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NOTICES
DEPARTMENT OF COMMERCE
International Trade Administration
[(C-351-802)]
Steel Wheels From Brazil; Preliminary Affirmative Countervailing Duty
Determination and Initiation of Upstream Subsidy Investigation
Friday, October 28, 1988
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AGENCY: International Trade Administration/Import Administration, Department of Commerce.
ACTION: Notice of Preliminary Affirmative Countervailing Duty Determination and Initiation of Upstream
Subsidy Investigation.
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SUMMARY: We preliminarily determine that benefits which constitute subsidies within the meaning of the
countervailing duty law are being provided to manufacturers, producers, or exporters in Brazil of steel wheels.
The estimated net subsidy is zero for Borlem and 18.82 percent ad valorem for all other companies. 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 the subject merchandise from all companies, except Borlem, which 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withdrawn from warehouse, for consumption on or after the date of publication of this notice, and to require a cash deposit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 for each such entry equal to 18.82 percent ad valorem.
On the basis of new information submitted by the petitioner, we are initiating an investigation to determine whether
manufacturers, producers, or exporters in Brazil of steel wheels receive benefits which constitute upstream subsidies
within the meaning of the countervailing duty law. In accordance with section 703(g) of the Tariff Act of 1930, we
may extend the deadline for a final determination to 165 days after the preliminary determination if we
conclude that additional time is necessary to make the required determination concerning upstream subsidization.
We conclude that such additional time is required. Accordingly, we will make our final determination no later than
April 7, 1989.
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EFFECTIVE DATE: October 28, 1988.
FOR FURTHER INFORMATION CONTACT: Philip Pia or Bernard Carreau, Office of Countervailing Compliance, Import
Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution
Avenue NW., Washington, DC 20230; telephone: (202) 377-2786.
supplemental information
Case History
On July 29, 1988, we received a petition in proper form from the Kelsey-Hayes Company on behalf of United States
producers of steel wheels. In compliance with 19 CFR 355.26, the petition alleged that manufacturers, producers, or
exporters in Brazil of steel wheels receive, directly or indirectly, benefits which constitute 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 August 18, 1988, we initiated such an investigation (53 FR 32267, August 24, 1988). We stated that
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we expected to issue a preliminary determination by October 24, 1988.
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 ITC of our initiation. On September 12,
1988, the ITC preliminarily determined that there is a reasonable indication that imports of steel wheels materially injure,
or threaten material injury to, a U.S. industry (53 FR 36660. September 21, 1988).
Scope of Investigation
The United States has developed a system of tariff classification based on the international harmonized system of Customs
nomenclature. On January 1, 1989, the U.S. tariff schedules will be fully converted to the Harmonized Tariff Schedule
(HTS). All merchandise entered, or withdrawn from warehouse, for consumption on or after this date will be classified
solely according to the appropriate HTS item number(s). Until that time, however, the Department will be providing both
the appropriate Tariff Schedules of the United States Annotated (TSUSA) item number(s) and the appropriate HTS item
number(s) with our product descriptions. As with the TSUSA, the HTS item numbers are provided for convenience and
Customs purposes. The written description remains dispositive.
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We are requesting petitioners to include the appropriate HTS item number(s) as well as the TUSUA item number(s) in all
new petitions filed with the Department. A reference copy of the HTS 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.
The products covered by this investigation are steel wheels currently provided for in item 692.3230 of the TSUSA and
currently classifiable under HTS item number 8708.70.80. The merchandise includes steel wheels, assembled or
unassembled, consisting of a disc and a rim, designed to be mounted with both tube type and tubeless pneumatic tires, in
wheel diameter sizes ranging form 13.0 inches to 16.5 inches, inclusive, and generally for use on passenger automobiles,
light trucks, and other vehicles.
In a submission dated September 28, 1988, Borlem, S.A., a respondent company, argued that rims imported separately are
not within the scope of the investigation. In submissions dated October 7, 1988 and October 12, 1988, the petitioner
argued that rims imported separately and sold as "distinct articles of commerce" are not within the scope of the
investigation, but that rims imported separately as a means of circumvention, are within the scope of the investigation. In
a submission dated October 21, 1988, the petitioner, as well
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as NI Industries, a domestic interested party, argued that all rims, whether imported separately as a distinct article of
commerce or not, are within the scope of the investigation.
We intend to examine these arguments, and any additional arguments submitted in this proceeding, in further detail. Until
we have sufficient information to make a definitive scope ruling, we tentativley determine that rims or discs, imported
separately, are included in the scope of this investigation.
Analysis of Programs
For purposes of this preliminary determination, the period for which we are measuring subsidization (the review
period) is calendar year 1987. During our investigation of steel wheels we received information showing that two
companies, Rockwell-Fumagalli and *43750
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Borlem S.A., accounted for substantially all exports of steel wheels to the United States during the period of review.
