STAFF REPORT

Improving the Temporary/Interim Manufacturing

Procedure for Small and Medium-Sized Manufacturers

August 2006

 

 
1

 Although the focus of the T/IM proposal was the ability of small and medium-sized manufacturers to use

general-purpose zone sites, existing FTZ space also includes approved subzones.

2

 The purging of older approvals from the T/IM database reflects the idea that – since duty rates, duty-rate

relationships between components and finished products, and industry circumstances often evolve over time – cases

older than five years may not be a good basis for determining what would be non-controversial in terms of new

activity.

SUMMARY

In 2004, as part of the Department of Commerce’s Manufacturing Initiative, the Foreign-Trade

Zones (FTZ) Board approved a new procedure for rapid approval of applications for

“temporary/interim manufacturing” (T/IM) authority in existing FTZ space based on similarity to

prior approvals. In 2006, after practical experience showed the T/IM procedure to be less

successful than envisioned in assisting small and medium-sized manufacturers in participating in

the FTZ program, the FTZ Staff proposed a modification to allow greater flexibility in T/IM

eligibility. Public comment on this modification has been uniformly positive, and the FTZ Staff

recommends changing the T/IM procedure to allow for applications based on evidence of

similarity to previous approvals.

BACKGROUND

In October 2004, as part of the Department of Commerce's Manufacturing Initiative, the FTZ

Board implemented a new procedure for T/IM authority in existing FTZ space1. The goal was a

radical reduction in the time between application filing and approval so that U.S. manufacturers

could react quickly to new opportunities for manufacturing under FTZ procedures. To

accomplish this case-processing time reduction, the FTZ Board delegated to the Executive

Secretary authority to approve T/IM cases in specific circumstances. This procedural change was

designed to be particularly useful to small- and medium-size manufacturers (SMMs). 

Eligibility for T/IM case processing was limited to non-complex, non-controversial

circumstances. The FTZ Staff’s May 2004 report, which delineated T/IM procedures, established

a specific mechanism for determining T/IM eligibility. The FTZ staff would create a webaccessible database of non-controversial manufacturing approvals within the preceding five years

– new applicants could then request T/IM authority if their specific components and finished

products existed in the T/IM database. The database would be updated regularly as new regular

FTZ (non-T/IM) manufacturing applications were approved, with cases older than five years

automatically purged2.

Given the untested nature of the T/IM concept, the FTZ Staff created strict rules for the T/IM

procedure. Specifically, eligibility for T/IM processing would require matching component and

finished product combinations in the T/IM database with specificity at the level of six-digit

HTSUS categories. The T/IM rules also limited a given applicant to twenty components, ten

inverted tariffs, and five finished products (again defined with six-digit HTSUS specificity).
3

 71 FR 23895-23896, April 25, 2006. The notice also solicited comments related to the concept of scope

of authority for FTZ manufacturing. That subject, which is more complex than modification to T/IM procedures,

will be the subject of future analysis by the FTZ Staff.

-2-

Published Proposal

After more than eighteen months of experience in administering the T/IM procedure, the FTZ

Board staff published a Federal Register notice3 in April soliciting public comment on the

possibility of improving T/IM by “modifying the T/IM procedure to define eligibility for

application consideration on the basis of broader product and input categories than is currently

the practice.”

The notice went on to make clear that a number of constraints – designed to ensure adequate

review and minimize industry issues – would remain in place:

T/IM applicants would still be required to explain the specific activity which they seek to

conduct under T/IM procedures, including the degree of similarity of requested

products/inputs to already approved products/inputs in the T/IM database. Modification

of the T/IM procedure would leave most current elements of T/IM practice in place,

including limitation to non-complex, non-controversial proposals, the requirement for a

30-day public comment period on any T/IM proposal, the practice of consultation with

appropriate industry experts within government, and the FTZ Board Executive Secretary's

discretion to refer any T/IM case to the full FTZ Board.

The notice stated that “[a] particular benefit of modifying the T/IM procedure, as outlined above,

could be to give manufacturers already operating in FTZs/subzones greater ability to react

quickly to new challenges or opportunities.”

Comments Received

In response to our Federal Register notice, we received submissions from the following five

entities: the National Association of Foreign-Trade Zones (NAFTZ); Miller & Company, P.C.;

the Jackson (Mississippi) Municipal Airport Authority; the Mississippi Coast Foreign-Trade

Zone, Inc.; and the City of Mobile (Alabama). All of the submissions supported the T/IM

procedure, in general, and modification of the FTZ Board’s practice to allow greater flexibility

for T/IM requests.

