(Cite as: 54 FR 15523)


                                            NOTICES

                                    DEPARTMENT OF COMMERCE

                                           [C-351-802]

            Final Affirmative Countervailing Duty Determination; Steel Wheels From Brazil

                                       Tuesday, April 18, 1989

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

ACTION: Notice of final affirmative countervailing duty determination.

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 Brazil of steel wheels, as described in the
"Scope of 
                                       (Cite as: 54 FR 15523)

Investigation" section of this notice. The estimated net subsidy and duty deposit rates are specified in the "Suspension of
Liquidation" section of this notice.

We have notified the U.S. International Trade Commission (ITC) of our determination. If the ITC determines that
imports of steel wheels materially injure, or threaten material injury, to a United States industry, we will direct the U.S.
Customs Service to resume suspension of liquidation of all entries of steel wheels from Brazil that are entered, or
withdrawn from warehouse, for consumption on or after the date of publication of the countervailing duty order,
and to require a cash deposit as described in the "Suspension of Liquidation" section of this notice.

EFFECTIVE DATE: April 18, 1989.

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.

SUPPLEMENTARY INFORMATION:

                                       (Cite as: 54 FR 15523)


Final Determination

Based on our investigation, we determine that 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 steel
wheels. For purposes of this investigation, we find the following programs to confer subsidies:
- CACEX Preferential Working Capital Financing for Exports
- Income Tax Exemption for Export Earnings
- CIC-OPCRE 6-2-6 Financing
- BEFIEX: IPI Export Credit Premium, and Import Duty and IPI Tax Reductions
- FINEX (Resolution 509) Export Financing
- Upstream Subsidy (steel input)
We determine the estimated net subsidy to be 1.82 percent ad valorem for Borlem S.A. and 17.29 percent ad valorem for
all other manufacturers, producers or exporters in Brazil of steel wheels.

Case History

Since the publication of the preliminary determination (Steel Wheels From 
                                       (Cite as: 54 FR 15523)

  Brazil; Preliminary Affirmative Countervailing Duty Determination and Initiation of Upstream Subsidy
Investigation) (53 FR 43749; October 28, 1988), the following events have occurred. Respondents submitted a
supplemental response containing information pertaining to Borlem do Nordeste on December 23, 1988, and a response to
our upstream questionnaire on January 6, 1989. We conducted verification in Brazil, from January 25, to February 3,
1989, of the questionnaire responses of the Government of Brazil (GOB), Rockwell-Fumagalli, Borlem, S.A., Borlem do
Nordeste (BNE), and Usinas Siderurgicas de Minas Gerais (USIMINAS).
Petitioner requested a public hearing. Petitioner and respondents filed pre-hearing briefs on March 1, 1989. We held a
public hearing on March 3, 1989. Petitioner and respondents filed post-hearing briefs on March 27, 1989.

Scope of Investigation

The United States, under the auspices of the Customs Cooperation Council, has developed a system of tariff classification
based on the international harmonized system of Customs nomenclature. On January 1, 1989, the United States fully
converted to the Harmonized Tariff Schedule (HTS), as provided for in section 1201 et seq. of the Omnibus Trade and
Competitiveness Act of 1988. All merchandise entered, or withdrawn from warehouse, for consumption on or 
                                       (Cite as: 54 FR 15523)

after that date is now classified solely according to the appropriate HTS item number(s).
The products covered by this investigation are steel wheels (except custom wheels), assembled or unassembled, consisting
of both a disc and a rim, designed to be mounted with both tube type and tubeless pneumatic tires, in wheel diameter sizes
ranging from 13.0 inches to 16.5 inches, inclusive, and generally for use on passenger automobiles, light trucks and other
vehicles. In 1988, such merchandise was classifiable under item 692.3230 of the Tariff Schedules of the United States
Annotated. This merchandise is currently classifiable under HTS item number 8708.70.80.
In our preliminary determination, we stated that "until we have sufficient information to make a definitive scope
ruling, we tentatively determine that rims or discs, imported separately, are included in the scope of this investigation."
Petitioner argues that rims should be included within the scope of the order to prevent circumvention. The petition
described the merchandise covered as wheels from Brazil, which included rims and centers for such wheels so as to
avoid possible circumvention through the shipment of wheel components rather than finished wheels. In an October 7,
1988 letter to the department, petitioner restated this position with regard to the rims market by asserting that its
"intention was not to include within the scope of the imports subject 
                                       (Cite as: 54 FR 15523)

to investigation rims sold as distinct articles of commerce and, therefore, not in circumvention of an order. . . . Petitioner's
concern lies with circumvention." In other submissions, petitioner was inconsistent regarding the reasons for including
rims in the scope. We conclude, however, that petitioner's primary concern is circumvention.
We verified that during the period of review the only parts of steel wheels imported from Brazil into the United States
were rims. Discs were not imported. These rims were purchased by unrelated custom wheel manufacturers who combined
the rims with non-Brazilian discs to make custom wheels at their own facilities. The discs add significant value to the rims.
The rims that are now imported are not of concern to the petitioner. The rims that are currently being imported are used
exclusively for the manufacture of custom wheels, and the petitioner has explicitly indicated that it did not wish to include
custom wheels in the scope of the order (October 7, 1988 letter). Nor is it likely that imports of these rims would
undermine the effectiveness of a countervailing duty or antidumping order on steel wheels. While the steel wheels
that are subject to this investigation are purchased by original equipment manufacturers (i.e., automobile manufacturers),
the custom wheels that incorporate the rims currently being imported are sold exclusively in the aftermarket (i.e., to
automobile owners).
In past cases where petitioners have raised concerns about circumvention 
                                       (Cite as: 54 FR 15523)

of any resulting order, the department has specifically included parts in the scope of an investigation because of *15524
                                    (Cite as: 54 FR 15523, *15524)

uncertainty as to the authority of the Department to include parts subsequent to the publication of an order where parts
are imported to circumvent the order. See, e.g., Cellular Mobile Telephones from Japan (50 FR 42577 (1985)). Now,
however, section 781 of the Omnibus Trade and Competitiveness Act of 1988 not only clarifies that the Department has
such authority but sets forth the criteria for dealing with this type of circumvention. Therefore, notwithstanding pre-1988
Act administrative precedents, it is neither necessary nor appropriate to include rims in the scope of the proceeding at this
time. If in the future there is evidence of circumvention of the order on steel wheels by importation of Brazilian rims and
discs, the Department will invoke the remedies available under section 781.

Analysis of Programs

For purposes of this final determination, the period for which we are measuring subsidies ("the review period") is
calendar year 1987. Based upon our analysis of the petition, the responses to our questionnaire, verification, and written
comments filed by petitioner and respondents, we determine the following:


                                    (Cite as: 54 FR 15523, *15524)

I. Programs Determined To Confer Subsidies

We determine that subsidies are being provided to manufacturers, producers and exporters in Brazil of steel wheels
under the following programs.

(1) CACEX Preferential Working Capital Financing for Exports

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 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 21, 1984, resolution 950 make 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 we verified the lending
institution passed 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 
                                    (Cite as: 54 FR 15523, *15524)

absent the equalization fee and the exemption from the IOF (a tax on financial transactions). Therefore, the interest
differential for these 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 determine that it is countervailable.
We consider the benefit from loans to occur when the borrower makes the interest payments. For CACEX loans on which
interest was paid during the period of review, we multiplied the interest differential by the length of the loan and the loan
principal. We allocated the result over Fumagalli's total exports. On this basis, we determine the benefit from this program
to be zero for Borlem and 1.10 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. According to Brazilian tax law, the tax-exempt fraction of profit is calculated as the ratio of export
revenue to total revenue. Because this program provides tax exemptions that are limited to exporters, we 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 
                                    (Cite as: 54 FR 15523, *15524)

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 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 determine the benefit from this program to be zero for Borlem and 0.39 percent ad valorem for
Fumagalli and all other firms.

