SUPPLEMENTARY INFORMATION:

The insular possessions watch industry provision in Sec. 110 of Public Law 97-446 (96 Stat. 2331) (1983), as amended by Section 602 of Public Law 103-465 (108 Stat. 4991) (1994), and additional U.S. Note 5 to chapter 91 of the Harmonized Tariff Schedule of the United States (“ HTSUS”), as amended by Public Law 94-241 (90 Stat. 263) (1976) requires the Secretary of Commerce and the Secretary of the Interior (“the Secretaries”), acting jointly, to establish a limit on the quantity of watches and watch movements that may be entered free of duty during each calendar year. The law also requires the Secretaries to establish the shares of this limited quantity that may be entered from the Virgin Islands, Guam, American Samoa and the Commonwealth of the Northern Mariana Islands (“CNMI”). After the Departments have verified the data submitted on the annual application (Form ITA-334P), the producers' duty-exemption allocations are calculated from the territorial share in accordance with 15 CFR 303.14 and each producer is issued a duty-exemption license. The law further requires the Secretaries to issue duty-refund certificates to each territorial watch and watch movement producer based on the company's duty-free shipments and creditable wages paid during the previous calendar year.

Public Law 106-36 (113 Stat. 127) (1999) authorizes the issuance of a duty-refund certificate to each territorial jewelry producer for any article of jewelry provided for in heading 7113 of the HTSUS that is the product of any such territory. The value of the certificate is based on creditable wages paid and duty-free units shipped into the United States during the previous calendar year. Although the law specifically mentions the U.S. Virgin Islands, Guam and American Samoa, the issuance of the duty-refund certificate would also apply to the CNMI due to the Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the United States of America (Pub. L. 94-241), that states that goods from the CNMI are entitled to the same tariff treatment as imports from Guam. See also19 CFR 7.2(a). In order to be considered a product of such territories, the jewelry must meet the U.S. Customs Service substantial transformation requirements (the jewelry must become a new and different article of commerce as a result of production or manufacture performed in the territory). To receive duty-free treatment, the jewelry must also satisfy the requirements of General Note 3(a)(iv) of the HTSUS and applicable Customs Regulations (19 CFR 7.3). Section 1562 of Public Law 108-429 (2004), amended by Public Law 97-446, Public Law 103-465 and Public Law 106-36 and authorizes extending the duty refund benefits to include the value of usual and customary health insurance, life insurance and pension benefits; raising the ceiling on the amount of jewelry that qualifies for the duty refund benefit; allowing new insular jewelry producers to assemble jewelry and have such jewelry treated as an article of the insular possessions for up to 18 months after the jewelry company commences assembly operations; allowing duty refund certificate holders to secure a duty refund on any articles that are imported into the customs territory of the United States by the certificate holder duty paid; and providing compensation to insular watch producers if tariffs on watches and watch movements are reduced.

Comments Received in Response to the Advanced Notice of Proposed Rulemaking

The Department's regulations provide that the current total value of watch components per watch and watch movement that are eligible for duty-free entry into the U.S. are $800 per watch and $35 per watch movement. See15 CFR 303.14(b)(3). On July 25, 2006, the Department received a letter from the U.S. Virgin Islands Watch & Jewelry Manufacturers Association requesting that the Department of Commerce reexamine the current value limits for watches assembled in the U.S. Virgin Islands. The Association asserted that the rising cost of gold has made it difficult to continue production of gold watches with the current ceilings in place.

In response to the Association's request, on October 20, 2006, we published an advanced notice of proposed rulemaking in the Federal Register . See Insular Possession Watch, ( printed page 3084) Watch Movement and Jewelry Programs, 71 FR 61923 (October 20, 2006). The notice requested comments on whether to change the maximum value of watch components per watch and watch movement that are eligible for benefits under the program and provide comments on four possible options. We received comments from four parties:

The first commenter favored removing any restrictions on the value of watch components as long as all other program requirements are met.

