[Federal Register Volume 64, Number 61 (Wednesday, March 31, 1999)]
[Notices]
[Pages 15530-15553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7529]
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DEPARTMENT OF COMMERCE
International Trade Administration
[C-580-832]
Final Negative Countervailing Duty Determination: Stainless Steel
Plate in Coils From the Republic of Korea
AGENCY: Import Administration, International Trade Administration,
Department of Commerce.
EFFECTIVE DATE: March 31, 1999.
FOR FURTHER INFORMATION CONTACT: Christopher Cassel or Kristen Johnson,
Office of CVD/AD Enforcement VI, Group II, Import Administration, U.S.
Department of Commerce, Room 4012, 14th Street and Constitution Avenue,
NW, Washington, DC 20230; telephone (202) 482-2786.
Final Determination
The Department of Commerce (the Department) determines that
countervailable subsidies are not being provided to producers and
exporters of stainless steel plate in coils from the Republic of Korea.
Petitioners
The petition in this investigation was filed by Allegheny Ludlum
Corporation, Armco Inc., J&L Specialty Steel, Inc., Lukens Inc., United
Steel Workers of America, AFL-CIO/CLC, Butler Armco Independent Union,
and Zanesville Armco Independent Organization, Inc. (the petitioners).
Case History
Since the publication of our preliminary determination in this
investigation on September 4, 1998 (63 FR 47253), the following events
have occurred:
We conducted verification of the countervailing duty questionnaire
responses from December 3 through December 18, 1998. Because the final
determination of this countervailing duty investigation was aligned
with the final antidumping duty determination (see 63 FR 47253), and
the final antidumping duty determination was postponed (see 63 FR
59535), the Department on January 13, 1999, extended the final
determination of this countervailing duty investigation until no later
than March 19, 1999 (see 64 FR 2195). On January 27, February 2, 10,
and 12, 1999, the Department released its verification reports to all
interested parties. The Department issued decision memoranda on the
issue of direction of credit by the Government of Korea (GOK) and the
operations of the Korean domestic bond market on March 4 and March 9,
1999, respectively. Petitioners and respondents filed case briefs on
March 5 and 10, 1999, and rebuttal briefs on March 10 and 12, 1999.
The Applicable Statute and Regulations
Unless otherwise indicated, all citations to the statute are
references to the provisions of the Tariff Act of 1930, as amended by
the Uruguay Round Agreements Act (URAA) effective January 1, 1995 (the
Act). In addition, unless otherwise indicated, all citations to the
Department's regulations are to the regulations as codified at 19 CFR
Part 351 (April 1998).
Scope of Investigation
For purposes of this investigation, the product covered is certain
stainless steel plate in coils. Stainless steel is an alloy steel
containing, by weight, 1.2 percent or less of carbon and 10.5 percent
or more of chromium, with or without other elements. The subject plate
products are flat-rolled products, 254 mm or over in width and 4.75 mm
or more in thickness, in coils, and annealed or otherwise heat treated
and pickled or otherwise descaled. The subject plate may also be
further processed (e.g., cold-rolled, polished, etc.) provided that it
maintains the specified dimensions of plate following such processing.
Excluded from the scope of this petition are the following: (1) Plate
not in coils, (2) plate that is not annealed or otherwise heat treated
and pickled or otherwise descaled, (3) sheet and strip, and (4) flat
bars.
The merchandise subject to this investigation is currently
classifiable in the Harmonized Tariff Schedule of the United States
(HTS) at subheadings: 7219.11.00.30, 7219.11.00.60, 7219.12.00.05,
7219.12.00.20, 7219.12.00.25, 7219.12.00.50, 7219.12.00.55,
7219.12.00.65, 7219.12.00.70, 7219.12.00.80, 7219.31.00.10,
7219.90.00.10, 7219.90.00.20, 7219.90.00.25, 7219.90.00.60,
7219.90.00.80, 7220.11.00.00, 7220.20.10.10, 7220.20.10.15,
7220.20.10.60, 7220.20.10.80, 7220.20.60.05, 7220.20.60.10,
7220.20.60.15, 7220.20.60.60, 7220.20.60.80, 7220.90.00.10,
7220.90.00.15, 7220.90.00.60, and 7220.90.00.80. Although the HTS
subheadings are provided for convenience and Customs purposes, the
written description of the merchandise under investigation is
dispositive.
Injury Test
Because the Republic of Korea (Korea) is a ``Subsidies Agreement
Country'' within the meaning of section 701(b) of the Act, the
International Trade Commission (ITC) is required to determine whether
imports of the subject merchandise from Korea materially injure, or
threaten material injury to, a U.S. industry. On May 28, 1998, the ITC
published its preliminary determination finding that there is a
reasonable indication that an industry in the United States is being
materially injured, or threatened with material injury, by reason of
imports from Korea of the subject merchandise (See Certain Stainless
Steel Plate in Coils From Belgium, Canada, Italy, Korea, South Africa,
and Taiwan, 63 FR 29251).
[[Page 15531]]
Period of Investigation
The period for which we are measuring subsidies (the POI) is
calendar year 1997.
Subsidies Valuation Information
Benchmarks for Long-term Loans and Discount Rates: During the POI,
Pohang Iron & Steel Company, Ltd. (POSCO) had a number of won-
denominated and foreign currency-denominated long-term loans
outstanding which the company received from government-owned banks,
Korean commercial banks, overseas banks, and foreign banks with
branches in Korea. A number of these loans were received prior to 1992.
In the 1993 investigation of Steel Products from Korea, the Department
determined that the GOK influenced the practices of lending
institutions in Korea and controlled access to overseas foreign
currency loans through 1991. See Final Affirmative Countervailing Duty
Determinations and Final Negative Critical Circumstances
Determinations: Certain Steel Products from Korea, 58 FR at 37328,
37338 (July 9, 1993) (Steel Products from Korea), and the ``Direction
of Credit'' section below. In that investigation, we determined that
the best indicator of a market rate for long-term loans in Korea was
the three-year corporate bond rate on the secondary market. Therefore,
in the final determination of the instant investigation, to calculate
the benefit which POSCO received from direct foreign currency loans and
domestic foreign currency loans obtained prior to 1991, and still
outstanding during the POI, we used as our benchmark the three-year
corporate bond rate on the secondary market.
In this investigation, the Department also examined whether the GOK
continued to control and/or influence the practices of lending
institutions in Korea between 1992 and 1997. Based on our findings on
this issue, discussed below in the ``Direction of Credit'' section of
this notice, we are using the following benchmarks to calculate POSCO's
benefit from long-term loans obtained in the years 1992 through 1997:
(1) For countervailable, foreign-currency denominated loans, we are
using POSCO's company-specific, weighted-average U.S. dollar
denominated interest rate on the company's loans from foreign bank
branches in Korea; (2) for countervailable won-denominated loans, we
are using POSCO's company-specific three-year corporate bond rate. In
the preliminary determination, we used a national average three-year
corporate bond rate. See Preliminary Negative Countervailing Duty
Determination and Alignment of Final Countervailing Duty Determination
with Final Antidumping Duty Determination: Stainless Steel Plate in
Coils from the Republic of Korea, 63 FR 47253, 47254 (September 4,
1998) (Preliminary Determination). We continue to find that the Korean
domestic bond market was not controlled by the GOK during the period
1992 through 1997, and that domestic bonds serve as an appropriate
benchmark interest rate. See Analysis Memorandum on the Korean Domestic
Bond Market, dated March 9, 1999, (public document on file in the
Department's Central Records Unit, Room B-099 (CRU)). On February 5,
1999, POSCO submitted to the Department the company's average interest
rate on corporate bonds for each year 1992 through 1997. See POSCO's
February 5, 1999 Questionnaire Response (QR) (public version on file in
the CRU). Because POSCO was unable to retrieve data on the bond
issuance fees the company paid in the years 1992 through 1996, we have
added to the average interest rate for each of those years the bond
issuance fees that POSCO paid in 1997.
We are also using POSCO's three-year company-specific corporate
bond rate as the discount rate to determine the benefit from non-
recurring subsidies received between 1992 and 1997.
Benchmarks for Short-Term Financing: For those programs which
require the application of a short-term interest rate benchmark, we
used as our benchmark a company-specific weighted-average interest rate
for commercial won-denominated loans for the POI. Each respondent
provided to the Department its respective company-specific, short-term
commercial interest rate. During our verification of Samsun Corporation
(Samsun) on December 15, 1998, we learned that the weighted-average,
short-term interest rate which Samsun had earlier submitted to the
Department was incorrect. For the final calculations for this
determination, we have used the interest rate obtained at verification.
Allocation Period: In the past, the Department has relied upon
information from the U.S. Internal Revenue Service (IRS) for the
industry-specific average useful life of assets in determining the
allocation period for non-recurring subsidies. See the General Issues
Appendix (GIA), 58 FR at 37227, which is appended to the Final
Affirmative Countervailing Duty Determination: Certain Steel Products
from Austria, 58 FR 37225 (July 9, 1993). However, in British Steel plc
v. United States, 879 F. Supp. 1254 (CIT 1995) (British Steel I), the
U.S. Court of International Trade (the Court) held that the IRS
information did not necessarily reflect a reasonable period based on
the actual commercial and competitive benefit of the subsidies to the
recipients. In accordance with the Court's remand order, the Department
calculated a company-specific allocation period for non-recurring
subsidies based on the average useful life (AUL) of non-renewable
physical assets. This remand determination was affirmed by the Court on
June 4, 1996. See British Steel plc v. United States, 929 F. Supp. 426,
439 (CIT 1996) (British Steel II). Thus, we are determining the
allocation period for non-recurring subsidies using company-specific
AUL data where reasonable and practicable. See, e.g., Final Results of
Countervailing Duty Administrative Review: Certain Cut-to-Length Carbon
Steel Plate from Sweden, 62 FR 16551 (April 7, 1997).
For the preliminary determination of this investigation, the
Department followed the Court's decision in British Steel I and II.
Using the AUL information which POSCO submitted, we calculated POSCO's
AUL, excluding adjustments for special accelerated depreciation
expenses and a depreciation of salvage value which the company
reported. During verification, we reviewed POSCO's calculation of its
average useful life of assets. In examining the company's calculations,
we learned that the basis of the rates in the GOK's tax depreciation
tables is the Japanese tax depreciation tables which were in existence
at the time the GOK determined the useful life of assets in the 1950's.
In order to determine whether the tax tables provide a reasonable
estimation of POSCO's average useful life of assets, we examined
POSCO's asset ledger. We verified through an examination of POSCO's
asset ledgers that the depreciation schedule used by POSCO does not
represent the actual useful life of the company's assets. See March 1,
1999 Supplement to the POSCO Verification Report, (public version on
file in the CRU). For these reasons, we determine that it is not
appropriate to use POSCO's AUL data to determine the average useful
life of the company's assets. Therefore, for the final determination,
as facts available, we have used the 15-year allocation period as
reported in the IRS depreciation tables for the allocation of POSCO's
non-recurring subsidies.
Treatment of Subsidies Received by Trading Companies: During the
POI, POSCO, the only Korean steel producer of stainless steel plate in
coils, exported the subject merchandise to the United
[[Page 15532]]
States through five trading companies: POSCO Steel Service & Sales
Company, Ltd. (POSTEEL), Hyosung Corporation (Hyosung), Samsun, Samsung
Corporation (Samsung), and Sunkyong Ltd. (Sunkyong). We required that
the five trading companies provide responses to the Department's
questionnaires with respect to the export subsidies under
investigation. One of the trading companies, POSTEEL, is affiliated
with POSCO within the meaning of section 771(33)(E) of the Act because
POSCO owned 95.3 percent of POSTEEL's shares as of December 31, 1997.
The other four trading companies are not affiliated with POSCO.
We required responses from the trading companies because the
subject merchandise may be subsidized by means of subsidies provided
separately to the exporter, in addition to any subsidies provided to
the producer. All subsidies conferred on the production and exportation
of the subject merchandise benefit the subject merchandise, even if it
is exported to the United States by an unaffiliated trading company
rather than by the producer itself. Therefore, the Department
calculates countervailable subsidy rates on the subject merchandise by
cumulating subsidies provided to the producer with those provided to
the exporter.
Under Sec. 351.107 of the Department's regulations, when the
subject merchandise is exported to the United States by a company that
is not the producer of the merchandise, the Department may establish a
``combination'' rate for each combination of an exporter and supplying
producer. However, as noted in the ``Explanation of the Final Rules''
(the Preamble), there may be situations in which it is not appropriate
or practicable to establish combination rates when the subject
merchandise is exported by a trading company. In such situations, the
Department will make exceptions to its combination rate approach on a
case-by-case basis. See Antidumping Duties; Countervailing Duties;
Final Rule, 62 FR 27296, 27303 (May 19, 1997).
In this investigation, we have determined that it is not
appropriate to establish combination rates. This determination is based
on two main facts: First, the majority of the subsidies conferred upon
the subject merchandise were received by the producer, POSCO. Second,
the difference in the levels of subsidies conferred upon the subject
merchandise among the individual trading companies is insignificant.
Therefore, combination rates would serve no practical purpose because
the calculated subsidy rate for POSCO/Hyosung or POSCO/Sunkyong or
POSCO and any of the other trading companies effectively would be the
same rate. For these reasons, we have not calculated combination rates
in this investigation. Instead, we have only calculated one rate for
the subject merchandise, all of which is produced by POSCO.
To include the subsidies received by the trading companies, which
are conferred upon the export of the subject merchandise, in the
calculated ad valorem subsidy rate, we used the following methodology:
For each of the five trading companies, we calculated the benefit
attributable to the subject merchandise and factored that amount into
the calculated subsidy rate for the producer. In each case, we
determined the benefit received by the trading companies for each
export subsidy and weight-averaged the benefit amounts by the relative
share of each trading company's value of exports of the subject
merchandise to the United States. This calculated ad valorem subsidy
was then added to the subsidy calculated for POSCO. Thus, for each of
the programs below, the listed ad valorem subsidy rate is cumulative of
any countervailable subsidies received by both the trading companies
and POSCO.
I. Programs Determined To Be Countervailable
A. Direction of Credit
In the 1993 investigation of Steel Products from Korea, the
Department determined that (1) the GOK influenced the practices of
lending institutions in Korea; (2) regulated long-term loans were
provided to the steel industry on a selective basis; and (3) the
selective provision of these regulated loans resulted in a
countervailable benefit. See Steel Products from Korea, 58 FR at 37338.
Accordingly, all long-term loans received by the producers/exporters of
the subject merchandise were treated as countervailable. The
determination in that investigation covered all long-term loans
bestowed through 1991.
In the instant investigation, petitioners allege that the GOK
continued to control the practices of lending institutions in Korea
through the POI, and that the steel sector received a disproportionate
share of low-cost, long-term credit, resulting in countervailable
benefits being conferred on the producers/exporters of the subject
merchandise. Petitioners assert, therefore, that the Department should
countervail all long-term loans received by the producers/exporters of
the subject merchandise that were still outstanding during the POI.
1. The GOK's Credit Policies Through 1991
As noted above, we previously found significant GOK control over
the practices of lending institutions in Korea through 1991, the period
investigated in Steel Products From Korea. This finding of control was
determined to be sufficient to constitute a government program and
government action. See Steel Products from Korea, 58 FR at 37342. We
also determined that (1) the Korean steel sector, as a result of the
GOK's credit policies and control over the Korean financial sector,
received a disproportionate share of regulated long-term loans, so that
the program was, in fact, specific, and (2) that the interest rates on
those loans were inconsistent with commercial considerations. Id. at
37343. Thus, we countervailed all long-term loans received by the steel
sector from all lending sources.
In this investigation, we provided the GOK with the opportunity to
present new factual information concerning the government's credit
policies prior to 1992, which we would consider along with our finding
in the prior investigation. In the preliminary determination, we stated
that respondents' information did not lead us to change our
determination concerning the GOK's pre-1992 credit policies, as
described in Steel Products From Korea. Moreover, respondents'
arguments in their case brief have also not led us to change our
preliminary determination concerning the GOK's pre-1992 credit
policies. See the discussion under Comment 1, below (``The GOK's Pre-
1992 Credit Policies: New Factual Information Concerning Foreign
Currency Denominated Loans''). On this basis, we continue to find for
this final determination that all regulated long-term loans provided to
the producers/exporters of the subject merchandise through 1991, were
provided to a specific enterprise or industry, or group thereof, within
the meaning of section 771(5A)(D)(iii)(III) of the Act. This finding
conforms with our determination in Steel Products from Korea (see 58 FR
at 37342), which was upheld by the Court of International Trade in
British Steel plc versus United States, 941 F. Supp 119 (CIT 1996)
(British Steel II). Moreover, in accordance with section 771(5)(E)(ii)
of the Act, a benefit has been conferred to the recipient to the extent
that the regulated loans are provided at interest rates less than the
benchmark rates
[[Page 15533]]
described under the ``Subsidies Valuation'' section, above.
POSCO was the only producer of the subject merchandise, and POSCO
received long-term loans prior to 1992, that were still outstanding
during the POI. These included loans with both fixed and variable
interest rates. To determine the benefit from the regulated loans with
fixed interest rates, we applied the Department's standard long-term
loan methodology and calculated the grant equivalent for the loans. For
POSCO's variable-rate loans, we compared the amount of interest paid
during the POI on the regulated loans to the amount of interest that
would have been paid at the benchmark rate. We then summed the benefit
amounts from the loans attributable to the POI and divided the total
benefit by POSCO's total sales. On this basis, we determine the net
countervailable subsidy to be 0.17 percent ad valorem.
