the finished product rather than for the  product’s imported foreign component parts, which may have a higher  duty rate (see sidebar). This benefit provides an incentive to companies  to manufacture in the United States rather than move their manufacturing  operations overseas to avoid paying U.S. duties. We reported in July  2017 that, while FTZs were created to provide benefits to the American  public, little is known about their overall economic impact. Few  economic studies have focused on FTZs, and those studies have not  quantified economic impacts or examined the effect of companies’ FTZ  status on regional and overall economic activity such as employment.

As of June 2018, there were 262 approved FTZs in the United States,  with at least 1 in each state and in Puerto Rico, according to Board staff.  Most FTZs consist of multiple physical locations, known as sites or  subzones, which include individual companies’ plants as well as multi- user facilities such as seaports or airports.

According to Board staff, the Board’s responsibilities include, among  others, approving the establishment of FTZs and reviewing notifications  and applications for production authority. The Board must authorize any  proposed production activity before a company can bring into an FTZ the  specified foreign-source materials or components for incorporation into a  final product and to potentially receive FTZ benefits. Current Board staff  are Commerce employees and comprise an Executive Secretary, eight  staff analysts who gather and analyze information for the Board’s  consideration, and a coordinator who handles clerical tasks, according to  Board staff.

CBP is responsible for oversight and supervision of FTZ operators,  including the collection of duties, taxes, and fees. CBP reviews  production notifications and applications with respect to its ability to  provide oversight and ensure program compliance and informs the Board  of its ability to oversee a proposed production activity if it were to be  authorized.

Production Notification and Application Processes

Federal regulations set forth processes and procedural rules for  companies applying for, and operating in, FTZs as well for the Board’s  evaluation of notifications and applications for production authority,  pursuant to the FTZ Act of 1934 as amended. According to Board staff,  the Board issued updated and modified regulations for FTZs in February  2012 to simplify the application process and expedite the review of  applications when possible. The Board staff stated that they took into  consideration comments from industry, including companies whose  production activities require authorization decisions within short time  frames, when updating the regulations.

The 2012 regulations divided the production application process into two  processes to create a less resource-intensive process for companies and  the U.S. government, according to Board staff. Board staff said that the  2012 regulations allow the Board to approve notifications and applications  with restrictions. For example, the Board may decide to, among other  things, (1) authorize the exemption of duty payments on some, but not all,  components named in the notification for the proposed production activity;  (2) authorize the activity for a limited time period; or (3) authorize the  activity for a specified quantity of the component to be brought into the  FTZ.

The following describes the notification and application processes under  the 2012 regulations.

Notification process. A company must first submit a production  notification—which requires less information from companies than a  production application—requesting production authority in an FTZ. If  the Board approves a company’s notification, the company can begin  the production activity. For example, in a 2013 notification, a company  requested authority to produce printing plates used in the newspaper  industry and to pay duties at the duty rate applicable to the final  product (i.e., printing plates) instead of the duty rates applicable to the  five individual foreign-source components (e.g., aluminum coils). The  Board approved the notification without restrictions, allowing the  company to begin conducting the authorized activity. If a notification is  approved with restrictions, the company may begin the production  activity while adhering to the specified restrictions. For example, in  another 2013 notification, a company requested authority to produce  sports safety helmets, bicycle baby seats, and bicycle car-carrier  racks and pay duties on the final products instead of paying individual  duties on some foreign-source components (e.g., helmet and baby  seat parts). The Board approved the notification with a restriction,  authorizing the company to begin the production activity but requiring  it to pay duty on one foreign-source component (textile bags).

Application process. According to Board staff, if a notification is  approved with restrictions or denied, the company may file a more  detailed production application to continue seeking authority for the  activity that was restricted or denied. If the Board does not  unanimously decide to authorize the application with or without  restrictions, the production authority is denied. For example, in 2012,  the Board determined that a notification requesting that a company’s  existing authority to produce plastic adhesive bandages in an FTZ be  expanded to include production of fabric adhesive bandages using  foreign-source textile components warranted further review and  denied the notification. The company subsequently filed an application  for the expanded authority, providing additional information to support  its request, which the Board also denied. A company whose  application is denied may appeal the Board’s decision to the U.S.

Court of International Trade. According to Board staff, the  production application process is similar to the application process  under the pre-2012 regulations.

Figures 1 and 2 provide an overview of the Board processes for  considering notifications and applications for production authority.

Criteria Relevant to Evaluation of Production Notifications and Applications

The 2012 regulations detail criteria for the Board to consider when  reviewing notifications and applications. These criteria include threshold  and economic factors as well as consideration of significant public  benefits (see table 1). According to the regulations, if the Board  determines that any of the threshold factors apply to a proposed or  ongoing production activity, it shall deny or restrict authority for the  activity. After reviewing the threshold factors, if there is a basis for further  consideration of the application, the Board shall consider economic  factors listed in the regulation when determining the net economic effect  of the proposed activity.

The regulations’ requirements for the Board to consider these criteria  when reviewing notifications and applications differ as follows (italics  added for emphasis):

Notifications. Section 400.37 of the regulations states that the  Executive Secretary’s recommendation shall consider, among other  things, comments submitted in response to the notification in the  context of the factors set forth in section 400.27. The regulation  does not state that the Executive Secretary’s recommendation must  consider each factor individually.

Applications. Section 400.27 states that the Board shall apply the  criteria set forth therein. According to section 400.27, the Board must  first review the threshold factors and after its review, if there is a basis  for further consideration of the application, must consider all of the  listed economic factors when determining the net economic effect of  the proposed activity. Additionally, the Board is to take the threshold  factors and economic factors into account in considering the  significant public benefit(s) that would result from the production  activity.

Board staff observed that the notification process is designed for  identifying concerns related to the proposed production authority, not for  resolving such concerns. If the Board identifies any concerns that it  deems significant enough to deny a notification, the application process  allows the Board to collect more information to inform further analysis.  Board staff stated that examples of concerns related to production  notifications and applications might include objections from domestic  producers of component materials, such as textiles, who believe they  would be negatively affected by duty reduction on foreign-source  components used in the proposed production activity.

According to the Board, of the 293 production notifications submitted from  April 2012 through September 2017 for which it rendered decisions, 218  notifications were approved without restrictions, 62 were approved with  restrictions, and 13 were not approved (see fig. 3). For further information  about the Board’s decisions for the 293 notifications by industry category,  see appendix II.

Of the companies that submitted the 75 production notifications approved  with restrictions or not approved from April 2012 through September  2017, nine companies subsequently submitted production applications.  As of September 2017, the Board had authorized two of these  applications with restrictions and had not authorized one application,  according to Board staff. For the remaining six applications, the Board  had not authorized one application and the Board’s decisions were  pending for the other five applications as of August 2018.