The second commenter suggested a ceiling of $2,000 for watch components per watch and $200 for watch components per watch movement.

The third commenter encouraged the Departments to significantly increase or eliminate the value limits for watches and watch movements.

The fourth commenter urged the Departments of Commerce and the Interior to eliminate the watch and watch movement value limits from the regulations.

In 1983, the passage of Pub. L. 97-446 added features to the insular possessions watch program, which included a duty refund provision for watch producers. Contained in the rulemaking, implementing Pub. L. 97-446, was the addition of the value limits on components for watches and watch movements. (See Allocation of Watch Quota for Calendar Year 1983 Among Watch Producers Located in the Virgin Islands, Guam and American Samoa, 48 FR 17579, April 25, 1983) (“1983 Final Rule”)

Since 1983, the value limitations have been raised on several occasions, most recently in 1998 and 2004. Although two commenters favored eliminating the ceiling all together, we propose raising the value limits rather than eliminating them because we believe that the original policy reasons for maintaining the ceiling still have merit in terms of domestic and international trade policy. In the notice of proposed rulemaking ( See Allocation of Watch Quota for Calendar Year 1983 Among Watch Producers Located in the Virgin Islands, Guam and American Samoa, 48 FR 7186, February 18, 1983) for the 1983 Final Rule, the Departments included value limits in response to language added by the Senate Finance Committee report, which required the Secretaries to ensure that work performed in the insular possessions adds “significantly to the value of the product.” A basic tenant of the policy was to stimulate employment in the insular possessions while not creating disproportionate gains for watch producers and maintaining the ceiling assures that a balance is maintained. Because there have been substantial increases in the price of gold and the dollar has weakened against the Euro and the Swiss France, we propose raising the maximum total value of watch components per watch and watch movement that are eligible for duty-free entry into the U.S., from $800 to $3,000 per watch and from $35 to $300 per watch movement to account for increases in the price of gold as well as provide allowances for further fluctuation. We believe that the increase would provide flexibility to producers and has the potential to attract new producers and increases in employment while maintaining a correlation between wages paid to employees and duty savings. We, therefore, propose increasing the value limits on watches and watch movements while maintaining the option to further review value limits in future years if circumstances dictate a change.

Proposed Amendments

As discussed above, we propose to amend § 303.14(b)(3) by raising the maximum total value of watch components per watch and watch movement that are eligible for duty-free entry into the U.S., from $800 to $3,000 per watch and from $35 to $300 per watch movement due to recent increases in the price of gold.

We further propose amending §§ 303.1(c) and 303.15(b) to reflect that the duty-refunds may now be obtained on any articles that entered the customs territory of the United States duty paid except for any article containing a material which is the product of a country to which column 2 rates of duty apply, pursuant to Pub. L. 108-429. The proposed rule would further amend § 303.1(c) by removing the erroneous reference to “Headnote 6” and adding “additional U.S. note 5 to chapter 91 of the HTSUS” in its place.

We also propose amending § 303.2(a)(8) to correct a minor typographical error by adding the closing parenthesis at the end of the sentence and amending § 303.2(a)(10) by changing “watch components” to “watch movements” to more accurately define the kind of component.

Further, we propose amending §§ 303.2(a)(13), 303.2(a)(13)(ii), 303.2(a)(13)(ii)(A), 303.2(a)(13)(ii)(B), 303.2(a)(14), 303.2(a)(14)(ii), 303.2(a)(14)(ii)(A), 303.2(a)(14)(ii)(B), 303.16(a)(9), 303.16(a)(9)(ii), 303.16(a)(9)(ii)(A), 303.16(a)(9)(ii)(B), 303.16(a)(10), 303.16(a)(10)(ii), 303.16(a)(10)(ii)(A) and 303.16(a)(10)(ii)(B) to further clarify which wages, health insurance, life insurance and pension benefits are creditable in the Departments' calculation of the duty-refund benefits and which are not.