2. The GOK's Credit Policies From 1992 Through 1997
The Department's preliminary analysis of the GOK's credit policies
from 1992 through 1997, is contained in the March 4, 1999, Memorandum
Re: Analysis Concerning Post 1991 Direction of Credit, on file in the
CRU (Credit Memo). As detailed in the Credit Memo, the Department
preliminarily determined that the GOK continued to control directly and
indirectly the lending practices of most sources of credit in Korea
through the POI. The Department also preliminarily determined that GOK-
regulated credit from domestic commercial banks and government-
controlled banks such as the Korea Development Bank (KDB) was specific
to the steel industry. This credit conferred a benefit on the producer/
exporters of the subject merchandise in accordance with section
771(5)(E)(ii) of the Act, because the interest rates on the
countervailable loans were less than the interest rates on comparable
commercial loans. See Credit Memo at 15-17. Finally, we preliminarily
found that POSCO's access to government-regulated foreign sources of
credit did not confer a benefit to the recipient, as defined by section
771(5)(E)(ii) of the Act, and, as such, credit received by POSCO from
these sources was found not countervailable. This determination was
based on the fact that credit from Korean branches of foreign banks
were not subject to the government's control and direction. Thus,
POSCO's loans from these banks served as an appropriate benchmark to
establish whether access to regulated foreign sources of funds
conferred a benefit on respondent. On the basis of that comparison, we
found that there was no benefit. See id. at 18. While some of the
comments we received from the parties have led us to make minor
modifications to our calculations, they have not led us to change the
basic findings detailed in the Credit Memo.
In the preliminary determination we examined, as a separate
program, loans provided under the Energy Savings Fund, and found that
these loans were countervailable. See Preliminary Determination, 63 FR
at 47256. However, on the basis of our findings detailed in the Credit
Memo, we now determine that these loans are countervailable as directed
credit, rather than as a separate program. These loans are policy loans
provided by banks that are subject to the same GOK influence that is
described in the Credit Memo. Accordingly, they are countervailable as
directed credit, and we have included these loans in our benefit
calculations. Thus, on the basis of our finding in the credit memo, and
the modifications to the calculations discuss in the comments section,
below, for the GOK's post-1991 credit policies, we determine a net
countervailable subsidy of less than 0.005 percent ad valorem.
B. GOK Infrastructure Investments at Kwangyang Bay
In Steel Products from Korea, the Department investigated the GOK's
infrastructure investments at Kwangyang Bay over the period 1983-1991.
We determined that the GOK's provision of infrastructure at Kwangyang
Bay was countervailable because we found POSCO to be the predominant
user of the GOK's investments. The Department has consistently held
that a countervailable subsidy exists when benefits under a program are
provided, or are required to be provided, in law or in fact, to a
specific enterprise or industry or group of enterprises or industries.
See Steel Products from Korea, 58 FR at 37346.
No new factual information or evidence of changed circumstances has
been provided to the Department with respect to the GOK's
infrastructure investments at Kwangyang Bay over the period 1983-1991.
Therefore, to determine the benefit from the GOK's investments to POSCO
during the POI, we relied on the calculations performed in the 1993
investigation of Steel Products from Korea, which were placed on the
record of this investigation by POSCO. In measuring the benefit from
this program in the 1993 investigation, the Department treated the
GOK's costs of constructing the infrastructure at Kwangyang Bay as
untied, non-recurring grants in each year in which the costs were
incurred.
To calculate the benefit conferred during the POI, we applied the
Department's standard grant methodology and allocated the GOK's
infrastructure investments over a 15-year allocation time period. See
the allocation period discussion under the ``Subsidies Valuation
Information'' section, above. We used as our discount rate the three-
year corporate bond rate on the secondary market as used in Steel
Products from Korea. We then summed the benefits received by POSCO
during 1997, from each of the GOK's yearly investments over the period
1983-1991. We then divided the total benefit attributable to the POI by
POSCO's total sales for 1997. On this basis, we determine a net
countervailable subsidy of 0.29 percent ad valorem for the POI.
C. Short-Term Export Financing
The Department determined that the GOK's short-term export
financing program was countervailable in Steel Products from Korea (see
58 FR at 37350). During the POI, POSCO was the only producer/exporter
of the subject merchandise that used export financing.
In accordance with section 771(5A)(B) of the Act, this program
constitutes an export subsidy because receipt of the financing is
contingent upon export performance. A financial contribution is
provided to POSCO under this program within the meaning of section
771(5)(D)(i) of the Act in the form of a loan. To determine whether
this export financing program confers a countervailable benefit to
POSCO, we compared the interest rate POSCO paid on the export financing
received under this program during the POI with the interest rate POSCO
would have paid on a comparable short-term commercial loan. See
discussion above in the ``Subsidies Valuation Information'' section
with respect to short-term loan benchmark interest rates.
Because loans under this program are discounted (i.e., interest is
paid up-front at the time the loans are received), the effective rate
paid by POSCO on its export financing is a discounted rate. Therefore,
it was necessary to derive from POSCO's company-specific weighted-
average interest rate for short-term won-denominated commercial loans,
a discounted benchmark interest rate. We compared this discounted
benchmark interest rate to the interest rates charged on the export
financing and found that the program interest rates were lower than the
benchmark rate. Therefore, in accordance with section 771(5)(E)(ii) of
the Act, we determine that this program confers a
[[Page 15534]]
countervailable benefit because the interest rates charged on the loans
were less than what POSCO would have had to pay on a comparable short-
term commercial loan.
To calculate the benefit conferred by this program, we compared the
actual interest paid on the loans with the amount of interest that
would have been paid at the applicable discounted benchmark interest
rate. When the interest that would have been paid at the benchmark rate
exceeded the interest that was paid at the program interest rate, the
difference between those amounts is the benefit. Because POSCO was
unable to segregate its production financing applicable to only subject
merchandise exported to the United States, we divided the benefit
derived from the loans by total exports. On this basis, we determine a
net countervailable subsidy of less than 0.005 percent ad valorem.
D. Reserve for Export Loss
Under Article 16 of the Tax Exemption and Reduction Control Act
(TERCL), a domestic person engaged in a foreign-currency earning
business can establish a reserve amounting to the lesser of one percent
of foreign exchange earnings or 50 percent of net income for the
respective tax year. Losses accruing from the cancellation of an export
contract, or from the execution of a disadvantageous export contract,
may be offset by returning an equivalent amount from the reserve fund
to the income account. Any amount that is not used to offset a loss
must be returned to the income account and taxed over a three-year
period, after a one-year grace period. All of the money in the reserve
is eventually reported as income and subject to corporate tax either
when it is used to offset export losses or when the grace period
expires and the funds are returned to taxable income. The deferral of
taxes owed amounts to an interest-free loan in the amount of the
company's tax savings. During the POI, Samsun was the only exporter of
the subject merchandise which used this program.
We determine that the Reserve for Export Loss program constitutes
an export subsidy under section 771(5A)(B) of the Act because use of
the program is contingent upon export performance. We also determine
that this program provides a financial contribution within the meaning
of section 771(5)(D)(i) of the Act in the form of a loan. The benefit
provided by this program is the tax savings enjoyed by the company.
To determine the benefit conferred by this program, we calculated
the tax savings by multiplying the balance amount of the reserve as of
December 31, 1996, by the corporate tax rate for 1996. We treated the
tax savings on these funds as a short-term interest-free loan.
Accordingly, to determine the benefit, the amount of tax savings was
multiplied by the company's weighted-average interest rate for short-
term won-denominated commercial loans for the POI, as described in the
``Subsidies Valuation Information'' section, above. Using the
methodology for calculating subsidies received by trading companies,
which also is detailed in the ``Subsidies Valuation Information''
section of this notice, we determine a net countervailable subsidy of
less than 0.005 percent ad valorem.
E. Reserve for Overseas Market Development
Article 17 of the TERCL operates in a manner similar to Article 16,
discussed above. This provision allows a domestic person engaged in a
foreign trade business to establish a reserve fund equal to one percent
of its foreign exchange earnings from its export business for the
respective tax year. Expenses incurred in developing overseas markets
may be offset by returning from the reserve, to the income account, an
amount equivalent to the expense. Any part of the fund that is not
placed in the income account for the purpose of offsetting overseas
market development expenses must be returned to the income account over
a three-year period, after a one-year grace period. As is the case with
the Reserve for Export Loss, the balance of this reserve fund is not
subject to corporate income tax during the grace period. However, all
of the money in the reserve is eventually reported as income and
subject to corporate tax either when it offsets overseas expenses or
when the grace period expires. The deferral of taxes owed amounts to an
interest-free loan equal to the company's tax savings. The following
exporters of the subject merchandise used this program during the POI:
Hyosung, POSTEEL, Samsun, Samsung, and Sunkyong.
We determine that the Reserve for Overseas Market Development
program constitutes an export subsidy under section 771(5A)(B) of the
Act because use of the program is contingent upon export performance.
We also determine that this program provides a financial contribution
within the meaning of section 771(5)(D)(i) of the Act in the form of a
loan. The benefit provided by this program is the tax savings enjoyed
by the companies.
To determine the benefits conferred by this program during the POI,
we employed the same methodology used for determining the benefit from
the Reserve for Export Loss program. Using the methodology for
calculating subsidies received by trading companies, which is detailed
in the ``Subsidies Valuation Information'' section of this notice, we
determine a net countervailable subsidy of 0.01 percent ad valorem.
F. Investment Tax Credits
Under the TERCL, companies in Korea are allowed to claim investment
tax credits for various kinds of investments. If the tax credits cannot
all be used at the time they are claimed, then the company is
authorized to carry them forward for use in subsequent tax years.
During the POI, POSCO used various investment tax credits to reduce its
1996 net tax liability. In Steel Products from Korea, we found that
investment tax credits were not countervailable (see 58 FR at 37351);
however, there were changes in the statute effective in 1995, which
have caused us to revisit the countervailability of the investment tax
credits.
At verification, we received clarification of the particular
investment tax credits which POSCO used in its fiscal year 1996 tax
return which was filed during the POI. We learned that the company used
the following tax credits: (1) Tax credits for investments in
facilities for research and experiment under Article 10(1)(a) and
Article 10(1)(b); (2) tax credits for investments in productivity
improvement under Article 25; (3) tax credits for specific facility
investments under Article 26; and (4) tax credits for temporary
investments under Article 27.
Under these TERCL Articles, if a company invested in foreign-
produced facilities (i.e., facilities produced in a foreign country),
the company received a tax credit equal to either three or five percent
of its investment. However, if a company invested in domestically-
produced facilities (i.e., facilities produced in Korea) under the same
Articles, it received a 10 percent tax credit. Under section 771(5A)(C)
of the Act, which became effective on January 1, 1995, a program that
is contingent upon the use of domestic goods over imported goods is
specific, within the meaning of the Act. Because Korean companies
received a higher tax credit for investments made in domestically-
produced facilities, we determine that investment tax credits received
under Articles 10(1)(a), 10(1)(b), 25, 26, and 27 constitute import
substitution subsidies under section 771(5A)(C) of the Act. In
addition, because the GOK is foregoing the collection of tax revenue
otherwise
[[Page 15535]]
due under this program, we determine that a financial contribution is
provided under section 771(5)(D)(ii) of the Act. The benefit provided
by this program is a reduction in taxes payable. Therefore, we
determine that this program is countervailable.
To calculate the benefit from this tax credit program, we examined
the amount of tax credits POSCO deducted from its taxes payable for the
1996 fiscal year. POSCO deducted from its 1996 taxes payable, all
remaining credits earned in the years 1992, 1993, 1994, and a portion
of credits earned in 1995. Therefore, we first determined the amount of
the tax credits claimed which were based upon investments in
domestically-produced facilities. We then calculated the additional
amount of tax credits received by the company because it earned tax
credits of 10 percent on such investments instead of a three or five
percent tax credit. Next, we calculated the amount of the tax savings
earned through the use of these tax credits during the POI and divided
that amount by POSCO's total sales during the POI. On this basis, we
determine a net countervailable subsidy of 0.18 percent ad valorem.
G. Electricity Discounts under the Requested Load Adjustment Program
Petitioners alleged that POSCO is receiving countervailable
benefits in the form of utility rate discounts. The GOK reported that
during the POI the government-owned Korea Electric Power Company
(KEPCO) provided POSCO with three types of discounts under its tariff
schedule. These three discounts were based on the following rate
adjustment programs in KEPCO's tariff schedule: (1) Power Factor
Adjustment; (2) Summer Vacation and Repair Adjustment; and (3)
Requested Load Adjustment. See the discussion below in ``Programs
Determined To Be Not Countervailable'' with respect to the Power Factor
Adjustment and Summer Vacation and Repair Adjustment discount programs.
The GOK introduced the Requested Load Adjustment (RLA) discount in
1990, to address emergencies in KEPCO's ability to supply electricity.
Under this program, customers with a contract demand of 5,000 KW or
more, who can curtail their maximum demand by 20 percent or suppress
their maximum demand by 3,000 KW or more, are eligible to enter into a
RLA contract with KEPCO. Customers who choose to participate in this
program must reduce their load upon KEPCO's request, or pay a surcharge
to KEPCO.
The RLA discount is provided based upon a contract of two months,
normally July and August when the demand for electricity is greatest.
Under this program, a basic discount of 440 won per KW is granted
between July 1 and August 31, regardless of whether KEPCO makes a
request for a customer to reduce its load. During the POI, KEPCO
granted 44 companies RLA discounts even though KEPCO did not request
these companies to reduce their respective loads. The GOK reported that
because KEPCO increased its capacity to supply electricity in 1997, it
reduced the number of companies with which it maintained RLA contracts
in 1997. In 1996, KEPCO had entered into RLA contracts with 232
companies.
At the preliminary determination, we found that discounts provided
under the RLA were distributed to a limited number of customers, i.e.,
a total of 44 customers during the POI. Therefore, we preliminarily
determined that the RLA program is de facto specific under section
771(5A)(D)(iii)(I) of the Act. We also stated in the preliminary
determination that, given the information the GOK provided on the
record regarding KEPCO's increased capacity to supply electricity and
the resulting decrease in KEPCO's need to enter into a large number of
RLA contracts during the POI, we would further investigate the de facto
specificity of this discount program at verification. We stated that it
was the GOK's responsibility to demonstrate to the Department on what
basis KEPCO chose the 44 customers with which it entered into RLA
contracts during the POI.
Based on the information which we obtained at verification, we
analyzed whether this electricity discount program is specific in fact
(de facto specificity), within the meaning of section 771(5A)(D)(iii)
of the Act. We find that the GOK failed to demonstrate to the
Department a systematic procedure through which KEPCO selects those
customers with which it enters into RLA contracts. The GOK simply
stated that KEPCO enters into contracts with those companies which
volunteer for the discount program. If KEPCO does not reach its
targeted adjustment capacity with those companies which volunteered for
the program, then KEPCO will solicit the participation of large
companies. We note that KEPCO was unable to provide to the Department
the percentage of 1997 RLA recipients which volunteered for the program
and the percentage of those recipients which were persuaded to
cooperate in the program. Therefore, we continue to find that the
discounts provided under the RLA were distributed to a limited number
of users. Given the data with respect to the small number of companies
which received RLA electricity discounts during the POI, we determine
that the RLA program is de facto specific under section
771(5A)(D)(iii)(I) of the Act. The benefit provided under this program
is a discount on a company's monthly electricity charge. A financial
contribution is provided to POSCO under this program within the meaning
of section 771(5)(D)(ii) of the Act in the form of revenue foregone by
the government.
Because the electricity discounts are not ``exceptional'' benefits
and are received automatically on a regular and predictable basis
without further government approval, we determine that these discounts
provide a recurring benefit to POSCO. Therefore, we have expensed the
benefit from this program in the year of receipt. See GIA, 58 FR at
37226. To measure the benefit from this program, we summed the
electricity discounts which POSCO received from KEPCO under the RLA
program during the POI. We then divided that amount by POSCO's total
sales value for 1997. On this basis, we determine a net countervailable
subsidy of less than 0.005 percent ad valorem.
II. Programs Determined To Be Not Countervailable
A. Electricity Discounts Under the Power Factor Adjustment and Summer
Vacation and Repair Adjustment Programs
The GOK reported that KEPCO provided POSCO with three types of
discounts under its tariff schedule during the POI. These three
discounts were based on the following rate adjustment programs in
KEPCO's tariff schedule: (1) Power Factor Adjustment; (2) Summer
Vacation and Repair Adjustment; and (3) Requested Load Adjustment. See
the separate discussion above in regard to the countervailability of
the ``Requested Load Adjustment'' program.
With respect to the Power Factor Adjustment (PFA) program, the GOK
reported that the goal of the PFA is to improve the energy efficiency
of KEPCO's customers which, in turn, provides savings to KEPCO in
supplying electricity to its entire customer base. Customers who
achieve a higher efficiency than the performance standard (i.e., 90
percent) receive a discount on their base demand charge.
The GOK stated that the PFA is not a special program, but a normal
factor used in the calculation of a customer's electricity charge which
was introduced in 1989. The PFA is available to all
[[Page 15536]]
general, educational, industrial, agricultural, midnight power, and
temporary customers who meet the eligibility criteria. The eligibility
criteria are that a customer must: (1) Have a contract demand of 6 KW
or more; (2) have a power factor that exceeds the 90 percent standard
power factor; and (3) have proper facilities to measure its power
factor. If these criteria are met, a customer always receives a PFA
discount on its monthly electricity invoice. During the POI, over
600,000 customers were recipients of PFA discounts.