FTZ Board Followed Procedures Generally Aligned with Regulations in Evaluating Production Notifications We Reviewed

The Board’s Procedures for Evaluating Notifications Generally Align with Regulations

Our review of Board documents and interviews with Board staff found that  the Board has established procedures for the evaluation of notifications  that generally align with the Board’s regulations. The Board’s procedures  for evaluating notifications can be organized into three phases: (1)  information collection, (2) analysis and recommendation, and (3)  authorization decision (see fig. 4). Each phase includes steps specifying  the responsible party and the intended product and result.

In general alignment with the regulations, the Board’s procedures for  evaluating production notifications include steps for collecting information  from the notifications, from public comments submitted in response to  Federal Register notices of the notifications, from reviews of the  notifications by industry specialists at Commerce and other agencies, and  from CBP regarding its ability to oversee the proposed production activity.

Notification information. The regulations specify that notifications  must (1) provide the identity and location of the FTZ user; (2) identify  the materials, components, and finished products associated with the  proposed activity; and (3) include information as to whether any  material or component is subject to a trade-related measure or  proceeding, such as orders for antidumping duties. The Board  procedures require staff to determine whether a notification is  complete before beginning to evaluate it. To help companies complete  the application, Board staff provide an instruction sheet listing the  information required by the regulations.

Federal Register comments. The Board regulations require the  Executive Secretary to invite public comments in response to a  Federal Register notice, unless the Executive Secretary determines,  based on the notification’s content, to recommend further review  without inviting public comment. The Board procedures instruct staff  to publish a notice in the Federal Register after determining that the  notification is complete.

Agencies’ reviews. The Board regulations do not require that  industry specialists review notifications. The Board procedures  instruct staff to request industry specialists at Commerce and, as  appropriate, at other agencies to review the notifications.

CBP comments. The Board regulations do not require Board staff to  request CBP comments for notifications. The Board procedures  instruct staff to prepare a letter to the CBP Port Director. According to  CBP officials and guidance, CBP provides comments regarding its  ability to oversee the proposed production activity to help ensure FTZ  program rules and regulations are followed if it is approved.

In general alignment with the regulations, the Board’s procedures for  evaluating production notifications include steps to guide staff in  considering the information collected and in preparing a recommendation  to the Board regarding whether to approve the notification.

Review of comments and other relevant factors. The Board  regulations require that the Executive Secretary’s recommendation to  the Board consider any comments submitted in response to the  Federal Register notice; guidance from specialists within the  government; and other relevant factors based on Board staff’s  assessment of the notification in the context of the criteria, including  threshold and economic factors listed in section 400.27. The Board  procedures require staff evaluating notifications to consider any public  comments submitted in response to the Federal Register notice and  comments from industry specialists and CBP

Recommendations and memos. The Board regulations do not  require Board staff to prepare recommendations or memos. The  Board procedures require staff to use a prescribed format to prepare a  recommendation, based on the information collected, regarding  whether a notification should be approved (with or without restrictions)  or not approved because further review of the proposed production  activity is warranted. The staff also must prepare memos for the  Treasury and Commerce Board members. The staff are to provide the  memos with the recommendation to the Executive Secretary for  review before sending them to the Board members.

In general alignment with the regulations, the Board’s procedures for  evaluating production notifications include steps for the Executive  Secretary to make a recommendation to the Board for its consideration  and for Board staff to notify the applicant of the Board’s decision and to  ensure that evaluation of the notification is completed within specified  time frames.

Executive Secretary’s recommendation and Board’s decision.

The Board regulations specify that the Executive Secretary is required  to submit a recommendation to the Board regarding whether further  review of all or part of the proposed production activity is warranted.  The Board procedures require the Executive Secretary to review the  memos and recommendations prepared by the Board staff and submit  them to the Board members for their review and concurrence with the  recommendation.

Notice to applicant. The Board regulations require the Executive  Secretary to inform the applicant of the Board’s decision regarding  authorization of the notification. Similarly, the Board procedures  require Board staff to notify the applicant of the Board’s decision.

Evaluation time frames. The Board regulations and procedures  specify time frames for notification evaluation. For example, under  the regulations, the Executive Secretary shall submit to the Board a  recommendation on whether further review of all or part of the activity  subject to the notification is warranted within 80 days of receipt of the  notification. Similarly, the procedures state that Board staff will ensure  that the recommendation is finalized so that the recommendation and  memos can be sent to the Board members within 80 days of receipt of  the notification. In addition, the regulations and procedures require  that the applicant be informed of the Board’s decision about the  notification within 120 days.

FTZ Board Followed Its Procedures in Evaluating Production Notifications We Reviewed

Our analysis of Board case records for 59 notifications and our interviews  with Board staff and Commerce, Treasury, and CBP officials showed that  when evaluating the notifications, the Board followed its procedures in  collecting the required information from the applicants; inviting public  comments in response to Federal Register notices; requesting reviews  from specialists at other agencies and Commerce; and, for most  notifications, requesting CBP comments.

The Board collected the required information from applicants for the 59  notifications we reviewed. All of the notifications included (1) the identity  and location of the FTZ user; (2) the materials, components, and finished  products associated with the proposed activity; and (3) information on  whether any material or component was subject to a trade-related  measure or proceeding.

For 5 of the 59 notifications we reviewed, Board staff recommended  further review of the proposed activity on the basis of the applicant  information and staff knowledge of the industry, according to Board staff.  The staff explained that if the Board is aware of issues that would require  a more detailed review of the proposed activity, the Board can decide,  without collecting additional information, not to approve the notification. In  such cases, the company must file a more detailed application if it wants  to proceed with its request for production authority. For example, for 2 of  these 5 notifications, Board staff recommended further review without  collecting additional information because they were already reviewing  production applications requesting similar production authorities for  carbon fiber. For another notification, staff recommended further review  without collecting additional information because the Board had not  previously reviewed a similar request and the staff needed the additional  information that would be collected through the application evaluation  process. Of the five companies that submitted these 5 notifications, three  companies decided to submit applications for production authority.

For the remaining 54 notifications, Board staff published notices in the  Federal Register and received public comments on 5 of them. The  comments included both opposition and support from domestic producers  and associations. For example, in comments responding to one of the  notifications, a company opposed authorization of the proposed activity  because the company believed that the activity, if approved, would likely  have a negative impact on the domestic silicon metal industry. According  to the comments, the price of silicon metal had declined significantly and  granting the requested production authority would result in further  downward pressure on U.S. silicon metal prices. In comments responding  to another notification, a company supported the proposed extension of  FTZ authority to produce upholstered furniture and related parts. The  comments stated that the activity would, among other things, encourage  production in a related industry, domestic thread production.