The NAFTZ’s comments specifically supported broadening T/IM eligibility beyond the current

limitations, stating:

We support the Board’s proposal to broaden the product and input categories considered

in determining the T/IM application eligibility. In this regard, we believe that T/IM

eligibility should be broader than the current six-digit HTSUS limit applied to the product

and input categories.
4

 Of those forty-three cases, eighteen were for manufacturing/processing authority within existing FTZ

space (general-purpose or subzone).

-3-

The NAFTZ’s comments also address an additional aspect of enhancing flexibility:

With respect to the finished products to be sold in the U.S. market, we recommend that

the Board increase its limit of five (5) finished products and twenty (20) foreign status

inputs as well as its limit of ten (10) inverted tariffs for T/IM authority. These limits can

be increased to ten (10) finished products and thirty-five (35) foreign-status inputs as well

as its limit of twenty (20) inverted tariffs.

Miller & Company addressed in detail the reasons why broader T/IM eligibility would be

beneficial to U.S. manufacturers:

We have received a number of requests to analyze whether potential new activity that a

company may attract to the United States qualifies for this T/IM treatment. The

expedited time frame for approval (75 days) for T/IM is important as companies look for

immediate financial results when making these decisions on new locations for production

activity. Smaller and medium-sized companies must especially realize a return on their

investment in establishing a zone manufacturing operation as quickly as possible.

Miller & Company concludes:

Additional latitude should be provided to allow a company to make a “substantially

similar” argument as an input/finished product combination that may not exactly match

the Foreign-Trade Zones Board database, but is clearly very similar to what has already

been approved... The ability to quickly react to attract new activity to a United States

facility that is competing with its sister facilities located overseas within the same

company is extremely important.

The Jackson Municipal Airport Authority, the Mississippi Coast Foreign-Trade Zone, and the

City of Mobile buttressed their support of broader T/IM eligibility with specific examples from

local industries, including automotive, shipbuilding, and crop protection products, respectively.

ANALYSIS AND DISCUSSION

During the nearly two years since the Board approved the T/IM procedure, we have been

evaluating its implementation and are now able to assess the degree to which it has accomplished

the goals that led to its creation. Since T/IM’s 2004 introduction, we have received six T/IM

applications. However, this represents a small fraction of the forty-three standard FTZ

manufacturing/processing applications received during the same time period.4 In addition, we

have received a number of inquiries about the T/IM procedure from potential applicants whose
5

 In such cases, the fact that FTZ procedures are not available quickly generally ends the potential users'

evaluation of the FTZ program as a mechanism for enhancing their U.S. facilities' international competitiveness.

6

 Of the six T/IM applications to date, two were from companies already operating their own subzones

(they used T/IM to expand their authorized scopes for FTZ manufacturing), while another of the applications was

from a large petrochemical company.

-4-

components or finished products were similar to those approved previously, but that did not

constitute exact six-digit HTSUS matches.

5

 On balance, the T/IM procedure has not been as

successful as originally envisioned in allowing quick access to FTZ procedures for new program

users (particularly SMMs).6

It appears that a key factor contributing to the limited success of the current T/IM procedure has

been requiring exact six-digit HTSUS matches to prior approvals for any requested componentfinished product combination. While this strict requirement has had the effect of avoiding

controversy, its effect of limiting eligibility for rapid access to FTZ procedures must be

considered in the context of the important role that FTZ procedures can play in allowing many

U.S.-based manufacturing operations to remain internationally competitive. Further, as the

limited number of T/IM applications received to date has shown, existing subzone and FTZmanufacturing users also require a mechanism to be able to react quickly to new opportunities or

challenges.

One additional consideration in evaluating the flexibility of the T/IM procedure is the degree to

which it can serve as an inducement for U.S. manufacturers to choose to locate within FTZ

space, thereby potentially increasing their ability to secure future production runs. A range of

evidence suggests that many U.S. manufacturing plants face competitive situations which can

change or evolve more quickly than ever before. There is also a growing role for companies that

perform manufacturing on a contract basis – more and more U.S. companies appear to be opting

for contract production arrangements rather than taking on additional commitments in terms of

investment and employees. In many industries, this contract manufacturing is increasingly

occurring abroad. A more flexible T/IM procedure can increase the extent to which it will be

advantageous for many U.S. manufacturers – including those producing under contract

arrangements – to locate in FTZ environments in order to give themselves the ability to quickly

take advantage of FTZ procedures in future competitive situations.

