Certain Cotton Yarn Products From Brazil; Preliminary Results of

Countervailing Duty Administrative Review

AGENCY: International Trade Administration/Import Administration, Department of Commerce.

ACTION: Notice of preliminary results of countervailing duty administrative review.

SUMMARY: The Department of Commerce has conducted an administrative review of the countervailing duty order on certain cotton yarn products from Brazil for the period May 18, 1984 through December 31, 1985. The Department has preliminary determined the net subsidy to be zero or de minimis for five firms and 2.56 percent ad valorem for all other firms in 1984. For 1985, the Department has preliminarily determined the net subsidy to be 14.53 percent ad valorem for all firms. We invite interested parties to comment on these preliminary result.

EFFECTIVE DATE: March 23, 1988.

FOR FURTHER INFORMATION CONTACT: Philip Pia or Bernard Carreau, Office of Compliance, International Trade Administration, U.S. Department of Commerce, Washington, DC 20230; telephone: (202) 377-2786.

SUPPLEMENTARY INFORMATION:

Background

On April 18, 1984, the Department of Commerce ("the Department") published in the Federal Register (49 FR 15250) the final results of its last administrative review of the countervailing duty order on certain cotton yarn products from Brazil (42 FR 14089; March 15, 1977). On March 28, 1986, the petitioner, the American Yarn Spinners Association, requested in accordance with 19 CFR 355.10 that we conduct an administrative review of the order. We published the initiation on April 18, 1986 (51 FR 13273). The Department has now conducted that administrative review in accordance with section 751 of the Tariff Act of 1930 ("the Tariff Act").

Scope of Review

The United States has developed a system of tariff classification based on the international harmonized system of Customs nomenclature. Congress is considering legislation to convert the United States to this Harmonized System ("HS"). In view of this, we will be providing both the appropriate HS item numbers with our product descriptions on a test basis, pending Congressional approval. As with the TSUSA, the HS item numbers are provided for convenience and Customs purposes. The written description remains dispositive.
We are requesting petitioners to include the appropriate HS item number(s) in all new petitions filed with the Department. A reference copy of the proposed Harmonized System schedule is available for consultation at the Central Records Unit, Room B-099, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW, Washington, DC 20230. Additionally, all Customs offices have reference copies, and petitioners may contact the Import Specialist at their local Customs office to consult the schedule.
Imports covered by the review are shipments of Brazilian yarn, carded but not combed, wholly of cotton. Such merchandise is currently classifiable under items 301.01 through 301.98, inclusive, and it item 302.--with statistical suffixes 20, 22, and 24 of the Tariff Schedules of the United States. These products are currently classified under HS item numbers 5205.11.10, 5205.11.20, 5205.12.10, 5205.12.20, 5205.13.10, 5205.13.20, 5205.14.10, 5205.14.20, 5205.15.10, 5205.15.20, 5205.31.00, 5205.32.00, 5205.33.00, 5205.34.00, 5205.35.00. We invite comments from all interested parties on these HS classififications.
The review covers the period May 18, 1984 through December 31, 1985 and 20 programs.

Analysis of Programs

(1) CACEX Export Financing

Under this program, the Department of Foreign Commerce ("CACEX") of the Banco do Brasil provides short-term working capital financing to exporters at preferential rates. The loans have a duration of up to one year. During the period of review, producers of certain cotton yarn products could obtain CACEX financing based on the value of their previous year's exports. The maximum amount of CACEX financing that could be obtained in Brazil was 20 percent of the value of the previous year's exports.
Resolution 674, which became effective on January 22, 1981, set a maximum interest rate of 40 percent and required two interest payments, one 180 days after the loan was granted and the other at muturity. On June 11, 1983, the maximum interest rate for Resolution 674 loans was changed to 60 percent. Resolution 882, which became effective on January 2, 1984, required the full interest payment at maturity. It also set the maximum interest rate at monetary correction (calculated by the change in the value of readjustable treasury bonds ("ORTN")) plus 3 percentage points.
On August 21, 1984, Resolution 950 superseded Resolution 882 and changed the short-term export financing program substantially. Resolution 950, which was made effective retroactively to January 2, 1984 (the effective date of Resolution 882), made working capital financing available through commercial banks at prevailing market rates, with interest