Board staff sought and received reviews of the 54 notifications from  industry specialists in six Commerce offices, including the Offices of  Textiles and Apparel, Consumer Goods, Materials, and Energy and  Environmental Industries. The specialists recommended approving 49 of  the notifications (with or without restrictions) and not approving the  remaining 5 notifications because further review was warranted.

For example, for one notification, an industry specialist’s review  recommended approval, noting that the competitive landscape in Puerto  Rico—the FTZ’s location—had changed and some industry sectors had  shifted manufacturing to foreign locations. According to the review,  approval of the notification would therefore contribute to maintaining  manufacturing operations in Puerto Rico, which would provide  employment and an economic boost to the national economy. For a  second notification, an industry specialist’s review recommended denying  the requested production authority because of concerns about the  possible effect of importing a textile component that was being produced  domestically. The review stated that if the notification were approved, the  company would avoid paying duties on the textile component, resulting in  a significant incentive for the use of imported products over those  produced domestically. For a third notification, the Board staff requested  and received comments from the Department of Justice regarding a  firearm import regulation for a notification seeking production authority for  the demilitarization (or disassembly) of munitions and other explosive  components.

According to the industry specialists who had reviewed notifications in our  sample, their analyses were based on their knowledge of the industry,  including domestic manufacturers of components that applicants sought  to import into an FTZ, and on public comments submitted to the Federal  Register, among other things.

For 6 of the 59 notifications, Board staff did not ask CBP about its ability  to oversee a proposed production activity because the staff were  recommending further review of the notification. For the remaining 53  notifications, we found that the Board requested comments from CBP  regarding its ability to provide oversight.

We found that Board staff followed the Board’s procedures in reviewing  comments and other relevant factors for all notifications in our sample  and providing recommendations to the Board regarding authorization of  the notifications.

Review of Comments and Other Relevant Factors  Our review of Board case records found that Board staff prepared  evaluations for all 59 of the notifications we reviewed, documenting  consideration of public comments, any agency specialists’ reviews, and  CBP comments. In addition, although the regulations do not explicitly  require consideration of the criteria listed in the regulations when  evaluating notifications, Board staff informed us that they always  considered economic and threshold factors when they had collected  information that identified potential areas of concern.

Our review of the case records for the 59 notifications found that some of  the factors Board staff considered included whether similar production  authority had been granted in the past for another company and whether  concerns had been raised by domestic industries. For example, for one  notification requesting production authority for wind turbine components,  the Board staff’s evaluation noted that the Board had previously approved  production authority involving wind turbines and related components for  other companies. For another notification, requesting production authority  to import a foreign-source textile fabric for adhesive bandages duty free,  the Board staff’s evaluation noted that similar requests claiming lack of  availability of domestically produced textile fabric at competitive prices  had been strongly disputed by domestic producers, trade associations, or  both.

More than half of the Board staff evaluations of the notifications we  reviewed included a discussion of economic factors, and nearly a third  included discussion of threshold factors. For example, 15 evaluations  discussed the proposed activity’s potential impact on related domestic  industries. The evaluation of a notification requesting authority to produce  customized plastic containers stated that a domestic company producing  reusable plastic containers opposed the request on the grounds that the  proposed activity could harm that company in the U.S. market. In  addition, 13 evaluations discussed exporting and re-exporting finished  products. For example, an evaluation of a notification requesting authority  to produce automotive textile upholstery material noted that the company  did not intend to enter the finished product into the U.S. market for  domestic consumption (i.e., the company would re-export the finished  product for sale outside the U.S. market).

Our review of case records for the 59 notifications found that the Board  staff prepared recommendations for each notification and also prepared  memos to the Treasury and Commerce Board members for the Executive  Secretary’s review before providing them to the Board members.  Reasons noted in recommendations to authorize a production activity  without restrictions included prior authorization of a similar activity or lack  of impact on domestic industry. Reasons for recommending denial of  authorization included new or complex policy issues that required further  review. Recommendations to authorize an activity with restrictions  included restrictions on the quantity of a component that could be  imported duty-free into an FTZ, on the amount of time for which a  production activity would be authorized (e.g., 5 years), and on the  eligibility of some components for FTZ benefits. For example, for one  notification requesting authority to produce upholstered furniture, the  memo recommended, among other things, restricting the amount of a  specific foreign-source fabric that could be imported duty free into an FTZ  and requiring that all other foreign-source fabrics be admitted to an FTZ  under duty-paid status. We found that for all 59 notifications, the Board  staff’s recommendations were in agreement with the industry specialists’  comments.

Our review of the 59 sample notifications found that for each notification,  the Board’s Executive Secretary followed the Board’s procedures in  submitting a memo to the Board with recommendations for its decision  and notifying the applicants of the decision. In addition, the Board staff  generally followed time frames listed in the procedures.

Executive Secretary’s Recommendation and Board’s Decision  The Board’s Executive Secretary submitted a memo to the Board  recommending approving, approving with restrictions, or not approving  each of the 59 notifications we reviewed. The Executive Secretary  recommended approving 34 notifications, approving 15 notifications with  restrictions, and denying 10 notifications (see fig. 5). We found that the  Executive Secretary’s recommendations concurred with the Board staff’s  recommendations for all 59 notifications and that the Commerce and  Treasury Board members concurred with the FTZ Executive Secretary’s  recommendations for 56 of the 59 notifications. For the remaining 3  notifications, the Executive Secretary recommended that further reviews  were warranted and the Commerce Board member concurred. Because  the notification was not approved, the Executive Secretary did not contact  the Treasury Board member for his concurrence. According to Board staff, a notification will not be approved if at least one Board member  determines further review is needed. See appendix III for more  information about the Board’s decisions for the 59 notifications in our  sample.

For all 59 notifications, Board staff informed the applicant of the Board’s  decision.

For the majority of the notifications in our sample, the Board generally  followed time frames listed in the procedures. For example, for 46 of the  59 notifications, the Board informed the applicant of its decision within  120 days after the notification’s submission, as required by the  regulations and procedures. The other 13 cases were completed within  122 to 160 days. According to Board officials, processing some  notifications took more time because of a government shutdown or  internal procedural delays. (See app. IV for more information about the  processing times for notifications in our sample.) The Board staff also  noted that even when a case was delayed, processing the notification  took less time than if the company had submitted an application under the  production application process before the regulations were revised in  2012.

According to Board staff, the notification process is designed to ensure  that the applicant receives an authorization decision within 120 days.  Board staff stated that, in general, any issues arising during evaluation of  a production notification will lead to an authorization with restriction or  denial of the notification, since decisions on the merits of such issues  would require extended comment and rebuttal periods and additional  analysis that could not be completed within the 120-day time frame for  notifications. Board staff stated that, in these cases, a company can  choose to submit a more detailed application, triggering the Board’s  application evaluation process. Among the companies that filed the 59  production notifications we reviewed, three companies whose  notifications were not approved had filed a more detailed application for  production authority as of September 2017.

