IMPORT ADMINISTRATION POLICY BULLETIN Number 94.1 Date of Issue: 3/25/94 Topic: Cost of Production-Standards for Initiation of Inquiry Author: David Mueller Approved:(S) 3-25-94 Joseph A. Spetrini Acting Assistant Secretary for Import Administration Issue Standards and procedures for initiating cost of production (COP) inquiries. Discussion and Analysis Section 773(b) of the Tariff Act of 1930, as amended (the Tariff Act) states that whenever the Department has reasonable grounds to believe or suspect that sales in the foreign market are at prices less than the cost of producing the merchandise, it shall determine whether, in fact, such sales were made at less than the cost of producing the merchandise. If other conditions in this section are met (substantial quantities over an extended period of time, and the inadequacy of below cost prices in the normal course of trade for recovering all costs in a reasonable period of time), individual sales below the actual costs of production will be disregarded in calculating foreign market value (FMV). The statute thus envisages a two step process. First, we must determine if it is reasonable to suspect that sales are at less than the cost of production. Second, if we so suspect, we must determine whether that is the case by collecting the actual cost information from the producer. This bulletin will establish standards and procedures for this process. Import Administration has not previously established standards or procedures, beyond those in the regulations, for considering whether there are "reasonable grounds to believe or suspect" that foreign sales have been made at prices less than the cost of production. The facts available to petitioners and the Department vary greatly from case to case, so no fixed set of rules guiding the interpretation of facts would be appropriate for all cases. Nevertheless, the grounds for suspecting sales at less than cost in a given instance should be articulated on the record before initiating a COP inquiry. COP inquiries normally cover all of the models sold in the foreign market, manufactured by a specific producer, which are of the class or kind sold to the United States, unless in making an allegation the petitioner specifies that a COP inquiry is sought only for specific foreign models. Recall that although a decision whether to ultimately disregard a sale is made on a model specific basis (see Policy Bulletin 92/3, December 15, 1992), it does not follow that the initiation of a COP inquiry must also be model-specific. In many cases it would be impractical or impossible for a domestic interested party to obtain an example of below cost sales for each and every foreign model. Representativeness In view of Congressional disapproval of basing foreign market value on below cost sales, initiation standards should not unreasonably impede the Department from gathering the information necessary to determine actual costs. Congress did not desire to erect a barrier to cost investigations, but also did not direct their initiation without some indication that below cost sales might exist. COP inquiries can be expensive and time consuming, and expanding investigations or reviews beyond foreign price without cause would conflict with a consistent Congressional desire to conclude proceedings as promptly as possible. The emphasis should be on reasonable grounds. To satisfy both concerns, the examples used in an allegation should be representative of the broader range of foreign models which may be used to determine FMV for the various U.S. models. If they are representative, then it is reasonable to believe that other models are also below cost, and we should collect the information necessary to determine this in fact. If the allegation examples are not representative, then we would not have reasonable grounds to conclude other models might be sold below cost, and ought not to initiate the inquiry, unless the allegation specifically requests a cost investigation of selected models. Although representativeness of the examples used in the allegation must be determined on a case-by-case basis, some possible factors to consider are whether examples used are mainstream or unusual models, whether or not production methods are similar enough that costs of different models could be similar also, or whether it is a potential match to a U.S. sale. Petitioners must explain why the allegation is representative. Availability to the petitioner of cost and price information should be considered in determining whether the petitioner provided sufficient data. Since a much greater amount of information on prices, and perhaps costs, are available after a sales response is filed, an allegation of sales at less than cost received after that point in the proceeding would be expected to meet a higher standard of representativeness than one contained in a petition for a new investigation. For example, if the questionnaire response contained cost information for most of the foreign models, but the petitioner only alleged a very small number of models were below cost, one should question the representativeness of the allegation, particularly if the allegation made no attempt to explain why the examples chosen were representative of other models, and the costs in the response were not disputed. On the other hand, if the alleging party had to develop cost estimates from his own experience, a smaller number of models might be taken as representative, particularly if the examples provided were large sales volume models, or the prices or quantities of the examples used were not aberrational when compared to sales of other similar foreign models. Substantial Quantities, Extended Period of Time, and Cost Recovery While the statute requires reasonable grounds to believe or suspect that sales below cost are occurring to initiate an inquiry, it does not require reason to believe or suspect the below cost sales are also substantial in quantity, sold over an extended period of time, and at non-cost recovery prices. These latter determinations can only be made after costs are collected. Therefore, an allegation need not address these factors, and the Department will not consider them in deciding whether to initiate a cost inquiry. However, once a cost investigation is initiated, the COP questionnaire should provide the respondent an opportunity to demonstrate that prices that are below cost at the time of sale will recover all costs in a reasonable period of time. Only the producer has this information, and the Department must provide him with an opportunity to provide it before concluding that prices below costs will not recover all costs in a reasonable period of time. Administrative Reviews An additional element in establishing reasonable grounds is present in administrative