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due at maturity. It authorized the Banco do Brasil to pay the lending institution an "equalization fee," or rebate, of up to 10 percentage points over the commercial interest rate, which the lending institution could pass on to the borrowers. On May 2, 1985, Resolution 1009 increased the equalization fee to 15 percentage points.
To find the interest differential for Resolution 882 loans, we compared two effective interest rates. The nominal interest rates on Resolution 882, 950, and 1009 loans are the same as the effective rates because there are no other charges, and the full amount of interest is paid at maturity. For our benchmark, we took the national average rate for thirty-day discounts of accounts receivable, as reported in Analise/Business Trends. This rate includes the 1.5 percent tax on financial transactions ("IOF"), from which preferential loans are exempt. We then compounded this rate to find the effective annual commercial benchmark.
Since the interest charged on CACEX export financing under Resolutions 950 and 1009 is now at prevailing market rates, this program would not be countervailable absent the equalization fee and the exemption from the IOF. Therefore, the interest differential for those loans is equal to the equalization fee plus the 1.5 percent IOF.
We consider the benefit from loans to occur when the borrower makes the interest payments. For Resolution 674, 882, 950, and 1009 loans on which interest was paid during the period of review, we multiplied the interest differential by the loan principal. We allocated the result over each firm's total exports and then weight-averaged each company's benefit by its share of total exports of this merchandise to the United States (excluding exports from firms with zero or de minimis aggregate benefits). On this basis, we preliminarily determine the benefit from this program to be 1.30 percent ad valorem in 1984 and 3.36 percent ad valorem in 1985.

(2) Income Tax Exemption for Export Earnings

Under this program, exporters of certain cotton yarn products are eligible for an exemption from income tax on the portion of their profits attributable to exports. The Brazilian government calculates the tax-exempt fraction of profit as the ratio of export revenue to total revenue. Six firms used this program in 1984, and seven firms used it in 1985.
The nominal corporate tax rate in Brazil is 35 percent. However, Brazilian tax law permits companies to reduce their income taxes by investing up to 26 percent of their tax liability in specified companies and funds. This tax credit effectively reduces the nominal 35 percent corporate tax rate. The firms under review invested in the specified companies and funds.
We calculated the effective tax rates by dividing each company's net tax liability by its taxable profit. We calculated the benefit by multiplying the amount of tax-exempt profit by the company's effective corporate tax rate and allocating the result over its total exports. We then weight-averaged each company's benefit by its share of total exports of the merchandise to the United States (excluding exports from firms with zero or de minimis aggregate benefits). On this basis, we preliminarily determine the benefit from this program to be 1.17 percent ad valorem in 1984 and 1.48 percent ad valorem in 1985.

(3) The IPI Export Credit Premium

Exporters of certain cotton yarn products are eligible for the maximum IPI export credit premium. Under this program, the Brazilian government pays exporters in cash a percentage of the f.o.b. price of the exported merchandise. The payment is made through the bank involved in the export transaction.
Effective June 26, 1981, the Brazilian government imposed an export tax to offset the benefit of the IPI premium on exports to the United States. In the final results of our last administrative review (49 FR 15250), we determined that the Brazilian government did not collect the export tax in a timely manner, and we considered this lag in collection to confer a benefit. However, for this review, we have found that the Brazilian government collected the export tax on time. Further, on May 1, 1985, the Brazilian government eliminated the IPI export credit premium for exporters of certain cotton yarn products. For these reasons, we preliminarily determine that exporters of this merchandise received no benefits from this program during the period of review.
Although we preliminary determine that the export tax completely offsets the IPI rebate in this case, we are reconsidering whether these export taxes meet the criteria set forth in section 771(6)(C) of the Tariff Act. We are concerned that these export taxes do not serve the larger purpose of the countervailing duty law, which is to encourage governments to cease subsidizing. Furthermore, such export taxes might not completely offset the subsidy, especially if the money collected from the tax could be refunneled into the same industries in different forms. We may seek further clarification of this program.