FTZ Board Followed Procedures Generally Aligned with Regulations in Evaluating Applications We Reviewed, but It Did Not Consistently Document Consideration of All Required Criteria Board’s Procedures Generally Align with Regulations for Evaluating Production Applications

Our review of Board documents and interviews with Board staff showed  that the Board has established procedures for evaluating production  applications that generally align with its regulations. The Board’s  procedures for evaluating production applications can be organized into  the same three phases as those for evaluating production notifications— (1) information collection, (2) analysis and recommendation, and (3)  authorization decision—although some of the requirements differ (see fig.  6 for an illustration of the Board’s application process). For each phase,  the procedures include steps that specify the responsible party and the  intended product and result.

In general alignment with the regulations, the Board’s procedures for  evaluating production applications include steps for collecting information  from the applications, from public comments submitted in response to  Federal Register notices of the applications, from reviews of the  applications by industry specialists at Commerce and other agencies, and  from CBP.

Application information. The Board regulations require the applicant  to provide detailed information about the proposed production  activities, such as (1) a summary of the reasons for the application,  including a description of the finished products and imported  components; (2) the estimated annual value of benefits to the  applicant; and (3) an explanation of the requested production  authority’s anticipated economic effects. To guide companies in  completing applications, the Board provides an application instruction  sheet with numerous questions, many of which are similar to  requirements listed in the regulations. The Board’s procedures  require Board staff to determine whether the application is complete  before beginning to evaluate it.

Federal Register comments. The Board regulations require that,  after Board staff determine that the application satisfies regulatory  requirements, the Executive Secretary shall, among other things,  publish a notice in the Federal Register inviting public comments.  Similarly, the Board procedures require the preparation of a notice for  the Executive Secretary’s review and signature that will be transmitted  to the Federal Register.

Agencies’ review. While the Board’s regulations do not specifically  require Board staff to ask industry specialists to review the production  applications, the procedures instruct staff to consult with industry  specialists at Commerce and other agencies as appropriate. See  the text box for a description of production application reviews by  industry specialists in Commerce’s Office of Textiles and Apparel  (OTEXA).

Description of Production Application Review by Department of Commerce Industry Specialists  According to industry specialists at the Department of Commerce, when Foreign-Trade Zones (FTZ) Board staff receive an application  pertaining to textiles products, they forward the application to the department’s Office of Textiles and Apparel (OTEXA). OTEXA  officials then issue a mass mailing alerting industry (i.e., nongovernment) representatives that a textile case was submitted. In  addition, the industry specialists said that the department co-manages the Industry Trade Advisory Committee on Textiles and  Clothing, consisting of 23 vetted advisory committee members representing domestic producers, importers, retailers, distributors and  associations, among others. The specialists stated that OTEXA officials would notify this committee about the Federal Register notice  for the textile application to help ensure that the industries have seen the notice.

According to the industry specialists, OTEXA will thoroughly review the case, taking into account public comments, and submit a  memo with a recommendation to the FTZ Board staff for consideration. The specialists stated that the main purpose of OTEXA’s  review is to determine whether the applicant is seeking to bring into an FTZ a textile component that is being manufactured  domestically. According to the specialists, if OTEXA determines that the component is manufactured domestically, it will recommend  to the FTZ Board staff that the application should not be authorized. The industry specialists said that lack of opposition to the  application usually indicates that there is no domestic manufacturer of the product.

CBP’s review. The regulations require the Executive Secretary to  provide the application and Federal Register notice to CBP for review  and require CBP to submit any comments about the application to the  Executive Secretary by the conclusion of the Federal Register public  comment period. Similarly, the Board procedures require Board staff  to prepare a letter to the CBP Port Director. According to the Board  staff and CBP officials, a letter is sent to the local CBP Port Director to  collect information on CBP’s ability to provide oversight and help  ensure that FTZ program rules and regulations are followed if the  activity is authorized.

The Board Followed Its Procedures in Evaluating Production Applications We Reviewed

Our review of available documents for each of the three applications in  our sample indicate that Board staff followed the Board’s procedures in  collecting information from companies, publishing notices and obtaining  public comments from the Federal Register, and gathering comments  from agencies such as Commerce and CBP. All three companies  requested authority to import textiles from foreign suppliers into an FTZ  for use in manufacturing products that would be later imported from the  FTZ into the U.S. market for consumption.

The Board staff collected information from all three companies’  applications. For example, each company provided information regarding  (1) reasons for the application and an explanation of its anticipated  economic benefits; (2) the estimated total annual value of benefits of the  proposed activity to the company; (3) whether the activity was consistent  or inconsistent with U.S. trade and tariff law or policy formally adopted by  the executive branch; (4) whether approval of the activity under review  would seriously prejudice U.S. tariff and trade negotiations or other  initiatives; and (5) whether the activity involved items subject to  quantitative import controls or inverted tariffs.

We found that two of the companies responded partially to a question  soliciting data on annual current and planned production capacity for the  proposed FTZ activity. In addition, one of these companies did not  respond to a question regarding whether the production activity would  result in significant public benefits, taking into account the threshold and  economic factors. According to Board staff, applicants may not be able to  provide the quantitative information needed to answer some of the  questions. The staff stated that, because the evaluation process does not  lend itself to specific calculations, the absence of certain data does not  prevent the Board’s evaluation of the application. According to Board  staff, the Board’s recommendations are based on the totality of qualitative  and quantitative information in the case record.

The Executive Secretary posted notices in the Federal Register of the  three production applications, pursuant to the Board’s procedures, and  received public comments on all three. One application received two  comments from a domestic textile producer that opposed the application.  Another application received three comments—two from a domestic  textile producer and one from domestic textile industry trade  associations—opposing the application and received a fourth comment— from a domestic textile producer—supporting it. The third application  received 14 comments from domestic textile producers, textile  organizations, and congressional and city government officials, among  others. Twelve of the 14 comments supported the application; the  remaining 2 comments, from the same domestic producer, opposed it.

Board staff requested that industry specialists review one of the three  production applications, although the Board’s procedures do not require  such reviews, according to Board staff. In a memo from Commerce’s  OTEXA, a specialist who reviewed the application recommended not  approving it because the textile components that the company had  planned to import into the FTZ were also produced domestically by other  manufacturers. In addition, the memo stated that granting the company’s  request for FTZ production authority would provide a significant incentive  to use imported textile materials rather than textile materials produced  domestically, which could have negative economic effects on domestic  producers and companies supplying the production components.

For the other two applications—both related to the production of carbon  and other fiber with foreign-source components—the Board staff did not  seek comments from industry specialists and initiated their own industry  research instead. According to Board staff, they did not reach out to  OTEXA because OTEXA had recently provided comments on a similar  carbon fiber case. The Board staff did not request that other agencies  review the three applications.