(3) CIC-OPCRE 6-2-6 (CIC-CREGE 14-11) Financing

Under its Circular CIC-CREGE 14-11, later modified by Circular CIC-OPCRE 6-2- 6, 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. 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 
                                    (Cite as: 54 FR 15523, *15524)

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.
Based on information gathered during verification from commercial banking sources in Brazil, we have determined
that the "taxa ANBID" rate published by Gazeta Mercantil, a Brazilian daily financial publication, is a broader measure of the
rates available for short-term financing and is a more accurate basis for calculating our benchmark than the rate for the
discounting of accounts receivable used in our preliminary determination. Because of the complex calculations
necessary to convert the rates on discounts of accounts receivable into an annual benchmark, certain distortions can
occur that sometimes lead to a benchmark below the rate of inflation. The "taxa ANBID" is an average monthly lending rate
calculated by the National Association of Brazilian Investment Banks (ANBID) and is based on a survey of the monthly
rates on short-term loans charged by Brazilian commerical banks. We calculated our annual average benchmark by
compounding the "taxa ANBID" rate published for each month during 1987.
To calculate the benefit, we compared the benchmark with the preferential rate and multiplied the differential by the term
of the loan and 
                                    (Cite as: 54 FR 15523, *15524)

the loan principal. We then divided the result by Fumagalli's total exports. On this basis, we determine the benefit from this
program to be zero for Borlem and 0.14 percent ad valorem for Fumagalli and all other firms.
Because we verified that, effective September 20, 1988, the interest rate on all CIC-OPCRE 6-2-6 loans was equal to the
ANBID rate (our commercial benchmark rate), we determine that these loans are not longer preferential. Therefore, for
purposes of the cash deposit of estimated countervailing duties, we determine the benefit from this program to be
zero for all firms.

*15525
                                    (Cite as: 54 FR 15523, *15525)

(4) 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 IPI
export credit premium, and tax exemptions or tax credits. Because these benefits are provided only to exporters, we
determine that this program is countervailable.
(a) The IPI Export Credit Premium. This benefit is a cash payment by the Brazilian government to exporters. The amount of
the payment is a fixed percentage of the f.o.b. price of the exported merchandise. The payment is made through the bank
involved in the export transaction. Fumagalli was 
                                    (Cite as: 54 FR 15523, *15525)

eligible for the maximum IPI export credit premium, which was 15 percent during the period of review. Borlem was not
eligible to receive this benefit during the period of review.
We calculated the benefit by dividing the amount of IPI credit premiums received by Fumagalli on shipments of the
merchandise to the United States by the company's exports of the merchandise to the United States. On this basis, we
determine the benefit from this program to be zero for Borlem and 12.47 percent ad valorem for Fumagalli and all other
firms.
(b) Import Duty and IPI Tax Reductions on Imported Capital Equipment. Fumagalli received reductions of customs duties
and the IPI tax on imported capital equipment used in the manufacture of the subject merchandise during the review
period.
To calculate the benefit, we divided the total amount of the reductions received in 1987 by Fumagalli's total exports in
1987. On this basis, we determine the benefit to be zero for Borlem and 0.43 percent ad valorem for Fumagalli and all other
firms.

(5) FINEX Export Financing

Resolutions 68 and 509 of the Conselho Nacional do Comercio Exterior (CONCEX) provide that CACEX may draw upon the
resources of the Fundo de Financiamento a 
                                    (Cite as: 54 FR 15523, *15525)

Exportacao (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 on Resolution 509 dollar loans ranged between 5.25 percent and
8.19 percent per annum, which are below our benchmark rate. Because this program provides loans at preferential rates
only to exporters (or their foreign importers), we determine that it is countervailable.
We consider loans to U.S. importers to be equivalent to loans to their corresponding exporters. One of Fumagalli's
importers had Resolution 509 FINEX loans on which it made interest payments in 1987. Neither Borlem nor its importers
used this program during the period of review. Since Resolution 509 loans to U.S. importers are given in U.S dollars, we
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 was 10.47 percent per annum in 1986 and
9.81 percent per annum in 1987.
To calculate the benefit, we multiplied the value of the loan principal on 
                                    (Cite as: 54 FR 15523, *15525)

which interest payments were due in 1987 by the differential between the preferential interest rate and our benchmark.
Since we were able to tie these loans to exports to the United States, we divided the result by Fumagalli's exports of steel
wheels to the United States in 1987. On this basis, we determine the benefit to be zero for Borlem and 1.04 percent ad
valorem for Fumagalli and all other firms.

II. Upstream Subsidy

Petitioner has alleged that steel wheel producers benefit from an upstream subsidy, as defined in section 771A of the Act,
by virtue of domestic subsidies provided to producers of the major raw material imput in steel wheels: hot- rolled
sheet and coil. We verified that USIMINAS supplied all of the steel used in the merchandise exported to the United States in
1987. We determine that USIMINAS benefited from two domestic subsidies in 1987: government provision of equity and
import duty and IPI tax reductions under CDI.

A. Government Provision of Equity of USIMINAS

Siderurgia Brasileira S.A. (SIDERBRAS) is a government-controlled corporation under the jurisdiction of the Ministry of
Industry and Commerce. Pursuant to 
                                    (Cite as: 54 FR 15523, *15525)

Decree Law No. 6159 of December 6, 1974, SIDERBRAS became the holding company for the federally-owned steel
corporations. SIDERBRAS is a majority shareholder of nine Brazilian steel producers, including USIMINAS, and a minority
shareholder of one small Brazilian steel producer. From 1977 through 1987, SIDERBRAS made equity infusions in
USIMINAS.
We have consistently held that government provision of, or assistance in obtaining, capital does not per se confer a
subsidy. Government equity purchases or financial backing bestow a countervailable benefit only when provided on terms
inconsistent with commercial considerations. Because USIMINAS' shares are not publicly traded, there is no
market-determined price for its shares. Therefore, we examined whether USIMINAS was a reasonable investment (a
condition we have termed "equityworthy") in order to determine whether the equity infusions were inconsistent with
commercial considerations.
A company is a reasonable investment if it shows the ability to generate a reasonable rate of return within a reasonable
period of time. For purposes of this determination, we reviewed the company's financial data and other factors on the
record. We focused on the rate of return on equity and long-term prospects for the company in question for the period
1980 through 1987. (Petitioner alleged that USIMINAS was unequityworthy based on prior determinations by the
Department. We did not investigate equity infusions from 1977 through 1979 because we have previously determined that
USIMINAS was 
                                    (Cite as: 54 FR 15523, *15525)

equityworthy in those years.) We examined financial ratios, profitability, and other factors, such as market demand
projections and current operating results, to evaluate the company's current and future ability to earn a reasonable rate of
return on investment.
Based on these factors, as applied to information on the record, we conclude that USIMINAS was unequityworthy between
1980 and 1987 (see also, Certain Carbon Steel Products from Brazil; Final Affirmative Countervailing Duty
Determinations (49 FR 17988; April 26, 1984) (USIMINAS unequityworthy between 1980 and 1982); Final
Affirmative Countervailing Duty Determination; Certain Agricultural Tillage Tools from Brazil (50 FR 34525;
August 26, 1985) (USIMINAS unequityworthy in 1983); Certain Carbon Steel Products from Brazil; Final Results of
  Countervailing Duty Administrative Review (52 FR 829; January 9, 1987) (USIMINAS unequityworthy in 1984).
Accordingly, we determine that the actions of the Government of Brazil in taking an equity position in USIMINAS
*15526
                                    (Cite as: 54 FR 15523, *15526)

in the years 1980 through 1987 were inconsistent with commercial considerations and may confer a subsidy.
To the extent that we find government investment to be commercially unreasonable and the government's rate of return
on its investment less than the national average rate of return on investment, we consider the investment to provide a
countervailable benefit. Starting in the year such an infusion is made, we examine the "rate of return shortfall," which is the
difference 
                                    (Cite as: 54 FR 15523, *15526)

between the national average rate of return on equity and the company's rate of return on equity. We continue to examine
the shortfall in each year of a 15- year period, the average useful life of capital assets in integrated steel mills according to
the Asset Guideline Classes of the U.S. Internal Revenue Service. For example, we would examine the rate of return
shortfall for the 1980 equity infusion in each year through 1994. If no shortfall exists for any year under review during the
15-year period, there is no countervailable subsidy for that particular year. If a shortfall does exist for the year under
review, we multiply the rate of the shortfall by the amount of the original equity infusion to find the benefit for the review
period.
For purposes of this determination, we consider the amounts received from SIDERBRAS as "advances for future
capital increase" and "capitalized funds" in a particular year as the amount of the equity infusion in that year. According to
generally accepted accounting principles in Brazil, these amounts become part of a firm's capital account at the time of
receipt, and they appeared as part of USIMINAS' capital account in its financial statements. That the amounts in these
accounts are later transferred to the paid-in capital account with the formal issuance of shares has no impact on the total
amount in the capital account. Furthermore, when determining the rate of return on equity, it is standard accounting
practice in Brazil to include advances for future capital increase and capitalized funds as equity in that calculation.

