DEPARTMENT OF COMMERCE

[C-122-825]



Final Negative Countervailing Duty Determination and Final

Negative Critical Circumstances Determination: Certain Laminated

Hardwood Trailer Flooring (LHF) From Canada



AGENCY: Import Administration, International Trade Administration,

Department of Commerce



EFFECTIVE DATE: February 4, 1997.



FOR FURTHER INFORMATION CONTACT: David Boyland or Daniel Lessard, AD/

CVD Enforcement, Office I, Import Administration, U.S. Department of

Commerce, Room 3099, 14th Street and Constitution Avenue, NW.,

Washington, DC 20230; telephone (202) 482-4198 and 482-1778,

respectively.



FINAL DETERMINATION: The Department determines that countervailable

subsidies are not being provided to manufacturers, producers, or

exporters of LHF in Canada.

Case History

    Since the publication of the preliminary negative determination

(Preliminary Determination) in the Federal Register (61 FR 59079,

November 20, 1996), the following events have occurred.

    Verification of the responses of the Government of Canada (GOC),

the Government of Quebec (GOQ), Nilus Leclerc, Inc. and Industries

Leclerc, Inc., Erie Flooring and Wood Products (Erie), Industrial

Hardwoods Products, Ltd. (IHP), and Milner Rigsby Co., Ltd. (Milner)

was conducted between November 13 and 27, 1996.

    Petitioner and respondents filed case and rebuttal briefs on

December 17, 1996, and December 23, 1996, respectively. The hearing was

held on January 7, 1997.

Scope of Investigation

    The scope of this investigation consists of certain edge-glued

hardwood flooring made of oak, maple, or other hardwood lumber. Edge-

glued hardwood flooring is customized for specific dimensions and is

provided to the consumer in ``kits,'' or pre-sorted bundles of

component pieces generally ranging in size from 6'' to 14'' x 48' to

57' x 1'' to 1(1/2)'' for trailer flooring, from 6'' to 13'' x 12' to

28' x 1(1/8)'' to 1(1/2)'' for vans and truck bodies, from 9'' to 12(1/

2)'' x 8' to 10' x 1(7/8)'' to 2(1/2)'' for rail cars, and from 6'' to

14'' x 19' to 48' x 1(1/8)'' to 1(3/8)'' for containers.

    The merchandise under investigation is currently classified, in

addition to various other hardwood products, under subheading

4421.90.98.40 of the Harmonized Tariff Schedule of the United States

(HTSUS). Edge-glued hardwood flooring is commonly referred to as

``laminated'' hardwood flooring by buyers and sellers of subject



---- page 5202 ----



merchandise. Edge-glued hardwood flooring, however, is not a hardwood

laminate for purposes of classification under HTSUS 4412.14. Although

the HTSUS subheading is provided for convenience and Customs purposes,

our written description of the scope of this proceeding is dispositive.



The Applicable Statute and Regulations



    Unless otherwise indicated, all citations to the statute are

references to the provisions of the Tariff Act of 1930, as amended by

the Uruguay Round Agreements Act effective January 1, 1995 (the Act).

References to the Countervailing Duties: Notice of Proposed Rulemaking

and Request for Public Comments, 54 FR 23366 (May 31, 1989) (Proposed

Regulations), which have been withdrawn, are provided solely for

further explanation of the Department's countervailing duty practice.



Petitioner



    The petition in this investigation was filed by the Ad Hoc

Committee on Laminated Hardwood Trailer Flooring, which is composed of

the Anderson-Tully Company, Havco Wood Products Inc., Industrial

Hardwoods Products Inc., Lewisohn Sales Company Inc., and Cloud

Corporation.



Period of Investigation (POI)



    The period for which we are measuring subsidies is calendar year

1995.



Ontario Companies



    We have determined that three producers of the subject merchandise

have received zero or de minimis subsidies. Erie and IHP formally

requested that they be excluded from any potential countervailing duty

order. Milner responded to our questionnaire.