CBP’s local Port Director reviewed all three production applications and  responded that it could provide oversight of the proposed activities.

We found that Board staff followed the Board’s procedures in reviewing  comments and other relevant factors for the three production applications  and providing recommendations to the Board regarding approval of the  applications.

Review of Comments and Other Relevant Factors  Our review of Board case records for the three applications found that in  evaluating the applications, Board staff considered the public comments  submitted in response to the Federal Register notices as well as  comments from industry specialists and CBP. In addition, although the  case records did not document consideration of all required criteria for  two of the three applications, we concluded after interviewing Board staff  that they had considered the required criteria. The procedures do not  require Board staff to document consideration of the required criteria. The  case records we reviewed also showed that Board staff considered the  authorization decisions of recent applications involving similar foreign- source components.

Examiner’s Reports and Recommendations  We found that the Board staff issued preliminary recommendations and  subsequently prepared detailed examiner’s reports, with final  recommendations, for the three production applications. For two of the  applications, the examiner preliminarily recommended authorizing one of  the requested production activities with a restriction, namely, requiring  that the final product be re-exported and not sold on the U.S. market.  For the third application, the examiner preliminarily recommended, on the  basis of the OTEXA specialist’s analysis, not approving the request for  expanded FTZ production authority. The Board staff also prepared  reports with final recommendations for the Executive Secretary’s review,  taking into account new evidence and rebuttals that the applicants had  submitted in response to opposing public comments. The final  recommendations proposed by the Board staff were identical to the  preliminary recommendations.

For the two applications that received final recommendations to authorize  with restrictions, the examiner’s reports stated that an authorization  without restrictions would negatively impact a domestic producer and that  the applicants had not demonstrated a causal link between proposed  FTZ-related cost savings and an overall net positive national economic  effect, among other reasons. For the application that the industry  specialist had reviewed, the examiner’s report stated that, after reviewing  all comments and information on the case record, OTEXA’s position  continued to be that approving FTZ production authority in this  circumstance, given the domestic supply of required textile materials,  would encourage the use of imported textiles and reduce purchases from  domestic producers, which could cause domestic production to decline.

Our review of the case records for the three production applications found  that the Executive Secretary submitted the examiner’s reports and  recommendations to CBP for review and comment and to the Board  members for their respective votes, pursuant to the Board’s procedures  and regulations, and that the applicants were notified of the Board’s  decisions. We also found that all three applications took longer than the  general 12-month time frame detailed by the regulations.

Executive Secretary’s Recommendation and Board’s Decision  We found that CBP reviewed, and concurred with, the examiner’s  recommendations for all three applications. The Executive Secretary  submitted copies of his memos for each of the three applications, along  with the examiner’s reports and recommendations, to both the Treasury  and Commerce board members. The memos recommended authorizing  with restrictions two of the applications and not authorizing the third  application, in agreement with the examiner’s recommendations. In  addition, the Executive Secretary’s memo to the Board regarding the  application that OTEXA had reviewed stated that, as with recent cases  involving textile-based production components, the content of OTEXA’s  memorandum established a key basis for the final recommendation for  the Board’s action. The Board members unanimously concurred with  the Executive Secretary’s recommendations for all three applications.

For all three applications, the Board staff notified the applicants of the  Board members’ decisions.

Board staff developed the examiner’s preliminary recommendation within  the general 150-day time frame cited in the Board’s procedures for one of  the three applications we reviewed and took additional time for the other  two applications. Each of the three applications involved textiles related to  foreign-source components, which our review of the case records showed  can be controversial. For the three applications, the examiner took 116,  235, and 431 days, respectively, to complete the preliminary  recommendations. In addition, the Board’s evaluation of each of the three  applications that we reviewed took longer than the general 12-month time  frame detailed by the regulations; however, the regulations state that  processing a case may take longer when it involves a controversial or  complex issue. Processing the three applications took approximately 18,  28, and 28 months, respectively, from the dates when the Board received  the applications to the dates when the applicants were notified of the  Board’s decisions.

For all three applications, preliminary recommendations to either  authorize with restrictions or not authorize led to the submission of  additional evidence by the applicants, opposition and support by various  parties through public comments in response to the Federal Register  notices, and the applicants’ rebuttals of public comments. For example,  Board staff said that for one of the applications, the OTEXA specialist  who reviewed it asked the Board staff to request additional information  from the applicant to facilitate analysis of the potential impact of the  proposal. The applicant took more than 3 months to provide the  information. After the specialist and the Board staff reviewed the  additional information, a preliminary negative recommendation was  rendered, which necessitated opening an additional public comment  period. An opposing party requested an extension of that comment  period. After the extended comment period ended, the Board staff said  that it allowed a public comment period for rebuttal comments. According  to Board staff, another application that we reviewed involved somewhat  similar sets of complex circumstances. Board staff noted that these two  applications each involved a complex set of circumstances that needed to  be carefully and thoroughly reviewed.

Lack of Consistent Documentation Made It Difficult to Verify the Board Considered All Required Criteria for Applications We Reviewed

While the Board’s procedures and regulations do not call for staff to  document their consideration of all criteria required by section 400.27 of  the regulations, the absence of such documentation for two of the three  applications we reviewed made it difficult to verify that the Board had  considered all of these criteria when evaluating the applications. For  example, the examiner’s report for one of these two applications did not  include documentation to demonstrate that the Board staff had  considered the required threshold factors. Also, the reports for the two  applications did not include documentation that the staff had considered  several of the required economic factors, including (1) retention or  creation of value-added activity, (2) extent of value-added activity, and (3)  overall effect on import levels of relevant products. The records for all  three applications included documentation of consideration of the  proposed production activity’s potential significant public benefits. Board  staff and the Executive Secretary explained in interviews and in written  responses to our questions how they had considered all the required  threshold and economic factors and any significant public benefits when  evaluating the three applications we reviewed.

The examiner’s reports for the two applications did not include  documentation indicating the Board staff’s rationale for selecting criteria  as relevant. According to Board staff, each examiner’s report includes  information that is most relevant to the analysis of the case. Each report  also provided a narrative discussing the criteria that the Board staff  considered relevant and that supported the recommendation, and each  report explained the rationale for the Board staff’s decision to recommend  authorizing with restrictions or not authorizing the production activity.  According to the Board staff, because only the most relevant criteria are  included in the examiner’s report, not all of the threshold and economic  factors are explicitly documented. According to Standards for Internal  Control in the Federal Government, management should clearly  document internal control and all transactions and other significant events  in a manner that allows the documentation to be readily available for  examination. If management determines that a criterion is not relevant,  management should support that determination with documentation that  includes its rationale. Without such documentation in the examiner’s  reports, Board members lack readily available written assurance that the  recommendations reflect consideration of all of the required criteria and  that its decisions comply with U.S. trade and tariff laws and policy that  has been formally adopted by the executive branch. In addition, such  documentation would provide an institutional record of the examiner’s  consideration of all the required criteria.