                                    (Cite as: 54 FR 15523, *15526)

Due to inflation, the nominal values of the original equity infusions in USIMINAS have increased substantially. All
companies in Brazil must regularly restate the value of certain accounts (including equity) according to a standard
factor for monetary correction. The index used for monetary correction is the readjusted value of Brazilian Treasury bills,
Obrigacoes do Tesouro Nacional ("OTN," formerly ORTN). For each year's equity infusions, we converted the actual
cruzeiro (or cruzado, after the February 1986 currency reform) amount received into an OTN equivalent by dividing the
amount received by the average value of the OTN in that year. To obtain the 1987 cruzado value of the government's
equity infusions since 1980, we multiplied the OTN equivalents by the average cruzado value of the OTN in 1987.
We measured USIMINAS' rate of return by dividing its net loss in 1987 by its total capital and compared the result with the
national average rate of return on equity in Brazil in 1987, as reported in a September 1988 special annual edition of
Exame, a Brazilian business publication. USIMINAS' rate of return was lower than the national average. We then multiplied
this rate of return shortfall by the 1987 cruzado value of all equity infusions (back to 1980) that we have found to be
inconsistent with commercial considerations.
However, because USIMINAS' net loss was very large during the 1987 review period, the benefit calculated using the rate
of return shortfall methodology exceeded the amounts we would have calculated for the review period had we 
                                    (Cite as: 54 FR 15523, *15526)

treated the equity infusions as outright grants rather than equity. Under no circumstances do we countervail in any year
an amount greater than what we would have countervailed in that year had we treated the government's equity infusions as
outright grants. Therefore, we have capped the subsidy for the review period at the level that would have resulted if we had
treated the equity infusions as grants.
To determine the grant cap for the review period, we allocated the OTN equivalents of the equity infusions in each year
from 1980 through 1987 using a declining balance methodology and the 15-year allocation period. Because there is no
nongoverment long-term cruzado borrowing in Brazil, we have used as a discount rate the highest rate the Brazilian
government pays on its longest- term OTNs' 8 percent on 5-year OTNs. (The discount rate we normally use in our grant
methodology is a rate that incorporates both the "real" and inflation components of an interest rate, and we apply this
discount rate to the original amount of the grant. However, by converting the equity amounts to OTNs as a means of
determining their value over time, we have accounted for the effects of hyperinflation on the amount of the original equity
infusions. Therefore, we have used as our discount rate the interest rate on OTNs, which is a real interest rate, as the basis
for allocating the inflation-adjusted OTN values over time.) We then converted the OTN benefit allocated to 1987 into
cruzados by multiplying that benefit by the average value of the OTN in 1987. Finally, 
                                    (Cite as: 54 FR 15523, *15526)

we divided this cruzado benefit by the value of USIMINAS' total sales in 1987. On this basis, we determine the subsidy to
USIMINAS from this program to be 5.82 percent ad valorem.

B. Fiscal Benefits by Virtue of a Project Approved by CDI

Under Decree Law 1428, the Industrial Development Council ("CDI") provides for the exemption of up to 100 percent of the
customs duties and up to 10 percent of the IPI tax, a value-added tax on domestic sales, on certain imported machinery for
specific projects in 14 industries approved by the Brazilian goverment. The recipient must demonstrate that this
machinery or equipment is not available from a Brazilian manufacturer.
Decree Law 1726 repealed this program in 1979. However, companies whose projects were approved prior to the repeal
continue to receive benefits from this program pending completion of the project. USIMINAS received benefits under this
program during 1987. Because this program is limited to specific enterprises of industries, we determine that it is
countervailable.
To calculate the benefit, we divided the total amount of import duty and IPI tax reductions in 1987 by USIMINAS' total
1987 sales. On this basis, we determine the subsidy to USIMINAS from this program to be 0.79 percent ad valorem.

                                    (Cite as: 54 FR 15523, *15526)


C. Competitive Benefit

Section 771A(a)(2) provides that the domestic subsidies described above must bestow a competitive benefit on the
merchandise. Section 771(A)(b) states:
* * * a competitive benefit has been bestowed when the price for the input product referred to in subsection (a)(1) for such
use is lower than the price that the manufacturer or producer of merchandise which is the subject of a countervailing
duty proceeding would otherwise pay for the product in obtaining it from another seller in an arms-length transaction.
To determine the price that steel wheel producers would have paid in an arm's length transaction, we first look to see at
what price a steel wheel producer could have bought the input from an unsubsidized seller in Brazil. During the review,
the only producers in Brazil of hot-rolled sheet and coil were USIMINAS, Companhia Siderurgica *15527
                                    (Cite as: 54 FR 15523, *15527)

Paulista (COSIPA) and Companhia Siderurgica Nacional (CSN). Although we have not determined in this investigation
whether COSIPA and CSN received countervailable subsidies, we determined in a past investigation and administrative
review (see the final determination and final results of review on Certain Carbon Steel Products (op. cit.)) that both
companies benefited from countervailable government provisions of equity. Based on our equity methodology, most of
these equity infusions 
                                    (Cite as: 54 FR 15523, *15527)

would continue to provide benefits in 1987 to the extent that these companies' rates of return fell below the national
average rate of return on equity. Furthermore, a report submitted by the GOB, "Evaluation of the Financial Restructuring of
the SIDERBRAS Group: Report to the SIDERBRAS Directors" (February 1989), indicates that both COSIPA and CSN received
additional equity infusions from SIDERBRAS through 1988--in fact, more than USIMINAS received. The report also
indicates that COSIPA and CSN had worse profitability, liquidity and leverage ratios than USIMINAS in 1987.
Based on this information, we believe it is reasonable to assume that other domestic suppliers of hot-rolled sheet and
coil received subsidies during the period of review. Therefore, the prices charged by these companies would not be an
appropriate benchmark for determining whether a competitive benefit arises through the steel wheels producers' purchase
of this input from USIMINAS.
In the absence of an unsubsidized domestic price, we look to world market prices as a potential benchmark. Generally, we
will use the price of one of the world's lowest-cost producers. During the review period, one of the lowest-cost producers of
steel was the Republic of Korea (ROK). If the world market price is lower than the price that producers of the merchandise
actually paid for the input product, we would conclude that there is no competitive benefit on the merchandise. If the
world market price is higher than the price 
                                    (Cite as: 54 FR 15523, *15527)

that producers paid for the input product, we would conclude that there is a competitive benefit on the merchandise. The
amount of the competitive benefit would depend on the difference between the subsidized price and the world market
price.
As the best estimate of the price of Korean steel in Brazil, we used the average monthly c.i.f. price for hot-rolled
sheet and coil, with the specifications needed to produce wheels, imported into the United States from the ROK in 1987. We
found that the Korean prices were on average over 50 percent higher than domestic Brazilian prices in 1987. Therefore, we
conclude that there is a competitive benefit.

D. Significant Effect

For purposes of determining whether the competitive benefit has a significant effect on the cost of producing the
merchandise, we multiplied the ad valorem subsidy rate on the steel input by the proportion of the total production costs
of steel wheels accounted for by the steel input. Multiplying those proportions by the total domestic subsidy for USIMINAS
yields a rate of 2.66 percent for Fumagalli and 2.31 percent for Borlem.
In the Final Affirmative Countervailing Duty Determination; Certain Agricultural Tillage Tools from Brazil
(50 FR 34525; August 26, 1985), we 
                                    (Cite as: 54 FR 15523, *15527)

established thresholds regarding the existence of a significant effect. We stated that we would presume no significant effect
if the ad valorem subsidy rate on the input product multiplied by the proportion of the input product in the cost of
manufacturing the merchandise accounted for less than one percent. If the result of this calculation is higher than five
percent, we would presume that there is a significant effect. If the result is between one and five percent, we would examine
the effect of the input subsidy on the competitiveness of the merchandise. Since in this case the input subsidy allocated to
the merchandise yields rates that are between one and five percent for both Fumagalli and Borlem, we have examined the
price sensitivity of steel wheels.
A steel wheel is a relatively unsophisticated product made by welding a circular rim to a disc. This process requires
standard technology that is available both in Brazil and the United States. The quality of the product made in Brazil
is similar, if not identical, to that made in the United States. In fact, the wheels imported into the United States from
  Brazil are made to standard specifications. These specifications include size, thickness, Society of Automotive Engineer
grades of steel, and, in certain instances, the casting process for making the steel used in the wheels. For example, we
verified that, in at least one contract, a U.S. importer required that continuous cast steel be used in the wheels.

