| U.S. Foreign-Trade Zones Board |
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CONOCO INC. ET AL. V. UNITED STATES, 90-06-00289 This remand determination is submitted in accordance with this Court's June 30, 1994
decision and order, in which the Court ordered that the Foreign-Trade Zones Board (hereinafter
"FTZ Board") "fully articulate the rationale underlying its decision to condition Conoco's and
Citgo's subzone grants, including whether and in what manner the conditions it has imposed on
the grants serve the public interest". Based on the information and analysis below, the FTZ
Board reaffirms its determination that approval of the applications is in the public interest
only if subject to the following conditions: Summary of Rationale 1. The "fuel consumed" exemption was denied for two reasons. First, the exemption has never been formally recognized by the FTZ Board as an interpretative matter because the Foreign-Trade Zones Act of 1934, as amended ("FTZ Act"), does not extend zone benefits to products consumed in zones, whether or not they result from a process conducted within zones. While the 1978 Hawaiian Independent Refinery (HIRI) court decision (460 F. Supp. 1249 (Cust. Ct.)) resulted in some refinery subzones claiming this benefit, the 1988 Nissan case (693 F. Supp. 1183 (CIT), upheld on appeal by the U.S. Court of Appeals for the Federal Circuit, 1989) ruled that goods are exempt from duty only as expressly provided in the FTZ Act, which provides no exemption for goods consumed in zones (including goods manufactured in zones). Secondly, even if this benefit were legally available under the FTZ Act, our analysis indicated that granting it to refiners that use foreign crude would not be in the public interest because it would give them an unwarranted economic advantage over other domestic refiners that use only domestic crude inputs. 2. The option of paying duties at the rate applicable to finished products (e.g., coke, propylene) when it is lower (inverted tariff) than the rate applicable to the incoming foreign product (crude oil) is granted by the FTZ Board under its public interest mandate only when the proposed activity does not conflict with trade policy and there is convincing evidence that such a reduction in duty rates will have a net positive economic effect without an adverse effect on other domestic producers. Evidence on record indicated opposition from other domestic refiners who contended that unrestricted approval would provide refiners that import foreign crude oil an unfair economic advantage over those that use domestic crude oil. Also, analysis conducted by the Office of Energy of the U.S. Department of Commerce in 1987 and 1988 (OE analyses) concluded that approval of any oil refinery subzone should be limited to duty deferral benefits and export activity; otherwise there would be a detrimental economic effect on other domestic producers. The major positive effects cited by the applicants were associated with exports, which are not affected by the conditions. There was not sufficient evidence of foreign competition in refined petroleum products to support a positive finding regarding import displacement. Thus, no adequate basis was found for recommendation of unconditional approval. This left the FTZ Board with the choice of denying the applications in question or approving them subject to the conditions it has been including in decisions on oil refinery cases since the 1988 TransAmerican case (see below, p. 14). The conditions in question serve the public interest because they allow zone activity to be conducted to the extent that it is within the scope of authority covered by the FTZ Act, and results in a net positive economic effect, taking into account the overall effect on U.S. industry. The adoption of conditions is a preferred alternative to denying applications in their entirety, when a significant part of the positive effects can be realized if the negative effects are averted through conditions. The conditions in these cases were thus intended to preclude the negative effects, while allowing that part of the proposed activity that is in the public interest. Approval with the conditions provided a significant portion of the benefits sought. Thus, we viewed our decisions as helping improve the competitiveness of the two refineries in question without having an adverse impact on other domestic producers. General Summary Applicants for subzones must demonstrate not only how the proposed subzone activity will help them, but also how it will result in a public benefit. That is, subzone applicants are expected to explain (by category) the savings they expect from subzone status, how it will help them, and further, how the savings will result in positive economic effects such as creating and preserving domestic employment that is threatened by foreign competition. The reviews we conducted in the Conoco and Citgo cases considered the entire record, including evidence developed by FTZ Board staff. Neither the evidence presented by the applicants nor the record as a whole provided a public interest basis for granting subzone status to the extent of allowing the option of paying of Customs duties on products subject to lower duty rates (inverted tariffs) which enter the domestic market (inverted tariff benefit -- parties must have