reviews (but not investigations). There is a possible history of a given producer selling in its home or third-country markets at below cost prices, as established in either a prior review or the investigation. Accordingly, it has been Department practice to automatically self-initiate COP inquiries when the most recent period investigated or reviewed resulted in disregarding sales below cost for a particular company. Note that the standard is not simply that some sales were below cost, but that the statutory criteria for disregarding below cost sales were met. However, this type of self-initiation is based not on the prices or cost estimated for the period at issue, but on the selling practices in an earlier period. Non-Market Economy Products Normally, FMV for products of non-market economies (NME) is determined by reference to the factors methodology of section 773(c) of the Tariff Act. However, when the conditions of the intermediate country provision (section 773(f)) of the Tariff Act) are met, FMV is based on the price charged by resellers located in third countries. In view of the economic distortion created by state control in NMEs, and the absence of market directed decisions on price and output, it is unrealistic to expect the prices of NME produced goods sold to third countries resellers to be unaffected by that distortion. Because the price from a NME producer to a third country reseller is not based on market-determined factors, neither can we expect that the resale price by that reseller will be. This provides reasonable grounds to believe or suspect that sales in the foreign market are at prices less then the cost of producing the merchandise. Consequently, whenever third country reseller prices are the intended source of FMV, we will initiate a cost inquiry to determine the cost of production. As with other COP inquiries, the cost of manufacture must be based on the costs of the producer of the goods. Since the producer is located in an NME, the only available method to measure costs accurately is the surrogate method of section 773(c), unless the NME producer is part of a market oriented industry (MOI), in which case the producer's recorded costs may be used. However, since the purpose is to determine COP and not CV, there is no need to add either statutory minimum general expenses or profit. Pre-Initiation Role of Respondent Respondents have no role in the Department's evaluation of petitions for investigations, including any COP allegation contained in them. The petition is evaluated independently by the Department which initiates an inquiry if the petition is sufficient. However, COP allegations received subsequent to initiation of an investigation are available for respondent comment. The Department does take into account respondent's comments relating to the methodology of the allegation and its use of information previously on the administrative record, but disregards new factual information relating to the actual costs of production. In particular, rebuttal of portions of a allegation based on newly provided actual costs is to be ignored. Our purpose at this stage is not to determine if sales are in fact below cost, but rather, whether based on information available to the petitioner there is sufficient reason to believe they might be. Information from the respondent on actual costs of production must be full and complete and in response to the Department's COP questionnaire, not volunteered in a piece-meal fashion to short-circuit an inquiry by challenging portions of the petitioner's allegations. Timing of Allegations Section of 353.31(c) of the Department's regulations establishes time limits for submission of allegations of sales below cost. Since a COP inquiry will not be initiated at the onset of an investigation unless the allegation provides reasonable grounds at the time of initiation, it follows that a later allegation that does not provide those grounds by the regulatory deadlines will not result in a COP initiation. Effectively extending the deadlines to allow essential amendments (i.e., those without which reasonable grounds would not be established) to allegations would result in insufficient time available to complete COP inquiries, and will therefore not be allowed. Whenever possible, the Department will point out deficiencies in COP inquiries. Statement of Policy Cost of production inquiries will be initiated when there are reasonable grounds to believe or suspect sales that below cost are occurring in the appropriate foreign market. Such grounds may be established by an allegation based on specific examples of specific producers that are reasonably representative of that producer's range of comparable foreign models. Model specific investigations may be initiated where the model selected is not representative. Further, an inquiry will not be initiated unless the allegation provides adequate grounds not later than the times provided in section 353.31(c) of the Commerce Regulations. Comments from respondents will not be considered in deciding whether to initiate a COP inquiry in response to an allegation in a petition. Comments from respondents will be considered in response to a post-initiation allegation, but only to the extent they deal with the adequacy of the allegation itself in establishing reasonable grounds to believe or suspect sales at less than cost. New factual information from potential respondents will not be considered in a decision to initiate. COP inquiries will be self-initiated in administrative reviews if the most recent period examined resulted in disregard sales below cost in calculating foreign market value. COP inquiries, using surrogate methodology for costs of the NME producer, will also be self-initiated when FMV for NME produced products is to be based on a third country reseller's price. Implementation The above policies should be followed in all cases in which a decision whether to initiate a COP inquiry is taken after the issue date of this bulletin. If these policies are challenged in comments after a preliminary determination, the response of the Department should use the reasoning in this bulletin, as well as citing to any appropriate cases. However, the bulletin itself, standing alone, cannot be cited as authority for an action, as it is not a regulation. [We make the assumption that practices which led to disregarding sales below cost in the most recent period for which final results of review have been issued and sales below cost were investigated are continuing, and will investigate COP until the practice is known to have stopped. Just as for new investigations or petitioner allegations, there must be cause to believe that a specific producer's prices are less than cost, not simply that sales below cost are occurring in the industry.]