With the aim of curtailing KEPCO's summer load by encouraging
customer vacations or the repair of their facilities during the summer
months, the GOK introduced the Summer Vacation and Repair Adjustment
program (VRA) in 1985. Under this program, a discount of 550 won per KW
is given to customers, if they curtail their maximum demand by more
than 50 percent, or 3,000 KW, through a load adjustment or maintenance
shutdown of their production facilities during the summer months.
The GOK stated that the VRA discount program is available to all
industrial and commercial customers with a contract demand of 500 KW or
more. The GOK stated that the VRA is one of several programs that KEPCO
operates as part of its broad long-term strategy of demand-side
management which includes curtailing peak demand. The GOK submitted
information demonstrating that over eight hundred customers, from a
wide and diverse range of industries, received VRA discounts during the
POI.
We analyzed whether these electricity discount programs are
specific in law (de jure specificity), or in fact (de facto
specificity), within the meaning of section 771(5A)(D)(i) and (iii) of
the Act. First, we examined the eligibility criteria contained in the
law. The Regulation on Electricity Supply and KEPCO's Rate Regulations
for Electric Service identify companies within a broad range of
industries as eligible to participate in the electricity discount
programs. With respect to the PFA, all general, educational,
industrial, agricultural, midnight power, and temporary customers who
have the necessary contract demand are eligible to participate in the
discount program. The VRA discount program is available to a wide
variety of companies across all industries, provided that they have the
required contract demand and can reduce their maximum demand by a
certain percentage. Therefore, based on our analysis of the law, we
determine that the PFA and VRA electricity programs are not de jure
specific under section 771(5A)(D)(i) of the Act.
We also examined evidence regarding the usage of the discount
electricity programs and found no predominant use by the steel
industry. The information on the record demonstrates that discounts
under the PFA and VRA are distributed to a large number of firms in a
wide variety of industries. Therefore, after analyzing the data with
respect to the large number of companies and diverse number of
industries which received electricity discounts under these programs
during the POI, we determine that the PFA and VRA programs are not de
facto specific under section 771(5A)(D)(iii) of the Act. Accordingly,
we determine that the PFA and VRA discount programs are not
countervailable.
B. GOK Infrastructure Investments at Kwangyang Bay Post-1991
The GOK has made the following infrastructure investments at
Kwangyang Bay since 1991: Construction of a road from Kwangyang to
Jinwol, construction of a container terminal, and construction of the
Jooam Dam. The GOK stated that pursuant to Article 29 of the Industrial
Sites and Development Act, it is the national and local governments'
responsibility to provide basic infrastructure facilities throughout
the country, and the nature of the infrastructure depends on the
specific needs of each area and/or the types of industries located in a
particular area. The GOK provides services to companies through the use
of the infrastructure facilities and charges fees for the services
based on published tariff rates applicable to all users.
With respect to the GOK's post-1991 infrastructure investments at
Kwangyang Bay, the GOK argues that the construction of the
infrastructure was not for the benefit of POSCO. The GOK reported that
the purpose of developing the Jooam Dam was to meet the rising demand
for water by area businesses and households. The supply capacity of the
Sueochon Dam, which was constructed prior to 1991, cannot meet the
area's water needs and, therefore, a second dam in the Kwangyang Bay
area was built. The GOK further reported that the Jooam Dam does not
benefit POSCO because POSCO receives all of its water supply from the
Sueochon Dam. At verification, we obtained information which
demonstrates that the Jooam Dam's water pipe line connects neither to
the Sueochon Dam nor to POSCO's steel mill at Kwangyang Bay.
Accordingly, POSCO cannot source any of its water supply from the Jooam
Dam and, therefore, the company is not benefitting from the GOK's
construction of the Jooam Dam.
The GOK also constructed a container terminal at Kwangyang Bay to
relieve congestion at the Pusan Port and to encourage the further
commercial development of the region. The GOK stated that, given the
nature of the merchandise imported, produced, and exported by POSCO at
Kwangyang Bay, this container terminal cannot be used by POSCO's
operations. According to the responses of the GOK and POSCO and the
information obtained at verification, neither steel inputs nor steel
products can be shipped through the container terminal at Kwangyang
Bay. Given the nature of steel inputs (e.g., bulk products like scrap)
and finished steel products (e.g., bundled bars and plate), products
such as these would or could not be loaded or unloaded from a ship
through a container terminal and, therefore, the facility is not used
by steel producers.
The road from Kwangyang to Jinwol was constructed in 1993. The GOK
stated that this is a general service, public access road available
for, and used by, all residents and businesses in the area of Kwangyang
Bay. According to the GOK, the reason for building the public highway
was not to serve POSCO, but to provide general infrastructure to the
area as part of the GOK's continuing development of the country and to
relieve a transportation bottleneck. At verification, we obtained
information on the road and learned that, in fact, it is utilized by
both industries in the area to transport goods and by residents living
in the Kwangyang Bay area.
Based on the information obtained at verification regarding the
GOK's infrastructure investments at Kwangyang Bay since 1991, we
determine that the GOK's investments in the Jooam Dam, the container
terminal, and the public highway were not made for the benefit of
POSCO. Therefore, we find that these investments are not providing
countervailable benefits to POSCO.
C. Port Facility Fees
In the 1993 investigation of Steel Products from Korea, the
Department found that POSCO, which built port berths at Kwangyang Bay
but, by law, was required to deed them to the GOK, was exempt from
paying fees for use of the berths. POSCO was the only company entitled
to use the berths at the port facility free of charge. The Department
determined that because this privilege was limited to POSCO, and
because the privilege relieved
[[Page 15537]]
POSCO of costs it would otherwise have had to pay, POSCO's free use of
the berths at Kwangyang Bay constituted a countervailable subsidy. The
Department stated that each exemption from payment of the fees, or
``reimbursement'' to POSCO, creates a countervailable benefit because
the GOK is relieving POSCO of an expense which the company would have
otherwise incurred. See Steel Products from Korea, 58 FR at 37347-348.
With respect to the instant investigation, since 1991, POSCO, at
its own expense, has built new port facilities at Kwangyang Bay.
Because title to port facilities must be deeded to the GOK in
accordance with the Harbor Act, POSCO transferred ownership of the
facilities to the GOK.
In return, POSCO received the right to use the port facilities free
of charge, and the ability to charge other users a usage fee until the
company recovers all of its investment costs. At the preliminary
determination, we determined that because POSCO is exempt from paying
port facility fees, which it otherwise would have to pay, and the
government is foregoing revenue that is otherwise due, POSCO's free
usage of the port facilities provided a financial contribution to the
company within the meaning of section 771(5)(D)(ii) of the Act. We also
preliminarily found that the exemption from paying port facility
charges is specific under section 771(5A)(D)(iii) of the Act, because
POSCO was the only company exempt from paying these port facility fees
during the POI.
Since our preliminary determination, we have gathered further
information with respect to the Harbor Act and the number and types of
companies which have built infrastructure which, as required by law,
were subsequently transferred to the government. At verification, we
learned that, because the government does not have sufficient funds to
construct all of the infrastructure a company may need to operate its
business, the GOK allows a company to construct, at its own expense,
such infrastructure. However, the Harbor Act prohibits a private
company from owning certain types of infrastructure, such as ports.
Therefore, the company, upon completion of the project, must deed
ownership of the infrastructure to the government pursuant to Article
17-1 of the Harbor Act. Because a company must transfer to the
government its infrastructure investment, the GOK, under Articles 17-3
and 17-4 of the Harbor Act, grants the company free usage of the
facility and the right to collect fees from other users of the facility
until the company recovers its investment cost. Once a company has
recovered its cost of constructing the infrastructure, the company must
pay the same usage fees as other users of the infrastructure facility.
We verified that under the Harbor Act, any company within any
industrial sector is eligible to construct infrastructure necessary for
the operation of its business provided that it receives approval by the
Administrator of the Maritime and Port Authority to build the facility.
We learned that if the ownership of the infrastructure, which the
company built, must transfer to the government, then the company, by
law, has the right to free usage of that facility and the ability to
collect fees from other users of the facility. The right of free usage
and the ability to collect user fees are granted to every company which
has to deed facilities to the GOK. The free usage and collection of
user fees continues only until the company which built the facility
recaptures its cost of constructing the facility.
Further, at verification we learned that in permitting a company to
build infrastructure subject to the Harbor Act requirements, the GOK
has in place a procedure for approving a company's investment costs and
for monitoring the company's free usage and collection of user fees.
Because the GOK allows a company, for a period of time, to use for free
the infrastructure it built, the GOK, through the respective port
authority, reviews each infrastructure project to assess the cost. The
port authority then approves a certain monetary amount for the
infrastructure through a settlement process with the company. A company
can only receive free usage of a facility up to the monetary amount
approved by the port authority.
At verification, we obtained documentation which indicates that
since 1991, a diverse grouping of private sector companies across a
broad range of industrial sectors have made a number of investments in
infrastructure facilities at various ports in Korea, including at
Kwangyang Bay. In each case, the company which built the infrastructure
was required to transfer it to the GOK, and received free usage of the
infrastructure and the ability to collect user fees from other
companies until they recover their respective investment costs. POSCO
was not the only company entitled to use a particular port facility
infrastructure, which it built, free of charge.
As a result of the information obtained at verification, we have
revisited our preliminary determination that POSCO's exemption from
paying port facility charges is specific under section 771(5A)(D)(iii)
of the Act. As discussed above, we verified that since 1991, a diverse
grouping of private sector companies representing a wide cross-section
of the economy have made a large number of investments in
infrastructure facilities at various ports in Korea, including numerous
investments at Kwangyang Bay. Those companies which built
infrastructure that was transferred to the GOK, as required by the
Harbor Act, received free usage of the infrastructure and the ability
to collect user fees from other companies which use the facilities,
until they recover their respective investment costs. POSCO is one of a
large number of companies from a diverse range of industries to use
this program. Accordingly, we determine that this program is not
specific under section 771(5A)(D)(iii) of the Act. Therefore, we find
that this program is not countervailable.
III. Programs Determined To Be Not Used
Based on the information provided in the responses and the results
of verification, we determine that the companies under investigation
either did not apply for or receive benefits under the following
programs during the POI:
A. Tax Incentives for Highly-Advanced Technology Businesses under the
Foreign Investment and Foreign Capital Inducement Act
B. Reserve for Investment under Article 43-5 of TERCL
C. Export Industry Facility Loans and Special Facility Loans
D. Export Insurance Rates Provided by the Korean Export Insurance
Corporation
E. Excessive Duty Drawback
Petitioners alleged that under the Korean Customs Act, Korean
producers/exporters may have received an excessive abatement,
exemption, or refund of import duties payable on raw materials used in
the production of exported goods. The Department has found that the
drawback on imported raw materials is countervailable when the raw
materials are not consumed in the production of the exported item and,
therefore, the amount of duty drawback is excessive. In Steel Products
from Korea, we determined that certain Korean steel producers/exporters
received excessive duty drawback because they received duty drawback at
a rate that exceeded the rate at which imported inputs were actually
used. See
[[Page 15538]]
Steel Products from Korea, 58 FR at 37349.
At verification, we learned that the refund of duties only applies
to imported raw materials that are physically incorporated into the
finished merchandise. Items used to produce a product, but which do not
become physically incorporated into the final product, do not qualify
for duty drawback. We confirmed that the National Technology Institute
(NTI) maintains a materials list for each product, and only materials
and subsidy-materials that are physically incorporated into the final
product are eligible for duty drawback.
We verified that the NTI routinely conducts surveys of producers of
exported products to obtain their raw material input usage rate for
manufacturing one unit of output. With this information, the NTI
compiles a standard usage rate table for imported raw material inputs
which is used to calculate a producer/exporter's duty drawback
eligibility. In determining an input usage rate for a raw material, the
NTI factors recoverable scrap into the calculation. In addition, the
loss rate for each imported input is reflected in the input usage rate.
At verification, the GOK confirmed that the factoring of reusable scrap
into usage rates is done routinely for all products under Korea's duty
drawback regime. We further verified that the NTI most recently
completed a survey of POSCO in 1993, and because POSCO is the only
producer of the subject merchandise, the standard input usage rate
table for the subject merchandise is based on POSCO's actual production
data.
We also confirmed during our verification of POSCO that there is no
difference in the rate of import duty paid and the rate of drawback
received. The rate of import duty is based on the imported materials
and the rate of drawback depends on the exported merchandise and the
usage rate of the imported materials. POSCO pays import duties based on
the rate applicable to and the price of the imported raw material.
POSCO then receives duty drawback based on the amount of that material
consumed in the production of the finished product according to the
standard input usage rate. Accordingly, the rate at which POSCO
receives duty drawback is the amount of import duty paid on the amount
of input consumed in producing the finished exported product.
Based on the information on the record, we determine that POSCO has
not received duty drawback on imported raw materials that were not
physically incorporated in the production of exported merchandise. As
in Steel Products from Korea, we also determine that POSCO
appropriately factored recovered scrap into its calculated usage rates
and that the duty drawback rate applicable to POSCO takes into account
recoverable scrap. See Steel Products from Korea, 58 FR at 37349.
Therefore, we determine that POSCO has not received excessive duty
drawback.
VI. Program Determined To Be Terminated
Unlimited Deduction of Overseas Entertainment Expenses
We verified that Article 18-2(5) of the Corporation Tax Law which
provided for unlimited deductions of overseas entertainment expenses
was repealed by the revisions to the law dated December 29, 1995. In
calculating their 1996 income tax (which was filed during the POI)
Korean exporters could no longer deduct overseas entertainment expenses
without any limits.
Interested Party Comments
Comment 1: The GOK's Pre-1992 Credit Policies: New Factual
Information Concerning Foreign Currency-Denominated Loans. Respondents
assert that the Department ignored new factual information on the
record of this proceeding concerning domestic foreign currency loans.
Specifically, respondents submitted information indicating that from
1986 through 1988, interest rates on domestic foreign currency loans
were only subject to an interest rate ceiling, and that after 1988,
banks and other financial institutions were free to set the interest
rates on these loans subject only to the ceiling established by the
Interest Limitation Act. Respondents claim that the Department ignored
this information and incorrectly assumed that the reimposition of
interest rate ceilings on Korean won loans after a failed attempt at
liberalization in 1988, also applied to domestic foreign currency
loans. Respondents further state that the Department found at
verification that the interest rate liberalization program applied
solely to lending rates in Korean won. Therefore, respondents state,
for all domestic foreign currency loans received prior to 1992, there
is no basis for the Department's determination that interest rates on
these loans were regulated and that these loans provided
countervailable subsidies.
According to petitioners, the Department's finding that pre-1992
direct foreign loans provided a countervailable subsidy was correct and
supported by the evidence on the record. Petitioners further state that
respondents have provided no new evidence to disprove this finding and
nothing in the new law is contrary to the Department's 1993
determination.
Department's Position: The alleged ``new'' information cited by
respondents in their brief concerning interest rates on domestic
foreign currency loans was in fact considered by the Department in
Steel Products From Korea. The discussion addressing the GOK's strict
control of interest rates specifically states that ``[i]nterest rate
ceilings on domestic foreign currency loans were also maintained until
1988.'' See Steel Products From Korea, 58 FR at 37341. Thus, the
Department considered the fact that the de jure controls over domestic
foreign currency loans were removed after 1988, in reaching its
conclusion that these loans continued to be subject to indirect GOK
influence. Moreover, respondents' contention that ``window guidance''
(i.e., the GOK's indirect control over interest rates) applied only to
domestic won loans is also without merit. The Department examined this
issue and reached the opposite conclusion in Steel Products From Korea.
Also, in this investigation, independent bankers stated that ``interest
rates were once again regulated until the early 1990s, through a system
of `window guidance.' '' Under this system commercial banks were
effectively directed by the government not to raise interest rates
above a certain level. While this statement is contained within the
discussion of the failed 1988 liberalization plan, the bankers did not
distinguish between domestic and foreign rates of lending by domestic
commercial banks. Finally, in calling for the prohibition of ``window
guidance'' over financial institutions' loan rates, the Presidential
Commission did not refer only to won-denominated rates. As noted above,
the Department's finding in Steel Products From Korea took into account
respondents ``new'' information. This finding has since been upheld by
the Court in British Steel plc v. United States, 941 F. Supp 119 (CIT
1996) (British Steel II). For these reasons our finding concerning the
countervailability of pre-1992 foreign currency denominated loans from
domestic sources remains unchanged in this final determination.
Comment 2: The GOK's Pre-1992 Credit Policies: Whether Direct
Foreign Loans Constitute a Financial Contribution Within the Meaning of
the Act. According to respondents, the only government regulation of
direct foreign loans consisted of an interest rate ceiling. Respondents
state that the GOK could not, under its regulations, direct
[[Page 15539]]
or induce foreign lenders to provide loans to POSCO; nor could it
regulate (and reduce) the interest rates these lenders would charge on
such loans. Rather, these loans were negotiated directly between
foreign banks and POSCO without the GOK's direct or indirect
involvement. As such, respondents' state that the Department's
preliminary finding that direct foreign loans are countervailable is in
conflict with the ``financial contribution'' standard of section
771(5)(D)(i) of the Act. Respondents assert that direct foreign loans
from foreign banks do not constitute countervailable subsidies because
there is no government financial contribution. Respondents further
claim that the Department did not explain in its preliminary
determination how loans from foreign sources could constitute a
financial contribution by the GOK. Moreover, respondents state that
these loans do not meet the ``entrusts or directs'' standard of the
Act, because (1) they can not be characterized as a contribution that
``would normally be vested in the government,'' and (2) the requirement
that the practice of lending by the foreign entity ``does not differ in
substance from practices normally followed by the government'' is not
met in this instance. Furthermore, because access to direct foreign
loans was restricted by the GOK on the basis of a borrowers' ability to
access the market without a government or bank guarantee, POSCO would
have been able to receive direct foreign loans at the interest rates
obtained on its own and without government involvement.