(4) CIC-CREGE 14-11 Financing

Under its CIC-CREGE 14-11 circular, the Banco do Brasil provides preferential financing to exporters on the condition that they maintain on deposit a minimum level of foreign exchange. Exporters of certain cotton yarn products participated in this program during the period of review.
There is no maximum interest rate for this program. Interest payments are normally made quarterly or semiannually, with the full principal to be repaid at maturity. We calculated the benefit based on the interest payment date in a manner similar to that used for CACEX export financing, using the same benchmark rate. We allocated the result over each firm's total exports and then weight-averaged each company's benefit by its share of total exports of the merchandise to the United States (excluding exports from firms with zero or de minimis aggregate benefits). We preliminarily determine the benefit from this program to be 0.01 percent ad valorem in 1984 and 0.03 percent ad valorem in 1985.

(5) BEFIEX

The Commission for the Granting of Fiscal Benefits to Special Export Program ("BEFIEX") allows Brazilian exporters, in exchange for export commitments, to take advantage of several types of benefits, such as import duty reductions, an increased IPI export credit premium, and tax exemptions or tax credits. We verified that one firm received import duty reductions during the review period.
To calculate the benefit, we divided the amount of import duty reductions received in each year of the review period by that firm's total sales in the corresponding year of the review period. We then weight-averaged the company's benefit by its share of total exports of the merchandise to the United States (excluding exports from firms with zero or de minimis aggregate benefits). On this basis, we preliminarily determine the benefit to be 0.05 percent ad valorem in 1984 and 0.12 percent ad valorem in 1985.

(6) Price Equalization Program

Under the Price Equalization Program ("the PEP"), which was operated from April 1985 to February 1986, the Companhia de Financiamento da Producao ("CFP"), a government agency, provided a specific quantity of raw cotton to textile exporters at a price that was significantly lower than both the internal market price and the world market price. The Government of Brazil claims that the purpose of this program

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was to eliminate, in the aggregate, the difference between the world market price and the higher internal market price of raw cotton for textile exporters. The Government of Brazil devised a formula to determine the quantity of raw cotton the exporter was able to purchase at this low price. It claims that the amount paid for this quantity, when combined with the amount paid for cotton purchased at the internal market price, equaled approximately what the exporter would have paid if all of his raw cotton (used for export) were purchased at the world market price.
We preliminarily determine this program to be countervailable because the CFP provided the cotton yarn exporters with a specific quantity of raw cotton on terms more favorable than those commercially available to the exporters. Under item (d) of the Illustrative List of Export Subsidies annexed to the Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General Agreement on Tariffs and Trade ("the Subsidies Code"), the delivery of goods by governments or their agencies for use in the production of exported goods constitutes an export subsidy when provided on terms more favorable than those commercially available on world markets to their exporters.
If Brazilian exporters of cotton yarn had actually imported raw cotton in commercial quantities during the review period, we could have considered such imports as the commercially available alternative to domestic raw cotton (in which case the PEP might have been consistent with item (d)). However, because of import restrictions imposed by the Government of Brazil, cotton yarn exporters did not import raw cotton during the period of review.
Therefore, although the net effect of the PEP may have been to provide raw cotton used in export production at world market prices, we do not consider the PEP to be consistent with item (d) because purchasing raw cotton at world market prices was not a "commercially available" alternative to Brazilian cotton yarn exporters. Without access to, and actual use of, imported raw cotton, the commercially available alternative to purchasing raw cotton under the PEP was purchasing raw cotton on the internal market. Cotton yarn exporters purchased most of their raw cotton on the internal market, and we have used the internal market price as the benchmark for measuring the benefit from cotton yarn purchased under the PEP.
To calculate the benefit, we multiplied the amount of cotton purchased by each firm at the PEP price by the average internal market price between April and December 1985. The benefit is the difference between this amount and the amount paid for raw cotton under the PEP. We allocated the benefit over each firm's total exports for 1985 and then weight-averaged each company's benefit by its share of total exports of the merchandise to the United States. On this basis, we preliminarily determine the benefit from this program to be 9.53 percent ad valorem in 1985.
Since the PEP was eliminated in February 1986, we preliminarily determine, for purposes of cash deposits of estimated countervailing duties, that there is no current benefit from this program.