the option of selecting non-privileged foreign status in order to use this benefit). The level of imports of refined petroleum products was not high enough to support a finding that approval would result in import displacement. Also, there was no basis for finding that fuel consumed at the refineries was non-dutiable. The FTZ Act does not extend zone benefits to goods consumed in zones, and even if it did, our review concluded that the granting of this savings would also not be in the public interest. During the reviews of both applications, there were numerous discussions with the applicants, during which the factors that were being evaluated as part of the review were discussed. The applicants were aware of the conditions we have included in FTZ Board orders on oil refinery actions since 1986. In both cases, when the matter of choosing duty rates on finished products was discussed, the applicants were advised that such authority could not be granted without detailed product-by-product information (so that the analysis regarding the net economic effect could include consideration of the nature and extent of foreign competition on both raw materials and end products related to the inverted tariff savings). Such information is needed so that we can assess economic impact from both a domestic and world market perspective. The applicants never fully supplied the information needed, nor did they make it clear that the inverted tariff benefits were being requested (see below, pp. 19-21). The discussion below contains background information on the FTZ Board's decision process, Congressional reviews and concern about the granting of authority for allowing the election of lower duty rates on zone imports, how the broad "public interest" mandate affects decisions, and how these factors applied to Conoco, Citgo and other oil refinery cases. I. Decisionmaking Process of the Foreign-Trade Zones Board Each zone application is evaluated under a process which draws on the expertise of the
respective agencies. The review is directed and coordinated by the FTZ Board staff, located at
the Department of Commerce and directed by the FTZ Board's Executive Secretary. The review
process in effect when the Conoco and Citgo applications were filed has been described as
follows: II. The "Public Interest" Mandate Most cases we review that involve manufacturing present no basic policy issues, but all require an economic evaluation. Assessment of the net economic effect involves weighing positive factors (such as increased or preserved employment, U.S. value-added activity, exports and import displacement) against potential negative factors (such as adverse effects on domestic industry that result in the loss of sales to imports of finished products, reduction in employment at plants that use few or no imported components, possible decreases in value-added activity and reduction in domestic supplier purchases, increases in imports, and market distortions). The evaluation includes considering the extent to which zone procedures affect the various factors. Because both the positive and negative economic effects are usually prospective and because the role that zone procedures play is incremental, the net economic effect often cannot be precisely quantified. Our decisions are thus often based on estimated effects. In light of the expressions of Congressional concern, we have taken an especially cautious approach in granting authority that allows the election of lower tariff rates on products to be imported. Thus, we have granted such authority only under conditions in which there is at least a reasonable likelihood of significant positive economic effects with no threat of significant harmful effects on other domestic producers. The FTZ Board has always fully considered the concerns expressed by domestic industry regarding adverse effects on domestic producers, as well as our own findings as to industry impact. We frequently include restrictive conditions in our decisions in order to address possible negative consequences. This allows us to grant approval for the part of a proposal that is in the public interest. The evaluation of impact on the domestic industry occurs mostly in reviews involving
subzone applications. The FTZ Board has considered subzone status to be a privilege rather
than a right and that prospective subzone users have the burden of proof to demonstrate
significant public benefits that will result from subzone status. After its 1989 FTZ hearings,
the Government Operations Subcommittee suggested that we formalize our position on burden of