Respondents also address the Department's assertion in the new
countervailing duty regulations (and the Statement of Administrative
Action) that its indirect subsidy standard remains unchanged under the
``financial contribution'' standard of the Post-Uruguay Round law,
specifically referring to the indirect subsidy practices countervailed
in Steel Products from Korea.1 Respondent's state that to
simply subsume direct foreign loans from foreign entities within the
broad claim of an unchanged indirect subsidy standard (and the
endorsement in the SAA of Steel Products From Korea) is ``overly
simplistic and legally in error.''
---------------------------------------------------------------------------
\1\ Countervailing Duties; Final Rule, 63 65348, 349 (November
25, 1998) (CVD Final Rule); SAA at 926.
---------------------------------------------------------------------------
Petitioners dispute respondents' assertion that the GOK's control
over access to direct foreign loans does not constitute a financial
contribution, within the meaning of the Act. Petitioners state that
this question has been answered by the SAA, which specifically
references the Department's indirect subsidy findings in Steel Products
From Korea to illustrate that the indirect subsidy standard includes
the GOK's control over access to direct foreign loans. Petitioners
contend that to accept respondents' argument would be to repudiate the
interpretation of the statute in the SAA. Petitioners note, moreover,
that the Department preliminarily has found in the Credit Memo that the
GOK's control over the Korean financial system continued through the
POI and included the control of access to direct foreign loans.
Department's Position: As petitioners correctly note, respondents'
arguments concerning this issue have been fully answered by the
Congress through its approval of the SAA and the CVD Final Rule
2 In Steel Products From Korea, the finding of government
control was determined to be sufficient to constitute a government
program and government action, as defined by the Act. Moreover, in the
preliminary determination, we did not revisit that prior determination,
and also found that the subsidy identified meets the standard for a
subsidy as defined by the post-URAA Act. Preliminary Determination, 63
FR at 47255.
---------------------------------------------------------------------------
\2\ Although the CVD Final Rule are not controlling in this
investigation, they do represent a statement of the Department's
practice and interpretations of the Act, as amended by the URAA.
---------------------------------------------------------------------------
While respondents contend that subsuming GOK-controlled access to
direct foreign loans from foreign entities within the SAA's claim of an
unchanged indirect subsidy standard is ``overly simplistic and legally
in error,'' the clear and unambiguous language of the SAA is that
Congress intended the specific types of indirect subsidies found to be
countervailable in Steel Products From Korea to continue to be covered
by the Act, as amended by the URAA. The Department's final
countervailable duty regulations are equally clear on this issue, the
preamble of which confirms that the standard for finding indirect
subsidies countervailable under the URAA-amended law ``is no narrower
than the prior U.S. standard for finding an indirect subsidy as
described in Steel Products from Korea.'' See CVD Final Rule, 63 FR at
65349. For these reasons, we have not changed our preliminary
determination concerning the countervailability of pre-1992 direct
foreign loans.
Comment 3: The GOK's Pre-1992 Credit Policies: Whether Direct
Foreign Loans Are Not Countervailable Pursuant to the Transnational
Subsidies Rule. Respondents assert that pursuant to the so-called
``transnational subsidies rule,'' funds provided from sources outside a
country under investigation are not countervailable. Specifically,
respondents state that section 701(a)(1) of the Act applies only to
subsidies provided by the government of the country in question or an
institution located in, or controlled by, that country. In support of
this contention, respondents cite North Star Steel v. United States,
824 F. Supp. 1074 (CIT 1993) (North Star), in which the Court upheld
the Department's determination that an Inter-American Development Bank
loan guaranteed by the Government of Argentina on behalf of the
recipient was not subject to the countervailing duty law. In
particular, the CIT stated that ``[t]his determination is consistent
with the purpose of the countervailing duty law, which is ``intended to
offset the unfair competitive advantage that foreign producers would
otherwise enjoy from * * * subsidies paid by their government.' ''
North Star, 824 F. Supp. at 1079 (quoting Zenith Radio Corp. v. United
States, 437 U.S. 443, 456 (1978)). Respondents also cite a case in
which the Department refused to initiate an investigation of private,
foreign co-financing of a World bank project, stating that ``[f]or the
same reasons (applicable to funds from the World Bank), a loan granted
by a group of Japanese banks and insurance companies (in the
Philippines) * * * would not be countervailable.'' See Initiation of
Countervailing Duty Investigation: Certain Textiles and Textile
Products from the Philippines, 49 FR 34381 (1984). Petitioners assert
that the Department's determination does not contravene the
transnational subsidy rule because the subsidy in this case is based on
controlled access to credit, and not on a differential in interest
rates. The fact that the payment of the funds comes from a private
source outside of Korea is irrelevant. According to petitioners, the
case law cited by respondents does not involve situations in which a
foreign government conferred countervailable subsidies by controlling
access to third country financial sources. In addition, petitioners
note that these cases predate the changes in the statute that expressly
recognize indirect subsidies provided through private actors.
Department's Position: Respondents' assertion concerning the
transnational subsidies rule is without merit. Respondents made this
same argument in Steel Products From Korea (see, 58 FR at 37344). In
upholding the
[[Page 15540]]
Department's determination in Steel Products From Korea, the Court did
not find in any way that the Department's determination with respect to
direct foreign loans was in conflict with the transnational subsidies
rule, as argued by respondents in that prior investigation. The cases
cited by respondents are also not relevant to the facts of this
investigation because those cases deal with funds from foreign
governments or international lending or development institutions. This
investigation, however, concerns the Korean government's control over
access to funds from overseas private sources of credit.
More specifically, however, the Department rejected respondents'
argument in Steel Products From Korea, because the benefit alleged was
not the actual funding of direct foreign loans, but rather the
``preferential access to loans that are not generally available to
Korean borrowers.'' Steel Products From Korea, 58 FR at 37344. The GOK
was found to control this access and because the steel industry
received a disproportionate share of these low-cost funds, this
preferential access was found to confer a countervailable benefit on
the steel industry.
Nothing argued by respondents in this investigation would lead us
to change that prior determination concerning direct foreign loans.
Therefore, our preliminary determination remains unchanged.
Comment 4: The GOK's Pre-1992 Credit Policies: Benchmark Applied to
Determine the Benefit From Foreign Currency-Denominated Loans.
Respondents challenge the Department's use of a won-denominated
benchmark to calculate the countervailable benefit from POSCO's
outstanding pre-1992 long-term foreign currency-denominated loans.
According to respondents, the Department's long established methodology
is to compare countervailable loans with a benchmark in the same
currency. Respondents cite the Final Affirmative Countervailing Duty
Determination: Certain Apparel from Thailand, 50 FR 9818, 9824 (1985),
which states that, the ``benchmark must be applicable to loans
denominated in the same currency as the loans under consideration.''
Respondents also note that this standard was articulated in the Final
Affirmative Countervailing Duty Determination: Cold-rolled Carbon Steel
Flat-rolled Products from Argentina, 49 FR 18006 (1984) (Cold-Rolled
Steel From Argentina). In that case, the Department stated:
[f]or loans denominated in a currency other than the currency of
the country concerned in an investigation, the benchmark is selected
from interest rates applicable to loans denominated in the same
currency as the loan under consideration (where possible, interest
rates on loans in that currency in the country where the loan was
obtained; otherwise, loans in that currency in other countries, as
best evidence). The subsidy for each year is calculated in the
foreign currency and converted at an exchange rate applicable for
each year. Id. at 18019.
Respondents contend that this policy was reiterated in the
Department's new regulations, the preamble to which refers to the
currency of the loans as one of ``the three most important
characteristics'' in determining the benchmark. CVD Final Rule, 63 FR
at 65363. Thus, respondents assert that the Department (1) did not
consider any other commercially-viable alternatives (such as those
rates ``in other countries''); (2) ignored any reference to its long-
standing policy of comparing loans in the same currency; and (3)
provided no explanation for abandoning that policy. Accordingly,
respondents state that the Department must revise its calculation of
the benefit from foreign currency-denominated loans, using a benchmark
that is in conformance with its policy and regulations.
Petitioners dispute respondents' benchmark argument, stating that
respondents focused solely on currency and ignored the underlying
principle of what the benchmark is intended to measure, namely the
financing the company could have obtained on the market in lieu of the
government-provided loans. In Steel Products From Korea, the Department
had to determine what interest rate the company would have had to pay
absent the GOK's policy and control over lending sources. Petitioners
state that, because prior to 1992, all sources of foreign currency-
denominated credit were found to be controlled by the GOK, these
sources ``in other countries'' could not serve as a benchmark because
they would not have been available to POSCO but for the approval by the
Ministry of Finance and Economy (MOFE). Therefore, petitioners state,
the Department chose the 3-year corporate bond rate. Record evidence in
the current investigation also indicates that the bond market is the
only commercial source (i.e., free from GOK control) of long-term
funding in Korea. Thus, petitioners assert, domestic bond rates reflect
the most comparable, commercial financing that a company could obtain
in the market absent the GOK's direction of credit and, therefore, are
the most appropriate benchmark for POSCO's foreign currency loans and
bonds both pre-and post-1992.
Department's Position: Respondents' arguments concerning the
Department's methodology for measuring benefits from countervailable
foreign currency-denominated long-term loans are partially correct. It
is true that in most instances we measure the benefit from
countervailable foreign currency loans by comparing such loans with a
benchmark denominated in the same currency, provided the borrower would
otherwise have had access to such foreign currency loans. However, in
the context of the Korean financial system prior to 1992, this
methodology is not appropriate. Specifically, in Steel Products From
Korea, the Department found that all sources of foreign currency-
denominated credit were subject to the government's control and
direction. Therefore, these sources of foreign currency credit,
including overseas markets, could not serve as an appropriate
benchmark, as they were also found to be countervailable. In the
absence of such a benchmark, the Department had to determine the rate
that companies would have had to pay absent government control. That
rate was the corporate bond yield on the secondary market. See Steel
Products From Korea, 58 FR at 37346. Respondents assert that the
Department did not consider any other commercially viable alternatives.
Respondents ignore, however, the fact that the corporate bond yield on
the secondary market was the only alternative, unregulated source and
commercially viable source of financing in Korea. Accordingly, this was
the only viable benchmark with which to measure the benefit from
government-regulated sources of credit. Nothing argued by respondents
in this investigation has led us to change our determination in Steel
Products From Korea. Therefore, our finding concerning POSCO's pre-1992
foreign currency-denominated long-term loans remains unchanged in this
final determination.
Comment 5: Post-1991 GOK Credit Policies: Whether Foreign Currency
Loans From Domestic Branches of Foreign Banks are Countervailable.
According to petitioners, the Department incorrectly found that
domestic branches of foreign banks were not controlled and directed by
the GOK. Petitioners state that the Department, in reaching its
conclusion, relied only on a lack of any substantive discussion in the
record concerning the influence of the GOK on foreign banks as
affirmative evidence that no such controls exist. Petitioners further
assert that there is little, if any, meaningful discussion
[[Page 15541]]
about the direct or indirect influence of GOK regulations and policies
on the operation of foreign banks in Korea in the record, including the
verification reports. Petitioners assert that record evidence in fact
shows that foreign banks are subject to the same GOK controls and
direction that applied to domestic commercial banks.
According to petitioners, the Department's assumption that, absent
evidence to the contrary, GOK controls or influence over foreign
commercial banks do not exist, is legally impermissible. In support,
petitioners cite Al Tech Specialty Steel v. United States, where the
CIT ruled that the Department may not simply infer the truth of certain
facts from lack of any contradictory evidence on the record; rather,
the Department is required to support or authenticate with record
evidence (i.e., verify) any factual assertion on which it relies. Slip
Op. 98-136 at 9 (CIT 1998). Petitioners state that, in this case, the
Department has violated that principle by failing to gather and verify
the necessary facts in support of the conclusion reached. As such, the
Department's conclusion is not based on substantial evidence on the
record.
Petitioners further claim that the Department ignores record
evidence that demonstrates GOK control over foreign banks in Korea. For
example, petitioners state that foreign commercial banks are included
within the OECD's analysis of commercial banks in its 1996 report. OECD
Economic Surveys: Korea 1996 at 41-42, submitted at Exhibit 20 of the
March 31, 1998 Petition, on file in the CRU. Petitioners also claim
that the Presidential Reports and the 1998 OECD Report recognize that
foreign banks operating in Korea were subject to excessive control.
Petitioners further state that the relevant banking legislation that
restricts domestic commercial banks also restricts domestic branches of
foreign banks operating in Korea. In particular, petitioners cite to
the General Bank Act, the Bank of Korea Act, and the Foreign Exchange
Management Law, noting that foreign banks are also subject to the
provisions of these laws.
According to petitioners, foreign commercial banks must be subject
to the same ``window guidance'' as domestic commercial banks to prevent
interest rates from increasing. Petitioners point out that POSCO's
interest rates from foreign commercial banks were lower than the
company's rates for foreign securities. According to petitioners, risk-
averse, profit-motivated foreign commercial banks would only charge
such low interest rates in the Korean market if GOK policies restricted
either the interest rates or borrowers' access to credit from those
banks.
Moreover, petitioners state that foreign commercial banks in Korea
could not have satisfied POSCO's demand for funds. In Steel Products
From Korea, the Department specifically found that POSCO was unable to
raise the large sums of money necessary for its credit needs from
domestic banks. See Steel Products From Korea, 58 FR at 37345 (quoting,
``the domestic foreign loan market could not have adequately supplied
POSCO with the volume of, and/or terms of payment on, loans that POSCO
required.'') Petitioners note that foreign bank branches in Korea were
responsible for less than 4 percent of total lending. OECD 1996 Survey
at 42. According to petitioners, this is a direct result of government
controls over the market.
Even if domestic branches of foreign commercial banks were not
regulated by the GOK, petitioners state that they would be
``inescapably influenced by the controls on every other sector of the
banking industry.'' As such, they could not behave in a free market
manner. For example, foreign banks would be no less influenced than
their Korean counterparts by the lead of the Korean Development Bank
and the Bank of Korea to extend credit to certain government favored
projects. In light of the GOK's complete dominance over the financial
system, petitioners state that it would be impossible for foreign
commercial banks to operate free of the same constraints and influences
that domestic banks were subject to.
Respondents assert that the record evidence cited by petitioners
amounts to (1) generalities and speculation about the operation of the
Korean banking system, and (2) lists of normal regulatory provisions of
how banks must operate in Korea and basic foreign exchange controls
applicable to them. Respondents contend that this ``evidence'' was not
relied upon by the Department in its finding of control and direction
of credit from GOK-owned and domestic commercial banks, and has no
relevance with respect to direction of credit to the steel industry.
Respondents also note that petitioners fail to reveal any record
evidence which betrays the means by which the GOK controls the lending
of foreign bank branches so as to direct credit where the GOK allegedly
intends it to go, such as to the steel industry. For example, the
Department cited the bank ownership rules and the GOK's intervention in
the appointment of banking officials as means by which the government
could influence domestic bank lending practices. Respondents note that
foreign banks, in contrast, are wholly-owned by their parent banks and
appoint their own officials. Thus, this was not a way in which the GOK
could influence their lending decisions. Respondents also indicate that
foreign banks' most important source of funds is from their head
offices, which provide them with both greater autonomy from the Korean
banking system and a lower cost of funds than available to Korean
commercial banks which, due to their credit ratings, borrow at rates
that are comparable to the rates POSCO can obtain on its own.
Respondents dismiss as empty speculation and unsupported inference
petitioners claim that even if foreign bank branches were not regulated
in the same manner as domestic banks, they would have nonetheless been
``influenced by the biases and controls built into the tightly
controlled financial system.'' Respondents assert that such speculation
is contradicted by the same OECD report cited by petitioners, which
states that in the midst of a faltering economy, the foreign banks
reportedly reduced their exposure. This indicates, respondents state,
that foreign banks were acting not in a copycat manner, but prudently,
and consistent with the GOK's view of the role of foreign banks in
Korea, which ``play a leading role in motivating domestic banks to
improve their banking practices and managerial skills.'' GOK July 1,
1998, Questionnaire Response, Exhibit A-7 at 32, on file in the CRU.
Respondents also reject petitioners' theory that foreign commercial
banks' lending rates were lower than those of POSCO's foreign
securities because GOK policies required them to charge such low rates.
According to respondents, the rational explanation for this
differential is market competition, of which they state there is clear
record evidence. Specifically, respondents cite POSCO's loan documents
collected as verification exhibits. One of these, a domestic foreign
currency loan from the Seoul branch of Chase Manhattan Bank, states
that POSCO chose Chase as the lead bank for the loan because it offered
the lowest rate compared to two other foreign bank branches.
Respondents state that there is no evidence of government control of
interest rates or direction of credit by these banks with respect to
this loan. Rather, the banks all competed to provide funds to POSCO at
relatively low rates and chose to lend to POSCO because they saw it as
good business and a solid asset in their portfolio. To conclude
otherwise, respondents state, is to suggest that the
[[Page 15542]]
GOK can somehow manage the terms of a syndicated loan. Respondents
state that this and other record evidence indicates that the GOK does
not, and does not need to, influence these banks to lend to POSCO.