I. Programs Preliminarily Determined to Confer Subsidies
(1) CACEX Preferential Working Capital Financing for Exports Under this
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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 term of one year or less. During the period of review,
Fumagalli made interest payments on CACEX loans, but Borlem did not use this program.
On August 31, 1984, Resolution 950 made CACEX working capital financing available through commercial banks at
prevailing market rates, with interest 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.
Since the interest charged on CACEX export financing under Resolutions 950 and 1009 is at prevailing market rates, this
program would not be countervailable absent the equalization fee and the exemption from the IOF (a general tax on
financial transactions). Therefore, the interest differential for those loans is equal to the equalization fee plus the 1.5
percent IOF. Because this program provides financing at preferential rates only to exporters, we preliminarily determine
that it is countervailable.
We consider the benefits from loans to occur when the borrower makes the interest payments. For CACEX loans on which
interest was paid during the
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period of review, we multiplied the interest differential by the loan principal. We allocated the result over Fumagalli's total
exports. On this basis, we preliminarily determine the benefit from this program to be zero for Borlem and 2.25 percent ad
valorem for Fumagalli and all other firms.
(2) Income Tax Exemption for Export Earnings
Under this program, exporters of steel wheels 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. Because this program provides tax exemptions that are limited to exporters, we preliminarily
determine that it is countervailable. Fumagalli used this program in 1987, but Borlem did not.
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. Because Fumagalli invested in the specified companies and funds, its
effective tax rate was lower than the nominal 35 percent rate during the period of review.
We calculated Fumagalli's effective tax rate by dividing its net tax liability
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by its taxable profit. We calculated the benefit by multiplying the amount of tax-exempt profit by the effective tax rate and
allocating the result over Fumagalli's total exports. On this basis, we preliminarily determine the benefit from this program
to be zero for Borlem and 2.15 percent ad valorem for Fumagalli and all other firms.
(3) The 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. Exporters of steel wheels were
eligible for the maximum IPI export credit premium, which was 15 percent during the period of review. Because this
program provides payments that are limited to exporters, we preliminarily determine that it is countervailable. Fumagalli
received the premium in 1987, but Borlem did not.
We calculated the benefit by dividing the amount of IPI credit premium earned on shipments of steel wheels to the United
States by Fumagalli's exports to the United States. On this basis, we preliminarily determine the benefit from this program
to be zero for Borlem and 13.24 percent ad valorem for Fumagalli and all other firms.
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(4) CIC-CREGE 14-11 Financing
Under its Circular CIC-CREGE 14-11, the Banco do Brasil provides preferential financing to exporters on the condition that
they maintain on deposit a minimum level of foreign exchange. The interest rate is based on the cost of funds to banks plus
a spread of three percentage points, which is below our benchmark rate (see below). The loans have a term of one year and
a variable interest rate, which changes every quarter. Because this program provides loans at preferential rates only to
exporters, we preliminarily determine that it is countervailable. Fumagalli made payments on a loan under this program
during the period of review. The interest payments on this loan were made on the last day of each month, and the full
principal was repaid at maturity. Borlem did not participate in this program during the review period.
The predominant short-term lending instrument commercially available in Brazil during the review period was a
60-day discount of accounts receivable. For our benchmark we used a yearly average of the annualized cost of these
dicount rates, which are published weekly in Gazeta Mercantil, a Brazilian financial publication. In order to borrow a given
amount for one year, a commercial borrower in Brazil would have been required to roll over a 60-day discount of
accounts receivable ("duplicatas") five times. Each rollover would consist of discounting the original principal by the
commercial discount rate prevailing
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on the day of the rollover. We have calculated an annual effective interest rate benchmark by multiplying the average
monthly discount rate in 1987 by two to obtain a 60-day discount rate. We then converted the 60-day discount to an
interest rate. Finally we compounded this rate six times to obtain an annual effective interest rate benchmark of 280.90
percent.
To measure the benefit, we compared the benchmark with the preferential rate and multiplied the differential by the full
amount of the loan. We then divided the result by Fumagalli's exports to the United States. On this basis, we preliminarily
determine the benefit from this program to be zero for Borlem and 0.10 percent ad valorem for Fumagalli and all other
firms.
(5) BEFIEX
The Commission for the Granting of Fiscal Benefits to Special Export Programs ("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. Because these benefits are provided only to exporters, we preliminarily
determine that this program is countervailable. Fumagalli received import duty reductions on capital
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equipment during the review period, but Borlem did not.
To calculate the benefit, we divided the amount of import duty reductions by Fumagalli's total exports in 1987. On this
basis, we preliminarily determine the benefit to be zero for Borlem and 0.48 percent ad valorem for Fumagalli and all other
firms.