proof: Operations Subcommittee Report at 25. The GAO similarly recommended that: 1989 GAO Report at 42. See Final Rule: Foreign-Trade Zones Board, 56 Fed. Reg. 50790 (October 8, 1991) (citations omitted) (emphasis supplied). As noted, the revised regulations codified past practice with respect to review criteria and procedure. The regulations reflect the FTZ Board's cautious approach toward subzone authorization in order to comply with the Congressional direction received in the late 1980s. III. Authorization for Subzone Status for Oil Refineries In 1985, applications involving three oil refineries in Corpus Christi, Texas, were approved based upon the potential for increased export activity (FTZ Board Order 310, 50 Fed. Reg. 38020, 9/19/85). The applications were limited in scope. Zone savings were requested for export activity and duty deferral, and inverted tariffs were not mentioned. While they made reference to savings on fuel consumed, this benefit at the time was considered a Customs procedural matter which was under review by that agency. None of the cases was opposed by domestic industry. Thus, the FTZ Board did not view inverted tariff benefits as being within their scope of authority. While the FTZ Board orders covering the three refineries does not contain specific conditions as the post-1986 cases, they are in fact restricted in scope based on the form of the requests made in the applications. The post-1986 cases involved a number of refineries seeking a wider range of zone savings. Unlike previous cases, these were opposed by other domestic refiners (including Mobil, Ashland, Phillips 66, Amoco) and the American Independent Refiners Association. As noted in the 1988 ITC report, the petroleum FTZ cases were among the most contentious before the FTZ Board in terms of industry opposition. 1988 ITC Report at 7-2. Based on the issues raised (lower tariffs, fuel consumed) and the prospect of widespread use of zone procedures in the industry, we requested a review from the U.S. Commerce Department's Office of Energy (OE). Conoco 44 at 463. OE conducted an analysis in 1987, followed by another in 1988 (OE analyses). These reviews indicate that approval for export activity would be positive, but raised concerns regarding savings from lower tariffs and fuel consumed. They concluded that allowing these savings for refineries that use foreign crude oil would give them an unwarranted advantage over refiners that use domestic crude. The OE analyses concluded that granting zone authority for other than exports raised the potential for negative effects on domestic producers. Concern over Customs control requirements also had an effect on the prospects for exercising the inverted tariff benefit. Throughout the 1980s, Customs worked on developing procedures for adequate inventory control and supervision of subzone refineries. The 1988 ITC report notes certain Customs problems in devising adequate control procedures because of the complexity of the activity proposed and the nature of the refinery process. 1988 ITC Report at pp. xv, 3-22. Based on experimental projects for the Corpus Christi refineries and based on meetings with subzone applicants (TransAmerican, Conoco, Citgo, Champlin), Customs suggested a refinery subzone operational module for all refinery subzones. They first suggested that all crude oil be placed in non-privileged status or that entry be made after the first stage of refining, but the subzone operators and applicants objected because this would have required them to pay the higher duty rates applicable to their primary finished products (gasoline and other fuels). Customs settled on an interim plan that called for all incoming crude being placed in privileged foreign status. This precluded savings on the few end products which are subject to lower tariff rates. Although this plan was not entirely satisfactory to all, it was a first-step that provided the majority of benefits sought and it had the effect of diminishing interest in inverted tariff benefits. The FTZ Board's 1988 decision on the TransAmerican (Gramercy, LA) refinery (Conoco 57 at 533) was the first of the post-1986 cases and it contained restrictions on fuel consumed and inverted tariff savings, setting the stage for cases that followed. Four more refinery approvals were made later that year, including Conoco. Citgo followed several months later in 1989. All six of these cases had the same restrictions. Five more refinery subzones were approved between 1991 and 1994 and these also were subject to the restrictions (which became referred to as the "standard refinery restrictions"). Thus, the FTZ Board adopted the fuel and inverted tariff restrictions for each of the eleven subzones approved since March 1988. In the most recent three cases (late 1993/94), one exception was made to grant the inverted tariff benefit with regard to sulfur. This was possible because the applicant submitted new information indicating relatively high import levels of sulfur and we found significant foreign competition in this product. Finding no adverse effect on domestic producers, we concluded that allowing the election of the lower duty rate on sulfur would have a contributory effect in helping improve the refineries' international competitiveness. This was the first time product-specific evidence was presented regarding the public benefits of allowing such procedures for a lower duty product. Because of similar industry circumstances, this exception would likely be available to the other refineries (including Conoco/Citgo) upon application. IV. Review of the Conoco and Citgo Subzone Applications Import Displacement In their applications, both companies made general arguments indicating that zone
procedures would help improve cash flow savings at their refineries. They argued that these
savings would help them compete against foreign refiners that ship finished products to the
United States, and they cited increases in imported products. However, our analysis indicated
that import levels were not high in this industry at the time (see below, OE analyses p. 18).