(7) FST Financing

During the period of review, three producers of cotton yarn made interest payments on loans obtained under a program called FST financing. The term of the loans was less than one year, and the interest rates were below our commercial benchmark rates. The Government of Brazil claims that these loans are commercial working capital loans and that they are available to all industrial enterprises. However, the Government of Brazil did not produce any documentation showing that these loans are provided to more than the cotton yarn industry. Therefore, based on the best information available, we preliminarily determine that this program is provided to a specific industry. Since the interest rates on the FST loans are below our commercial benchmark rate, we also preliminarily determine that these loans are provided on terms inconsistent with commercial considerations.
We calculated the benefit based on the interest payment date, using the same benchmark rate as we used for CACEX export financing. We allocated the benefit over each firm's total sales and then weight-averaged each company's benefit by its share of total exports of the merchandise to the United States (excluding exports from firms with zero or de minimis aggregate benefits). On this basis, we preliminarily determine the benefit from this program to be 0.03 percent ad valorem in 1984 and 0.01 percent ad valorem in 1985.

(8) Other Programs

We examined the following programs and preliminarily find that exporters of cotton yarn did not use them during the review period:
a. Incentives for trading companies ("Resolution 883");
b. Accelerated depreciation for Brazilian-made capital goods;
c. Tax reductions on export production equipment ("CIEX");
d. Export financing under Resolution 68 ("FINEX");
e. Duty-free treatment and tax exemption on equipment used in export production ("CDI");
f. Export financing under the Fundo Nacional de Participadoes ("FUNPAR");
g. Exemption from state-administered value-added taxes ("ICM") on domestic sales;
h. Export promotion financing ("PROEX");
i. Benefits from import substitution ("PROSIM");
j. Financing for the storage of merchandise destined for export ("Resolution 330");
k. Green-Yellow drawback;
l. Cotton auctions; and
m. Federal stock (EGF) loans.

Upstream Subsidy Allegations

In letters of June 11, 1986 and November 26, 1986, the petitioner, the American Yarn Spinners Association ("AYSA"), alleged that the following Brazilian subsidy programs provide upstream benefits to Brazilian cotton yarn exporters:
(1) CACEX export financing;
(2) Income tax exemptions for export earnings;
(3) BEFIEX;
(4) CIC-CREGE 14-11 financing;
(5) Incentives for trading companies (Resolution 883);
(6) FINEX export financing;
(7) PROEX financing;
(8) Financing for merchandise destined for export (Resolution 330);
(9) Tax reductions on equipment used in export production ("CIEX");
(10) Export financing under the Fundo Nacional de Paricipadoes ("FINPAR");
(11) Benefits from import substitution ("PROSIM");
(12) Gold draft of exportation;
(13) Fundo de Democratizacao do Capital das Empresas;
(14) Partially indexed long-term loans;
(15) Exemption of IPI and customs duties on imported equipment ("CDI");
(16) Accelerated depreciation for Brazilian-made capital equipment;
(17) Green-Yellow drawback;
(18) Cotton auctions; and
(19) Price Equalization Program.
Of these, programs (1) through (9) are export subsidy programs, which cannot form the basis of an upstream subsidy (see section 771A(a) of the Tariff Act). For programs (10) through (16), AYSA did not provide any information that gives us reasonable grounds to believe or suspect that an upstream subsidy is being paid or bestowed to the cotton