According to Board staff, the examiner’s reports may contain varying  levels of discussion on each criterion, depending on the specific  circumstances of the application. Board staff stated that the criteria listed  in section 400.27 of the regulations form the framework and basis of the  analysis in each examiner’s report, although the analysis and discussion  in the reports may not refer directly to each economic factor. With respect  to the examiner’s report that contained no documentation of the  consideration of the threshold factors, the Board staff stated that their  consideration of the economic factors had indicated that the application  should be denied and had formed the basis of the report’s  recommendation. The recommendation and the Board’s decision would  not be affected by including in the report a discussion of the threshold  factors, according to the Board staff.

In addition, Board staff stated that the extent to which the examiner’s  reports discuss specific pieces of evidence can vary depending on the  relevance and significance of each piece of evidence to determining  whether the applicant has met the burden of proof for approval under the  regulatory factors or criteria. The Board staff also noted that the extent to  which the examiner addresses each piece of evidence is generally a  subject of discussion with the Executive Secretary during the drafting of  the report. Only by interviewing Board staff, in conjunction with our review  of the case records, were we able to determine that the Board had  considered all of the required criteria when making its recommendations  to authorize (with or without restrictions) or not authorize an application  for production authority.

The Board has procedures that generally align with the regulations for  evaluating production notifications and applications for production  authority, and our review of FTZ sample cases and interviews with Board  staff and other relevant agencies found that the Board followed these  procedures. The Board regulations include criteria that the Board is  required to consider during its review of an application for production  authority. However, the examiner’s reports we reviewed did not  consistently include documentation demonstrating that the examiner  considered all required criteria before recommending whether the  applications should be authorized. While not required by the Board  regulations and procedures, such documentation would provide the Board  members readily available written assurance that the recommendations  reflect consideration of all of the required criteria and that its decisions  comply with U.S. trade and tariff laws. In addition, such documentation  would provide an institutional record of the examiner’s consideration of all  the required criteria.

The Secretary of Commerce, as Chairman of the FTZ Board, should  ensure that the Board’s Executive Secretary incorporates into its  procedures a requirement that each examiner’s report document Board  staff’s consideration of all required criteria listed in section 400.27 of the  regulations during evaluations of applications for production authority.  (Recommendation 1)

We provided a draft of this report to Commerce, Treasury, and the  Department of Homeland Security for review and comment. Commerce  provided written comments, which are reproduced in appendix V. In its  comments, Commerce concurred with our recommendation and stated  that it had taken action to address it. In addition, Commerce and Treasury  provided technical comments, which we incorporated as appropriate. The  Department of Homeland Security stated by email that it had no  comments about our draft report.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretaries of  Commerce, the Treasury, and Homeland Security and other interested  parties. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.

If you or your staff have any questions concerning this report, please  contact me at (202) 512-8612 or gianopoulosk@gao.gov. Contact points  for our Office of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made key contributions to  this report are listed in appendix VI.

Appendix I: Objectives, Scope and Methodology

This report examines (1) the extent to which the Foreign-Trade Zones  Board (the Board) has established and followed procedures aligned with  its regulations for evaluating production notifications and (2) the extent to  which the Board has established and followed procedures aligned with its  regulations for evaluating production applications.

To examine the extent to which the Board has established procedures  aligned with its regulations for evaluating production notifications and  applications, we reviewed and compared the Board’s 2012 regulations to  the Board’s staff internal procedures. In conducting this analysis, we also  identified procedures that the Board is required to follow in evaluating  notifications and applications. We interviewed Board staff, industry  specialists in the Department of Commerce (Commerce), and officials  from the Department of the Treasury (Treasury) and the Department of  Homeland Security’s Customs and Border Protection (CBP) to identify  their roles in the evaluation of notifications and applications and to clarify  the regulations’ requirements and the Board’s internal procedures.

To examine the extent to which Board staff followed the Board’s  procedures when evaluating production notifications and applications, we  selected and analyzed a nongeneralizable sample of case records for 59  of the 293 production notifications submitted to the Board from April 2012  through September 2017. We selected this time period to ensure that the  sample reflected the Board’s activities between April 2012—when,  according to staff, the Board began implementing regulations that it had  modified in February 2012—and the end of fiscal year 2017. To select our  sample of 59 notifications, we first selected 10 of the 13 notifications  submitted during the selected time period that were not approved by the  Board. We did not select the remaining 3 notifications that were not  approved, because the companies that submitted those notifications  subsequently submitted production applications and the Board’s  decisions about the applications were pending when we made our  selection. The notifications that were not approved were submitted by  companies in seven industry categories—silicones/polysilicon,  textiles/footwear, oil refineries/petrochemical facilities, other energy,  chemicals, medical supplies and devices and miscellaneous. For each of  these seven categories, our sample of 59 notifications includes all  notifications for which the Board had rendered decisions at the time of our  selection and excludes any for which decisions were pending. Our  sample does not include six production notifications submitted by  companies in the textiles/footwear industry category that the Board did  not approve or approved with restrictions, because those companies  subsequently submitted applications. Our final sample of 59 notifications  includes all three types of Board decisions (34 approved, 15 approved  with restrictions, and 10 not approved). However, because of its size, our  final sample is not generalizable to all notifications submitted from April  2012 through September 2017. We also selected and analyzed three  production applications, respectively submitted by three companies that  submitted 3 of the 59 notifications we analyzed. These three applications  were the only applications that the Board reviewed and rendered final  decisions on from April 2012 through September 2017.

We analyzed case records containing documents that companies  submitted when they filed their production notifications and applications;  information collected by Board staff from public comments in response to  Federal Register notices; comments from industry specialists at  Commerce, CBP, and the Department of Justice; and reports prepared by  Board staff, documenting their analyses and recommendations for each  notification and application. To conduct a systematic assessment of the  case records, we created a data collection instrument to determine,  among other things, whether the applicant submitted all required  information for each notification and application. In addition, at least two  analysts, including an economist, independently reviewed each case  record; any resulting disagreements were resolved through discussion  among team members and, as appropriate, with Board staff. Further, we  collected and analyzed data for these cases on the types of Board  decisions (approved, approved with restrictions, and not approved); the  extent of public comments received for both notifications and applications;  the extent of industry specialists’ and CBP’s comments; the types and  amount of notification restrictions; and whether the duration of the Board’s  evaluations was within the time frames detailed in the Board’s regulations  and procedures. We also determined the extent to which the  recommendations of the Board’s analysts, Commerce’s industry  specialists, the Board’s Executive Secretary, and Board members were in  agreement. We determined that the case records data we reviewed,  which we obtained from the Board’s case tracking system, were  sufficiently reliable for our purposes of understanding the universe of  notifications and applications submitted for production authority and  reviewing a sample from that universe. To make this determination, we  took steps that included reviewing related documentation guidance for the  Board’s case records tracking system; interviewing knowledgeable  agency officials; and reviewing a sample of cases with our data collection  instrument, which confirmed information included in the case tracking  system data.

