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U.S. Foreign-Trade Zones
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Foreign-Trade Zones 101

Conoco

REMAND DETERMINATION:
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:
  1. Foreign crude oil used as fuel for the refinery shall be dutiable.
  2. [Conoco/Citgo] shall elect privileged foreign status on foreign crude oil and other foreign merchandise admitted to the subzone.

Summary of Rationale
The rationale for the FTZ Board’s adoption of the conditions in question may be summarized as follows:

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
Subzones are single-user zone sites at which FTZ procedures are available only to the site operator. This makes them a private type of zone, differentiated from general-purpose zones which are public in nature and designed to accommodate multiple users. Under its regulations, the FTZ Board reviews proposed zone activity — whether it is conducted in general-purpose zones or subzones — to determine if it is in the public interest. The criteria involves consideration of the trade policy implications and net economic effect of the proposed activity, taking into account the overall effect on related domestic producers.

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
As provided in the FTZ Act, the Foreign-Trade Zones Board is composed of the Secretaries of the Departments of Commerce, Treasury, and the Army, with the Secretary of Commerce acting as the FTZ Board’s chairperson. The FTZ Board operates like an interagency committee with members viewing decisions in light of their respective jurisdictional responsibilities and areas of expertise. The Commerce Department takes the lead on economic and industry impact issues. The Department of the Treasury’s main responsibilities involve the enforcement of Customs laws and the supervision of zone activity. The Department of the Army is involved through its Corps of Engineers, which advises the FTZ Board on land use and environmental matters when they exist.

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:
- The Executive Secretary designates a Commerce examiner (usually from the FTZ Staff) for each case. This person chairs an Examiners Committee that includes a Customs member designated by the Regional Commissioner for the area involved, and the District Army Engineer. The function of this committee is to conduct an investigation of the application.
- Public notice is given in the Federal register in all cases (applicants are encouraged to issue local press releases and a public comment period of 30-45 days is announced.
- When additional time is requested by interested parties to review the application and record, extensions of 40-60 days for public comment are generally given. This allows opposing parties an opportunity to submit comments and briefs in rebuttal. While the public comment period is usually open no more than 90-120 days after filing, the Commerce examiner continues to review all written material and information he receives as part of his continuing investigation. Should any submission contain new evidence that could effect the outcome of the case, opposition parties would be informed of the evidence or point in issue and given an opportunity to submit further evidence or comment.
- In the course of the investigation, the Commerce examiner consults with Department officials on policy, and with other agencies or Department staffs. These contacts are usually to obtain information, and to request comments or studies to assist in the evaluation of economic and policy issues. For example, in recent years there have been consultations with DOE [Department of Energy] (oil refineries), USDA [Department of Agriculture](food products), DOT [Department of Transportation] (shipyards), and DOD [Department of Defense](strategic materials). Within Commerce the examiner uses ITA’s [International Trade Administration] industry specialists as a resource.
(Foreign-Trade Zones [FTZ] Program Needs Restructuring, Committee on Government Operations, H. Rep. 363, 101st Cong., 1st Sess. at 8-9)(“Operations Subcommittee Report”). Upon completion of the review, an examiners committee report is prepared with findings and recommendations:
- As the investigation draws to a close, the Commerce Examiner and/or the Executive Secretary discuss precedents and the Department’s position on policy questions with the Assistant Secretary [for Enforcement and Compliance]. The examiners committee report summarizes the application and record, the proposal and its economic impact, policy considerations, and concludes with a non-binding recommendation for the FTZ Board. The comments of the Customs and Army Engineer members are appended, and they receive copies for concurrence.
- The Examiners Committee report and recommendations are circulated by the Executive Secretary with a draft resolution to the staffs of the other FTZ Board members. Meetings and discussions are held as necessary at the staff or policy level. Customs Service headquarters officials conduct a final appraisal and forward papers to the Department of Treasury. Upon receiving the votes of the Treasury and Army Departments, the Executive Secretary prepares final documents, including a memorandum that summarizes the case process, and a FTZ Board Order for a decision by the Commerce Secretary or Assistant Secretary. The FTZ Board Order is published in the Federal Register.
Id. (footnote omitted). After the interagency review is completed, decision documents are prepared for the FTZ Board Chairperson. The decision “package” includes a decision memorandum, a resolution similar to the one adopted by the other FTZ Board members, and a FTZ Board Order. A copy of the examiners report is attached as are copies of the resolutions signed by the Treasury and Army FTZ Board members noting their concurrence with the Examiners Committee report and recommendation. Finally, a Federal Register notice is published of the FTZ Board Order.
As discussed below, the above process was followed in both the Conoco and Citgo cases.

II. The “Public Interest” Mandate
The FTZ program has been the subject of executive and legislative scrutiny as the use of zones and subzones for manufacturing has increased since the early 1980s. At the heart of this scrutiny is whether and under what conditions the conduct of manufacturing activity for importation under zone procedures is in the public interest. Two Congressional committees held hearings in the late 1980s. In addition, both the U.S. General Accounting Office (GAO) and the International Trade Commission (ITC) conducted a number of studies on the FTZ program at the request of Congress. A major concern expressed throughout the hearings and studies regarded potential adverse impact on domestic industry resulting from zone savings on products destined for the U.S. market. The recommendations made to the FTZ Board call for a careful review that results in granting zone benefits on products manufactured in zones for importation only when there is no trade policy conflict and there is evidence of a clear net positive economic effect and no adverse effect on domestic industry. We consider these recommendations important guidance as to how we should evaluate zone activity in terms of the FTZ Act’s 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:
The FTZ Board’s regulations should provide that an FTZ license is a privilege, not a right. The granting of a zone license, with its associated reduction in tariff revenues, should only be given upon the basis of demonstrated public benefits. The FTZ Board’s regulations should be amended to reaffirm that the burden of proof is on the applicant to show why he should be granted the privileges of an FTZ license.

Operations Subcommittee Report at 25. The GAO similarly recommended that:
The Congress should amend the FTZ Act to provide guidance for decisions on grant applications, particularly those involving manufacturing. Such an amendment should establish that subzone grants, with their potential tariff revenue loss, are a privilege to be based on a demonstrated public benefit. It should also specify factors to be considered, such as the estimated effects of a proposed grant on exports, imports, employment, and investment.

1989 GAO Report at 42.
The FTZ Board took these views into account when we revised our regulations in 1991. The revised regulations reflect the stricter standards applicable to subzone operations:
The factors enumerated [] with regard to subzones are essentially a codification of current practice… Authorization to conduct manufacturing activity in zones is a privilege, not a right, and in addition to viewing technical requirements, the FTZ Board must determine that zone activity is consistent with the public interest… In the case of subzones, the application burden is greater. Subzones are single-user facilities, which are not structured to serve the public. It is their activity that has a public effect, and case law has recognized that the FTZ Board has broad discretionary authority to evaluate that effect in terms of the public interest.

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
To date, the FTZ Board has approved subzone status for 16 refineries, but none of these actions authorized the full range of benefits sought by Conoco/Citgo. The decisions can be divided into two time periods: pre-1986 and post-1986. The pre-1986 cases can be further divided into two categories. The two earliest approvals were special cases from the standpoint of oil policy and economic considerations based on their insular locations (HIRI, Hawaii, and Conoco, Puerto Rico) and they were not considered precedents. Concerns about competitive effects were minimal because these refineries were designed to serve export and local markets and they did not have direct access to the pipeline system of the contiguous states. Other requests made prior to 1985 were not approved or were withdrawn because of oil policy concerns.

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
In reviewing the Conoco and Citgo applications, the FTZ Board considered material submitted by the applicants in the application and in later submissions, the concerns expressed by opposition, industry analyses and the advice of other government officials. This record material was evaluated in terms of the public interest standard as discussed above. A discussion follows of the key factors considered in adopting the conditions in question.

Import Displacement
A key factor in justifying savings on zone products to be imported is whether such savings will result in import displacement. That is, value-added production activity will occur in the United States that would otherwise be conducted abroad. Both the Conoco and Citgo plants ship well over 50 percent of their products into the domestic market, yet there was little evidence of 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:
By 1985, imported refined products supplied approximately 4% of the U.S. daily demand. Today, imported gasoline, which is economically more risky than imported crude oil, is meeting about 5% of the U.S. gasoline consumption.

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
Four major domestic refiners (Mobil, Amoco, Ashland Oil, Phillips) and a refiner’s association opposed the applications, raising concerns about adverse effects on domestic industry. The American Independent Refiners Association indicated that “granting the referenced applications would have the affect of damaging the competitiveness of domestic refining generally, rather than improving its competitive posture in the world market.” Citgo 18 at 252. Ashland’s letter reflects the basic concerns of all opposing domestic refiners:
“In short, all the advantages Conoco claims for FTZ status represent unfair competitive advantages vis-a-vis other domestic plants….To the extent Conoco is enabled to process more crude oil for U.S. consumption, there will result an offsetting loss of capacity and loss of jobs somewhere else in the United States….In any case, these small potential benefits to Conoco do not offset the fact that jobs, traffic, tax revenues, etc. would be lost in other areas.”

Conoco 13 at 302.
The opposition focussed on the duty savings related to products that would enter the U.S. market. The major zone savings of concern thus involved fuel consumed and inverted tariffs. These savings could be significant enough to pose competitive problems in a low margin industry such as this one. Domestic industry impact is always a major concern to the FTZ Board and we took industry concerns into full account as we reviewed these cases.

Office of Energy Analyses
The Commerce Department’s Office of Energy (OE) was consulted during the review and it advised the FTZ Board against approval without restrictions. OE cautioned the FTZ Board about possible adverse effects on other domestic producers. An OE memo submitted in response to applicants’ claims about increased import competition, noted that import competition was actually relatively low, and that imports appeared to have stabilized:
PADD [Petroleum Administration for Defense District] III (Gulf Coast), where almost all the refiner-applicants are situated, had only 145 mbd of finished petroleum products imports in 1986, more than half of which were petrochemical feedstocks. Those imports represented 2.2 percent of PADD III refinery products and were substantially below the 274 mbd of refined product exports. The addition of substantial FTZ refinery production in PADD III would not be likely to compete solely with imports, there being so few of them, and would therefore compete with domestic products.

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 potential adverse impact of FTZ refiners over non-FTZ refiners is the principal concern of the Office of Energy, because the granting of duty-free treatment of refinery fuel gives FTZ refiners a small but clear financial edge over non-FTZ refiners….The memo’s assertion that inland refiners can obtain FTZ status (just like coastal refiners) may be read as implying that any competitive disadvantage of a non-FTZ refiners can be corrected by his obtaining FTZ status, too. That presumes that all non-FTZ refiners have the capability of obtaining competitive foreign crude oil, and that all would find FTZ operations no more costly or inconvenient than coastal refiners. We doubt the presumption.
Conoco 50 at 494-495 (emphasis supplied).

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
With respect to the inverted tariff savings, the applications and later statements by the applicants were ambiguous and inconsistent. Although the Citgo application discussed potential inverted tariff savings, it omitted the savings from its list of proposed savings. Citgo 1 at 120. Citgo later indicated that it was not planning to take advantage of inverted tariff savings in a letter it submitted in response to opponents’ concerns about competitive advantages:
As Citgo stated in its application, it will import and admit into the subzone foreign crude in privileged foreign status. When it enters refined products for consumption, CITGO will pay U.S. custom duties at the rate applicable to the crude it imported. In other words, subzone status for CITGO will have a neutral impact on the tariff structure.

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:
The Sub-Zone would create substantial economic benefit to the City of Lake Charles, the State of Louisiana and the United States. The establishment of the Sub-Zone would result in substantial economic benefit to the city of Lake Charles, the State of Louisiana and the United States. Substantial number of jobs should be directly retained at the refinery facility itself and a greater number of jobs would be indirectly retained as well in the surrounding greater metropolitan region. Port traffic would increase and substantial tax and other revenues would be generated. Of equal significance, the increase in refinery activities would result in a noteworthy increase in U.S. exports. The “value-added” refinery production would create U.S. jobs based upon the sale of U.S. products overseas, improving the U.S. balance of payments position and benefitting the overall U.S. economy.

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
There were two reasons for denying the “fuel consumed” benefit. One was on legal grounds, the other economic. As an interpretative matter, we have never formally decided that zone procedures allow parties to avoid Customs duties on goods consumed in zones, whether or not they are zone products. The 1978 HIRI Court decision provided this benefit to the HIRI oil refinery in Hawaii and it was subsequently claimed by four other refineries approved prior to 1986. The reasoning underlying the HIRI decision (goods are not dutiable until they enter Customs territory) was challenged by the Government in the 1988-89 Nissan case in which it argued that zone benefits are available only to the extent expressly provided for in the FTZ Act, and that foreign capital equipment brought into zones is dutiable. The Nissan decision in favor of the Government had the effect of undermining the underlying rationale for the HIRI decision.

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
Based on the discussion and summary above, we conclude that the adoption of the conditions in question in both these cases was necessary to avoid consequences that would have made approval of the subzones contrary to the public interest. Thus, we reaffirm the FTZ Board decisions in these cases.

Adopted and signed in Washington, DC, this _____ day of __________ 1994.

Paul L. Joffe
Acting Assistant Secretary of Commerce
for Enforcement and Compliance
Alternate Chairman
Foreign-Trade Zones Board

Concur:John P. Simpson
Deputy Assistant Secretary of the Treasury
(Regulatory, Tariff and Trade Enforcement)
FTZ Board Alternate

Concur:Kenneth H. Murdock
Director, Water Resources Support Center
FTZ Board Alternate