[C-580-602]

Final Affirmative Countervailing Duty Determination; Certain Stainless Steel Cooking Ware From the Republic of Korea

Wednesday, November 26, 1986

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AGENCY: Import Administration, International Trade Administration, Commerce.

ACTION: Notice.

SUMMARY: We determine that certain benefits which constitute subsidies within the meaning of the countervailing duty law are being provided to manufacturers, producers, or exporters in the Republic of Korea (Korea) of certain stainless steel cooking ware as described in the "Scope of Investigation" section of this notice. We are not including Woo Sung Company, Ltd. (Woo Sung) or Dae Sung Industrial Company, Ltd. (Dae Sung) in this determination because benefits received by those companies are de minimis. Where a company receives de minimis benefits, we consider that to be a "significant differential" warranting company-specific treatment under section 706 of the Tariff Act of 1930 as amended by section 607 of the Trade and Tariff Act of 1984 (Pub. L. 98-573). The estimated net subsidy for all other manufacturers, producers, or exporters in Korea of certain stainless steel cooking ware is 0.78 percent ad valorem.

We have notified the U.S. International Trade Commission (ITC) of our determination. We are directing the U.S. Customs Service to suspend liquidation of all entries of stainless steel cooking ware from Korea, except that produced and exported by Woo Sung or Dae Sung, that are entered, or withdrawn from warehouse, for consumption, on or after the date of publication of this notice, and to require a cash deposit or bond on entries of these products in the amount equal to the estimated net subsidy as described in the "Suspension of Liquidation" section of this notice.

EFFECTIVE DATE: November 26, 1986.

FOR FURTHER INFORMATION CONTACT: Rick Herring or Gary Taverman, Office of Investigations, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW., Washington, DC 20230; telephone: (202) 377-0187 or 377-0161.

SUPPLEMENTARY INFORMATION:

Final Determination

Based upon our investigation, we determine that certain benefits which constitute subsidies within the meaning of section 701 of the Tariff Act of 1930, as amended (the Act), are being provided to manufacturers, producers, or exporters in Korea of stainless steel cooking ware. For puposes of this investigation, the following programs are found to confer subsidies:

- Short-Term Export Financing under the Export Financing Regulations and Foreign Trade Financing Regulations;

- Export Tax Reserve under Articles of the Act Concerning the Regulation of Tax Reduction and Exemption;

- Unlimited Deduction of Overseas Entertainment Expenses under Article 18-2 of the Corporation Tax Law;

- Loans to Promising Small and Medium Enterprises;

- Exemption from the Acquisition Tax under the Law for the Promotion of Income Sources in Rural Areas; and

- Duty Drawback on Non-physically Incorporated Items and Excessive Loss Rates under the Duty Drawback System.

We determine the estimated net subsidy for certain stainless steel cooking ware to be 0.78 percent ad valorem for all manufacturers, producers, or exporters in Korea except for Woo Sung and Dae Sung which have not been included in this determination.

Case History

On January 21, 1986, we received a petition filed in proper form by the Fair Trade Committee of the Cookware Manufacturers Association on behalf of the U.S. industry which manufactures certain stainless steel cooking ware. In compliance with the filing requirements of s 355.26 of the Commerce Regulations (19 CFR 355.26), the petition alleged that manufacturers, producers, or exporters in Korea of certain stainless steel cooking ware receive, directly or indirectly, subsidies within the meaning of section 701 of the Act, and that these imports materially injure, or threaten material injury to, a U.S. industry.

We found that the petition contained sufficient grounds upon which to initiate a countervailing duty investigation, and on February 10, 1986, we initiated an investigation (51 FR 6019, February 19, 1986). We stated that we expected to issue a preliminary determination by April 16, 1986.

Since Korea is a "country under the Agreement" within the meaning of section 701(b) of the Act, an injury determination is required for this investigation. Therefore, we notified the ITC of our initiation. On March 4, 1986, the ITC determined that there is a reasonable indication that imports of certain stainless steel cooking ware from Korea materially injury, or threaten material injury to, a U.S. industry (51 FR 9541, March 19, 1986).

We presented questionnaires concerning the petitioner's allegations to the Government of Korea at its embassy in Washington, DC on February 20, 1986. We received the responses to our questionnaires on March 26, 1986.

There are seven Korean producers of the subject merchandise accounting for over 75 percent of the exports to the United States during the period of review. They are Kyung Dong Industrial Company, Ltd. (Kyung Dong), Namil Metal Company, Ltd. (Namil), Il Shin Company, Ltd. (Il Shin), Hai Dong Stainless Industries Co. (Hai Dong), Woo Sung, Dae Sung, and Bum Koo Industrial Co., Ltd. (Bum Koo). For the producers identified above, the following trading companies accounted for substantially all of their trading company sales of the subject merchandise to the United States during the review period: Sammi Corporation, Daewoo Corporation, Korea Trading International Company, Samsung Company, Haitai International, Sunkyong Company, Daewonsa Corporation, Hyundai Corporation, G.I. Corporation, Ssangyong Corporation, and Dong Chang Company.

On the basis of information contained in the responses, we made a preliminary negative countervailing duty determination on April 16, 1986 (51 FR 15520, April 24, 1986). On April 30, 1986, we extended the deadline for the final determination in this investigation to September 15, 1986, to correspond to the dates of the final determinations in the antidumping duty investigations of the same products from Korea and Taiwan (51 FR 16882, May 7, 1986). This was done at the request of petitioner pursuant to section 705(a)(1) of the Tariff Act of 1930, as amended by section 606 of the Trade and Tariff Act of 1984 (Pub. L. 98-573). From April 28 through May 12, 1986, we verified the responses of the Government of Korea and the following companies: Bum Koo, Hai Dong, Kyung Dong, Namil, Il Shin, Woo Sung, Sammi, Hyundai, Daewonsa, Daewoo, and Samsung.

On August 1, 1986, the deadlines for the final determinations in the antidumping duty investigations of certain stainless steel cooking ware from Korea and Taiwan were postponed to no later than November 19, 1986.

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Accordingly, the final determination for the countervailing duty investigation of certain stainless steel cooking ware from Korea was also postponed to coincide with the antidumping duty determinations of the same products from Korea and Taiwan (51 FR 28610, August 8, 1986).

On August 12, 1986, we presented a supplemental questionnaire to the Government of Korea requesting information

Petitioner submitted a request for a hearing, which was subsequently withdrawn with the consent of respondents. Both petitioner and respondents filed briefs discussing the issues arising in this investigation which have been taken into consideration in this determination.

Scope of Investigation

The products covered by this investigation are all non-electric cooking ware of stainless steel which may have one or more layers of aluminum, copper, or carbon steel for more even heat distribution. These products are provided for in item number 653.94 of the Tariff Schedules of the United States (TSUS). The products covered by this investigation are skillets, frying pans, omelette pans, sauce pans, double boilers, stock pots, sauce pots, dutch ovens, casseroles, steamers, and other stainless steel vessels, all for cooking on stove top burners, except tea kettles and fish poachers. Excluded from the scope of investigation are stainless steel oven ware and stainless steel kitchen ware, which are included under the 653.94 TSUS classification.

Analysis of Programs

Throughout this notice we refer to certain general principles applied to the facts of the current investigation. These general principles are described in the "Subsidies Appendix" attached to the notice of Cold-Rolled Carbon Steel Flat-Rolled Products from Argentina: Final Affirmative Countervailing Duty Determination and Countervailing Duty Order (49 FR 18006, April 26, 1984).

For purposes of this final determination, the period for which we are measuring subsidies (the review period) is calendar year 1985. Based upon our analysis of the petition, the responses to our questionnaires, verification, and comments filed by petitioner and respondents, we determine the following.

I. Programs Determined to Confer Subsidies

We determine that subsidies are being provided to manufacturers, producers, or exporters in Korea of certain stainless steel cooking ware under the following programs:

A. Short-Term Export Financing
Petitioner alleges that producers and exporters in Korea of certian stainless steel cooking ware receive preferential short-term export financing under the Export Financing Regulations.

The Export Financing Regulations were promulgated on February 25, 1982. On October 17, 1985, these regulations were terminated with the creation of the Foreign Trade Financing Regulations. These latter regulations provide the guidelines for short-term export financing. Export financing takes the form of loans on bills related to export sales transactions. Eligibility is based upon presentation of export documents or upon past export performance. Export loans based on past preformance cannot exceed 90 days, while loans based on specific export documents cannot exceed 180 days and are limited to the terms of the applicable letter of credit. During our review period, the rate of interest charged on short-term export financing remained constant at ten percent, which was the ceiling established by the governor of the Bank of Korea.

During verification, we found that the Bank of Korea continues to set different rediscount ratios for export and domestic short-term loans. We first learned of this preference in the administration of short-term loans in our investigation of Oil Country Tubular Goods in 1984.

The rediscount ratio for export loans is 70 percent of the face value of the loan. The rediscount ratio on domestic commercal bills is 30 percent of the face value of the loan for large firms. The rediscount ratio for small- and medium-sized firms is 70 percent. Small- and medium-sized firms are defined as companies with fewer than 300 employees.

Of the seven producers, Kyung Dong and Namil are classified as large firms, as are all the trading companies, except G.I. Corporation.

Because only exporters are eligible to use the short-term export financing, we find these loans to be countervailable to the extent that they are provided on preferential terms. Moreover, we determine that the different rediscount ratios applied to financing for the large firms (70 percent for export transactions, 30 percent for domestic transactions) results in the provision of export financing on preferential terms for large firms. This is because in lending to large firms, commercial banks have an incentive to channel more funds to finance those firms' export transactions and fewer funds to finance their domestic transactions.

To measure the benefit bestowed on large firms, we computed a weighted-average interest rate to represent what large firms pay to finance domestic transactions. Because commercial banks have an incentive to direct their loans for large firms to financing export transactions, large firms are likely to receive relatively less commercial bank financing for their domestic transactions. As a result, large firms must seek alternative sources for financing domestic sales.

The weighted-average interest rate we have computed is a best estimate measure of the preference created by the different rediscount ratios. It includes the interest rates on commercial bank loans for domestic transactions, financing from investment and finance companies, the curb market, and the issuance of commercial paper.

The weights assigned to each of these sources of short-term domestic credit were based on the Monthly Statistical Bulletin of the Bank of Korea and on the annual survey on curb market financing published by the Korean Chamber of Commerce. The Monthly Statistical Bulletin provided the size of, and interest rates charged on, short-term financing from each of the sources except the curb market. We are using the information from the Korean Chamber of Commerce as the most appropriate measure of the average curb market size and rate in 1985, because it is the only independently-conducted survey of the curb market we were able to obtain during this investigation.

Using the data from these sources we calculated a weighted-average interest rate of 13.02 percent. We compared that rate to the 10 percent interest rate on export loans received by the companies classified as large companies.

For small- and medium-sized firms, no preference is created by the rediscount ratios because the ratios for export loans and domestic loans to small- and medium-sized businesses are identical. Instead, export financing for small- and medium-sized firms is countervailable to the extent that the interest rate on export loans is less than the benchmark interest rate. We have chosen as our benchmark the interest rate on

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commercial bank loans for domestic transactions.

During 1985, the interest rate on domestic short-term bank loans was allowed to vary from 10 to 11.5 percent. During our verification of Offshore Platform Jackets and Piles from Korea in September and October 1985, we were told by the Bank of Korea, the Korea Development Bank, and two commercial banks that, although the interest rate is allowed to vary from 10 to 11.5 percent, commercial banks will usually charge the ceiling rate of 11.5 percent on all their lending. The respondents in their briefs in this current investigation concede the fact that most lending by commercial banks is done at 11.5 percent. Therefore, to measure the benefits from those companies classified as small- and medium-sized firms, we compared the 10 percent interest rate for their export loans to the benchmark interest rate of 11.5 percent charged by commercial banks on domestic short-term lending.

In determining the benefit provided under this program, we based our calculations on total export loans because the companies were unable to tie

Since Dae Sung and Woo Sung have been excluded from this determination, we have deducted both the benefits received under this program and their sales from our denominator when calculating the estimated net subsidy for all other manufacturers, producers, or exporters. The same procedure was followed in the calculation of the estimated net subsidy for each of the other programs determined to confer subsidies.

B. Export Tax Reserves
Petitioner alleges that manufacturers, producers, and exporters of the subject merchandise receive tax benefits under Articles 22, 23, and 24 of the Act Concerning the Regulation of Tax Reduction and Exemption. These articles provide for deductions from taxable income for a number of different reserves covering export losses, overseas, market development, and price fluctuation losses.

Under Article 22, a corporation may establish a reserve amounting to one percent of foreign exchange earnings, or 50 percent of net income in the applicable period, whichever is smaller. If certain export losses occur, they are offset from the reserve fund. If there are no offsets for export losses, the reserve is returned to the income account and taxed, after a one-year grace period, over a three-year period.

Under Article 23, governing overseas market development, a corporation may establish a reserve fund amounting to one percent of its foreign exchange earnings in the export business for the respective business year. Expenses incurred in developing overseas markets are offset from the reserve fund. Like the export loss reserve fund, if there are no offsets for expenses, the reserve is returned to the income account and taxed, after a one-year grade period, over a three-year period.

A price fluctuation reserve fund may be established under Article 24. A corporation may establish reserves equivalent to five percent of the book value of the products and works in progress which will be exported by the close of the business year. This reserve may be used to offset losses resulting from the fluctuation of prices for export goods by returning an amount equivalent to the losses to the income account. If not so utilized, the reserve is returned to the income account the following year.

The balance in all three reserve funds is not subject to corporate tax, although all moneys in the reserve fund are eventually reported as income and subject to corporate tax either when they offset export losses or when the one- year grace period expires.

We determine that these export reserve programs confer benefits which constitute export subsidies because they provide a deferral, contingent upon exports, of direct taxes.

To measure the benefit conferred by the deferral, we treated the tax savings on these funds as short-term interest-free loans. Accordingly, the amount of tax savings was multiplied by the rate of interest the firm would have had to pay for a short-term commercial bank loan (11.5 percent). On this basis, we calculated an estimated net subsidy of 0.01 percent ad valorem for all manufacturers, producers, or exporters in Korea except Dae Sung and Woo Sung. For Dae Sung, we calculated an estimated

C. Unlimited Deduction of Overseas Entertainment Expenses
Petitioner alleges that producers and exporters of the subject merchandise receive tax benefits in the form of entertainment expense deductions.

Under Article 18-2 of the Corporation Tax Act and supporting legislation, entertainment expenses for domestic clients and foreign clients ("overseas entertainment expenses") are eligible to be deducted from taxable income. The amount which can be deducted for domestic entertainment expenses is subject to a ceiling according to an established formula and depending on the amount of any overseas entertainment expenses claimed. There is no cap on overseas entertainment expenses. Because entertainment expense deductions are unlimited only for export business activities, we determine that this program confers benefits which constitute export subsidies, to the extent that the overseas expenses claimed are greater than those which would have been allowed using the domestic cap formula.

To calculate the benefit from this program for the review period, we added the amounts of overseas entertainment expenses claimed in the companies' tax returns filed in 1985 exceeding their domestic caps. We then divided this amount by the value of exports in 1985, and calculated an estimated net subsidy of 0.01 percent ad valorem for all manufacturers, producers, or exporters in Korea except Dae Sung and Woo Sung. For Dae Sung, we calculated an estimated net subsidy of less than 0.01 percent ad valorem. Woo Sung did not receive any benefits under this program.

D. EException from the Acquisition Tax
Under the Law for the Promotion of Income Sources in Rural Areas, companies which establish factories in rural areas may be exempted from paying the acquisition tax on purchases of land, buildings, and capital equipment. The rate of the acquisition tax is two percent. Since the tax exemption is limited to companies located in certain regions of the country, we determine the program to be countervailable.

E. Loans to Promising Small and Medium Enterprises
Under this program, the Bank of Korea directs banks to provide loans to select "promising" small- and medium-sized companies. The Ministry of Trade and Industry provides the guidelines to be used by the banks in designating promising companies. According to these guidelines, promising small and medium companies are to be designated among:

- companies producing basic raw materials and components for manufacturing industries;

- companies possessing advanced technology;

- exporting companies;

- import-substituting companies;

- companies producing folk artifacts and souvenirs;

- companies manufacturing high-quality sporting goods;

- companies manufacturing Olympic-related merchandise; and

- rural companies producing local specialties with local resources.

Bum Koo and Il Shin have been designated as promising companies and both had loans outstanding under this program during the period of review.

During verification we were not provided with documentation on the specific criterion Bum Koo and Il Shin, or any other company, met to be selected as a promising company under this program. From the selection criteria of the program, it appears that the only criterion either company could meet is that it is an exporting company. Therefore, we determine that the loans received by Bum Koo and Il Shin under this program are countervailable to the extent that they were provided at preferential interest rates.

For Bum Koo, the information provided in the supplemental response on the outstanding loans under this program did not correspond to the loan information contained in the company's interest-expense ledger. Therefore, we used the interest-expense ledger to determine the amount of loans outstanding under this program for Bum Koo. For Il shim, we used the information contained in the supplemental response.

To determine whether loans received under this program provided a countervailable benefit, we compared their interest rate to the interest rate on other long-term loans received by the two companies. For Il Shin, the interest rates of previously outstanding loans were reduced when the company was designated as "promising" under this program. Therefore, we compared the interest rate on the loans prior to the designation to the interest rate on the loans after the designation of Il Shin.

For Bum Koo, it appears from the information that we verified that the company has only received loans from under this program or under the Export Loan program. Therefore, as a benchmark for Bum Koo, we used the interest rate on the long-term loans of Il Shin prior to its designation, as best information available on the national average interest rate on long-term variable rate loans, and compared that to the interest rate of the loans Bum Koo received under this program. Using that benchmark, we determine that the loans received by Il Shin and Bum Koo under this program are countervailable.

Since these are variable-rate loans, we used our short-term methodology to calculate the benefit conferred by this loan program. To calculate a benefit, we took the amount of the interest savings of the loans and divided by the total export value of all producers. Using this methodology, we calculated an estimated net subsidy of 0.11 percent ad valorem for all manufacturers, producers or exporters in Korea except Dae Sung and Woo Sung. Dae Sung and Woo Sung did not receive any benefits under this program.

F. Duty Drawback on Non-Physically Incorporated Items and Excessive Loss Rates
Under the Korean duty drawback system, cooking ware manufacturers are allowed to claim duty drawback on emery powder and chromic oxide. Emery powder and chromic oxide are used in the washing and polishing of cooking ware, and are not physically incorporated in the exported item. We determine the amount of duty drawback received on emery powder and chromic oxide to be countervailable because they are not physically incorporated into the exported item.

The Korean government also establishes an authorized loss rate for raw materials used in the manufacture of exported goods. Duty drawback includes the amount of duty remitted on the loss or wastage for the raw material. For stainless steel sheet or coil used in the production of cooking ware, two standard usage rates (input ratios) based on the loss rates are established by the Government of Korea. For pots, kettles, creamers and colanders (category 1) the rate is 1.5530. For pans, dishes, bowls and kitchen tools (category 2), the rate is 1.4465. For example, to claim duty drawback on 1.5530 kilograms of stainless steel, only 1 kilogram need be physically-incorporated in an exported pot. These input ratios include material which may later be sold as scrap.

The Government of Korea reduces the amount of duty drawback received on the exported product to account for the sale of by-products produced from the excess raw materials used in the production of the exported goods. For stainless steel cooking ware, a deduction for stainless steel scrap is made. This deduction is based on the grade of the steel. For AISI-430, a deduction of 2.13 percent is made to reflect the sale of scrap which is created in the production process of cooking ware. For AISI-304, the deduction rate is 2.46 percent.

During the government verification on the calculation of these rates, we reviewed summarized calculations of input ratios. However, when we asked to see the backup documentation, including the files and the responses from cooking ware companies used to determine these rates, we were told by government officials that these records were not available. Because we were unable to check back to source documents, we must consider the government calculation of the input ratios as unverified.