Further, we analyzed the extent to which Board staff considered all  required threshold and economic factors and any significant public  benefits for the three applications in our sample. While neither the  Board’s regulations nor its procedures require Board staff to document  consideration of all required threshold and economic factors and  significant public benefits, as detailed in section 400.27 of the regulations,  during their evaluations of production applications, Standards for Internal  Control in the Federal Government calls for such documentation. To  conduct this analysis, we reviewed the examiner’s reports for all three  applications and interviewed Board staff to determine whether the  examiner had considered all of the required criteria. We cannot  generalize or extrapolate our analysis for the three applications to all  notifications and applications submitted to the Board from April 2012  through September 2017. We also interviewed relevant officials from  Commerce (including industry specialists), Treasury, and CBP to obtain  clarifications regarding some of the notifications and applications in our  sample.

We conducted this performance audit from July 2017 to November 2018  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Appendix II: Foreign-Trade Zones Board Decisions for All Production Notifications Submitted April 2012–September 2017

From April 2012 through September 2017, the Foreign-Trade Zones  Board (the Board) rendered decisions on 293 notifications requesting  foreign-trade zones (FTZ) production authority that were submitted by  companies in 25 industry categories (see table 2). The Board reported  approving 218 notifications (74 percent), approving 62 notifications with  restrictions (21 percent), and not approving 13 notifications (4 percent).  Nine of the companies whose notifications were approved with  restrictions or not approved continued to seek production authority by  submitting production applications.

Our analysis of the Board’s decisions from April 2012 to September 2017  found the following.

The Board approved all production notifications for six industry

Other electronics/telecommunications (10 notifications)

Oil drilling equipment (2 notifications)

According to Board staff, companies in some industry categories,  such as auto parts and pharmaceutical, often have long-established  records of operating in FTZs. Board staff also stated that many  companies in these industry categories submit notifications requesting  production authority for items similar to those for which the Board has  granted authority in the past. Officials also stated that companies are  more likely to submit notifications requesting authorization for certain  production activities if other companies have previously received  authorization for similar activities.

Textiles/footwear was the industry category with the largest number of  notifications that were approved with restrictions or not approved. Of  the 23 notifications submitted, 14 were approved with restrictions and  4 were not approved. Board staff noted that domestic textile  producers that could be affected by authorization of production  notifications are often those that oppose approval of the notifications.

Of the companies that submitted the 75 production notifications that  were approved with restrictions or not approved, 9 companies  continued seeking production authority by filing a more detailed  production application with the Board. As of August 2018, 2  applications had been authorized with restrictions, 2 applications had  not been authorized, and the Board’s decisions were pending for the  remaining 5 applications.

Appendix III: Rationales for Foreign-Trade Zones Board Decisions for Selected Production Notifications Submitted April 2012–September 2017

We selected and analyzed Foreign-Trade Zones (FTZ) Board (the Board)  case records for a nongeneralizable sample of 59 notifications to identify  the rationales for the Board’s decisions and the types of restrictions, if  any, included in the decisions. Table 3 shows the Board’s decisions for  the 59 notifications in our sample, by industry category.

The Board approved production authority for 34 of the 59 notifications in  our sample. Our analysis of Board case records found that the Board’s  rationale for its decision for 32 of the 34 authorizations fell into one of the  following four categories:

The Board had previously approved similar production authority  for another company (23 notifications). For example, in evaluating  a notification requesting production authority for lithium ion batteries  and electric vehicle motors, Board staff noted that the Board had  approved similar production notifications for other companies in recent  years.

No opposition or concerns were raised by an industry or  industry analyst during the Board’s review of the notification (4  notifications). For example, in evaluating one notification, Board staff  noted that no concerns were raised during the public comment period  or by Department of Commerce industry analysts.

No duty savings would be realized for the finished product of the  proposed activity (3 notifications). For example, in evaluating a  notification requesting authority to produce finished upholstery grade  leather and cut parts, Board staff noted that duties for the finished  goods were not lower than the duties for the components (leather  hides) required for production.

No products of foreign origin would be involved in the proposed  activity (2 notifications). For example, in evaluating one notification  Board staff noted that the applicant was not requesting the use of any  foreign-source steel in the proposed FTZ operations.

Notifications That Were Approved with Restrictions

Our sample of 59 notifications included 15 cases in which the Board  approved production authority with restrictions. Our analysis of Board  case records found that the restrictions imposed by the Board fell into one  or more of the following six categories.

The Board required the company to pay duties on one or more  components before importing the component into the FTZ (9  notifications). For example, the Board’s decision for one notification  stated that the company must pay duties on certain foreign-origin  upholstery fabrics before bringing them into the zone.

The Board required the company to pay duties on some or all  components brought into the FTZ when transferring the finished  product from the zone, even if the components were used in  production (8 notifications). For example, for one notification, the  Board required the company to pay duties on upholstery leather  brought into an FTZ for manufacturing furniture when the furniture left  the FTZ.

The Board authorized a limited quantity of certain components  specified in the notification (6 notifications). For example, the  Board decision for one notification limited the square yards of a given  fabric that the company was allowed to admit into an FTZ.

The Board required the FTZ user to submit additional data and  information (6 notifications). For example, the Board decision for  one notification required the company to submit supplemental annual  report data and information for the purpose of monitoring by Board  staff.

The Board restricted the duration of FTZ production authority (4  notifications). For example, the Board decision for one notification  limited production authority to 5 years.

The Board required that a product be re-exported from the zone  (not for entry into U.S. market) (1 notification). For this notification,  the Board instructed the company to ship all of the foreign upholstery  fabric out of the subzone and not ship it into the United States for U.S.  consumption.

For the 15 notifications that were approved with restrictions, our analysis  of Board case records found that the Board’s rationales for its decisions  fell into one or more of the following six categories.

Similar authority had been approved in the past (6 notifications).  For example, in its decision for one notification, the Board noted that a  similar authority had been requested by another company and that the  authority was granted with a similar restriction.

The proposed activity supported U.S.-based production that  otherwise would be conducted abroad (4 notifications). For  example, in decisions for two notifications, the Board noted that the  approved production authority supported domestic U.S. production  that otherwise could be (or was being) conducted abroad. The  restriction for these notifications concerned the quantity of a fabric that  could be brought into the zone duty free.