                                    (Cite as: 54 FR 15523, *15527)

USIMINAS, which supplied all of the steel used in the wheels exported to the United States during the period of review, has
a special line of steel used exclusively for the production of wheels. Fumagalli, which accounted for over 95 percent of the
wheels exported to the United States from Brazil during the period of review, is owned entirely by Rockwell
International Corp., A U.S. firm. Fumagalli exports over 90 percent of the wheels it produces, mostly to the United States.
Rockwell maintains strict quality control over the wheels produced by Fumagalli. In Fumagalli's product manual, every
type of wheel produced is matched to specific models of cars produced by the world's major automobile manufacturers.
The only U.S. importers of steel wheels from Brazil are original equipment manufacturers (OEM's) of automobiles. The
ITC found in its preliminary determination (Certain Steel Wheels from Brazil; Investigation No. 701-TA-246
  (Preliminary)) that a wheel producer must be approved by the OEM's purchasing and engineering departments before
it can submit a bid. Once the supplier is approved, it achieves the same status as all other approved suppliers. Both
Fumagalli and Kelsey-Hayes, the petitioner, are approved suppliers for all the major U.S. automobile manufacturers. The
ITC found that an OEM's request for a quotation usually includes a set of specifications and criteria for the wheels.
The ITC also found that steel wheel producers have little bargaining power in 
                                    (Cite as: 54 FR 15523, *15527)

the contract negotiations because of the market power of the large automobile manufacturers. The overwhelming majority
of the demand for steel wheels stems from the demand for new automobiles. The ITC report quotes the petitioner as saying
"* * * because the market for steel wheels is static, from the standpoint that there are no new potential customers for
wheels, price competition is severe." (p.A-34).
Although we recognize, as stated in the ITC report, that there are nonprice factors, such as long-standing supplier
relationships and reliability in delivery, that may affect the outcome of the bid, we conclude, given the uniformity of the
Brazilian and U.S. product, that price is the single most important factor in determining which supplier wins the bid.
Therefore, we conclude that subsidies to the input supplier have a significant effect on the competitiveness of Brazilian
steel wheels.
In summary, we have determined that: (1) There are domestic subsidies to input suppliers; (2) there is a competitive
benefit bestowed on producers of steel wheels; and (3) subsidies to input producers have a significant effect on the cost of
manufacturing steel wheels. Therefore, we determine that producers *15528
                                    (Cite as: 54 FR 15523, *15528)

of steel wheels in Brazil benefit from an upstream subsidy.
Since the amount of the differential between the Korean and Brazilian prices is higher than the amount of domestic subsidy
on USIMINAS steel, we conclude that there is a full pass-through of the subsidy from USIMINAS to the wheel 
                                    (Cite as: 54 FR 15523, *15528)

producers. To determine the amount of the upstream subsidy, we multiplied the total domestic subsidy on the input
product by the proportion of the value of the merchandise accounted for by the input product. (Although we use the cost
of the merchandise for purposes of determining whether the input subsidy has a significant effect on the merchandise, we
calculate the upstream subsidy, as we do most other subsidies, on an ad valorem basis.) We determine the upstream benefit
for Borlem to be 1.82 percent ad valorem and 1.72 percent ad valorem for all other firms.

III. Programs Determined Not To Be Used 

We determine that manufacturers, producers and exporters in Brazil of steel wheels did not receive benefits during the
review period under the following programs:
(1) Accelerated depreciation for Brazilian-made capital goods;
(2) Financing for the storage of merchandise destined for export ("Resolution 330");
(3) Federal stock (EGF) loans; and
(4) Industrial enterprise (FST) loans.

COMMENTS

                                    (Cite as: 54 FR 15523, *15528)


Comment 1: The Government of Brazil (GOB) argues that the Department overstated the amount of the benefit
attributable to the income tax exemption for export earnings. The Department mistakenly divided the benefit received by
Fumagalli by the total exports of Borlem. Furthermore, the Department should allocate the benefits from this program
over total sales instead of total exports. Since the program rebates direct taxes, it is a domestic subsidy, which requires the
Department to allocate the benefit over total sales. In addition, effective January 1, 1988, the GOB decreed that export
earnings are no longer fully exempt from income taxes and are now subject to a 3 percent tax. Therefore, the Department
should take into account this program-wide change in calculating the rate of cash deposit of estimated countervailing
duties for this program.
Department's Position: We have corrected the clerical error made in our preliminary determination by dividing
the benefit to Fumagalli by that firm's total exports. We have considered and rejected in other Brazilian countervailing
duty cases the GOB's claim that the income tax exemption is a domestic subsidy. See, e.g., Certain Carbon Steel Products
From Brazil (op. cit.). The GOB has provided neither new evidence nor new arguments that convince us to reconsider
this issue. With respect to program-wide changes in this program, we do not have sufficient information to recalculate the
cash 
                                    (Cite as: 54 FR 15523, *15528)

deposit rate. Because none of the companies we verified has yet filed income tax statements incorporating this change, we
are unable to measure the effect of the change.
Comment 2: The GOB argues that the Department overstated the benefit from CACEX preferential export financing by
failing to take into account the length of each loan when calculating the benefit. In addition, the GOB claims that, in
calculating the short-term interest rate benchmark, the Department should not include the IOF tax. The IOF functions as an
indirect tax, and neither the exemption nor the rebate of an indirect tax is considered a subsidy under the General
Agreements on Tariffs and Trade and U.S. law. Inclusion of the IOF in the benchmark improperly countervails an
exemption of an indirect tax applicable to exports. In addition, the Department should also take into account a reduction
in the equalization rate from 15 to 7.5 percent, effective November 30, 1988, for purposes of calculating the cash deposit
rate.
Department's Position: We have corrected the clerical error of failing to take the length of the loans into account. We have
considered and rejected in other Brazilian countervailing duty cases the GOB's claim concerning the propriety of
including the IOF tax in our benchmark. See, e.g., Certain Castor Oil Products From Brazil; Final Results of
  Countervailing Duty Administrative Review (48 FR 40534, September 8, 1983). The Brazilian government has
provided neither new evidence or new arguments that convince us to reconsider this issue. We have 
                                    (Cite as: 54 FR 15523, *15528)

not taken into account the reduction in the equalization rate because it is our policy to consider only those program-wide
changes that occur prior to our preliminary determination, which was published on October 28, 1988.
Comment 3: The GOB argues that loans issued pursuant to the Banco do Brasil's CIC-CREGE 14-11 circular (later modified by
circular CIC-OPCRE 6-2-6) do not constitute a government program and, therefore, cannot confer a subsidy on exports of
steel wheels. The Banco do Brasil receives no financial support from the GOB for this program and operates the program in
a manner consistent with commercial considerations. Even assuming, arguendo, that the program is countervailable, the
Department has overstated the benefit by using an incorrect benchmark. The Department has used the discounting of
accounts receivable rate in past investigations and administrative reviews because there was no published short-term
commercial interest rate information available. In this investigation, the Department should use the"taxa ANBID" rate
published in Gazeta Mercantil, which it has verified is the general commercial rate for short-term loans. Furthermore, if the
Department uses the discounting of accounts receivable as its benchmark, it should adjust its methodology for
compounding interest.
Department's Position: We have considered and rejected in other Brazilian countervailing duty cases the GOB'
argument concerning whether this program is countervailable. See, e.g., Final Affirmative Countervailing Duty  
                                    (Cite as: 54 FR 15523, *15528)

  Determination; Brass Sheet and Strip From Brazil, (51 FR 40837, November 10, 1986). The Brazilian
government has provided neither new evidence nor new arguments that convince us to reconsider this issue. As noted in
the discussion in section I(3) of this notice, we have used the "taxa ANBID" rate as our benchmark.
Comment 4: The GOB argues that the Department overstated the benefit attributable to the IPI export credit premium
program by dividing the amount of the benefit received on Fumagalli's total exports by the firm's exports to the United
States. In addition, the Department verified that Fumagalli will not be eligible for the IPI credit premium on exports made
after December 31, 1989. The Department should adjust the deposit rate automatically on January 1, 1990 to reflect this
change.
Department's Position: We have corrected our calculation of the benefit from this program by dividing the IPI export
credit premiums received on shipments of the subject merchandise to the United States by exports of this merchandise to
the United States (see section I(4) of this notice). Regarding Fumagalli's future ineligibility for the IPI export credit
premium, it is our policy to take into account only those program-wide changes that occur prior to our preliminary
determination. Any program-wide change that is scheduled to occur in 1990 can only be addressed in the context of
an administrative review.
*15529
                                    (Cite as: 54 FR 15523, *15529)

Comment 5: The GOB argues that Decree Law 1428, which allows import 
                                    (Cite as: 54 FR 15523, *15529)

duty exemptions on imported capital equipment of firms with projects approved by the Conselho de Desenvolvimento
Industrial (CDI), is not limited to an industry or group of industries and is therefore, not countervailable.
Department's Position: We disagree. We have found that CDI benefits are provided by the government to specific industries
(see section II.B.).
Comment 6: The GOB argues that the Department should adjust the deposit rate to take into account a program-wide
change, effective May 18, 1988, whereby the exemption of imported capital equipment from the IPI tax is no longer
specifically provided under the BEFIEX and CDI programs and is now generally available.
Department's Position: We disagree. Although we verified that program-wide changes took place, the availability of this
exemption is still subject to certain conditions. At this time, we do not have sufficient information to make a
  determination that this program is not specifically provided and no longer countervailable. For this reason, we are
not adjusting the rate of cash deposit of estimated countervailing duties for this program.
Comment 7: The GOB argues that FINEX financing under Resolutions 68 and 509 is not countervailable because the
program is consistent with the Arrangement on Guidelines for Officially Support Export Credits, which is not considered an
illegal export subsidy under item (k) of the Illustrative List of Export Subsidies annexed to the Agreement on
Interpretation and Application of 
                                    (Cite as: 54 FR 15523, *15529)

Articles VI, XVI, and XXIII of the General Agreement on Tariffs and Trade (the Subsidies Code). The Department verified
that the lending rate for FINEX financing is LIBOR plus a spread of 0.5 precent, a rate comparable to commercial lending
rates for importers in the United States. Furthermore, the Department verified that, effective January 4, 1989, the FINEX
program as suspended. This should be taken into account in any calculation of the rate of cash deposit of estimated
  countervailing duties.
Department's Position: We disagree. Since the FINEX loans in this case are short-term loans, they are not covered by the
Arrangement and, hence, do not fall within the second paragraph of item (k). Regarding the preferentiality of FINEX
lending rates, the Banco Central do Brasil (BCB) provides all or some portion of a spread (the equalization fee) above an
interest rate based on LIBOR. Exporters and importers were unable to demonstrate either the value of the spread or the
portion of the spread that was retained by the intermediary bank. Therefore, we have assumed that the full benefit from the
equalization fee was passed through to the importer. Since Resolution 509 short-term loans are given in U.S. dollars, we
maintain that the appropriate benchmark is the average rate for comparable short-term loans in the United States, as
published by the Federal Reserve. We have no documentation regarding an average lending rate based on LIBOR.
Concerning the suspension of this program, it is our policy to take into account only those program-wide changes that
occur prior to 
                                    (Cite as: 54 FR 15523, *15529)

our preliminary determination.
Comment 8: The GOB argues that, in alleging an upstream subsidy, petitioner never made an allegation that the GOB's
equity infusions in USIMINAS provided a subsidy during the period of review. On this basis, the GOB contends that the
statutory requirements for initiating and upstream subsidy investigation were not met on this issue. The GOB further
argues that if petitioner intended to imply, by referring to the section 751 administrative review on Certain Carbon Steel
Products from Brazil; Final Results of Countervailing Duty Administrative Review (52 FR 829; January 9,
1987), that USIMINAS was unequityworthy for the years 1980 through 1984, then petitioner's implied allegation only
provides a basis for investigation equity infusions in those years.
Department's Position: We disagree. In making the upstream subsidy allegation, petitioner cites the administrative review
on carbon steel products. Petitioner based the allegation on the amount of the domestic subsidies determined in that
review. Although the various domestic subsidies were not specifically identified, a clear reading of the results of that
review leaves no doubt that petitioner was alleging the existence of equity infusions in an unequityworthy company.
Subsidies from equity infusions from 1980 through 1984 were the single largest component of the total domestic subsidy
found in that review. With respect to the investigation of equity infusions 
                                    (Cite as: 54 FR 15523, *15529)

since 1984, the Department would be remiss in its administration of the countervailing duty law if it did not examine
additional equity infusions in a company it had previously determined to be unequityworthy.
Comment 9: The GOB asserts that the Department's determination that USIMINAS was not equityworthy from 1980
through 1984 in the administrative review of carbon steel products was incorrect and should be reversed. The GOB
contends that the methodology employed by the Department in determining the USIMINAS was not equityworthy was
erroneous because it: (1) Placed undue reliance on marginal returns on equity in the late 1970s to evaluate long-term
future earnings potential; (2) relied on financial ratios that were distorted by the inclusion of expansion project assets not
yet in operation; (3) improperly used subsequent operating performance to judge the reasonableness of SIDERBRAS' rate
of return expectations at the time the equity was provided; (4) did not address evidence submitted by respondents
concerning projections of long-term growth in steel demand in both the domestic Brazilian and international markets; and
(5) ignored independent studies by the World Bank and other reputable sources which had favorable views on the
prospects of the Stage III project as well as USIMINAS' performance and projected relatively high rates of return in the
long-term on the investments made by SIDERBRAS.
The GOB argues that the factors that should be examined in assessing the prospects for future performance include: the
long-term market environment, 
                                    (Cite as: 54 FR 15523, *15529)

the company's anticipated costs of production, the company's ability to operate efficiently, and the company's ability to
operate profitably.
Department's Position: We disagree. We stand by the methodology used in our determination in the administrative
review of carbon steel products, which was upheld by the Court of International Trade in Companhia Siderurgica Paulista,
S.A., et al. v. United States, 700 F. Supp. 38, Slip Op. 88-158, November 9, 1988. Although USIMINAS was not a party to
this court proceeding, the methodology used in the administrative review to determine that the GOB's equity infusions in
COSIPA, CSN and USIMINAS were countervailable was identical for all three companies.
Comment 10: The GOB argues that the Department incorrectly determined the USIMINAS was not equityworthy from 1980
through 1984. The Department evaluated government investments by SIDERBRAS from the point of view of a private
outside investor instead of a private owner-investor. The GOB argues that its motive, as an owner-investor, is to maximize
average returns on its past and future investments in USIMINAS, not to maximize marginal returns on investments, as an
outside investor would. Therefore, it is unreasonable to expect SIDERBRAS to treat past equity infusions as sunk costs.
*15530
                                    (Cite as: 54 FR 15523, *15530)

The GOB contends that the equity infusions in these years are directly tied to the massive long-term Stage III expansion
project undertaken by USIMINAS. The government's decision to invest in Stage III was 
                                    (Cite as: 54 FR 15523, *15530)

made in 1975. The decision relied on favorable long-term domestic and international market projections and World Bank
appraisals which showed favorable financial returns for the projects. The GOB further contends that if it no longer provided
equity, consequently forcing the Stage III project to a halt it would forego the future benefits from the expansion project,
and therefore, realize no return on its past investments.
Department's Position: We disagree. Both a rational outside investor and a rational owner-investor make investment
decisions at the margin. The relevant question for both types of investors is: What is the marginal rate of return on each
cruzeiro/cruzado invested An investor in USIMINAS does not ignore the potential return from the assets that the company
has already acquired. The potential for a favorable return from those assets is an integral part of the investment calculus.
However, a rational investor does not let the value of past investments affect present or future investment decisions. The
decision to invest is only dependent on the marginal return expected from each additional equity infusion. Therefore, new
equity infusions contemplated by investors such as the Brazilian government should not be affected by past investments or
sunk costs.
We do not dispute the findings of the long-term market projections or World Bank project reports made in 1975. The GOB
designed the Stage III expansion projects as a keystone in its Second National Development Plan (1971-1979). 
                                    (Cite as: 54 FR 15523, *15530)