The proposed rule would also amend §§ 303.16(a)(9)(i)(C) and (a)(10)(i)(D) by clarifying that two program producers may, under certain circumstances, work on the same unit of jewelry and receive creditable wages and fringe benefits proportionally if both producers demonstrate that they have met all the qualifications of the regulations and have records sufficient for the Departments' verification. However, a non-program jewelry producer may not work together with a program jewelry producer on the manufacturing of a single article of jewelry and receive creditable wages and benefits.

A further proposal would amend §§ 303.12(a)(1), 303.14(c), 303.19(a)(1) and 303.20(b) to provide further details about the calculation of the mid-year duty-refund and annual duty-refund. We modified the criteria for the calculation of the annual duty-refund to include health insurance, life insurance and pension benefits, pursuant to Public Law 108-429 and modified the criteria for the calculation of the mid-year duty refund.

We propose amending the heading to § 303.5(b) to reflect that only verified data is used in the calculation of the duty-exemptions and duty-refunds. Also, we propose amending §§ 303.5(b)(5) and 303.17(b)(6) to clarify that the payroll information that should be available for use in the verification includes time cards for each employee. We further propose amending §§ 303.5(c) and 303.17(c) to specify that all data must be available at the time of the annual verification and that the Departments will not consider further data after the verification for the particular year has been completed.

We propose amending §§ 303.13(b) and 303.21(b) by changing “post office address” to “address” because some producers might not have post office addresses and express mail carriers often will not deliver to a post office address.

Finally, the proposed rule would amend §§ 303.2(b)(5) and 303.16(b)(3) by adding “duty paid” so it will be clearer that the refund of duties is specifically on items that entered into the Customs territory of the United States “duty paid”.

Administrative Law Requirements

Regulatory Flexibility Act. In accordance with the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., the Chief Counsel for Regulation at the Department of Commerce has certified to the Chief Counsel for Advocacy, ( printed page 3085) Small Business Administration, that the proposed rule, if promulgated as final, will not have a significant economic impact on a substantial number of small entities. The majority of the changes are being proposed to further clarify the definition of creditable and non-creditable wages and fringe benefits, to provide more details about the calculation of mid-year and annual duty-refund and the verification process, and to make minor editorial changes. There are currently four watch companies in the insular watch program and four jewelry companies in the insular jewelry program, all of which are small entities. This rulemaking would update the total maximum value of watch components per watch that are eligible for duty-free entry into the United States. Increases in the price of gold and a weakened dollar against the Euro and Swiss franc have driven up the price of gold watch components. Therefore, companies are faced with a difficult situation because if the value limit is exceeded, the watch becomes ineligible for the duty-free benefit or the duty refund benefit under the program due to the fact that the insular possessions are outside the Customs territory of the United States and the watches will not have met the regulatory requirements of the program. Adoption of this rule would increase the maximum value of watch components per watch that would be eligible for duty-free treatment into the United States. This would allow producers to increase higher-priced components in their watches. As a result, producers would realize an economic benefit in that they would increase flexibility in the types of watches they could produce, which may lead to increased sales and employment to help the insular economy. There would be no adverse economic impact from this proposed change.

This proposed rule also would not change reporting or recordkeeping requirements. The changes in the regulations will also not duplicate, overlap or conflict with other laws or regulations. Consequently, the changes are not expected to meet the RFA criteria of having a “significant” economic effect on a “substantial number” of small entities, as stated in 5 U.S.C. 603 et seq. Therefore, a regulatory flexibility analysis was not prepared.

Paperwork Reduction Act. This proposed rulemaking does not contain revised collection of information requirements subject to review and approval by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995. Collection activities are currently approved by the Office of Management and Budget under control numbers 0625-0040 and 0625-0134.

Not withstanding any other provision of the law, no person is required to respond to, nor shall any person be subject to a penalty for failure to comply with a collection of information unless it displays a currently valid OMB control number.

E.O. 12866. It has been determined that the proposed rulemaking is not significant for purposes of Executive Order 12866.

For reasons set forth above, the Departments propose to amend 15 CFR part 303 as follows: