(Cite as: 47 FR 26310)

NOTICES

DEPARTMENT OF COMMERCE

Preliminary Affirmative Countervailing Duty Determination; Carbon Steel Plate From Brazil

Thursday, June 17, 1982

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AGENCY: International Trade Administration, Commerce.

ACTION: Preliminary affirmative countervailing duty determination.

SUMMARY: We preliminarily determine that certain benefits which constitute subsidies within the meaning of the countervailing duty law are being provided to manufacturers, producers, or exporters in Brazil of carbon steel plate. The estimated net subsidy is indicated in the "Suspension of Liquidation" section of this notice. Therefore, we are directing the U.S. Customs Service to suspend liquidation of all entries of carbon steel plate from Brazil which are entered, or withdrawn from warehouse, for consumption, and to require a cash deposit or bond on this product in the amount equal to the estimated net subsidy.

If this investigation proceeds normally, we will make our final determination by August 24, 1982.

EFFECTIVE DATE: June 17, 1982.

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FOR FURTHER INFORMATION CONTACT:

Paul J. McGarr, Office of Investigations, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW., Washington, D.C. 20230, telephone: (202) 377- 1167.

SUPPLEMENTARY INFORMATION:

Preliminary Determination

Based upon our investigation, we preliminarily determine there is reason to believe or suspect 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 Brazil of carbon steel plate. For purposes of this investigation, the following programs are preliminarily found to be subsidies:
IPI Rebates for Capital Investment.
IPI Export Credit Premium.
Preferential Working Capital Financing For Exports

We estimate the net subsidy to be the amount indicated in the "Suspension of Liquidation" section of this notice.

Case History

On January 11, 1982, we received petitions from the United States Steel Corporation, and counsel for Republic Steel Corporation, Inland Steel Company, Jone & Laughlin Steel, Inc., National Steel Corporation, and Cyclops Corporation ("the Five"), filed on behalf of the U.S. industry producing carbon steel plate. The petitions alleged that certain benefits which constitute subsidies within the meaning of section 701 of the Act are being provided, directly or indirectly, to the manufacturers, producers, or exporters in Brazil of carbon steel plate. Counsel for the Five also alleged that "critical circumstances" exist, as defined in section 703(e) of the Act.

We found the petitions to contain sufficient grounds upon which to initiate a countervailing duty investigation, and on February 1, 1982, we initiated a countervailing duty investigation (47 FR 5751). We stated that we expected to issue a preliminary determination by April 6, 1982. We subsequently determined that the investigation is "extraordinarily complicated", as defined in section 703(c) of the Act, and postponed our preliminary determination for 65 days until June 10, 1982 (47 FR 11738).

Since Brazil 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 U.S. International Trade Commission ("ITC") or our initiation. On Februray 26, 1982, the ITC preliminarily determined that there is a reasonable indication that these imports are materially injuring a U.S. industry.

We presented a questionnaire concerning the allegations to the government of Brazil in Washington, D.C. on April 22, 1982, we received the response to that questionnaire. A supplemental response was received on June 7, 1982.

Scope of the Investigation

The product covered by this investigation is hot-rolled carbon steel plate. The product is fully described in Appendix A which appears with the notice of "Preliminary Affirmative Countervailing Duty Determinations, Certain Steel Products from Belgium", in this issue of the Federal Register.

Companhia Siderurgica Paulista (COSIPA) and Usinas Siderurgicas de Minas Gerais S.A. (USIMINAS) are the only known exporters in Brazil of carbon steel plate to the United States. The period for which we are measuring subsidization is calendar year 1981.

Analysis of Programs

In its responses, the government of Brazil provided data for the applicable periods. Throughout this notice, general principles applied by the Department of Commerce to the facts of the current investigations concerning certain steel products are described in detail in Appendix B which appears with the notice of "Preliminary Affirmative Countervailing Duty Determinations, Certain Steel Products from Belgium", in this issue of the Federal Register (hereinafter Appendix B). Based upon our analysis to date of the petitions and the responses to our questionnaire, we preliminarily determine the following.

I. Programs Preliminarily Determined To Be Subsidies

We preliminarily determine that subsidies are being provided to manufacturers, producers, or exporters in Brazil of carbon steel plate under the following programs.

A. IPI Rebates for Capital Investment

Decree Law 1547 (April 1977) provides funding for the expansion of the Brazilian steel industry through a rebate of the Industrialized Products Tax ("IPI") the Brazilian federal excise tax. Under this tax system, a company determines its liability for the tax at the end of each month. The net tax owed is calculated as the difference between the total IPI the company paid on purchases and the total IPI it collected on domestic sales. Normally, within five months after the end of each month, a company must pay the amount of the net tax owed directly to the Brazilian government. This net IPI tax is the basis for calculating the rebate for investment. A Brazilian steel company may deposit 95 percent of the net IPI tax in a special account with the Banco do Brasil. The amounts deposited are to be applied to steel expansion projects, and when rebated to the firms constitute tax-free capital reserves which must eventually be converted into subscribed capital. We consider the amount rebated each year as an united grant received in that year. As such, we have applied the methodology described in Appendix B. The grants were amortized over 15 years and the total benefit for 1981 was divided by each company's total sales for 1981. The ad valorem benefit of this subsidy is 1.47 percent. COSIPA and USIMANAS received benefits under this program from 1977 to 1981. With the enactment of Decree Law 1843 (December 1980), COSIPA and USIMINAS must now pay the IPI tax to the government which in turn rebates 95 percent to SIDERBRAS, the government holding company to which COSIPA and USIMINAS belong, to increase its capital.

B. IPI Export Credit Premium

The IPI export credit premium has been found to be a subsidy in previous countervailing duty investigations involving Brazilian products. After having suspended this program in December 1979, the government of Brazil reinstated it on April 1, 1981. Currently, the program is scheduled to be phased out in several steps, ending on April 1, 1983.

Exporters of carbon steel plate are eligible for the maximum IPI export credit premium. During the applicable period, 15 percent of the "adjusted" f.o.b. invoice price of the exported merchandise was reimbursed in cash to the exporter through the bank involved in the export transaction.

In calculating the amount the exporter is to receive, several deductions are made to the invoice price to obtain the "adjusted" f.o.b. value. These adjustments include: any agent commissions, rebates or refunds resulting from quality deficiencies or damage during transit, contractual penalties, and the value of imported inputs. In order to receive the maximum export credit premium, the exported product must consist of a minimum of 75 percent value added in Brazil. If this minimum limit is not met, there is a specific calculation to reduce the f.o.b. invoice price when calculating the base upon which the IPI export credit

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premium is paid. Since the companies involved in this investigation import large quantities of slab, which is approximately 65 percent of the value of the exported product, they do not receive the maximum available benefit.

To calculate the ad valorem subsidy, we relied on information provided by the government of Brazil. It provided us with the amount of the IPI credit received by COSIPA and USIMINAS for the period July 1, 1981 to December 31, 1981 (dating from when the companies began to receive payments), as well as the value of exports of carbon steel plate for the same time period. By dividing the IPI credits received by the value of their exports, we calculated an ad valorem export subsidy of 5.40 percent.

This ad valorem rate is premised on an IPI export credit premium of 15 percent. The government of Brazil reduced the benefit to 14 percent on March 31, 1982 and is scheduled to reduce it again to 12.5 percent on June 30, 1982.

Accordingly, the Brazilian government asserts that a downward adjustment in the rate for this program is appropriate to reflect the current availability of the benefit.

We have made such an adjustment because we must still resolve two matters. First, the receipt of the IPI credit occurs sometime after the merchandise is exported; therefore, the figures we relied on in making our calculation may understate the benefit. Exports reported for the last part of 1981 probably do not completely correspond to the IPI credits for those exports in the 1981 figures we received. If this is so, we will adjust the rate accordingly. Second, the use of imported slab was a major factor in the relatively low level of the benefit. We will seek to ascertain whether this is a temporary situation.

C. Preferential Working Capital Financing for Exports: Resolution 674

Under this program, companies are declared eligible to receive working capital loans by CACEX (the Department of Foreign Commerce of the Banco Central do Brasil). These loans may have a duration of up to one year. Firms in the steel industry can obtain this preferential financing for up to 20 percent of the net f.o.b. value of the previous year's exports. We preliminarily determine that such financing is an export subsidy.

This net export value is calculated by taking numerous deductions from the export value of the merchandise, including agent commissions, contractual penalties or refunds, exports denominated in cruzeiros, imported inputs over 20 percent of the export value, and a deduction for the company's trade deficit as a percentage of the value of its exports. Since both COSIPA and USIMINAS have trade deficits (due primarily to the importation of coal) the sum of these deductions is substantial, thus reducing the maximum level of financing available. In addition, any growth in the cruzeiro value of exports over the previous year will reduce the value of the benefit as a percentage of the current year's exports. To determine the value of loans in existence under this program during 1981, we prorated any loans that straddled other years. For loans taken out in 1980, only that portion extending into 1981 was included in our calculation. Any 1981 loans extending into 1982 were similarly adjusted. We than divided the total value of these loans by the total value of exports for these two companies in 1981 to calculate the amount of preferential financing they received.

As in previous Brazilian countervailing duty cases, we are looking to the rate established by the Banco do Brasil for discounting sales of accounts receivable as the commercial rate for the acquisition of short-term working capital. Although we are comparing the terms of a loan with the terms of sale of an asset, we have used this comparison because information provided by the government of Brazil indicates that, within the Brazilian financial system, working capital is normally raised through the sale of accounts receivable. Currently, the rate for discounting sales of accounts receivable is 59.6 percent plus a 6.9 percent tax on financial transactions (IOF). The subsidy is the difference between the interest rate available under Resolution 674 and the commercial rate.

The interest rate on loans under Resolution 674 is 40 percent, with interest payable semiannually and the principal fully payable on the due date of the loan. The effective rate of interest for these loans is 44 percent. These loans are also exempt from the IOF. Therefore, the differential between these two types of financing is 22.5 percent. When multiplying this differential by the amount of preferential financing received as a percent of exports, we determined an ad valorem export subsidy of 1.71 percent.

The Brazilian government claims that Resolution 674 financing provides no countervailable benefit because COSIPA and USIMINAS have the ability to obtain working capital at lower rates either by discounting accounts receivable in hard currency or by borrowing hard currency on international markets, and in the absence of Resolution 674 financing they would utilize these options more frequently. Despite the claim, there is no comparability between these two procedures and Resolution 674 financing. Resolution 674 is a program to provide working capital in cruzeiros, and the loans are payable in cruzeiros. The interest rate for cruzeiros, even when subsidized, may be sustantially higher than rates for hard currency because of the high inflation rate in Brazil. When a company sells a hard-currency receivable to a bank to obtain working capital in cruzeiros, the bank is paid in the currency of the receivable and discounts it accordingly. After reducing the value of the receivable by the discount rate, the company receives the current cruzeiro value of the receivable. Any gain from the appreciation of the receivable against the cruzeiro, which can be considerable, is passed on to the bank. To compare this method of raising working capital with Resolution 674 financing would require adding the exchange loss by the company to the discount rate. As for hard currency loans, a company would not use them domestically because of the considerable exchange risk involved and thus such loans would not serve the same purpose as Resolution 674 loans.

The government of Brazil also claims that the IOF is an indirect tax on the production of goods for export, that the exemption of loans under Resolution 674 from this tax is not a subsidy, and that if we determine that Resolution 674 financing provides a subsidy we should not consider this exemption as part of that subsidy. The IOF is an indirect tax and it is paid on domestic financial transactions. However, this fact is not relevant. Since we are considering the discounting of a cruzeiro-denominated account receivable, a transaction upon which the IOF is paid, as the commerical alternative to Resolution 674 loans, it is entirely appropriate that we include the exemption of Resolution 674 loans from the IOF as part of the subsidy, in order to measure the full benefit provided under this program.

II. Programs Preliminarily Determined Not To Be Subsidies

We prelimniarily determine subsidies are not being provided to manufacturers, producers, or exporters in Brazil of carbon steel plate under the following programs.

A. Government Purchase of Equity

The government of Brazil has owned a portion of the equity in USIMINAS and COSIPA since they were established in

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the 1950's and 1960's, respectively. This ownership takes several institutional forms but consists chiefly of shares owned by SIDERBRAS and the National Development Bank ("BNDE"). Currently, COSIPA is 99.9 percent owned by such entities (81.5 percent SIDERBRAS, 12.4 percent BNDE) and USIMINAS is 80.7 percent owned by them (34.3 percent SIDERBRAS, 46.4 percent BNDE). Nippon Steel has owned shares in USIMINAS since it was established and currently holds 17.3 percent of the equity. Neither company's stock is freely traded.

Between the years 1977-1981, COSIPA made a profit in only one year, 1978. USIMINAS has made a profit in all but one of these years, 1979, which was a difficult year financially for COSIPA, USIMINAS and any other company with substantial foreign currency debt, because of a 30 percent devaluation of the cruzeiro in December 1979. In the 1977-81 period, both companies experienced significant growth financed largely through debt, but also by government equity infusions. COSIPA's growth has been more substantial, and it has been the greater beneficiary of the government equity purchases. Most of this equity funding has come from government purchases of SIDERBRAS' equity, which in turn has purchased equity in its subsidiaries.

The petitioners alleged that these equity infusions are capital grants which constitute subsidies, in that they are investments in unprofitable companies without expectations of a reasonable return. They further alleged that prudent investors would not invest in COSIPA and USIMINAS, that government investment is "on terms inconsistent with commerical considerations," and that the government purchase of equity is "the grant of funds * * * to cover operating losses." As set forth in Appendix B, where such allegations were made, we look to see whether the companies concerned appeared to present sound investment opportunities when an investment was made.

USIMINAS has a history of being profitable. For the one year in the recent past when it was not, 1979, that failure was largely attributable to the cruzeiro devaluation.

For COSIPA, the losses have been frequent in recent years, but the government of Brazil states that this is largely because of the strain placed on the company's resources by expansion. To support its claim that COSIPA is a commerically sound investment, the Brazilian government cited a 1975 feasibility study prepared by the World Bank regarding COSIPA's Phase III expansion project, which included a financial and commerical analysis of the project. Some of the conclusions of that analysis were as follows: (1) "the project provides a * * * rate of return (after taxes) of 10.7 percent in constant terms;" (2) "the company's financial position is expected to allow reasonable dividends after project completion;" and (3) "by 1982, the first full year of Stage III production, net profits * * * as a percentage of average equity * * * would be about 12 percent." In the context of its analysis, the World Bank report noted the substantial increase in steel consumption in Brazil during the previous two decades, particularly for flat products. In addition, COSIPA has been able to attract loans from numerous foreign private banks from the 1970's to the present.

Beause of USIMINAS' record of profits in recent years and the returns reasonably expected by the government of Brazil when COSIPA's expansion project began, we preliminairly determine that the purchase of equity in these companies by the government is not "inconsistent with commercial considerations."

B. Investment Subsidy From Credit to the Corporate Income Tax

COSIPA and USIMINAS have taken part in this program, but not during the applicable period. Brazilian tax law allows any corporation that owes corporate income taxes to elect to apply up to 51 percent of its corporate income taxes owed to the government to specified investment funds. The investment funds generally are for the economic development of certain regions, industries or national interests (e.g., the Amazon, the Northeast, fisheries, tourism and reforestation). The steel industry is not among the targeted sectors. If a corporation elects to direct the taxes it owes to the government into one or more of the specified investment funds, it receives stock for its investment in those funds. Upon receipt of the stock, which must be held at least five years, the investment is included in the equity holdings of the corporation. We preliminarily determine that election to participate in this program does not constitute a subsidy since all corporations which pay corporate income taxes are eligible to participate in the program on equal terms.

C. Export Financing Under Communication 331

Communication 331 is a set of rules and regulations established by the Brazilian government to govern foreign exchange contracts for export transactions. Beyond establishing these rules, the government has no further involvement. Banks that act as intermediaries in export transactions operate under these rules but are free to choose whether they will discount an account receivable denominated in foreign currency, the type of transaction at issue in this program. The government of Brazil states that it provides no resources to banks to enable them to perform these operations nor does it establish the discount rates. The rate of discount reflects commercial considerations such as the bank's relationship with its customer, its own circumstances, and market rates of interest, which generally track LIBOR rates. As such, we preliminarily determine that the discounting of foreign exchange accounts receivable under these conditions is not a subsidy.

D. Transportation Subsidies

The Brazilian government, in its response to our questionnaire, states that COSIPA and USIMINAS receive no preferential rates when using railroads and ports. We have no evidence that any programs exist which given preferential freight or insurance rates to steel exporters.

E. Purchase of Inputs From A Related Company

Companhia Siderurgica Nacional (CSN) is a member of the SIDERBRAS group and both COSIPA and USIMINAS have purchased slab from CSN. The petitioners alleged that CSN received the same types of subsidies from the government as COSIPA and USIMINAS and that subsidies to CSN are consequently indirect subsidies to COSIPA and USIMINAS. The government of Brazil states that COSIPA and USIMINAS used the slab purchased from CSN exclusively for producing hot-rolled strip and that the specifications and dimensions of this slab preclude its use in producing carbon steel plate.

III. Programs Preliminarily Determined Not To Be Utilized

We preliminarily determine that the following programs which were described in the notice of "Initiation of Countervailing Duty Investigation" were not utilized by the manufacturers, producers, or exporters in Brazil of carbon steel plate.

A. Income Tax Exemption for Export Earnings

Exporters of carbon steel plate are eligible to participate in this program, under which the percentage of their profit attributable to export revenue is

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exempt from income tax. To arrive at this percentage, export revenue is divided by total revenue. The amount of profit exempt from the income tax is then multiplied by the 35 percent corporate income tax rate to determine the amount of the benefit.

In a program of this kind, benefits cannot be determined with finality until the books are closed sometime in the following year. Therefore, we must look at fiscal year 1980 to determine if any benefit was received in fiscal year 1981. Since neither COSIPA nor USIMINAS had a taxable profit in fiscal year 1980, neither company was eligible to receive benefits under this program.

B. The Commission for the Granting of Fiscal Benefits for Special Export Programs ("BEFIEX")

BEFIEX grants several types of benefits to companies that are part of certain targeted industries and that sign contracts that include specific export commitments. These benefits include the following: A reduction of between 70 percent and 90 percent of the import duties and the IPI tax on the import of machinery, equipment, apparatus, instruments, accessories and tools necessary to meet the approved export commitment; an extension of the period for carrying tax losses forward from four to six years, provided no dividends are paid during that time; and amortization of pre-operational expenses of BEFIEX projects at the discretion of the company rather than the normal straight-line amortization over ten years. As a general rule, companies that sign BEFIEX contracts guaranteeing these and any other benefits must make an export commitment that over the life of the project it will generate export earnings of at least three times the value of imports for the project. The government of Brazil states that since the steel industry in Brazil has been developed primarily to supply the domestic market and COSIPA and USIMINAS have large trade deficits, they are effectively ineligible for this program and did not receive any benefits in 1981.

C. Preferential Financing for the Storage of Merchandise Destined for Export: Resolution 330

This program prpvides financing for up to 80 percent of the value of merchandise placed in a warehouse and destined for export. Interest rates for such loans are 40 percent per annum, with interest payable semiannually. The government of Brazil states that neither COSIPA nor USIMINAS used this program, since both companies' exports are manufactured to order and there is no need to warehouse their merchandise.

D. Industrial Development Council ("CDI") Program This program allowed an exemption of 80 percent of the customs duties and 80 percent of the IPI tax on certain imported machinery for projects approved by the CDI. Decree Law 1726 repealed this program in 1979 and no new projects are eligible for these benefits. However, companies with projects approved prior to repeal may still receive these benefits pending the completion of the project. Neither COSIPA nor USIMINAS received benefits during 1981.

E. Accelerated Depreciation for Capital Goods Manufactured in Brazil

This program allows companies that purchase Brazilian-made capital equipment as part of an approved CDI expansion project to depreciate this equipment at twice the rate normally permitted under tax laws. The government of Brazil states that neither COSIPA nor USIMINAS utilized the accelerated depreciation provisions to reduce its tax liabilities in 1981.

F. Export Financing Under Resolution 68

This program provides financing for the export of Brazilian goods for a period of 181 days up to one year. Such financing is granted on a transaction-by- transaction basis and may cover up to 85 percent of the f.o.b. invoice price of the merchandise (plus freight and insurance). To be eligible, the exporter must show that the foreign purchaser has prepaid 15 percent of the invoice price. Neither COSIPA nor USIMINAS used Resolution 68 to finance exports of carbon steel plate to the United States in 1981.