Rather, as was repeatedly noted at verification, and specifically noted
in the Bankers Verification Report, ``POSCO is one of the best
companies in Korea and most commercial banks would like to lend to the
company.'' Memorandum For David Mueller, Meetings with Commercial and
Investment Banks and Research Institutes, 8 (February 2, 1999), on file
in the CRU (Bankers Report).
Department's Position: Petitioners' contention that record evidence
establishes that the Korean branches of foreign banks were subject to
the same GOK controls and direction that applied to domestic commercial
banks is not supported by the record. The record evidence cited by
petitioners does not amount to GOK control and direction of these
institutions' operations and lending practices.
First, the 1996 and 1998 OECD reports do not support petitioners'
arguments. While the 1996 OECD report discusses funding levels by
foreign banks in Korea, nowhere does that report state that these banks
were subject to the GOK's control or direction. Moreover, the 1998 OECD
Report, in discussing the weakness of the Korean banking system, and in
attributing responsibility for that weakness partly to the government's
direct and indirect intervention in the operations of commercial banks,
mentions only domestic commercial banks, not foreign banks. In fact,
the report discusses the inability of domestic commercial banks, after
their privatization, to ``develop the autonomy (from the government)
needed in a market economy.''
Petitioners reliance on the reports issued by the Presidential
Commission for Financial Reform, quoted by the Department in the Credit
Memo, is equally misplaced. The section of the Presidential Report
titled ``Deregulation of Access to Foreign Capital Markets,'' cited by
petitioners refers to regulations governing access to foreign capital
markets, not regulations governing foreign currency-denominated loans
from domestic branches of foreign banks in Korea.\3\ Regulations
governing access to foreign capital markets are quite separate from
those governing domestic branches of foreign banks in Korea. To the
extent that the Presidential Commission addressed domestic foreign
currency loans, it addressed the lifting of restrictions on the usage
of these funds, which is limited mostly to the importation of machinery
from abroad. This has nothing to do with any GOK controls over the
operations of domestic branches of foreign banks.
---------------------------------------------------------------------------
\3\ Financial Reform in Korea: The First Report (Presidential
Report I) 22, (April 1997), Exhibit MOFE-9 of the MOFE Verification
Report, on file in the CRU.
---------------------------------------------------------------------------
Petitioners also support their argument with the contention that
foreign banks are subject to some of the same regulatory provisions
contained in the General Bank Act that govern domestic commercial
banks. However, the Department's analysis in the Credit Memo did not
rely on these regulatory provisions but on the record evidence that the
GOK continued to influence the lending practices of these domestic
commercial banks indirectly, in part because these banks did not
develop autonomy from the government. As we explained in the Credit
Memo, the weakness of domestic banks vis-a-vis the government was in
part an outgrowth of the government's historical role in allocating
credit in accordance with policy objectives. Also, the corporate
governance structure of Korea's commercial banks (weak ownership
structure, lack of autonomy in appointing banking officials) only
contributed to their weakness vis-a-vis the government. The fact that
the GOK's indirect involvement in commercial banking operations
continued into the 1990s merely exacerbated this problem. See Credit
Memo at 8-9. Foreign banks in Korea, however, were not subject to this
same influence. Their source of funds was from their head offices and,
as respondents correctly illustrate, the appointment of their senior
officials was not subject to influence by the GOK. Petitioners proffer
no evidence that foreign banks in Korea were ``inescapably influenced
by the controls on every other sector of the banking industry.''
Rather, they speculate that these banks would be no less influenced
than their Korean counterparts by the lead of the Korean Development
Bank and the Bank of Korea to extend credit to certain government-
favored projects. This is not a conclusion reached by any of the
commercial bankers at verification, and petitioners do not point to any
evidence that would support this contention.
The fact that foreign banks in Korea did not account for a
significant amount of total lending in Korea is not sufficient evidence
to lead us to conclude that POSCO would not have been able to raise
sufficient funds from this source. Rather, the record shows that
benchmarks of foreign banks in Korea were a significant source of
POSCO's borrowing, and credit from these banks was not regulated by the
GOK. For these reasons, we disagree with petitioners' arguments that
funding from domestic branches of foreign banks cannot serve as an
appropriate benchmark to measure any potential benefit from regulated
foreign currency-denominated sources of credit, e.g., foreign
securities from abroad.
Comment 6: Post-1991 GOK Credit Policies: Whether POSCO's Access To
Foreign Securities Markets Results in Countervailable Benefits.
According to petitioners, extensive record evidence, in particular the
Department's findings at verification, shows that access to foreign
sources of funds, including foreign securities, was strictly controlled
by the GOK through the POI. Petitioners state that the Department in
its Credit Memo recognized this control.
In addition, petitioners claim that the GOK's control over access
to foreign funds constitutes a financial contribution within the
meaning of the Act, in particular, the ``entrusts or directs'' standard
of section 771(5)(B)(iii) of the Act. That this type of indirect
program meets this standard was clearly stated in the SAA, petitioners
note, which specifically referenced the Department's findings in Steel
Products From Korea as an application of the ``entrusts or directs''
standard. Because the interest rates on foreign securities are lower
than the rates charged on unregulated sources of credit in Korea, the
GOK in effect is controlling access to preferential interest rates.
Finally, petitioners assert that access to foreign securities was
provided on a specific basis to export and priority sectors in Korea.
According to petitioners, statistics show that companies with
substantial export earnings were given preferential access to foreign
securities issuances. Therefore, petitioners claim that access to this
source of funding is contingent, at least in part, on export
performance. Even if the Department were to find that this access is
not export contingent, petitioners argue that access was nonetheless de
facto specific to the basic metals industry, which issued a
disproportionate amount of foreign securities by Korean firms between
1992 and 1997.
Respondents dispute petitioners claim that access to foreign
securities constitutes a financial contribution within the meaning of
the Act, stating that petitioners' interpretation of the ``entrust or
directs'' standard is unreasonable. Respondents state that this
standard cannot encompass private actions by independent foreign
parties that are consistent with market-oriented
[[Page 15543]]
behavior at market-determined interest rates.
Respondents cite to Zenith Radio Corp. v. United States, 437 U.S.
443, 456 (1978), and section 701(a)(1) of the Act, for the proposition
that the countervailing duty law does not apply to funds independently
provided by foreign entities at market rates. Moreover, respondents
note, the ``entrusts or directs'' standard on which petitioners rely
includes the qualifier statement that such a practice ``would normally
be vested in the government.'' According to respondents, this language
is directed at circumstances where the government controls the provider
of the benefit and used the provider as a surrogate for government
functions. In this case, respondents argue, foreign securities markets,
and the interest rates set therein, are not controlled by the GOK.
Therefore, respondents state, the ``entrusts or directs'' standard of
the Act does not apply to foreign securities issuances.
Respondents also state that petitioners provide no legal standard
for a countervailable benefit from foreign securities issuances because
none exists. Specifically, respondents state that because foreign
securities issuances are essentially unregulated ``commercial loans''
with market-determined interest rates not subject to GOK influence, no
comparison with ``a comparable commercial loan,'' within the meaning of
section 771(5)(E)(ii) of the Act, is necessary to determine whether a
benefit was conferred. According to respondents, this is supported by
Article 14 of the SCM Agreement which states that it is a ``loan by a
government'' that is to be compared to a commercial loan.
Respondents next assert that even without the GOK's approval
regulations, POSCO would have obtained access to these foreign sources
of funds. According to respondents, it is POSCO's excellent credit
rating that allowed it to ``get practically unrestricted access to
these funds.'' Bankers Report at 10.
Respondents also take issue with petitioners' characterization of
interest rates on foreign currency-denominated bonds as
``preferential,'' which is based on the assertion that the appropriate
comparison for these foreign-currency bonds issued in foreign markets
is to domestic-currency bonds issued in the Korean market. However,
respondents note that the Department rejected the comparison of foreign
currency-denominated bonds to the interest rates on bonds issued in
Korean won in its Credit Memo. As argued by respondents in Comment 4,
above, the Department's own policy and regulations require, for
benchmark purposes, the comparison of interest rates on loans under
investigation be with a benchmark in the same currency. According to
respondents, interest rates in different currencies are not directly
comparable.
To illustrate the problem of making benchmark comparisons across
currencies, respondents explain that if the Department were to adopt
petitioners' methodology, it would find that bonds issued at market
rates in Japanese yen provided greater subsidies (because of a greater
interest rate differential) than bonds issued at market rates in U.S.
dollars for no other reason than that the market interest rates for
Japanese yen are lower. Respondents also note an additional problem
with comparing the cost of funds in different currencies, namely the
sometimes drastic change in the rates of exchange between currencies
over the life of loans. Respondents explain that while the rate of
change and even the direction of change may be unpredictable, the
consequences of such changes can be considerable, as illustrated by the
sharp depreciation in the exchange rate of the Korean won in late 1997.
This depreciation made all liabilities, such as loans in foreign
currencies incurred before the drop, far more costly than companies
originally could have anticipated.
Department's Position. In the Credit Memo, we stated that there are
three elements required to find a potential subsidy countervailable:
(1) A financial contribution is made by a government or public body;
(2) a benefit is conferred on the recipient; and (3) it is specific. If
one of these three elements is not met, the subsidy is not
countervailable. In accordance with section 771(5)(E)(ii) of the Act,
we examined whether a benefit has been conferred on the recipient,
POSCO, from foreign securities issued in overseas markets. We also
preliminarily determined that POSCO's access to government-regulated
foreign sources of credit did not confer a benefit to the recipient, as
defined by section 771(5)(E)(ii) of the Act, and, as such, is not
countervailable. See Credit Memo at 18. As discussed in Comment 5,
above, we continue to find that branches of foreign banks are not
subject to the GOK's control and direction. Therefore, we continue to
find that POSCO's access to government-regulated foreign sources of
credit did not confer a benefit to the recipient, because the rates
obtained on foreign securities, even though limited in access, were not
less than foreign currency loans available to POSCO in Korea. As such,
there is no need to address the specific comments raised by petitioners
and respondents above.
Comment 7: Post-1991 GOK Credit Policies: Whether POSCO's Direct
Foreign Loans Received in 1997 Should be Countervailed in This
Investigation. Petitioners argue that the Department incorrectly found
in its preliminary determination that there was no benefit to POSCO
from regulated direct foreign loans received in 1997. According to
petitioners, the Department did not examine direct foreign loans
received in 1997, because the company ``did not pay interest on these
loans until after the POI.'' According to petitioners, the Department
should determine that the benefit to POSCO and the financial
contribution are received in the year of the receipt of the loan rather
than the year the interest is paid. Petitioners contend that this is
consistent with the Department's policy on the valuation of subsidies
as it was applied in this case for pre-1992 loans.
Respondents argue that contrary to petitioners' contentions, the
interest rates on these loans are variable. Therefore, respondents
contend that the Department correctly did not examine these loans,
because no interest was paid during the POI. According to respondents,
this approach is consistent with the Department's variable rate loan
methodology.
Department's Position. We agree with respondents' contention that
petitioners have incorrectly characterized these loans as fixed rate
loans. Because these loans have variable interest rates, our
methodology is to calculate the benefit at the time the interest on the
loan is paid. For these reasons, we have not changed our preliminary
findings concerning direct foreign loans received by POSCO in 1997.
Comment 8: Post-1991 GOK Credit Policies: The Appropriate Benchmark
Interest Rate for POSCO's Long-Term Financing. Petitioners assert that,
even if the Department determines in the final determination that the
GOK's control over foreign commercial banks in Korea is not sufficient
to constitute direction for purposes of section 771(5)(B)(iii) of the
Act, the Department should conclude that the interest rates charged by
those banks are not appropriate benchmarks. Petitioners claim that the
maturity and the structure of the foreign bank loans, the other factors
(apart from currency) the Department treats as being of primary
importance, are not comparable commercial instruments to POSCO's
foreign securities. Petitioners assert that the Department in its
comparison has ignored this. Therefore, the Department should use the
corporate bond rate as a source of capital apparently not under the
GOK's direction.
[[Page 15544]]
Respondents' arguments concerning domestic branches of foreign
banks, and the appropriate use of lending rates from these banks, are
summarized under Comment 6, above. Respondents also dismiss
petitioners' contention that bonds issued in domestic currency are more
comparable in terms of their maturity and structure than the foreign
currency benchmark chosen by the Department. Respondents note that
domestic currency bonds are of shorter duration than POSCO's domestic
foreign currency loans, which generally have maturities of five years
or more. While petitioners correctly note that domestic and foreign
bonds are similar in terms of structure (i.e., fixed rate), respondents
assert that this one common criterion is not a superior or sufficient
basis for departing from the Department's long-standing practice of
comparing loans with benchmarks in the same currency.
Department's Position. The fact that the maturity and structure of
foreign securities may not be identical to long-term lending rates from
foreign banks in Korea is not a reason to reject these rates as
benchmarks and default to the won-denominated three-year corporate bond
rate. In fact, contrary to petitioners's assertion, in terms of
duration, foreign securities are closer in structure to long-term
foreign currency loans from Korean branches of foreign banks than to
domestic bonds, which have a maturity of three years, shorter than the
duration of POSCO's foreign securities. As outlined by respondents, it
is appropriate to compare government-regulated credit to a benchmark
denominated in the same currency, if such a benchmark is available.
This is in accordance with Department policy and past practice. See
e.g., CVD Final Rule, 63 FR at 65363; see also, Certain Apparel from
Thailand, 50 FR at 9824 (quoting, ``benchmark must be applicable to
loans denominated in the same currency as the loans under
consideration),'' and Cold-Rolled Steel From Argentina, 49 FR at 18019
(quoting, ``the benchmark is selected from interest rates applicable to
loans denominated in the same currency as the loan under
consideration''). For these reasons, we have not changed our benchmark
in this final determination.
Comment 9: Post-1991 GOK Credit Policies: Errors in POSCO's Loan
Calculations. Petitioners claim that the Department understated the
benefit conferred upon POSCO. First, petitioners state the Department
applied the 1997 benchmark to all of POSCO's outstanding loans, which
contradicts Department policy of using a fixed rate benchmark for
variable rate loans in the year the loan was provided if a variable
rate was not extended (19 CFR 351.505(a)(2)(iii) (1998)). Petitioners
next state that the Department failed to include the relevant fees in
the benchmark interest rate. Citing the Department's regulations,
petitioners explain that it is appropriate to compare the effective
interest rate on the government-provided loan, with an effective rate
benchmark (19 CFR 355.44(8); 19 CFR 351.505(a)(1)(1998)). Because POSCO
failed to provide fee information between 1992 and 1996, the Department
should, petitioners state, apply the 1997 fee to all previous years;
alternatively, the Department should use the higher of the company-
specific rate and the national average in each year between 1992 and
1996, as adverse facts available. Finally, petitioners note several
minor calculation errors that they state the Department should correct,
i.e., a ``negative benefit'' from one loan, which then was deducted
from the total benefit provided to POSCO through these loans, and the
exclusion of another loan from the Department's calculations.
Department's Position. We agree with the corrections recommended by
petitioners. For the fees, we have applied 1997 fee to all years, as
suggested by petitioners. See also the discussion under Comment 13,
below.
Comment 10: Post-1991 GOK Credit Policies: Whether POSCO Received
Disproportionate Benefits From GOK Regulated Long-Term Loans. According
to respondents, the Department's Credit Memo analyzes lending to the
basic metals sector as a whole but fails to directly analyze lending to
POSCO, the producer of the subject merchandise. This analysis,
respondents state, does not take into account the fact that POSCO
borrowed very little from commercial banks during this period and its
borrowings from the KDB declined and then stopped completely after
1995, so that POSCO's share of long-term loans was at or lower than its
share of GDP during this whole period.
Rather than addressing this data, respondents assert that the
Department merely relies on the GDP test to demonstrate that loans were
provided disproportionately to the steel industry.
According to respondents, the GDP test was not a sufficient measure
of disproportionality for the Department (citing British Steel I, 879
F. Supp. at 1323), and the Court was also unconvinced by the
Department's finding of disproportionality in Steel Products from
Korea. The Court remanded the case to the Department on the basis that
``Commerce does not sufficiently explain in the Korean Final
Determination the connection between the government de facto program
and the steel industries' alleged preferential access to specific
sources of credit.'' British Steel I, 879 F. Supp at 1325. Respondents
note that the Department was upheld by the Court on its finding only
after making additional claims that there was ``aggressive targeting''
of lending to POSCO for the construction of POSCO's Kwangyang mill. \4\
---------------------------------------------------------------------------
\4\ See Final Results of Redetermination Pursuant to Court
Remand, British Steel plc v. United States, Consol. Ct. No. 93-
0900550-CVD at 49-50(April 20, 1995) (Remand); British Steel PLC v.
United States, 914 F. Supp. 119, 130 (CIT 1995) (British Steel II)
(``the nature of the nexus Commerce found in this case (was)
purposeful targeting'').
---------------------------------------------------------------------------
Respondents characterize the Department's conclusion of
disproportionate use by the steel industry as ``collective guilt,''
whereby even one long-term loan to POSCO, no matter how small, would be
countervailable if the steel industry as a whole had received a
disproportionately large share of long-term loans. However, respondents
state that the appropriate legal standard is whether a domestic subsidy
``is a specific subsidy, in law or in fact, to an enterprise or
industry * * * .'' (quoting section 771(5A)(D) of the Act). Because
POSCO is ``an enterprise, as defined by the statute, and constitutes
``the industry'' for which the Department must make a determination
concerning the existence of a domestic subsidy from the purported
directed credit, the Department must find that the subsidy is not
specific to POSCO.