The plan explicitly called for steel investments with the objective of national self-sufficiency by 1979. With an anticipated
completion date of 1979, Stage III was designed to supply steel for the Development Plan's large public sector investment
program. The decision to sign the contracts for Stage III was based on the national goal of public welfare maximization and
not necessarily on commercial considerations.
Although the decision to invest was made in 1975, actual construction began in the late 1970s. By that time, the
investment climate had deteriorated, international markets for steel began to decline, and public sector investment dried
up. Stage III may still have yielded positive financial returns despite the financial and economic conditions at the time.
However, because a sufficient rate of return on equity depends on the performance of the firm as a whole, an investor will
invest based on the rate of return for the entire firm, not the rate of return for an individual project such as Stage III.
Current and anticipated future economic conditions and the effects of massive expansion projects on a steel company are
just as important as projected long- term markets in an investor's prediction of USIMINAS' long-term viability and,
therefore, the decision to invest in the company. Consistent with the desire to maximize overall profits, a rational
owner-investor must constantly reevaluate projects such as Stage III in light of other investment opportunities before
determining whether those projects should be continued, 
                                    (Cite as: 54 FR 15523, *15530)

delayed or abandoned.
Comment 11: The GOB argues that the Department's evaluation of the performance of USIMINAS during the Stage III
expansion program was short- sighted in that it incorrectly focused on financial performance instead of current operating
performance. The short-term static financial ratios and overall operating performance that the Department relied on are
insufficient measures of long-run investment potential and future company performance.
If the Department continues to depend on short-term indicators, it should adjust USIMINAS' overall operating
performance by eliminating nonproductive assets (i.e., assets under construction) and related liabilities from the
calculation of the financial ratios. When made, these adjustments reveal a healthy current operating performance for
USIMINAS during the periods the Department found the company not equityworthy. More importantly, such adjustments
show strong profit margins and asset turnover, current operating performance measures which are fundamental
determinants in the rate of return on equity.
The GOB contends that the economic constraints existing in the late 1970s and early 1980s, such as government price
increases, high real domestic and international interest rates, a temporary cyclical downturn in the steel market, and
lower-than-expected government equity infusions were unanticipated transient problems that were insufficient to cause
SIDERBRAS to abandon its 
                                    (Cite as: 54 FR 15523, *15530)

long-term investment plans. These transient problems and their effects on the companies are relatively unimportant
because they do not have a direct bearing on the company's long-term prospects.
The GOB believes that the logical conclusion from the evaluation of equityworthiness is that the only problem faced by the
firms was undercapitalization, or lack of equity infusions. Therefore, the GOB believes that SIDERBRAS should have infused
more, not less, equity into the companies.
Department's Position: We disagree. The most significant factor in determining the required rate of return on an investment
is the degree of risk. The greater the risk of the investment, the higher the expected rate of return. From the point of view of
an investor, the purchase of equity is highly risky compared to other types of investments.
In contemplating an equity purchase, an investor will evaluate past and present company performance, anticipated future
economic conditions, and overall investment climate. Important determinants in the evaluation include the financial
stability of the company (e.g., asset structure, funding sources, and risk of insolvency), past earnings, and the amount of
financial leverage in the company's capital structure. Therefore, we disagree with the Brazilian government that present
and past performance indicators are relatively unimportant in an investment decision.
Investors will also assess the potential future performance of the company. 
                                    (Cite as: 54 FR 15523, *15530)

In this case, the GOB undertook a massive expansion program designed to exploit the projected increase in the demand for
steel. In evaluating the equityworthiness of USIMINAS, we do not rely exclusively on the future prospects of the expansion
project. We also cannot ignore, just as an investor would not have ignored, the effects of such an expansion on the
company's present operations and future viability. An investor purchases equity based on the rate of return of the firm as a
whole, not on the financial returns from a specific project.
From an investor's point of view, there is no relevant distinction between financial and operating results. Rather, an
investor will look to the rate of return on equity, which is primarily a function of three variables: profit margin
(income/sales), asset turnover (sales/assets), and financial leverage (assets/equity).
Evaluation on the basis of current operating results (profit margin and asset turnover), without considering
nonoperational assets and accompanying liabilities, may be an appropriate approach for managing or *15531
                                    (Cite as: 54 FR 15523, *15531)

analyzing profit centers with a company. An investor, however, is concerned with the company's overall performance. An
investor must evaluate the effects of the Stage III expansion project on the whole company. Nonperforming assets not only
drag down overall operating performance, but the chance that they might never come on-stream creates additional
uncertainty for future earnings and 
                                    (Cite as: 54 FR 15523, *15531)

therefore increases the risk of the investment.
The rate of return on equity equation shows the fundamental interrelationship between financial performance (financial
leverage) and operating performance (profit margin and asset turnover). The decision to continue Stage III in the face of
inadequate equity infusions from the Brazilian government led to substantial increases in the company's financial leverage.
There is a direct relationship between financial leverage and earnings variability. Therefore, both are also directly related
to investment risk.
In the late 1970s and early 1980s the Brazilian steel industry was characterized by Stage III construction delays, marginal
or negative earnings, and a mounting economic and financial crisis. The lack of funding in the industry became critical.
(The GOB had a history of underfunding steel expansion projects.) By 1982, USIMINAS would have required hundreds of
millions of dollars in equity to correct its financial position. Although it is now clear that the company were severely
undercapitalized, we cannot base our equityworthiness decision on what the financial standing of the company might have
been if this were not the case.
USIMINAS responded to its condition in the late 1970s by contracting variable- rate debt at a time of high real interest
rates and using increasing amounts of short-term debt. Not only was USIMINAS undercapitalized, but it mismatched
long-term assets with expensive short-term debt.

                                    (Cite as: 54 FR 15523, *15531)

During this time, an investor would have found that USIMINAS was incapable of covering the additional debt expense with
internally-generated funds. The company had a low probability of increasing earnings over the short- and medium- term
from domestic sales because of the squeeze between supplier price increases and the government's policy of steel price
suppression. Further, it became increasingly evident that there was a long-term decline in the world- wide demand for
steel, continuing the depression of steel prices in the international market.
A project such as Stage III can have future positive returns only if the company does not become insolvent. In this case,
the continuation of Stage III severely jeopardized USIMINAS' financial standing. Even if we disregard profit margins and
asset turnover, we cannot disregard the adverse effects of increased financial leverage on the company's equity standing.
The additional risk in the highly leveraged company would have dissuaded any private investor from purchasing equity in
USIMINAS during the periods we consider it not to be equityworthy.
Comment 12: The GOB argues that its investments in USIMINAS in 1987 were not on terms "inconsistent with commercial
considerations." The investments were part of the SIDERBRAS Restructuring Plan, by which USIMINAS transferred some of
its debt to SIDERBRAS. This transfer was reflected as a reduction in long-term and short-term debt and an equal increase in
the equity 
                                    (Cite as: 54 FR 15523, *15531)

held by SIDERBRAS. The Restructuring Plan also provided for the recapitalization of SIDERBRAS; operational
improvements and investments to improve operating efficiency and reduce costs; a commitment to support a realistic
pricing policy to allow USIMINAS to recover its costs; and a commitment that SIDERBRAS not undertake investments
unless adequate funding is available. The effect of these measures has been to greatly improve the ability of USIMINAS to
meet its debt service obligations and earn a reasonable rate of return. A study by independent financial experts has
projected substantial returns on equity over the next ten years for USIMINAS. Thus, when the GOB invested additional
equity in USIMINAS under the Restructuring Plan, it had a reasonable expectation of a very high real return on its
investment.
Department's Position: We disagree. From the perspective of a rational private investor, USIMINAS was no more attractive
as a potential investment in 1987 than it was in any of the earlier years in which we determined it to be unequityworthy. Its
financial ratios since 1984 indicated no appreciable improvement and, in many areas, had deteriorated. The company had
become even more severely leveraged and, in those years in which it did not have a loss, did not demonstrate the ability to
generate more than minimal profits.
While the GOB's decision to convert some of USIMINAS' debt to equity clearly addressed one of the basic problems facing
USIMINAS, there were still considerable risks associated with any further investment in USIMINAS. The 
                                    (Cite as: 54 FR 15523, *15531)

debt conversion was only one component of the Restructuring Plan, and its success was dependent on other contingencies,
such as a proper pricing policy. The suppression of steel prices throughout the 1980s as part of the GOB's policies to
counter inflation, and the GOB's failure to provide scheduled equity infusions due to budgetary constraints, led to results
considerably different from the attractive rates of return projected for USIMINAS in the studies conducted in relation to
earlier investment plans.
In this respect, there is a clear distinction between a reasonable private investor's expectations and those of a government
owner-investor. In light of the past, a private investor would have to consider the possibility that future macroeconomic
concerns of the GOB could jeopardize any investment in an ailing, if recovering, company, whereas the GOB at any time
could decide to renege on its commitments to the improvement of USIMINAS' financial health in favor of national
economic and social obligations. In doing so, the GOB might again choose to sacrifice the interests of USIMINAS to some
more important public welfare goal.
The GOB refers to a study submitted by independent financial experts to SIDERBRAS in February 1989 evaluating the
results of the Restructuring Plan through 1988. This study projects substantial rates of return on equity for USIMINAS as a
result of the Restructuring Plan. While the projections of this study may prove accurate, they were not contemporaneous
with the Restructuring 
                                    (Cite as: 54 FR 15523, *15531)