We have determined that a duty drawback program which includes some amount for loss or wastage in determining the amount of custom duties remitted on raw materials used in the manufacture of exported goods is not necessarily countervailable. Duty drawback for loss or wastage a only becomes countervailable when the allowance for this loss or wastage is unreasonable or excessive. We consider duty drawback received on recoverable scrap to constitute an unreasonable or excessive remission of customs duties. Therefore, when loss or wastage rates

In this case, we compared, as best information available, the government's value-based duty drawback reduction rate (which theoretically accounts for the sale of scrap), to the average ratio of the value of the companies' actual scrap sales to total input purchased. Information on company-specific scrap sales was contained in the cost verification reports for the concurrent antidumping duty investigation, which

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have been formally submitted on the record of the countervailing duty investigation by respondents' counsel. Making this comparison, we find that the government's reduction rate does not adequately compensate for scrap sales. As such, we find that the duty drawback in this case is excessive, and hence, countervailable. To calculate the benefit from the excessive drawback, we multiplied the percentage of the excessive duty drawback by the total amount of duty drawback (less the amount of drawback received on emery powder and chromic oxide since that entire amount is countervailable).

Adding the benefits from the drawback of emery powder and chromic oxide and the excessive drawback from recoverable scrap, and dividing by total exports of the producers, we calculated an estimated net subsidy of 0.20 percent ad valorem for all manufacturers, producers, or exporters in Korea except Dae Sung and Woo Sung. For Dae Sung, we calculated an estimated net subsidy of 0.15 percent ad valorem, and for Woo Sung, we calculated an estimated net subsidy of 0.18 percent ad valorem.

II. PROGRAMS DETERMINED NOT TO BE USED

We determine that manufacturers, producers, or exporters in Korea of certain stainless steel cooking ware did not use the the following programs:

A. Tariff Reductions on Plant and Equipment Petitioner alleged that certain Korean manufacturers receive special tariff reductions on imported plant and equipment. Article 28 of the Customs Law allows for reductions of import duties for certain industries on particular items designated by the Ministry of Finance. According to the responses of the Government of Korea and Korean companies, and based upon our findings at verification, producers of the subject merchandise are not eligible for tariff reductions because Article 28 specifies that only machinery used in the production of machine parts, and machinery used in the manufacture of electronic goods are eligible for this program.

B. Free Export Zone Program
Petitioner alleged that firms located in free export zones received certain tax incentives such as exemptions on corporate, residence, defense, and property taxes. According to the responses of the Government of Korea and Korean companies, and based upon findings at verification, no stainless steel cooking ware producers or trading companies selling cooking ware are located in free export zones.

C. Export Credit Financing from the Export-Import Bank of Korea
Petitioner alleges that producers and exporters of certain stainless steel cooking ware may receive below market financing for pre-export projects and export transactions. Petitioner further alleges that the National Investment fund (NIF) finances exports on a deferred payment basis. According to the response of the Government of Korea, and based upon our findings at verification, financing from the Export-Import Bank of Korea (KXMB) is only provided for large capital goods, and no such financing is provided for exports of consumer goods like cooking ware. The only source of NIF deferred payment export loans is through export credit financing programs of the KXMB, and cooking ware exports are not eligible for such financing.

D. Export Guarantees from the KXMB
Petitioner alleged that producers of the subject merchandise receive advance payment export guarantees and performance quarantees from the KXMB. According to the response of the Government of Korea, and based upon verification findings, the KXMB only provides such guarantees for exports of large capital goods and projects, and no guarantees are offered for sales of consumer goods such as stainless steel cooking ware.

E. Accelerated Depreciation
Petitioner alleged that producers of the subject merchandise receive accelerated depreciation benefits. Article 25 of the "Act Concerning the Regulation of Tax Reduction and Exemption" permits a firm earning more than 50 percent of its total proceeds in a business year from foreign exchange to increase its normal depreciation by 30 percent. If the corporation has received less than 50 percent of its total proceeds from foreign exchange, it can still claim some accelerated depreciation, determined by a formula based on the firm's foreign exchange earnings and total business earnings. We found at verification that none of firms investigated used accelerated depreciation under this program during the review period.