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(6) FINEX Export Financing
Resolutions 68 and 509 of the Conselho Nacional do Comercio Exterior (CONEX) provide that CACEX may draw upon the
resources of the Fundo de Financiamento a Exportacaco (FINEX) to subsidize short- and long-term loans for both Brazilian
exporters (Resolution 68) and foreign importers (Resolution 509) of Brazilian goods. CACEX pays the lending bank an
"equalization fee" that makes up the difference between the subsidized interest rate and the prevailing commercial rate.
CACEX also provides the lending bank with a "handling fee" equal to two percent of the loan principal in order to encourage
foreign bank participation in the program. During the period of review, the interest rates ranged between 5.25 percent and
8.19 percent per annum, which are below our benchmark rate (see below). Because this program provides loans at
preferential rates only to exporters (or their foreign importers), we preliminarily determine that it is
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countervailable. We consider loans to U.S. importers to be equivalent to loans to their corresponding exporters. One of
Fumagalli's importers made interest payments on Resolution 509 FINEX loans in 1987. Neither Borlem nor its importers
used this program during the period of review.
Resolution 509 loans to U.S. importers are given in U.S. dollars. We therefore chose as a benchmark interest rate the
average quarterly interest rate for commercial and industrial short-term dollar loans as published by the United States
Federal Reserve Board. The average rate in 1987 was 9.81 percent per annum.
To measure the benefit, we multiplied the value of the loan principal on which interest payments were due in 1987 by the
differential between the preferential interest rate and our benchmark. We divided the result by Fumagalli's exports of steel
wheels to the United States in 1987. On this basis, we preliminarily determine the benefit to be zero for Borlem and 0.50
percent ad valorem for Fumagalli and all other firms.
II. Programs Preliminarily Determined Not to be Used
(We examined the following programs and preliminarily determine that producers or exporters of steel wheels did not use
them during the review period:
(1) Accelerated depreciation for Brazilian-made capital goods;
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(2) Duty-free treatment and tax exemption on equipment used in export production ("DCI");
(3) Financing for the storage of merchandise destined for export ("Resolution 330");
(4) Federal stock (EFG) loans; and
(5) Industrial enterprise (FST) loans.
Suspension of Liquidation
In accordance with section 703(d) of the Act, we are directing the U.S. Customs Service to suspend liquidation of all
unliquidated entries of steel wheels from Brazil from all companies, except Borlem S.A., that were 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 from all companies, except Borlem S.A., of 18.82
percent ad valorem. This suspension of liquidation 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
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determination. In addition, we are making available to the ITC all nonprivileged and nonproprietary information
relating to this investigation. We will allow the ITC access to all privileged and business proprietary 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 Assistant Secretary for Import Administration.
The ITC will determine whether these imports materially injure, or threaten material injury to, a U.S. industry 120 days
after the Department makes its preliminary affirmative determination or 45 days after the Department's final
affirmative determination, whichever is later.
Initiation of Upstream Subsidy Investigation
In our initiation notice (53 FR 32268, August 24, 1988), we declined to initiate as upstream subsidy investigation because
the petitioner did not provide adequate information to support its allegation that a competitive benefit was conferred on
steel wheels by means of subsidies provided to input (steel) producers. Under the terms of section 771A(b)(1),
"a competitive benefit has been bestowed when the price for the input product * * * is lower than the price that the
manufacturer or producer of
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merchandise which is the subject of the countervailing duty proceeding would otherwise pay for the product in
obtaining it from another seller in an arms- length transaction."
On October 12, 1988, the petitioner provided published Brazilian prices for hot-rolled sheet. Comparing these prices
with the petitioner's surrogate "arm's-length" prices, we conclude that there are reasonable grounds to believe or suspect
that a competitive benefit is bestowed on Brazilian producers of steel wheels. The petitioner had already provided
reasonable grounds to believe or suspect that a subsidy, as described in section 771(5)(B) of the Act, has been bestowed on
the input product (hot-rolled sheet), and that the alleged upstream subsidy has a significant effect on the cost of
manufacturing steel wheels. For these reasons, we are initiating an upstream subsidy investigation on steel wheels from
Brazil.
Public Comment
In accordance with 19 CFR 355.35, we will hold a public hearing, if requested, to afford interested parties an opportunity to
comment on this preliminary determination no later than March 3, 1989. Individuals who wish to participate in
the hearing must submit a request to the Assistant Secretary for Import Administration within 10 days of the date of
publication of this notice.
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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, at least 10 copies of pre-hearing briefs must be submitted to the Assistant Secretary by February 17, 1989.
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 November 28, 1988, at the above address and in at least 10 copies.
This notice is published pursuant to section 703(f) of the Act [19 U.S.C. 167lb(f)].
October 24, 1988.
Jan W. Mares,
Assistant Secretary for Import Administration.