Plan, and we cannot consider the results of this study to be the basis on which the GOB made its investment decisions in
1987. The GOB provided us with no studies contemporaneous with its investment decision.
Comment 13: The BOG claims that the amounts for "advances for future capital increase" that appear in the "Statement of
Changes in Financial Position" are end-of-year amounts that in certain years include interest and monetary correction
accrued during the year. Therefore, the GOB argues that the Department should use the OTN rate at the end of the year
when converting these amounts into OTN equivalents.
Department's Position: We disagree. Advances for future capital increase are received at various points during the year. It
is not apparent from the "Statement of Changes in Financial Position," nor could we verify, that in some years these
amounts included interest and monetary correction. We have assumed that the amounts of the *15532
                                    (Cite as: 54 FR 15523, *15532)

advances that we used for calculating the value of the equity infusions are the nominal amounts received during the year.
Therefore, we used the average OTN rate for the year when converting these amounts into OTN equivalents.
Comment 14: Respondents argue that it is inappropriate to include investments made during the year of review when
calculating the benefit from equity infusions. Respondents claim that it is improper to assume that the investor would
expect a return on equity for investments made during the year equal to 
                                    (Cite as: 54 FR 15523, *15532)

the rate of return on investments for a full year. Therefore, respondents argue that the Department should either exclude
such equity infusions or calculate a prorated return based on the number of months since the equity infusion was made.
Respondents further argue that, when calculating USIMINAS' loss as a percentage of its total capital, the Department
should add back any losses deducted from capital. To do otherwise would overstate the percentage of the loss.
Department's Position: We disagree. Adjusting the rate of return calculation to exclude or prorate equity infusions during
the year would either reduce the rate of return on equity in profitable years or increase the rate of loss on equity in
unprofitable years. The methodology proposed by respondents runs counter to standard accounting practices in Brazil.
   By using USIMINAS' total capital (including all equity received and losses incurred), we calculated a negative rate of
return for USIMINAS in 1987 that was identical to that reported in the September 1988 edition of Exame.
Comment 15: The GOB argues that the Department should change its policy of using as its benchmark a national average
rate of return and use instead an average rate of return applicable to heavy industry, thus recognizing the structural
differences and increased capital requirements of heavy industries.
Department's Position: We disagree. A national average rate of return 
                                    (Cite as: 54 FR 15523, *15532)

is a more accurate reflection of the return that a reasonable investor could expect from a prudent investment than an
industry-specific rate. A national average rate of return reflecting the different rates of return and levels of risk in the whole
economy is a better benchmark with which to compare rates of return for particular investments. Only by comparing the
expected returns and risks across the whole economy can the investor decide where to invest his money most effectively.
In contrast, an industry-specific benchmark rate would not serve as a reasonable basis for comparison because it does not
take into account the variety of investment options available to an investor.
Furthermore, the use of an industry-specific average rate of return would be especially inappropriate in this case because a
large portion of the steel industry in Brazil is controlled by the government. For this reason, the use of the steel sector
rate of return would not provide an objective standard. It is far more reasonable to use the national average rate of return
because it includes the rates of return for government-owned firms and private firms as well as for profitable and
unprofitable firms.
Comment 16: Respondents argue that the Department should use 1988 as the review period for the upstream subsidy
portion of this investigation. Calendar year 1988 is the most recently completed fiscal year prior to the date of the
upstream subsidy questionnaire response. Information from 1988 provides the most accurate basis for determining the
existence of an upstream subsidy.

                                    (Cite as: 54 FR 15523, *15532)

Petitioner contends that the Department cannot measure upstream subsidies for a different year than that used for all other
subsidies.
Department's Position: We agree with petitioner. We announced in our initiation notice on August 24, 1988 that the period
of review was calendar year 1987. We must use the same period for measuring all subsidies because to do otherwise might
distort the average benefit we attempt to capture in our "snapshot" view of the firm. Furthermore, we cannot use a review
period that did not conclude until after our preliminary determination.
Comment 17: Fumagalli contends that, because the government controls the price of steel, the Department should treat the
alleged below-market prices of steel as a direct subsidy, not as an upstream subsidy. Fumagalli notes the Department's
practice in a number of cases involving products from Mexico (e.g., Anhydrous and Aqua Ammonia from Mexico (48 FR
28522) and Oil Country Tubular Goods from Mexico (49 FR 47054)). In those cases, where the Department examined the
effect of the Mexican government's price control on natural gas, the Department found that low-priced natural gas was
available to a wide variety of users and not limited to a particular industry or group of industries. Since the Brazilian
government controls the price of steel, and steel is available to a wide variety of users, the provision of steel at
government-regulated prices to wheel producers is analogous to government controls on natural gas prices in Mexico.
Therefore, the Department should 
                                    (Cite as: 54 FR 15523, *15532)

analyze both situations in the same way.
Department's Position: The cases that Fumagalli refers to deal with the alleged preferential pricing of inputs, which is a
direct subsidy, not an upstream subsidy. The statute includes a special provision for upstream subsidies, as well as a
specific three-pronged test for determining whether an upstream subsidy exists. We do not believe that the existence of
price controls precludes us from invoking the the upstream subsidy provision (see our response to Comments 18 and 20).
Comment 18: Fumagalli argues that the specificity analysis that applies to any domestic subsidy also applies to upstream
subsidies. Thus, an upstream subsidy is only countervailable if the benefit of that subsidy on downstream products is
limited "to a specific enterprise or industry, or group of enterprises or industries."
Fumagalli cites Certain Steel Products from the Federal Republic of Germany (47 FR 26321), where the petitioner alleged
that German steel producers benefited from subsidies provided by the German government to coal producers. In its
  preliminary determination in that case, the Department found there was no benefit because low-priced coal was
not limited to the steel industry but was, in fact, available to a wide variety of users in the FRG.
Fumagalli contends that the legislative history of the Trade and Tariff Act of 1984 makes clear that the upstream subsidy
provision did not change basic 
                                    (Cite as: 54 FR 15523, *15532)

Department practice regarding subsidies. Congress intended that the specificity test be used to determine whether the
low-priced input was made available only to a specific industry or group of industries. In fact, in a letter to Congress, the
former Secretary of Commerce indicated that the Department intended the upstream subsidy provision to apply "where an
input is provided to a particular industry or group of industries, . . . "
Petitioner argues that it is clear in the statute and in the legislative history that the specificity test applies only at the
upstream level (i.e., on the input product). The statute clearly states that the Department is to look at the competitive
benefit from the upstream subsidy on the merchandise under investigation. To determine competitive benefit, the
Department must compare the price of the input product from the subsidized producer with a benchmark price. In
situations where prices of the input product are artificially depressed in the country under investigation, the *15533
                                    (Cite as: 54 FR 15523, *15533)

statute authorizes the Department to use other sources for the benchmark price, presumably including prices outside the
country. This provision would make no sense if there were a specificity requirement at the downstream level.
Department's Position: We agree with the petitioner that a second-tier specificity test is not required in the analysis of
upstream subsidies. If Congress had intended to include a separate specificity test, it would have included the same
specificity language in the upstream subsidy provision that 
                                    (Cite as: 54 FR 15523, *15533)