Even Citgo's application referred to a low level of imports: Citgo 1 at 115. While Citgo later came up with a higher figure of a 12 percent ratio of imports to consumption in refined products overall (Citgo 24 at 269), even this level (which appears to include all petroleum products) does not represent a high one by our standards, because most of the competition (at least 88%) involves other domestic refineries. Advice we received from government industry analysts confirmed the fact that import competition was low and that allowing zone procedures for some refineries would likely disadvantage other domestic refineries. Conoco 50 at 490. Domestic Opposition Conoco 13 at 302. Office of Energy Analyses The table that the [applicant's] memo uses to illustrate the "significant growth" of imports appears unduly threatening and warrants a special comment. The year selected for the table start with 1980, the last full year of price controls, when it was very difficult for foreign refined products (at world prices) to compete with domestic products (at lower, controlled prices). This skews the increase substantially. A comparison of average imports over price-controlled and free market years gives a fairer comparison (see below)....A last comment on the table is that both gasoline and distillate imports appear to have roughly stabilized in the last few years." Conoco 50 at 491-492 (emphasis supplied). OE concluded that unrestricted subzone status
would give FTZ refiners an unwarranted advantage over non-FTZ refiners: The applications were also reviewed by the Commerce Department's Office of Industry Resources Administration (OIRA). After reviewing the OE analyses and consulting with OE policy officials, the Assistant Secretary for Trade Administration recommended that approval of oil refinery applications should be for export only. Conoco 44 at 463. Inverted Tariff Savings Citgo 24 at 270. Thus, Condition 2 does not conflict with the applicant's own statement about electing privileged foreign status. Conoco's application discussed the potential for inverted tariff savings along with other savings such as duty deferral (Conoco 1 at 143). However, neither its calculation nor its list of zone savings included the inverted tariff savings (Conoco 1 at 190 and 192). Thus, the FTZ Board's Federal Register notice announcing the application indicated that the use of zone procedures would be limited to exempting the refinery from Customs duty payments on exports and deferring duties on imports (51 Fed. Reg. 24188, 7/2/86). Conoco 4 at 263. The ambiguity as to whether the inverted tariff savings was actually requested in the
application continues in other statements for the record. For example, Conoco's description of
public benefits reads as follows: Conoco 1 at 148 (emphasis in original). Had the inverted tariff benefit been correctly requested, the applicant would have had to include a statement as to its public benefit effects. Notwithstanding this omission and lack of clarity, inverted tariff savings were given consideration in both cases. The factors considered included impact on domestic production and employment, import displacement, domestic value-added activity, and the extent of import competition taking into account the concerns expressed by domestic industry. We found that there would be some positive effects from the savings attributable to exports and that there would be no harmful effect in granting duty-deferral on imports. However, there was no public benefit basis to extend zone authority to choosing the tariff rate on finished products on which the rate was lower (inverted tariff benefit). The record indicated that because of the low level of import competition, little displacement of imported products would occur. Most of the impact would be at the expense of other domestic refineries. We took into account that the inverted tariff savings might be relatively low. However, we concluded that even a small savings advantage would be significant in a low margin industry such as this one. Neither of the two applications represented a basis for the FTZ Board to change its position on not granting inverted tariff benefits for non-insular oil refinery subzones. Fuel Consumed The inclusion of a condition in zone grants after 1986 denying the fuel consumed benefit, was a statement as to the FTZ Board's long standing position. It was when the Government was preparing its legal response to the Nissan litigation in 1987-88 that the FTZ Board decided to include an express provision that requires the payment of duties on fuel consumed so there would be no confusion as to its legal interpretation on this matter. While there was a legal reason to include this condition, the request for the fuel consumed savings was also rejected on economic grounds. We considered the record, including the OE analyses and domestic industry opposition, and concluded that granting such a cost savings to refiners that use foreign crude oil would give them an unwarranted advantage over refiners that use domestic crude oil. As noted in the discussion on inverted tariffs, the fact that the level of imports of finished oil products was low meant that the competitive impact of the savings would be greater on other domestic producers than on foreign refiners, resulting in a net negative economic effect. Thus, approval of this benefit would not have been in the public interest. V. Conclusion Adopted and signed in Washington, DC, this _____ day of __________ 1994.
Paul L. Joffe While there was a legal reason to include this condition, the request for the fuel consumed savings was also rejected on economic grounds. We considered the record, including the OE analyses and domestic industry opposition, and concluded that granting such a cost savings to refiners that use foreign crude oil would give them an unwarranted advantage over refiners that use domestic crude oil. As noted in the discussion on inverted tariffs, the fact that the level of imports of finished oil products was low meant that the competitive impact of the savings would be greater on other domestic producers than on foreign refiners, resulting in a net negative economic effect. Thus, approval of this benefit would not have been in the public interest. V. Conclusion Adopted and signed in Washington, DC, this _____ day of __________ 1994. Paul L. Joffe Concur:John P. Simpson While there was a legal reason to include this condition, the request for the fuel consumed savings was also rejected on economic grounds. We considered the record, including the OE analyses and domestic industry opposition, and concluded that granting such a cost savings to refiners that use foreign crude oil would give them an unwarranted advantage over refiners that use domestic crude oil. As noted in the discussion on inverted tariffs, the fact that the level of imports of finished oil products was low meant that the competitive impact of the savings would be greater on other domestic producers than on foreign refiners, resulting in a net negative economic effect. Thus, approval of this benefit would not have been in the public interest. V. Conclusion Adopted and signed in Washington, DC, this _____ day of __________ 1994. Paul L. Joffe Concur:Kenneth H. Murdock |