IV. Program Preliminarily Determined to Be no Longer in Existence

We preliminarily determine that the following program which was described in the notice of "Initiation of Countervailing Duty Investigation" is no longer in existence.

Merchandise Circulation Tax (ICM) Export Credit Premium

This program, which provided Brazilian companies an overrebate of a state value-added tax on goods destined for export, was eliminated by Convention 01-79, published January 12, 1979.

V. Program for Which Additional Information Is Needed

The provision of long-term loans to COSIPA and USIMINAS was alleged by the petitioners to be a subsidy. COSIPA and USIMINAS have long-term loans from various sources in both domestic and foreign currencies. The loans in foreign currencies come from such sources as the World Bank, the Inter-American Development Bank, the U.S. Export-Import Bank, the Bank of America, Morgan Guaranty Trust and others, with interest rates ranging from 6 percent to around 2 percent above LIBOR. The government of Brazil states that long-term financing in cruzeiros is generally available only through government-controlled financial institutions. Both companies have received substantial loans from BNDE and FINAME for project investments and the purchase of capital equipment. These loans have real interest rates ranging from 5 and 8 percent, with the principal fully adjusted by the indexing factor. At this time, we do not have sufficient information upon which to determine whether these loans are providing manufacturers, producers, or exporters in Brazil of carbon steel plate benefits which constitute subsidies within the meaning of the countervailing duty law. We will seek additional information regarding these loans before reaching a final determination.

Negative Determination of "Critical Circumstances"

Counsel for the Five alleged that imports of carbon steel plate form Brazil present "critical circumstances". Under section 703(e)(1) of the Act, critical circumstances exist when the alleged subsidy is inconsistent with the Subsidies Code of the General Agreement on Tariffs and Trade and "there have been massive imports of the class or kind of merchandise which is the subject of the investigation over a relatively short period."

Since this investigation was initiated, U.S. imports of carbon steel plate from Brazil amounted to 16,442 net tons in February, 11,514 net tons in March, and 3,318 net tons in April, the most recent month for which import statistics are available. In the context of this industry, this product has not recently been massively imported from Brazil over a relatively short period of time. Therefore, critical circumstances do not exist for carbon steel plate.

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Verification

In accordance with section 776(a) of the Act, we will verify data used in making our final determination.

Suspension of Liquidation

In accordance with section 703 of the Act, we are directing the U.S. Customs Service to suspend liquidation of all entries of carbon steel plate from Brazil which are entered, or withdrawn from warehouse, for consumption, on or after the date of publication of this notice in the Federal Register and to require a cash deposit or bond for each such entry of this merchandise in the amount of 8.58 percent ad valorem. This suspension will remain in effect until further notice.

ITC Notification

In accordance with section 703(f) of the Act, we will notify the ITC of our determination. In addition, we are making available to the ITC all nonprivieged and nonconfidential information relating to this investigation. We will allow the ITC access to all privileged and confidential information in our files, provided the ITC confirms that it will not disclose such information, either publicly or under an administrative protective order, without the written consent of the Deputy Assistant Secretary for Import Administration.

Public Comment

In accordance with § 355.35 of the Commerce Department Regulations, if requested, we will hold a public hearing to afford interested parties an opportunity to comment on this preliminary determination at 10:00 A.M. on July 16, 1982, at the U.S. Department of Commerce, Room 6802, 14th Street and Constitution Avenue, NW., Washington, D.C. 20230. Individuals who wish to participate in the hearing must submit a request to the Deputy Assistant Secretary for Import Administration, Room 3099B, at the above address within ten days of this notice's publication. Requests should contain: (1) The party's name, address, and telephone number; (2) the number of participants; (3) the reason for attending; and (4) a list of the issues to be discussed. In addition, prehearing briefs must be submitted to the Deputy Assistanat Secretary by July 9, 1982. Oral presentations will be limited to issues raised in the briefs.

All written views should be filed in accordance with 19 CFR 355.34, on or before July 19, 1982, at the above address and in at least ten copies.

Gary N. Horlick,

Deputy Assistant Secretary for Import Administration