New or complex policy issues were involved (2 notifications). For  example, in its decision for one notification, the Board approved the  requested production authority for the first time and added a time  restriction that would allow the Board to identify any domestic impact.

No opposition was raised by domestic industry or by industry  analysts (1 notification). In its decision for this notification, the Board  noted that industry analysts at Commerce had no concerns as long as  the company paid duties on imported fabric components specified in  the notification when the finished good left the zone.

No duty savings would be realized for the finished product of the  proposed activity (1 notification). In its decision for this notification,  the Board noted that the applicant had indicated it would pay duties  on all foreign-source materials when leaving the zone for sale in the  United States.

The proposed activity would have no duty-reduction benefit and  would help only with logistics or record-keeping (1 notification).  In its decision for this notification, the Board noted that production  authority had previously been approved with restrictions and that the  company had requested a change to the authorization for record- keeping purposes.

The Board’s reasons for not approving 10 notifications fell into one or  more of the following two categories.

New or complex policy issues or concerns were involved (5  notifications). For example, in its decisions for these notifications,  the Board noted that (1) it had not previously approved production  authority for a given component or a given product, (2) circumstances  within the industry and opposition to the production notification  continued to evolve, (3) the production process made tracking the  source or destination of a given component difficult when it entered or  left the FTZ, (4) the component or product involved sensitive trade  policy issues, or (5) the economic impacts and potential precedents  were unclear.

Further review was needed because of domestic industry  concerns (8 notifications). For example, in its decisions for these  notifications, the Board cited concerns that included the possibility that  authorization would put pressure on domestic industries already  experiencing low growth and depressed prices and would cause  disagreements between the applicant and industry members  regarding the domestic availability of an FTZ production component at  competitive prices. In addition, for one notification, the Board’s  decision rationale stated that, although similar authority had been  approved several years earlier, authority was not currently being  granted because conditions had changed since the earlier  authorization.

Appendix IV: Time Frames for Foreign-Trade Zone Board’s Processing of Selected Production Notifications and Applications

The Foreign-Trade Zones Board (the Board) regulations establish time  frames for evaluating notifications and applications submitted by  companies seeking permission to conduct production activities in a  foreign-trade zone (FTZ). The regulations require that the Executive  Secretary inform the applicant of the Board’s authorization decision within  120 days of receiving the notification. The regulations also state that the  general time frame to process applications for production authority is 12  months. We selected and analyzed a nongeneralizable sample of 59  notifications and 3 applications and the Board’s case records to examine,  among other things, whether the Board completed its processing of these  notifications and applications within the time frames detailed in the  Board’s regulations. We found that the Board generally followed the 120- day time frame for the majority of the 59 notifications in our sample but,  for all 3 applications that we reviewed, took longer than the general 12- month time frame set in the regulations for the applications. According to  the regulations, additional time may be required to process applications  that involve a complex or controversial issue.

The Board generally completed its processing of the 59 notifications we  reviewed within the time frames detailed in the regulations. Eight cases  were completed in less than 120 days, with time frames ranging from 21  to 119 days. Twenty-five cases were completed in exactly 120 days. In 13  cases, the 120th day fell on a weekend or a holiday and the review was  completed on the next business day. Another 13 cases were delayed and  completed in 122 to 160 days. According to Board staff, processing 5 of  these 13 notifications exceeded the 120-day time frame because of a  government shutdown. In addition, according to the Board staff,  processing 8 of the 13 notifications exceeded the 120-day time frame  because of internal procedural delays, such as an industry specialist’s  needing more time to analyze a notification. Of those 8 notifications, 7  were submitted by companies in the textiles/footwear industry and the  eighth was submitted by a company in the “other energy” industry  category.

The time that the Board took to complete processing (i.e., finish its  evaluations and inform applicants of its decisions) for the 59 notifications  we reviewed varied by industry category (see table 4). For example, the  Board informed all of the applicants that submitted notifications in the  chemical, medical supply and device, and silicone/polysilicon industry  categories of its decisions within 120 days or within 120 days plus the  next business day. However, for 7 of 17 notifications from companies in  the textiles/footwear industry category, the Board informed applicants of  its decisions after the 120-day period.

The Board’s processing of each of the three applications in our sample  took longer than the general 12-month (365 days) time frame set in the  regulations. Processing of the three applications took 558, 866, and 864  days, respectively, from the date when Board received the application to  the date when the applicant was notified of the Board’s decisions. For all  three applications, the Board issued preliminary recommendations either  to approve with restrictions or not to approve the requested production  authority. These preliminary decisions led to the submission of additional  evidence, rebuttals to additional evidence, and opposition and support by  various parties, which extended the time needed for final decisions by the  Board members.

The regulations state that evaluating an application may take longer when  it involves a controversial or complex issue. The three applications we  reviewed involved textile-related foreign components, which the case  records and our interviews with Board officials showed can be  controversial. For the three applications, completing certain steps delayed  Board staff’s processing of the applications, causing it to exceed the  general time frame set in the regulations. For example, the regulations  state that the examiner shall generally develop recommendations and  submit a report within 150 days after the end of the public comment  period. For the three applications, the examiner took 116, 235, and 431  days, respectively, to complete the preliminary recommendations.  According to Board staff, processing two of the applications took longer  than the general time frame because of a complex set of circumstances  that called for careful and thorough review.

In addition, under the regulations, once the Executive Secretary has  circulated the examiner’s report, the Department of the Treasury  (Treasury) Board member is generally expected to return a vote within 30  days. For the three applications we reviewed, Treasury took 26, 90, and  212 days, respectively, to return a vote. A Treasury official also stated  that before rendering a decision about two applications requesting the  same type of authorization, Treasury waited for Board staff to complete its  review of both applications.  The Treasury official stated that he held  substantial discussions with Board staff about each of the three  applications before reaching a decision.

Appendix V: Comments from the Department of Commerce

Appendix VI: GAO Contact and Staff Acknowledgments

In addition to the individual named above, Christine Broderick (Assistant  Director), Barbara R. Shields (Analyst-in-Charge), Claudia Rodriguez,  Pedro Almoguera, Martin de Alteriis, Grace Lui, Reid Lowe, and  Christopher Keblitis made key contributions to this report. Other  contributors include Lilia Chaidez, Philip Farah, Peter Kramer, and Julia  Robertson.

To encourage companies to maintain and expand operations in the United States, the Foreign-Trade Zones program offers a range of benefits, such as the possible reduction or elimination of customs duties on certain imported goods.

A government board evaluates applications for establishing these zones as well as requests to reduce or eliminate specific duties and fees. We found the board followed its procedures—such as considering public and industry comments—in the cases we reviewed. However, its reports did not document that it considered all required criteria.

We recommended that the board more thoroughly document its applicant evaluations.