Respondents further assert that if the Department has sufficient
data to determine whether a company received disproportionate benefits
under a program, it must use that data. The fact that other companies'
benefits were disproportionate, respondents state, can not be ascribed
to a company whose benefits were not. Respondents link this analysis to
certain Department methodologies that are also based on company-
specific data, including benchmarks, average useful life of depreciable
assets calculations, and the calculation of company-specific
countervailing duty rates.
According to petitioners, respondents' contention that the
Department must examine whether disproportionate benefits have been
provided to POSCO is a misinterpretation of the law. In particular,
petitioners state that the statute dictates that the Department will
find de facto specificity when either an enterprise or an industry
receives disproportionate benefits. The record, petitioners note, shows
that the Korean iron and steel industry received a disproportionate
amount of a subsidy. See, e.g., Credit Memo at 15-16.
[[Page 15545]]
Accordingly, petitioners assert that the Department correctly found
that POSCO, as a member of the iron and steel industry, has benefitted
from the GOK's direction of credit in the form of access to preferred
sources of credit.
In petitioners' view, the fact that POSCO may have received only
one loan, as argued by respondents, is irrelevant. When a company
receives a subsidy that confers a benefit that is de facto specific to
its industry, that subsidy is countervailable. According to
petitioners, the very purpose of the specificity analysis is to
determine whether certain companies benefit when an enterprise or
industry receive a de jure or de facto specific subsidy.
Petitioners also reject respondents assertion that POSCO's long-
term loans declined during the 1992-97 period, because this is
irrelevant to whether such loans were subsidies, specific to the steel
industry, and countervailable as to POSCO. Moreover, petitioners state,
the quantification of the subsidy rate for individual companies and the
calculation of the amount of the benefit are unrelated to the
specificity to a particular industry.
Petitioners further assert that the record in this investigation
demonstrates disproportionality and targeting of the steel industry in
the post-1992 period, in the same manner that was established in Steel
Products From Korea. For example, petitioners refer to the lending
practices of the Korea Development Bank as a demonstration of the GOK's
policy of directed credit and the disproportionate lending to the steel
sector. Petitioners also note that the KDB's business plans and lending
guidelines, which are negotiated with and subject to the MOFE's final
approval, reflect the GOK's policy objectives. Petitioners also cite
statements by Korean bankers that the KDB's ``business plans'' serve as
lending models for other banks in the Korean market, and that KDB
funded projects represent an implicit guarantee for other domestic
banks to follow the KDB's lead. Thus, petitioners state, the KDB is an
important tool for the GOK's direction of credit in the Korean
financial system, and record statistics illustrate that the iron and
steel or basic metals sectors received a disproportionate amount of the
KDB's lending.
Department's Position: We disagree with respondents' arguments. The
fact that POSCO borrowed very little from those sources of credit that
were found to be de facto specific to the steel industry during the
relevant period is irrelevant. The clear language of the statute is
that a subsidy is specific when ``an enterprise or an industry receives
a disproportionately large amount of the subsidy.'' Section
771(5A)(D)(iii)(III) of the Act (emphasis added). Thus, when a subsidy
is specific to an industry, even if it is not specific to an enterprise
that is part of that industry, the Department will find that subsidy to
be countervailable, even if the actual subsidy to the enterprise is
very small. While respondents may characterize this approach as
``collective guilt,'' the Department has in numerous cases found
countervailable relatively small subsidies to a respondent firm on the
basis of disproportionate use by the industry to which the respondent
belongs. Indeed, this is not an unusual fact pattern for de facto
specificity findings, for example under large research and development
programs. As such it is not surprising that under respondents'
suggested approach, the Department would rarely find a subsidy to be de
facto, because subsidies under a program are frequently not received on
a disproportionate basis by an enterprise. Finally, we agree with
petitioners that respondents' attempt to link certain methodologies
that are conducted on a company-specific basis to the specificity
analysis is also without merit. The quantification of the benefit is
simply not germane to the Department's analysis concerning specificity.
Comment 11: Post-1991 GOK Credit Policies: Whether Long-Term Loans
From the KDB Were Provided at Favorable Interest Rates. Respondents
argue that the Department incorrectly used a domestic won-denominated
benchmark to calculate the benefit from POSCO's countervailable foreign
currency-denominated loans from domestic sources, including the KDB.
Respondents' reasons for the appropriateness of comparing, in
accordance with the Department's own policy and regulations, the
interest rates on loans under investigation with a benchmark in the
same currency, are discussed above under Comment 4. Respondents further
note that the Department asserted and applied this principle in its
Credit Memo when it compared the interest rates on POSCO's foreign
securities with the interest rates on POSCO's foreign currency loans
from foreign banks in Korea, which were found not to be not controlled
or directed by the GOK during the years 1992 and 1997.
Accordingly, respondents assert, the Department should have used
the dollar-based interest rates on these loans from foreign banks as
benchmarks for POSCO's foreign currency loans from Korean banks. If
this were done, the Department would find that there was no benefit to
POSCO from the foreign currency loans it received from domestic banks,
including the KDB. All of the loans at issue were variable rate loans,
based on a spread above a base rate of either LIBOR or the KDB's own
rate. This proves, respondents state, that loans from the KDB had
become too expensive for POSCO compared to the alternatives.
Petitioners note that they have previously noted the errors in the
Department's preliminary finding (that foreign banks in Korea are not
subject to the GOK's control and direction and, therefore, the foreign
bank interest rates are not an appropriate benchmark). See Comment 5,
above. Therefore, petitioners state, the Department must not use this
rate as a benchmark to determine the benefit from POSCO's access to
foreign currency loans. Moreover, petitioners argue that the currency
in which the loan is denominated is only one factor that the Department
examines in determining an appropriate benchmark. The Department also
examines the structure, maturity, principle amount, and availability of
funds of the potential benchmark compared to the subsidized loan. Based
on all these criteria, the Department should use the corporate bond
rate in Korea as the only appropriate available benchmark. Accordingly,
the Department should use the domestic corporate bond rate as the
benchmark for all long-term financing. In so doing, the Department
should find in its final determination that POSCO's foreign currency
loans do provide a quantifiable and countervailable benefit.
Department's Position. We agree with respondents that the
appropriate benchmark to use to determine the benefit from POSCO's
foreign currency-denominated loans from the KDB and domestic commercial
banks are the interest rates from unregulated foreign banks in Korea.
As discussed under Comment 8, above, it is appropriate to compare
countervailable foreign currency-denominated loans to a benchmark in
the same currency. Accordingly, we have revised our calculations to
reflect this change.
Comment 12: Average Useful Life. Petitioners note that, in the
preliminary determination, the Department used a 12-year AUL, based on
several adjustments to POSCO's calculations for certain special
depreciation charges. They assert that the calculated AUL for POSCO
remains distorted, however, in a way that cannot be rectified and,
therefore, it should not be used in the final determination.
Petitioners argue that the Department should use the 15-
[[Page 15546]]
year allocation period found in the IRS depreciation tables as the AUL
for the final determination.
Petitioners state that POSCO's reported AUL remains distorted
because of the company's revaluation of property, plant, and equipment
under the Asset Revaluation Law. They argue that the information
gathered at verification suggests that POSCO's AUL does not reflect the
actual useful life of its assets, because assets which had been fully
depreciated several years before remained in service. The Department,
therefore, should reject POSCO's reported AUL, in accordance with its
practice regarding distorted company-specific data. See, e.g., Final
Affirmative Countervailing Duty Determination: Steel Wire Rod From
Germany, 62 FR 54990, 54991 (Oct. 22, 1997) (Steel Wire Rod From
Germany).
According to respondents, in applying an AUL for POSCO of 12 years
at the preliminary determination, instead of the 9 years calculated by
POSCO, the Department misunderstood the nature of the special
depreciation claimed by POSCO and, therefore, disallowed it when
performing its own AUL calculation. Respondents state that, at
verification, POSCO explained and demonstrated the legal basis for the
reported salvage value, special depreciation, and 1989 revaluation.
Therefore, having addressed the Department's concerns, the Department
should use POSCO's calculation of its AUL for allocating the benefits
from any non-recurring subsidies.
In response to petitioners' argument, respondents state that any
misunderstanding the Department manifested in the preliminary
determination concerning POSCO's company-specific AUL data was resolved
at verification. Therefore, petitioners' allegation of distortions with
the company's data is incorrect. Further, they assert that the company-
specific AUL data provided by POSCO permits calculation of an
allocation period that is more reflective of any commercial and
competitive benefit to POSCO than the arbitrary 15-year IRS period.
Department's Position. We agree with petitioners that it is not
appropriate to use POSCO's AUL data to determine the average useful
life of the company's assets. During verification, we reviewed POSCO's
calculation of the company's average useful life of assets. In
examining the company's calculations, we learned that the basis of the
rates in the GOK's tax depreciation tables is the Japanese tax
depreciation tables which were in existence at the time the GOK
determined the useful life of assets in the 1950's. In order to
determine whether the tax tables provide a reasonable estimation of
POSCO's average useful life of assets, we examined POSCO's asset
ledgers. We verified through an examination of POSCO's asset ledgers
that the depreciation schedule used by POSCO does not represent the
actual useful life of the company's assets. Therefore, we determine
that it is not appropriate to use POSCO's AUL data. The available data
does not permit the calculation of an accurate company-specific AUL in
this investigation. In previous cases, the Department has recognized
instances in which the company-specific AUL information cannot be used
based on distortions in the data. See, e.g., Steel Wire Rod from
Germany, 62 FR at 54991. Therefore, for the final determination, we
used the 15-year allocation period as reported in the IRS depreciation
tables for the allocation of POSCO's non-recurring subsidies.
Comment 13: Long-Term Interest Rate Benchmark. Petitioners state
that POSCO failed to provide to the Department information on the fees
applied to its bonds prior to 1997, stating that ``the data on the bond
issuance fees for the prior years (i.e., 1992-1996) are difficult to
retrieve from POSCO's records.'' Petitioners note that the Department's
practice is to include all fees associated with debt obligations in
order to compare effective interest rates on the subsidized loan or
bond with an effective rate benchmark.
Petitioners assert that POSCO did not demonstrate that it was
unable to provide the requested information; it merely asserted that
providing the information would be ``difficult.'' Accordingly,
petitioners argue that the Department should find that POSCO did not
act to the best of its ability to provide fee information for the 1992-
1996 period and apply adverse facts available. As adverse facts
available, petitioners argue that the Department should use the higher
of (1) the national average rate or (2) add the percentage fees that
POSCO reported in 1997, for each of the bonds issued in the years 1992
through 1996.
Respondents state that in POSCO's submission to the Department
regarding the company's bond issuances, POSCO stated that ``the average
percentage cost of bond issuance fees is essentially the same for all
years.'' Respondents contend that POSCO was clearly suggesting to the
Department that adding the 1997 percentage fees to the average
effective interest rates on its corporate bonds for each of the prior
years was appropriate given that the relatively small bond issuance
fees were difficult to obtain for the period 1992 through 1996.
Department's Position. In their submissions to the Department,
respondents concede that the bond issuance fees which POSCO paid in
1997, are the appropriate basis for the adjustment to construct a long-
term interest rate benchmark for the years 1992 through 1996.
Therefore, in constructing the long-term interest rate benchmarks for
the final determination, we have added to POSCO's average interest rate
on its corporate bonds for each year 1992 through 1996, the bond
issuance fees POSCO paid in 1997. See ``Benchmarks for Long-term Loans
and Discount Rates'' section above for a further discussion of the
Department's analysis.
Comment 14: Energy Savings Fund Loans. In their case brief,
petitioners argue that while the Department accurately derived the
grant equivalent for each of POSCO's Energy Savings Fund Loans (ESF
loans), it miscalculated its allocation of the grant benefits by (1)
not using the life of the loan as the allocation period, and (2) not
starting the allocation of the loans in 1994. Petitioners assert that
the Department should correct these errors in the final determination.
Petitioners also state that the Department is correct in
countervailing the ESF loans provided to POSCO as the preferred terms
of the loans were specific to POSCO and provided a benefit. Further, as
policy loans, the ESF loans were monitored and implemented by the GOK.
The GOK, in keeping with its policy of maintaining stringent controls
on the Korean financial system, controlled the ESF loan program and
determined the maximum interest rate for ESF loans. Therefore, the
Department should affirm its preliminary determination that the ESF
loans are countervailable because (1) the loans provided a benefit to
POSCO, and (2) the loans were specific, in that POSCO was the only
recipient of the preferential rate.
Respondents note that in the preliminary determination, the
Department found that POSCO received two ESF loans and that the
interest rates paid by POSCO on these loans were less than the 7.0
percent rate purportedly prescribed by the program. On this basis, the
Department determined that these loans to POSCO were specific and,
thus, countervailable. However, based on the Department's findings at
verification with respect to the maximum interest rate prescribed by
the program and the interest rates charged to POSCO, the respondents
contend that
[[Page 15547]]
the Department should revisit its preliminary determination.
Respondents claim that the record evidence demonstrates that POSCO
was treated in accordance with the lending guidelines set by the Korea
Energy Management Corporation (KEMC), and in accordance with the
commercial lending practices of the Korea Exchange Bank (KEB).
Respondents state that while POSCO did receive an interest rate
slightly lower than the ceiling amount set by the KEMC, this rate was
set based upon the KEB's desire to induce future business from POSCO,
and not upon any government-directed preferential basis. Moreover, the
respondents state that the record demonstrates that ESF loans were not
specifically provided to POSCO, as 80 percent of the ESF loans
recommended by the KEMC each year were for small-and medium-size
enterprises, not for POSCO or the steel industry. Accordingly, the
Department should determine that ESF loans are not specific and thus
not countervailable.
Department's Position. In the preliminary determination, we treated
the ESF Loans as a separate program because, at that time, we required
additional information on the GOK's credit policies during the period
1992 through 1997. As noted above in the ``Direction of Credit''
analysis section, we have determined that the GOK maintained direct
control over many sources of long-term credit, including lending from
government-owned and/or controlled banks during the years 1992 through
1997. We, therefore, find that all loans, including policy loans, such
as the ESF loans, which POSCO received from government-owned and
controlled banks are countervailable.
Given that the KEB, the bank from which POSCO received the ESF
loans, is a government-owned bank, and the fact that loans under the
ESF program are government policy loans, we have determined that it is
not appropriate to treat the ESF loans as a separate program.
Accordingly, ESF loans are countervailable based upon our analysis of
the GOK's direction of credit. See ``Direction of Credit'' section
above for a further discussion of the Department's analysis. The
benefit from the ESF loans is included in the benefit calculation under
the ``Direction of Credit'' program. In determining the benefit the
loans provided to POSCO during the POI, we used the life of the loan as
the allocation period and began the allocation in 1994, for the final
calculations.
Comment 15: The GOK's Pre-1992 Investments Constitute Non-
Countervailable ``General Infrastructure''. Respondents state that in
the preliminary determination, the Department relied exclusively upon
its decision in Steel Products from Korea, to find that the GOK's
investments at Kwangyang Bay during the period 1983-1991, provided
countervailable subsidies to POSCO. Respondents note that the final
determination of Steel Products from Korea, however, was made under the
Pre-Uruguay Round law and on a different factual record. Therefore, in
order to carry out its statutory mandate, the Department must apply the
Post-Uruguay Round law to the facts presented in this instant
investigation, and revisit its preliminary determination. Under section
771(5)(B) of the Act, there is now a requirement that a financial
contribution must be provided by the government in order for a
countervailable subsidy to exist. Respondents further argue that under
section 771(5)(D)(iii) of the Act, the term ``financial contribution''
does not include the provision of general infrastructure.
Respondents state that, although the Department's administrative
determinations, and the statute itself, are silent as to the definition
of ``general infrastructure'' under the new law, the Department's new
CVD regulations are instructive. Respondents note that Sec. 351.511(d)
of the new regulations defines ``general infrastructure'' as
``infrastructure that is created for the broad societal welfare of a
country, region, state, or municipality.'' See CVD Final Rules.
Respondents explain that the GOK has established a system of
national industrial estates as part of a broad plan for the efficient
development of Korea. The Kwangyang Bay industrial estate, one of 200
industrial estates, was established under this national industrial
estate program. They contend that when analyzed within the context of
this national industrial estate system that is planned, created, and
administered under central government control, it becomes obvious that
these infrastructure investments constitute ``general infrastructure.''
They assert that the record evidence demonstrates that these
infrastructure investments are: (1) Generally available to all
industries and companies in Korea, and (2) are provided to aid public
welfare by advancing the economic development of Korea. Further, they
note, as stated in Article 1 of the Industrial Sites and Development
Act, ``The purpose of this Act is to promote the balanced development
of national land and sustained industrial progress through the
efficient supply of industrial locations and appropriate placement of
industry, thereby contributing to the sound development of the national
economy.'' Therefore, respondents argue that under the Post-Uruguay
Round law and the basic standard for general infrastructure articulated
in Sec. 351.511(d) of the new regulations, the GOK's pre-1992
infrastructure investments at Kwangyang Bay constitute non-
countervailable ``general infrastructure.''
