Recently Approved Carbon Fiber FTZ Demonstrates that Logistical Savings, with No Duty Savings, Can Justify Seeking FTZ Benefits

On March 30, 2017, SGL Automotive Carbon Fibers, LLC (SGLACF), submitted a notification of proposed revision to existing production authority to the Foreign-Trade Zone Board for its facility within FTZ 203--Site 3, in Moses Lake, Washington. The application related to the importation of polyacrylonitrile (PAN) fiber for use in the production of carbon fiber. Through the years there have been a few other carbon fiber FTZ applications. The U.S. producer Hexcel has always opposed and the applications have been approved, but with significant restrictions.

This time the applicant appears to have recognized the opposition from Hexcel would be a likely impediment and addressed it in the application by applying for FTZ benefits only for logistical reasons, not for duty savings. They even took the unusual step of not seeking tariff relief on the small portion of their imported PAN that becomes waste in the manufacturing process. In the application, SGLACF stated:

"[T]he purpose of this request is not for duty reduction purposes but for logistical recordkeeping purposes. Since the carbon fiber being produced in the zone that will be entered into the customs territory will have duties assessed at the rate applicable to the imported PAN (7.5%) there will be no duty reduction benefit. For example, in 2016 it took 2kg of PAN to produce 1kg of carbon fiber. If, in 2017, the ratio remains 2kg of PAN to make 1kg of carbon fiber and the cost of the PAN is $4.00 per kg, every kg of carbon fiber that will be entered into the customs territory will be valued at $8.00. Thus, every kg of PAN that will be used in the production of the carbon fiber to be entered into the customs territory will be subject to duty at 7.5%. SGLACF recognizes that there is a small amount of scrap that is generated during the process. For 2016, the scrap factor was slightly higher than 1%. SGLACF would add its scrap factor from the previous year to each entry of carbon fiber it files. For example, assuming a scrap factor for 2016 of 1%, if SGLACF files an entry in 2017 for 1,000kg of carbon fiber with a value of $8,000 (2,000kg of PAN, at $4 per kg, would be used in the production of the 1,000kg of carbon fiber), SGLACF would include on the entry an addition of 10kgs valued at $80 covering the scrap generated and it would be subject to duty at the 7.5% rate applicable to the PAN. Thus, the total amount of duty paid by SGLACF on the carbon fiber produced using privileged foreign status PAN should be virtually identical to the total amount of duty that would have been paid on the imported PAN when entered into the customs territory of the United States at the U.S. port of unlading prior to its use as imported duty-paid domestic status PAN in the production of carbon fiber."

They were successful in obtaining a letter from Hexcel stating that there was no objection to the application.

Yesterday the FTZ Board announced its approval of the application involving SGLACF's admission of all foreign-status status polyacrylonitrile (PAN) fiber in privileged foreign status (19 CFR 146.41). The proposed revision described in the notification was authorized, subject to the FTZ Act and the FTZ Board's regulations, including Section 400.14. For U.S. entry of carbon fiber produced in the FTZ, SGLACF will make duty payment at the polyacrylonitrile (PAN) fiber duty rate on the full value of PAN fiber introduced into the production process, including making duty payment at the PAN fiber duty rate on an estimated value of PAN fiber contained in scrap resulting from the production process (based on the actual percentage of scrap and the PAN to carbon fiber ratio from the preceding year's production).