is included in the definition of domestic subsidy, as provided for in section 771(5)(B) of the Act. Domestic subsidies given
directly to the input producer (in this case, the steel producer) must be specifically provided, and domestic subsidies given
directly to the downstream producer (in this case, the wheel producers) must be specifically provided, but subsidized
inputs purchased by downstream producers need not be specifically provided in order to be countervailable.
The House Conference Report describes an upstream subsidy as a subsidy paid by a government on an input product used
to manufacture the merchandise under investigation. The report states, "The potential for an upstream subsidy exists only
when a sector-specific benefit meeting all the other criteria of being a subsidy is provided to the input producer." (emphasis
added). H.R. Rep. No. 98-1156, 98th Cong., 2nd Sess. 171 (1984). The report makes no mention of a sector-specific
requirement for the downstream purchaser of the input product.
Furthermore, the Report indicates that the House Bill included a requirement that the upstream subsidy result in a "price
for the intermediate product lower than the generally available price of that product in that country. * * *," but the
Conferees agree to "* * * substitute for generally available price determination a determination that the
upstream subsidy in the judgment of the administering authority bestows a competitive benefit on the 
                                    (Cite as: 54 FR 15523, *15533)

merchandise * * *". This clarifies that Congress considered and rejected the second-tier specificity requirement.
The upstream subsidy provision was intended to codify and strengthen existing practice. See S. Rep. No. 98-485, 98th
Cong. 2nd Sess. 33 (1984). Although we found in the preliminary determination on Certain Steel Products from the
Federal Republic of Germany that subsidies to the coal industry did not benefit the steel industry because the coal was not
specifically provided to the steel industry, we abandoned this analysis in our final determination (47 FR 39345,
September 7, 1982). In the final determination, we found that there was no benefit not because the coal was not
specifically provided, but because the price of German coal was higher than world market prices. This approach is very
similar to the analysis we use to determine the existence of a competitive benefit.
Thus, despite an early flirtation with the idea of a second-tier specificity test, both Congress and the Department in the end
rejected this approach in favor of the competitive benefit test.
Comment 19: The GOB argues that, since wheel producers were able to import steel at prices less than the prices paid to
USIMINAS, they derived no competitive benefit from any alleged upstream subsidy. Fumagalli provided information
showing that hot-rolled coil was available in January 1989 from the Republic of Korea for less than what the wheel
producers paid for steel in 
                                    (Cite as: 54 FR 15523, *15533)

  Brazil. Furthermore, since wheel producers can obtain full reimbursement for any duties paid on imported steel
through Brazil's duty drawback system (provided for in Decree-Law NR 37/66 and Decree 68,904/71), the
Department should take duty drawback into account when calculating the benchmark price.
Department's Position: Fumagalli cites a price from 1989, and our period of investigation is 1987. We found that Korean
prices were on average over 50 percent higher than USIMINAS' prices in 1987. Since the world market benchmark price is
higher than the Brazilian price, thus making importation economically impractical, the issue of using an import price
adjusted for duty drawback is moot.
Comment 20: Fumagalli argues that the existence of price controls on domestically-sold Brazilian steel makes it impossible
for a Brazilian steel producer to pass through the benefit of any subsidies it receives to the downstream purchaser. In an
environment where prices are determined by an intervening and superseding cause, such as government price controls,
prices will not vary, regardless of the level of subsidization of any individual producer. There is no evidence that the
government of Brazil sets prices for any reason other than to control inflation. Thus, absent a causal relationship
between the price of steel to wheel exporters and any subsidies received by steel producers, no competitive benefit can be
bestowed.
Petitioner contends that controls on the selling price of steel guarantee the 
                                    (Cite as: 54 FR 15523, *15533)

pass-through of any upstream subsidy to the downstream producer. Some of the difference between the controlled price of
steel and the market price is accounted for by subsidies to the steel producer. Thus, government subsidies offset
differences between the two prices.
Department's Position: We disagree that the existence of price controls renders the pass-through of benefits impossible.
Price controls in and of themselves are not dispositive of whether the input was sold at a subsidized price. For example, if
there were unsubsidized sellers of the input product subject to the same price controls as subsidized sellers, we would
determine that there is no competitive benefits because the downstream producer could have bought the input at the same
price from an unsubsidized seller. Conversely, if all sellers of the input product are subsidized and all are subject to the
same price controls, we cannot determine whether, or to what extent, prices in the domestic market reflect the subsidies
received. In such cases, we resort to world market prices. If the world market price is higher than the domestic price of the
subsidized sellers, as in this case, we conclude that the subsidy is built into the price of the input product even if the price is
controlled.
Comment 21: Fumagalli contends that, in determining whether the competitive benefit has a significant effect on the
merchandise, the Department should calculate the cost of steel as a percentage of the U.S. selling price of the 
                                    (Cite as: 54 FR 15523, *15533)

merchandise rather than as a percentage of the cost of production of the merchandise. Fumagalli contends that this is the
most accurate measure of the effect of an upstream subsidy on the competitiveness of the merchandise because it captures
the degree of underselling of the merchandise in the U.S. market vis-a-vis merchandise sold by competing U.S. firms.
Department's Position: We disagree. Section 771A(a)(3) of the Act clearly states that the Department must examine
whether the subsidy on the input product has a significant effect on the "cost of manufacturing or producing the
merchandise."
Comment 22: Fumagalli contends that, for purposes of its upstream subsidy analysis, the Department should include
general and administrative expenses in its calculation of the cost of manufacturing or producing the merchandise.
According to the verification report, the Department calculated the cost of hot-rolled sheet and coil as a percentage of
manufacturing costs by erroneously applying its standard practice in antidumping proceedings, in which the *15534
                                    (Cite as: 54 FR 15523, *15534)

cost of manufacture is interpreted as the cost of production minus general and administrative expenses.
Department's Position: There is no explicit direction in the statute or the legislative history as to how to calculate the cost
of manufacturing or producing the merchanise in an upstream subsidy investigation. In this case, we measured the
significant effect of the upstream subsidy on the cost of the 
                                    (Cite as: 54 FR 15523, *15534)

merchandise based on the cost of manufacture. We have applied our standard practice used in antidumping proceedings of
calculating the cost of manufacture by deducting general and administrative expenses from the cost of production. We
note that using the cost of production, including general and administrative expenses, would not change the results of our
significant effect analysis in this case.

Verification

In accordance with section 776(b) of the Act, we verified the information used in making our final determination. We
followed standard verification procedures, including meeting with government and company officials, inspecting
documents and ledgers, tracing information in the response to source documents, accounting ledgers and financial
statements, and collecting additional information that we deemed necessary for making our final determination.

Suspension of Liquidation

In accordance with our preliminary affirmative countervailing duty determination, published on October
28, 1988, we directed the U.S. Customs Service to suspend liquidation on the products under investigation and to 
                                    (Cite as: 54 FR 15523, *15534)

require a cash deposit or bond equal to the duty deposit rate. This final countervailing duty determination was
extended, pursuant to section 703(h) of the Act, because of the upstream subsidy investigation. Under Article 5,
paragraph 3 of the Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General Agreement
on Tariffs and Trade (the Subsidies Code), provisional measures cannot be imposed for more than 120 days without final
affirmative determination of injury. Therefore, we instructed the U.S. Customs Service to discontinue the suspension
of liquidation on the subject merchandise entered on or after February 27, 1989, but to continue the suspension of
liquidation of all entries or withdrawals from warehouse, for consumption, of the subject merchanise entered between
October 28, 1989, and February 26, 1989. We will reinstate suspension of liquidation under section 703(d) of the Act, if the
ITC issues a final affirmative injury determination, and require duty deposits on all entries of the subject
merchandise in the amounts indicated below:
  
------------------------------------------------------------------------------- 
 Manufacturer/producer/exporter    Estimated net subsidy  Duty deposit rate   
------------------------------------------------------------------------------- 
Borlem, S.A ........................................ 1.82                1.82 
All others ........................................ 17.29               17.15 

                                    (Cite as: 54 FR 15523, *15534)

------------------------------------------------------------------------------- 
  

ITC notification

In accordance with section 705(d) of the Act, we will notify the ITC of our determination. In addition, we are making
available to the ITC all nonprivileged and nonprorietary 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.
If the ITC determines that material injury, or the threat of material injury, does not exist, this proceeding will be
terminated and all estimated duties deposited or securities posted as a result of the suspension of liquidation will be
refunded or cancelled. If, however, the ITC determines that such injury does exist, we will issue a countervailing duty
   order, directing Customs officers to assess countervailing duties on all entries of steel wheels from Brazil
entered, or withdrawn from warehouse, for consumption, as described in the "Suspension of Liquidation" section of this
notice.

                                    (Cite as: 54 FR 15523, *15534)

This determination is published pursuant to section 705(d) of the Act (19 U.S.C. 1671d(d)).
Date: April 7, 1989.

Timothy N. Bergan,

Acting Assistant Secretary for Import Administration.