Petitioners note that the Department in the past has found that the
Kwangyang Bay investments do not constitute general infrastructure. See
Preliminary Determination, 63 FR at 47257, and Steel Products from
Korea, 58 FR at 37346-47. Petitioners note that in Steel Products from
Korea, the Department found that because the infrastructure provided to
POSCO at the Kwangyang Bay Industrial Estate failed at least two of the
three prongs of the infrastructure test, the provision of the
infrastructure is specific. Petitioners argue that POSCO remains the
primary user of the Kwangyang Bay port facilities, accounting for
approximately 40 percent of all incoming and outgoing traffic between
1992 and 1997 and, therefore the Department should affirm its
preliminary finding.
Department's Position. Respondents are correct when they assert
that general infrastructure is not considered to be a financial
contribution under 771(5)(D)(iii) of the Act. However, they are
incorrect when they state that the infrastructure development at
Kwangyang Bay constitutes general infrastructure. As respondents have
acknowledged, the statute is silent as to the definition of ``general
infrastructure;'' however, they note that the Department's new CVD
regulations are instructive. See CVD Final Rules, 63 FR at 65412. While
the new CVD regulations are not applicable to this case because this
investigation was initiated before the effective date of these
regulations, we are referring to them, in part, for guidance as to what
constitutes ``general infrastructure.''
The new CVD regulations define general infrastructure as
``infrastructure that is created for the broad societal welfare of a
country, region, state or municipality.'' Thus, any infrastructure that
does not satisfy this public welfare concept is not general
infrastructure and is potentially countervailable. Therefore, the type
of infrastructure per se is not dispositive of whether the government
provision constitutes ``general infrastructure.'' Rather, the key issue
is whether the infrastructure is developed for the benefit of the
society as a whole. For example, interstate highways, schools, health
care facilities, sewage systems, or police protection
[[Page 15548]]
would constitute general infrastructure if we found that they were
provided for the good of the public and were available to all citizens
and members of the public. Infrastructure, such as industrial parks and
ports, special purpose roads, and railroad spur lines that do not
benefit society as a whole, does not constitute general infrastructure
within the meaning of the new CVD regulations, and is countervailable
if the infrastructure is provided to a specific enterprise or industry
and confers a benefit.
The infrastructure provided at Kwangyang Bay was not provided for
the good of the general public; instead, it was built to support POSCO;
therefore, it does not constitute ``general infrastructure.'' It is
clear from the record that the infrastructure provided for POSCO's
benefit at Kwangyang Bay is de facto specific, and that POSCO is the
dominant user. See Steel Products From Korea, 53 FR at 37346-47.
Therefore, the infrastructure at Kwangyang Bay is countervailable.
Indeed, the ``Explanation of the Final Rules'' (the Preamble) to the
new CVD regulations, which respondents assert are instructive on this
issue, specifically cites to the infrastructure provided at Kwangyang
Bay in Steel Product From Korea as an example of industrial parks,
roads, rail lines, and ports that do not constitute ``general
infrastructure,'' and which are countervailable when provided to a
specific enterprise or industry. See CVD Final Rules, 63 FR at 65378-
79.
Comment 16: GOK's Pre-1992 Investments Are Not Countervailable
Because They Are ``Tied' To Kwangyang Bay. Respondents state that, in
the preamble to the new regulations, the Department has adopted the
practice of attributing subsidies that can be ``tied'' to particular
products to those products. See CVD Final Rules, 63 FR at 65400. With
respect to the instant investigation, respondents argue that the
alleged subsidies are ``tied'' to the products that are produced at
POSCO's Kwangyang Bay facility. Since the subject merchandise is not
produced at the Kwangyang Bay facility, the subject merchandise does
not benefit in any way from the allegedly subsidized general
infrastructure at Kwangyang Bay. Respondents contend that it would run
counter to the Department's practice, and common sense, to attribute
countervailable benefits to products that cannot benefit from the
alleged subsidies. They also note that under the Department's past
practice, where a subsidy is ``tied'' only to non-subject merchandise,
that subsidy is not attributed to the merchandise under investigation.
See Final Results of Countervailing Duty Administrative Review: Certain
Iron-Metal Castings from India, 62 FR 32297, 32302 (June 13, 1997).
Respondents argue that the Department was faced with a similar
factual situation as the instant case in the Final Affirmative
Countervailing Duty Determination: Iron Ore Pellets from Brazil, (see,
51 FR 21961, 21966 (June 17, 1986) (Iron Ore Pellets from Brazil)). In
that case, petitioners argued that infrastructure and regional tax
benefits provided to the Carajas mine project should be attributed to
the respondent even though respondent did not produce (or intend to
produce) subject merchandise at the Carajas mine project. The
Department rejected petitioners' argument finding that the
infrastructure and tax benefits were, by definition, only for the
Carajas mine project. Because the respondent did not produce subject
merchandise at the Carajas mine project, the Department did not
consider this program countervailable with respect to subject
merchandise.
Respondents contend that, rather than directly addressing the fact
that the alleged subsidies are tied to Kwangyang Bay, the Department
has instead mis-cited to its earlier finding in Steel Products from
Korea. They note that in the preliminary determination of the instant
investigation the Department claims that the alleged subsidy in Steel
Products from Korea was treated as ``untied.'' However, respondents
state that nowhere in Steel Products from Korea does it state that the
alleged subsidy was being treated as ``untied.'' In fact, respondents
state that the issue of whether the subsidies were tied or untied never
arose in that investigation because the subject merchandise was
produced at both of POSCO's steel facilities and, therefore, it was
unnecessary for the Department to characterize the alleged subsidy as
either ``tied'' or ``untied.'' They argue that in mischaracterizing its
finding in Steel Products from Korea, the Department is attempting to
bootstrap that finding into the instant investigation.
In their rebuttal brief, petitioners reject the respondents'
argument that the Department is attempting to bootstrap its finding in
Steel Products from Korea into the instant investigation. In Steel
Products from Korea, petitioners state that the Department, by dividing
the benefit attributable to the POI by POSCO's total sales, clearly
treated the grants as untied benefits. See Steel Products from Korea,
58 FR at 37347. Therefore, petitioners argue the Department should
continue to find Kwangyang Bay infrastructure investments ``untied'' in
the final determination.
Department's Position. First, we note that the attribution, or
``tying,'' of a subsidy to a particular product or market is a long-
standing policy of the Department, not one recently adopted in the new
CVD regulations. Also, it has been the practice of the Department to
attribute the benefit conferred from an ``untied'' domestic subsidy to
the recipient's total sales. (This is how the subsidy rate was
calculated for the Kwangyang Bay subsidy in Steel Products from Korea.)
By contrast, if the subsidy was, for example, tied to export
performance, then the Department would only attribute the benefit of
the subsidy to the recipient's export sales.
Respondents' argument that the infrastructure subsidy provided to
POSCO is tied to only certain of POSCO's production is flawed. Part of
respondents' argument rests upon the premise that a regional subsidy
can be tied to only the subsidy recipient's production in that region.
If this allocation methodology were adopted and the Department tied
regional subsidies to production in a particular region, the Department
would essentially be forced to calculate factory-specific subsidy
rates. In addition, if such a methodology were applied, then foreign
companies could easily escape collection of countervailing duties by
selling the production of a subsidized region domestically, while
exporting from a facility in an unsubsidized region. This allocation
methodology has been clearly rejected by the Department. See, e.g.,
Final Negative Countervailing Duty Determination: Fresh Atlantic Salmon
from Chile, 63 FR 31437, 31445-46 (June 9, 1998) (stating, ``[T]he
Department does not tie the benefits of federally provided regional
programs to the product produced in the specified regions.'') Indeed,
the Department has explicitly rejected this argument in the new CVD
regulations cited by respondents in support of their argument on this
issue. See CVD Final Rules, 63 FR at 65404. The infrastructure
development at Kwangyang Bay provided a benefit to POSCO and, as
discussed further below, the benefit from the subsidy is untied and is
attributed to POSCO's total sales.
Respondents' argument is also flawed because respondents have
misinterpreted the attribution methodology. Attribution of the benefit
of a subsidy is based upon the information available at the time of
bestowal. The concept of ``tying'' a
[[Page 15549]]
subsidy at the time of bestowal can be traced back to Certain Steel
Products from Belgium. See Final Affirmative Countervailing Duty
Determination: Certain Steel Products from Belgium, 47 FR 39304, 39317
(September 7, 1982). At the time of bestowal of the subsidy conferred
by the Kwangyang Bay infrastructure, the benefit of the subsidy was to
POSCO, not to a specific product line. Thus, the benefit cannot be tied
to any specific product, but instead, is an untied benefit provided by
the GOK to POSCO. See Final Results of Redetermination Pursuant to
Court Remand (April 20, 1995) in British Steel PLC, v. United States
Slip Op. 95-17 (February 9, 1995) at 35 and 36. Once it is determined
that an untied subsidy has been provided to a firm, the Department will
attribute that untied subsidy to the firm's total sales, even if the
products produced by the firm differ significantly from the time when
the subsidy was provided. The Department will not examine whether
product lines have been expanded or terminated since the time of the
subsidy's bestowal.
Finally, we note that respondents' reliance on Iron Ore Pellets
from Brazil is misplaced. First, in both Iron Ore Pellets from Brazil
and in the Kwangyang Bay subsidy at issue in this investigation, the
determination of attribution of a subsidy was made at the time of
bestowal, which is consistent with Department policy. Thus, in both
cases, the Department applied the same standard in determining whether
a subsidy was tied or untied. Second, the subsidy alleged in Iron Ore
Pellets from Brazil was alleged to have been provided to an input into
the subject merchandise, an issue distinct from the issue in the
instant investigation. We further note that the treatment of input
subsidies at issue in Iron Ore Pellets from Brazil has changed since
1986. See e.g., Sec. 351.525(b)(6)(iv) of the CVD Final Rules and Final
Results of Countervailing Duty Administrative Review: Industrial
Phosphoric Acid from Israel, 63 FR at 13626 (March 20, 1998). Thus, if
the identical subsidy issue cited in Iron Ore Pellets from Brazil were
before the Department today, it is uncertain whether the same decision
would be made in 1999 as was made in 1986.
Comment 17: The Department Erred In Treating The Alleged Benefit To
POSCO As A Grant. Respondents note that, in the preliminary
determination, the Department determined that the GOK's costs of
constructing the infrastructure at Kwangyang Bay constituted grants to
POSCO. In treating these costs as grants to POSCO, respondents argue,
the Department has ignored the fact that the GOK owns these facilities
and charges POSCO the normal user fees for the services provided. They
assert that it is erroneous as a matter of law and contrary to
Department precedent to countervail as grants infrastructure that the
respondent does not own and where normal user fees are paid to use the
infrastructure services. (Citing, sections 771(5)(D)(i) and (E)(iv) of
the Act, and the Final Affirmative Countervailing Duty Determination:
Industrial Phosphoric Acid from Israel, 52 FR 25447, 25451 (July 7,
1987) (Industrial Phosphoric Acid from Israel).)
Respondents contend that rather than treating the infrastructure
investments as grants, the Department should have analyzed the issue as
one of whether the infrastructure services were provided ``for less
than adequate remuneration,'' citing section 771(5)(E)(iv) of the Act.
They note that adequacy of remuneration is the new statutory provision
for determining whether the government's provision of a good or service
constitutes a countervailable subsidy. According to section 771(5)(E)
of the Act, the adequacy of remuneration with respect to a government's
provision of a good or service shall be determined in relation to
prevailing market conditions (i.e., price, quality, availability,
marketability, transportation, and other conditions of purchase or
sale) for the good or service being provided or the goods being
purchased in the country which is subject to the investigation or
review.
Respondents state that the Department addressed a similar issue in
Industrial Phosphoric Acid from Israel. At issue in that case were
certain rail lines built (and owned) by the Israeli government for
``the almost exclusive use of a few chemical companies. See Industrial
Phosphoric Acid from Israel, 52 FR at 25447. The Department recognized
that any benefit to be derived from the infrastructure was related to
the use of that infrastructure, and since the respondent in question
paid for such use, the question was whether the payments for such use
were higher or lower than those paid by other users for similar
services. The Department determined that the rates paid were not
preferential and, therefore, that no benefit or subsidy existed.
Respondents also state that in Certain Steel Products from Brazil,
the Department applied a similar analysis. In that case, the Department
determined that ``The fees charged . . . reflected standard fees
applied to all users of port facilities, thus, they are non-specific.''
Final Affirmative Countervailing Duty Determination: Certain Steel
Products from Brazil, 58 FR at 37295 (July 9, 1993) (Certain Steel
Products from Brazil), and Final Affirmative Countervailing Duty
Determination: Carbon Steel Wire Rod from Trinidad and Tobago, 49 FR
480, 486 (Jan. 4, 1984) (Carbon Steel Wire Rod from Trinidad and
Tobago).
Respondents argue, in the alternative, that if the Department
continues to treat these benefits as ``grants,'' then these grants must
be pro-rated based upon the actual benefit to POSCO. They note that the
GOK provided information on the use of these facilities and, where
possible, POSCO's portion of the total usage during the POI. Since
POSCO is not the only company that benefits from the infrastructure
investments at Kwangyang Bay, the Department cannot simply attribute
the entire benefit from the GOK's infrastructure investments to POSCO.
The benefit found must be allocated proportionate to POSCO's use of
these facilities at Kwangyang Bay during the POI.
In their rebuttal brief, petitioners state that respondents are
blurring the distinction between the original provision of specific
infrastructure investments and the adequacy of remuneration of fees
charged for the future use of the infrastructure. In addition,
petitioners argue that the investment grants should not be ``pro-
rated'' based on POSCO's use of the facilities, because POSCO is the
dominant beneficiary. Petitioners note that in Steel Products from
Korea, the Department determined that Kwangyang Bay was specifically
designed for POSCO. See Steel Products from Korea, 58 FR at 37347.
Department's Position. The Kwangyang Bay infrastructure subsidy
under investigation in Steel Products from Korea and in this
investigation is not the fee charged by the government for use of rail
and port facilities, as was the issue in the cases cited by
respondents. Indeed, we found an alleged program providing
``preferential'' port charges to the Korean steel industry not to exist
in Steel Products from Korea. Therefore, the cases cited by respondents
are not relevant to the treatment of the Kwangyang Bay subsidy.
The benefit under this subsidy program to POSCO was the creation of
Kwangyang Bay to support POSCO's construction of its second integrated
steel mill. The building of this infrastructure to support POSCO's
expansion, which was planned years before POSCO commenced production at
Kwangyang Bay, was the benefit
[[Page 15550]]
countervailed in Steel Products from Korea and in this investigation.
Thus, the benefit conferred by this subsidy program to POSCO, and the
benefit that must be measured, is the construction of these facilities,
rather than the fees charged to POSCO for their use. Therefore, it is
reasonable to measure the benefit from this program by treating the
costs of constructing the Kwangyang Bay facilities for POSCO as
nonrecurring grants.
In addition, we also disagree with respondents' argument that we
pro-rate this subsidy between POSCO and to other companies currently
located at Kwangyang Bay. Again, respondents have misinterpreted the
nature of the benefit. The infrastructure at Kwangyang Bay was built to
support POSCO's expansion and its creation of its second integrated
steel mill. Therefore, the program is a subsidy provided to POSCO, and
the benefit from the program is properly attributed to POSCO.
Comment 18: POSCO'S Exemption From Port Facility Fees. Respondents
note that in the preliminary determination, the Department determined
that POSCO's exemption from paying port facility fees provides a
countervailable subsidy to POSCO. In reaching this conclusion,
respondents argue that the Department incorrectly determined that: (1)
A ``financial contribution'' had been provided to POSCO because it was
exempt from paying port facility fees that it otherwise would have to
pay; and (2) that the subsidy was ``specific'' because POSCO was the
only company exempt from paying port facility fees during the POI.
Respondents also argue that in reaching this preliminary determination,
the Department failed to address section 771(5)(B) of the Act, which
requires that a government action must confer a benefit in order to be
considered a countervailable subsidy.
As to the ``financial contribution'' requirement, the respondents
argue that but for the existence of a law (i.e., Article 17-1 of the
Harbor Act) compelling POSCO to cede title to the port facilities it
built to the GOK, the issue of these fees would not arise because POSCO
would simply own the facilities outright (and not have to pay fees to
itself). Because POSCO ceded title to the port facilities to the GOK,
the Department claims that a benefit arises because POSCO does not
currently pay fees to use the facilities it built. Respondents,
however, argue that the GOK is merely recognizing POSCO's costs and the
statutorily-authorized payment for construction costs incurred by a
private party. Therefore, according to respondents, the port fee
exemption does not constitute a ``financial contribution'' under the
new law.
Moreover, respondents state that the Department verified that port
fee exemptions are not limited to companies at Kwangyang Bay. Rather,
this program is commonly used by the GOK with respect to all ports in
Korea as a means of encouraging private companies to raise the capital
to develop port facilities throughout the country. Respondents also
argue that this verified information demonstrates that fee exemptions,
i.e., free usage, was not specific to POSCO because a variety of
companies which built and reverted port facilities to the GOK under
Article 17(1) of the Harbor Act received comparable exemptions.
Therefore, the Department should find that POSCO's exemption from port
fees does not constitute a countervailable subsidy.
Petitioners argue that the benefit conferred upon POSCO is the fact
that at the end of its fee exemption and fee collection period, POSCO
will have paid nothing to use the facilities which furthered the
company's business interests. Moreover, petitioners argue that more
than half of the fee exemptions provided at Kwangyang Bay were
conferred upon POSCO. Petitioners assert that under the Department's de
facto specificity analysis, POSCO has been the predominant beneficiary
of fee exemptions at Kwangyang Bay.