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yarn exporters, as required by section 701(c) of the Tariff Act.
AYSA did provide specific information on the Green-Yellow drawback program and two new programs, cotton auctions and the Price Equalization Program. We sent a supplemental questionnaire to the Brazilian government regarding these programs. At verification we found that the Green-Yellow drawback allows trading companies to qualify for export incentives. It is therefore not a potential domestic subsidy program. Of the two cotton auction programs, we found that one was designed only for raw cotton exporters, and the other for exporters and domestic producers of textile products. Because the first auction program cannot be used by cotton growers who sell their product in the domestic market, it cannot provide an upstream subsidy to cotton yarn exporters. The second auction program is not available to producers of raw cotton, the major input into cotton yarn. Upstream subsidies deal only with inputs (such as raw cotton) into the exported product. Any potential benefit from the second auction program would be direct, rather than upstream, and we verified that cotton yarn exporters did not use the second auction program. Finally, the benefit to the cotton yarn producers from the Price Equalization Program is direct, as opposed to upstream. See also, section on Price Equalization Program.
For these reasons, we preliminarily determine that none of these 19 programsprovided an upstream subsidy to cotton yarn exporters during the period of review.

Companies With Zero Benefits

We preliminarily determine that the following firms received zero or de minimis benefits during the review period:
For 1984:
(1) Unitika do Brazil Industria Textil Ltda;
(2) Cia. Industrial e Agricola Boyes;
(3) Lanficio Amparo Ltda;
(4) Fiacao Amparo S.A; and
(5) Brasital S.A. Para a Industria E.O. Comercio.

Preliminary Results of Review

As a result of our review, we preliminarily determine the net subsidy to be zero or de minimis for five firms and 2.56 percent ad valorem for all other firms in 1984, and 14.53 percent ad valorem for all firms in 1985.
The Department intends to instruct the Customs Service not to assess countervailing duties on shipments of Brazilian carded cotton yarn from the five firms with zero or de minimis benefits in 1984, and to assess countervailing duties of 2.56 percent of the f.o.b. invoice price on shipments from all other firms entered, or withdrawn from warehouse, for consumption on or after May 18, 1984 and exported on or before December 31, 1984. The Department also intends to instruct the Customs Service to assess countervailing duties of 14.53 percent of the f.o.b. invoice price on shipments from all firms exported on or after January 1, 1985 and on or before December 31, 1985.
The elimination of the Price Equalization Program in February 1986 decreases the total estimated duty deposit rate to 5.00 percent de ad valorem. Therefore, the Department intends to instruct the Customs Service to collect 5.00 percent of the f.o.b. invoice price on shipments from all firms entered, or withdrawn from warehouse, for consumption on or after the date of publication of the final results of this administrative review. This deposit requirements shall remain in effect until publication of the final results of the next administrative review.
Interested parties may submit written comments on these preliminary results within 30 days of the date of publication of this notice and may request disclosure and/or a hearing within 8 days after the date of publication. Any hearing, if requested, will be held 30 days after the date of publication or the first workday thereafter. Any request for an administrative protective order must be made no later than five days after the date of publication. The Department will publish the final results of this administrative review including the results of its analysis of issues raised in any such written comments or at a hearing.
This administrative review and notice are in accordance with section 751(a)(1) of the Tariff Act (19 U.S.C. 1675 (a)(1)) and § 355.10 of the Commerce Regulations (50 FR 32556, August 13, 1985).

Gilbert B. Kaplan,

Acting Assistant Secretary Import Administration.

Date: March 17, 1987.

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