With regard to the specific, practical changes to be made to the T/IM procedure, the starting point

is the concept of greater flexibility than the current requirement of an exact match with the T/IM

database for each six-digit HTSUS component-finished product combination. At the same time,

the entire T/IM concept is premised upon similarity to prior FTZ Board approvals. Therefore,

any enhanced flexibility for T/IM should involve the FTZ Staff creating a mechanism where

applicants can frame their T/IM requests by presenting arguments as to why their proposed

activity is similar to previously approved activity (as detailed in the T/IM database). To that end,
7

 Similarity could potentially be expressed in terms of duty rates, uses, production situation, competitors,

etc. Guidelines for the implementation of a revised T/IM procedure could clarify criteria for arguing similarity.

8

 Components and finished products would continue to be defined at the six-digit HTSUS level.

9

 Based on experience, the limitations on numbers of components and finished products should be adequate

without the complication (and potential confusion) of an additional limitation on the number of inverted tariffs.

-5-

the FTZ Staff should work with Import Administration’s information-technology staff to create a

user-friendly mechanism for applicants to find either components or finished products at a fourdigit HTSUS level within the T/IM database. After finding a given component (or finishedproduct) category at the four-digit HTSUS level, the database should then display the approved

components (or finished products) at the six-digit HTSUS level. The applicants could present

their arguments as to the similarity7 of their proposed activity to the previously approved activity

in the database.

One other aspect raised through the comment process is the number of components and finished

products that can be considered through a T/IM application. The initial T/IM implementation

was very conservative in approach, involving a limit of twenty components, ten inverted tariffs,

and five finished products. In practice, the limitation to ten inverted tariffs generally has actually

limited companies to ten dutiable components. Given the arguments presented for some greater

flexibility on this issue and the fact that T/IM has not functioned as originally envisioned, it is

reasonable to simplify the T/IM approach to focus on the number of components and finished

products, as well as consider a modest increase in the numbers allowed for those items. The

current numbers of components and finished products have posed no analytical problems for the

FTZ Staff on the cases processed to date. As such, an increase to thirty components and ten

finished products8 should be manageable9 and further enhance the usefulness of the T/IM

procedure for U.S. manufacturers that need to react quickly to new opportunities.

Finally, one aspect of T/IM that arose in 2004 and which is a factor for consideration now is

whether or when T/IM should be codified in the FTZ Board’s regulations. During the 2004

evaluation of the possibility of creating the T/IM procedure, the FTZ Board agreed that, “[w]hile

it may ultimately prove desirable for the FTZ Board to codify the delegation of T/IM approval

authority through regulations, implementation of the T/IM delegation should be given time to

evolve through practical experience before the FTZ Board seeks to codify it.” The wisdom of

that approach has been confirmed by the fact that, if T/IM’s procedural aspects had been codified

as originally conceived, the FTZ Board would already need to consider changing regulations

which – at this point – would be less than two years old. In this context, it continues to seem

most reasonable to make any revisions to T/IM practice and then allow at least two years of

experience with administering the revised T/IM procedure before considering codifying T/IM

procedure through regulatory changes.
10 This similarity would need to involve at least a four-digit (heading) or greater level of HTSUS

commonality.

-6-

RECOMMENDATIONS

For the reasons delineated above, the FTZ Staff recommends modifying the current T/IM

procedure to allow for requests on products and components similar (but not necessarily

identical) to previous approvals. This would entail a potential applicant using the existing T/IM

database to find previously approved finished products and component combinations similar10 to

what the applicant would be seeking authority to manufacture. The applicant could then explain

the degree to which the proposed components and inputs are similar.

The FTZ Staff also recommends allowing a modestly expanded number of finished products and

components for a given T/IM application: thirty components and ten finished products. The

Board’s Executive Secretary would have discretion to develop guidelines for these T/IM

applications to implement the framework for revisions to T/IM outlined above. The FTZ Staff

further recommends allowing at least two years of experience in administering the revised T/IM

procedure before considering codifying any of the T/IM practice in regulations. Finally, aspects

of T/IM practice (limitations, conditions, restrictions, etc.) not specifically recommended for

modification in the published proposal or this report would remain unchanged, including the

requirement that the FTZ Board staff notify the Board members (or their delegates) of all

approvals of T/IM authority on a quarterly basis.