Department's Position. We agree with respondents that the port fee
exemption is not specific to POSCO because POSCO was not the only
company exempt from paying port facility fees during the POI. At
verification, we obtained information which indicated that port fee
exemptions are not limited to companies at Kwangyang Bay. Moreover, the
verified information demonstrates that fee exemptions were not specific
to POSCO as a large number of companies from a diverse and broad range
of industries built and transferred port facilities to the GOK under
Article 17(1) of the Harbor Act received comparable exemptions. For a
further discussion of the Department's analysis see the section ``Port
Facilities Fees'' above.
Comment 19: Port Facility Fees Collected by POSCO. Petitioners
state that in the preliminary determination the Department failed to
countervail port facility fees which POSCO collected from other users
during the POI. Petitioners state that in addition to the revenues
foregone by the GOK for POSCO's free use of the facilities, the GOK
authorized POSCO to collect fees from other users. They note that the
Department confirmed at verification, the amount of fees which POSCO
collected from other users during the POI. Petitioners argue that as
with the exemption of port fees, POSCO has received a financial
contribution that is recurring and specific to POSCO since no other
company is eligible for this benefit with regard to these facilities.
Therefore, in the final determination, the Department should
countervail fees collected by POSCO.
Respondents state that Article 17(3) of the Harbor Act and the
Regulations on 20-year Repayment of Investment provide that companies
shall be reimbursed for their investments through the temporary
exemption from paying port facility fees and the right to collect fees
from other users. They assert that the fees collected from other users
simply serve as an additional form of reimbursement permitted by the
GOK until POSCO recoups its investment costs. They stress that this
option is available to all companies that revert port facilities to the
GOK. Moreover, as argued in POSCO's case brief, these fees do not
constitute a financial contribution or benefit to POSCO.
Department's Position. The Department disagrees with petitioners
and finds that the fees which POSCO collected from other users of the
infrastructure facilities which the company build are not
countervailable. For the same reasons as outlined above in the
Department's Position to Comment 18, we determine that POSCO's ability
to collect fees from other users is not specific under section
771(5A)(D)(iii) of the Act.
At verification, we learned that Article 17(3) of the Harbor Act
and the companion Presidential Decree provide that companies shall be
reimbursed for their investments through the temporary exemption from
paying port facility fees and the right to collect fees from other
users. All companies which build infrastructure that has to be
transferred to the GOK receive free usage of the infrastructure and the
ability to collect user fees from other companies which use the
facilities, until the investment cost of the facility is recovered. The
fees which POSCO collected from other users simply serve as an
additional form of reimbursement permitted by the GOK until POSCO
recoups its investment costs. This option is available to all companies
that transfer port facilities to the GOK. Because, POSCO was only one
of a large number of companies from a diverse and broad range of
industries which was authorized to collect users fees, we determine
that this program is not specific under section 771(5A)(D)(iii) of the
Act. See the ``Port
[[Page 15551]]
Facilities Fees'' section above for a further discussion of the
Department's analysis.
Comment 20: Adjustment of the Gross Countervailable Subsidy from
the Investment Tax Credits. Respondents do not dispute the Department's
preliminary finding that certain investment tax credits received by
POSCO conferred countervailable subsidies during the POI, because the
level of benefits received was contingent upon the use of domestic
goods instead of imported goods. However, as a result of verification,
the respondents argue that the Department needs to adjust the gross
subsidy amounts calculated for certain years. In the preliminary
determination, the Department noted that POSCO deducted from its tax
return for fiscal year 1996 (filed during the POI in 1997) tax credits
earned in the years 1992 through 1995, which had been carried forward
and used in fiscal year 1996. As discussed in the preliminary
determination, the Department ``calculated the additional amount of tax
credits received by the company because it earned tax credits of 10
percent on investments in domestically-produced facilities' rather than
at the regular rates for the respective tax credits. The Department
then calculated the portion of the total tax credits earned in each
year attributable to the 10 percent rate and applied that percentage to
the total of all tax credits claimed for that year during fiscal year
1996. On this basis, the Department calculated the countervailable
subsidy from these investment tax credits for the POI.
Respondents presume that the Department chose this methodology for
calculating the amount of the countervailable tax credits attributable
to fiscal year 1996, because, although it knew the total amount of the
tax credits from each year that were used in fiscal year 1996, it could
not determine for every year which tax credits were being used.
Respondents note that this problem was resolved at verification when
POSCO provided a detailed breakdown, by TERCL article, of the amounts
claimed for each tax credit in fiscal year 1996. With this verified
information, they state, the Department need only determine the amount
to be allocated to fiscal year 1996, for one tax credit earned in 1992,
Article 26, and for one tax credit earned in 1995, Article 25.
Respondents propose that in calculating the benefit conferred by the
investment tax credits, the Department should use the subsidy amounts
calculated in the Department's August 28, 1998 Calculation Memo for
Article 71 in 1993, Articles 10(1)(a), 25, 26 and 27 in 1994, and
Articles 10(1)(a), 10(1)(b) and 26 in 1995, in conjunction with the
allocable amounts for Article 26 in 1992 and Article 25 in 1995, to
calculate the total gross subsidy from investment tax credits which
POSCO used in its fiscal year 1996 tax return.
Department's Position. We agree that, as a result of the
information obtained at verification with respect to those specific
investment tax credits which POSCO utilized in its 1996 tax return, the
calculations for determining the benefit conferred by the investment
tax credits during the POI should be revised. However, we disagree with
the respondents' proposed methodology for calculating the benefit.
Respondents have not demonstrated to the Department that their proposed
methodology would more accurately calculate the benefit POSCO received
through the use of investment tax credits, than the methodology
employed by the Department in the preliminary determination.
As discussed above in the section ``Investment Tax Credits,'' to
calculate the benefit from this tax credit program, we examined the
amount of tax credits POSCO deducted from its taxes payable for the
1996 fiscal year. POSCO deducted from its 1996 taxes payable all
remaining credits earned in the years 1992, 1993, 1994, and a portion
of credits earned in 1995. With this information, we first determined
the amount of the tax credits claimed which were based upon the
investment in domestically-produced facilities. We then calculated the
additional amount of tax credits received by the company because it
earned tax credits of 10 percent on investments in domestically-
produced facilities instead of a three or five percent tax credit.
Next, we calculated the amount of the tax savings earned through the
use of these tax credits during the POI and divided that amount by
POSCO's total sales for the POI. On this basis, we calculated the
countervailable subsidy from these investment tax credits for the POI.
See ``Investment Tax Credits'' section above for a further discussion
of the Department's analysis.
Comment 21: Deduction of the Amount of the STRD Tax POSCO Paid On
Certain Investment Tax Credits. Respondents explain that, pursuant to
the Special Tax for Rural Development (STRD), certain investment tax
credits are subject to a 20 percent surtax on the amount of tax
exemptions claimed from the corporation income tax as a result of
receiving tax credits. Respondents state that POSCO provided copies of
its tax schedule from its fiscal year 1996 income tax return
calculating the amount of the surtax and a copy of the law governing
the STRD tax. As demonstrated in POSCO's calculation of its applicable
STRD tax for fiscal year 1996, respondents state the total amount of
tax credits claimed under TERCL Articles 25, 26, 27, and 88 in that
year were subject to the STRD tax at the rate of 20 percent.
Respondents note that according to section 771(6) of the Act, the
Department:
may subtract from the gross countervailable subsidy the amount of--
(A) any application fee, deposit, or similar payment paid in order
to qualify for, or to receive, the benefit of the countervailable
subsidy, * * *
Thus, respondents argue, section 771(6) of the Act, provides the
legal basis for determining the amount of the net countervailable
subsidy arising from the investment tax credits used by POSCO in fiscal
year 1996.
Respondents state that POSCO was required to pay the 20 percent
STRD tax in conjunction with its receipt of investment tax credits
under TERCL Articles 25, 26 and 27. In the absence of these tax credits
(as well as the tax credit under TERCL Article 88, which respondents
claim the Department found to be not countervailable), POSCO would not
have had to pay any STRD tax. Therefore, consistent with section
771(6), POSCO's receipt of the benefit from these tax credits was
contingent upon its payment of the STRD tax. They argue that the
obligation to pay the STRD tax is not a situation where there is any
uncertainty as to the amount of the STRD tax due or the net benefit to
POSCO from the tax credits. The payment of the STRD tax is not a
secondary consequence of a tax program, where the effects ``are too
uncertain to be a necessary part of a subsidy calculation.'' (Quoting,
Michelin Tire Corp. v. United States, 6 CIT 320, 328 (1983), vacated on
other grounds, 9 CIT 38 (1985) (Michelin Tire).) They assert that the
full tax consequences of using these investment tax credits are direct,
known, and quantifiable at the time the tax credits are used.
Respondents further note that a company can claim the tax credits only
insofar as it has taxable income and, when it claims certain tax
credits, there is a clear legal obligation to pay the STRD tax at a
fixed percentage rate.
Petitioners argue that respondents' suggestion that the amount of
STRD tax paid qualifies as a statutory offset to the investment tax
credit benefits should be rejected by the Department. Petitioners
assert that this type of ``after-the-fact'' tax does not qualify as a
permissible
[[Page 15552]]
offset. They note that the statute specifically defines the type of
offsets that can be subtracted from a countervailable benefit, (i.e.,
application fee, deposit, or similar payment in order to qualify for,
or receive the benefit). However, they note, the STRD is not mandatory
prior to receipt of the subsidy, but rather, is a surtax levied post-
receipt of the benefit.
Petitioners argue that respondents are asking the Department to
examine the secondary tax effects of subsidies. Petitioners note that
the Court has affirmed the Department's policy to disregard any
secondary effect of a direct subsidy on a company'' financial
performance. (Citing, Saarstahl AG v. United States, 78F.3d 1539, 1543
(Fed. Cir. 1996); Final Results and Partial Rescission of
Countervailing Duty Administrative Review: Certain Iron-Metal Castings
from India, 63 FR 64050, 64054 (Nov. 18, 1998).) Therefore, petitioners
argue that the Department must countervail in full the investment tax
credit benefits.
Department's Position. We agree with petitioners. Not only is it
the Department's long-standing policy to disregard secondary tax
consequences of countervailable benefits, but the statute is also clear
with regard to permissible offsets to subsidies. Section 771(6) of the
Act provides an exclusive list of offsets which may be deducted from
the amount of a gross subsidy, and a tax which is payable upon receipt
of a benefit is not included in that list. For purposes of determining
the net subsidy, the Department, pursuant to section 771(6), may
subtract from the gross countervailable subsidy the amount of:
(A) Any application fee, deposit, or similar payment paid in
order to qualify for, or to receive, the benefit of the
countervailable subsidy,
(B) Any loss in the value of the countervailable subsidy
resulting from its deferred receipt, if the deferral is mandated by
Government order, and
(C) Export taxes, duties, or other charges levied on the export
of merchandise to the United States specifically intended to offset
the countervailable subsidy received.
In Michelin Tire, the Court upheld the Department's policy of
disregarding secondary tax consequences, rejecting a claim that after-
tax considerations should be included in the calculation of a subsidy.
In its decision the Court stated that: ``(T)hese effects (secondary tax
effects) are too uncertain to be considered a necessary part of a
subsidy calculation in these circumstances.'' See Michelin Tire, 6 CIT
328. We note that the receipt of the investment tax credits are not
contingent upon the payment of the STRD tax. The payment of STRD tax is
a secondary tax effect. Thus, the payment of the STRD does not qualify
as an offset which may be deducted from the amount of the gross
subsidy. Therefore, based on the statute, case precedent, and the
Department's policy to disregard secondary tax effects on subsidies, we
have not altered our calculation of the countervailable subsidy which
POSCO received from the investment tax credits during the POI.
Comment 22: Requested Load Adjustment Electricity Discount Program.
Respondents note that, in the preliminary determination, the Department
determined that discounts under the Requested Load Adjustment (RLA)
program were countervailable because they were distributed to a limited
number of customers during the POI. The Department stated, however,
that it was going to further investigate the de facto specificity of
this program at verification. Based upon the information that was
obtained at verification, respondents argue, it is now clear that the
RLA program is not de facto specific. Accordingly, in the final
determination the Department should determine that the RLA program is
not countervailable.
According to respondents, it is clear that Korea Electric Power
Company (KEPCO) does not limit the availability of the RLA program. The
Department learned at verification that some companies volunteer to
participate in the RLA program, while KEPCO calls upon other companies
to solicit their cooperation. In soliciting participants, KEPCO does
not have a preference for companies in any particular industry sector
as KEPCO contracts with any company willing to participate in the RLA
program. The only limitations placed on availability arise from the
threshold requirement that customers have a contract demand of 5,000 KW
or more.
Second, respondents state that the verified record evidence
demonstrates that during the 1995-1997 period a wide variety of users
from various industries and all regions in Korea received benefits
under the RLA program. While the number of recipients decreased
significantly from 1996 to 1997, KEPCO officials explained that this
was because KEPCO foresaw an increased ability to meet demand for
electricity in 1997 and, therefore, decreased its targeted adjustment
capacity, reducing the number of RLA participants needed. In 1997, 44
customers from various industries including textiles, electronics,
cement and steel received benefits under the RLA during the POI.
Respondents state that another reason for the reduction in the
number of participants was KEPCO's policy for reducing the
administrative burdens of the RLA program by seeking out larger
companies to participate in the RLA program so it can reach its
targeted adjustment capacity with fewer participants. This policy,
respondents explain, is why it may appear that a disproportionate
number of the users are from the steel industry. In comparison to many
other industries, steel companies require a large amount of electricity
to power their machinery, plants, and furnaces. Since KEPCO is seeking
to reduce the administrative burden of this program, it is only logical
that they are going to seek out large electricity-intensive companies.
Accordingly, on the basis of the verified record evidence,
respondents contend, the Department should determine that the RLA
program is not de facto specific to POSCO or the steel industry, and
thus not countervailable.
Petitioners state that of the 44 companies which received RLA
discounts in 1997, a disproportionate amount of those benefits went to
the iron and steel manufacturers. The second most represented industry
which received discounts was the textile industry. Petitioners question
why other ``electricity-intensive companies'' were not included in the
list of the 44 companies which received discounts. Petitioners also
note that KEPCO was unable to indicate what percentage of the 44
discount recipients were volunteers and what percentage was composed of
selected participants. Petitioners assert that KEPCO must use
discretion in allocating RLA discounts because of the limited number of
users and the disproportionate use of the program by iron and steel
manufacturers. Therefore, petitioners assert that the Department should
uphold its preliminary determination and find that the RLA program is a
de facto specific subsidy.
Department's Position. We disagree with the respondents and
continue to find that the Request Load Adjustment electricity discount
program is countervailable. We stated in the preliminary determination
that, given the information the GOK provided on the record regarding
KEPCO's increased capacity to supply electricity and the resulting
decrease in KEPCO's need to enter into a large number of RLA contracts
during the POI, we would further investigate the de facto specificity
of this discount program at verification. We stated that it was the
[[Page 15553]]
GOK's responsibility to demonstrate to the Department on what basis
KEPCO chose the 44 customers with which it entered into the RLA
contracts during the POI.
However, at verification the GOK failed to demonstrate to the
Department a systematic procedure through which KEPCO selects those
customers with which it enters into RLA contracts. The GOK simply
stated that KEPCO enters into contracts with those companies which
volunteer for the discount program. If KEPCO does not reach its
targeted adjustment capacity with those companies which volunteered for
the program, then KEPCO will solicit the participation of large
companies. We note that KEPCO was unable to provide to the Department
the percentage of 1997 RLA recipients which volunteered for the program
and the percentage of those recipients which were persuaded to
cooperate in the program. Therefore, we continue to find that the
discounts provided under the RLA were distributed to a limited number
of users. Given the data with respect to the small number of companies
which received RLA electricity discounts during the POI, we determine
that the RLA program is de facto specific within the meaning of section
771(5A)(D)(iii)(I) of the Act. See ``Requested Load Adjustment
Program'' section above for the Department's complete analysis.
Verification. In accordance with section 782(i) of the Act, we
verified the information used in making our final determination. We
followed standard verification procedures, including meeting with the
government and company officials, and examining relevant accounting
records and original source documents. Our verification results are
outlined in detail in the public versions of the verification reports,
which are on file in the CRU of the Department of Commerce (Room B-
099).
Summary
In accordance with section 705(a)(3) of the Act, we determine that
the total estimated net countervailable subsidy rate is 0.65 percent ad
valorem which is de minimis. Therefore, we determine that no
countervailable subsidies are being provided to the production or
exportation of stainless steel plate in coils in Korea. Pursuant to
section 705(c)(2) of the Act, this investigation will be terminated
upon publication of the final negative determination in the Federal
Register.
ITC Notification
In accordance with section 705(d) of the Act, we will notify the
ITC of our determination.
Return or Destruction of Proprietary Information
This notice serves as the only reminder to parties subject to
Administrative Protective Order (APO) of their responsibility
concerning the return or destruction of proprietary information
disclosed under APO in accordance with 19 CFR 355.34(d). Failure to
comply is a violation of the APO.
This determination is published pursuant to sections 705(d) and
777(i) of the Act.
Dated: March 19, 1999.
Robert S. LaRussa,
Assistant Secretary for Import Administration.
[FR Doc. 99-7529 Filed 3-30-99; 8:45 am]
BILLING CODE 3510-DS-P