    IHP certified that the only subsidy it received during the POI was

consulting services pursuant to the Industrial Research Assistance

Program (IRAP). The GOC and Government of Ontario also certified and we

verified that this was the only benefit IHP received. Even assuming

this assistance constituted a countervailable subsidy, the benefit

would be de minimis.

    Erie certified that it received no countervailable subsidies. The

GOC and the Government of Ontario also certified this. We verified that

Erie received no countervailable subsidies. Finally, we verified that

Milner did not receive benefits during the POI.

    The remainder of this notice deals exclusively with Nilus Leclerc,

Inc. and Industries Leclerc, Inc.



Related Parties



    In the present investigation, we have examined affiliated companies

(within the meaning of section 771(33) of the Act) whose relationship

may be sufficient to warrant treatment as a single company with a

single, combined countervailing duty rate. In the countervailing duty

questionnaire, consistent with our past practice, the Department

defined companies as sufficiently related where one company owns 20

percent or more of the other company, or where companies prepare

consolidated financial statements. The Department also stated that

companies may be considered sufficiently related where there are common

directors or one company performs services for the other company.

According to the questionnaire, where such companies produce the

subject merchandise or where such companies have engaged in certain

financial transactions with the company producing the subject

merchandise, the affiliated parties are required to respond to our

questionnaire.

    Nilus Leclerc Inc. was identified in the petition as an exporter of

LHF from Canada. Nilus Leclerc Inc. is part of a consolidated group,

Groupe Bois Leclerc (GBL). Nilus Leclerc, Inc. and Industries Leclerc,

Inc. are the only companies in the group directly engaged in the

production of LHF. Because of the extent of common ownership, we have

found it appropriate to treat these two LHF producers as a single

company (Leclerc). As a consequence, we are calculating a single

countervailing duty rate for both companies by dividing their combined

subsidies by their combined sales.

    In addition, certain separately incorporated companies in the group

received subsidies. Where those subsidies were tied to the production

of a corporation that is not directly involved in the production of

LHF, we have not included those subsidies in our calculations. Where

the subsidies benefitted the production of LHF and other merchandise,

we included those subsidies in our calculations using the sales of the

relevant products in the denominator of the ad valorem subsidy rate

calculations.



Export Subsidy Issue



    Petitioner has alleged that the loans provided by the Canada-Quebec

Subsidiary Agreement on Industrial Development (Subsidiary Agreement)

and the Expansion and Modernization Program sponsored by the Societe de

Developpement Industriel du Quebec (SDI) are de facto export subsidies.

Petitioner argues that the programs should be deemed to be export

subsidies because the approval of government financing was ``in fact

contingent'' on exports to the United States. According to petitioner,

Leclerc's project and the government approval of the project were

entirely based on Leclerc's plan to export the vast majority of the

anticipated increased production to the United States. Petitioner

asserts that due to the limited growth potential of the LHF market in

Canada, the U.S. export market was the only viable market for Leclerc's

expanded capacity. Without the U.S. market, petitioner argues, there

would have been no need for expansion or financing and thus, the

government approval of Leclerc's project was, and could only have been,

``contingent'' on exports.

    In rebuttal, respondents maintain that the approval of government

financing was not ``contingent'' on exports and that Leclerc's export

potential was merely one aspect of the government officials' overall

assessment of the commercial viability of the expansion project.

According to respondents, the absence of provisions in the loan

agreements which condition the receipt of the loan on exports or

consider the failure to achieve a particular level of export

performance as a default of the loan demonstrate that the programs were

not ``contingent'' upon export performance. Furthermore, respondents

invoke the second sentence of note 4 of Article 3.1(a) of the SCM which

states: ``The mere fact that a subsidy is accorded to enterprises which

export shall not for that reason alone be considered to be an export

subsidy within the meaning of (Article 3.1(a)).'' Respondents contend

that this provision makes it clear that the mere fact that Leclerc

exported to the United States or projected future exports should not

transform the government financing into an export subsidy.

    While we have closely analyzed this issue, as discussed below, when

we examine the programs as domestic subsidies, the rate for these

programs is de minimis. Our analysis also shows that, even if we were

to find these programs to be export subsidies, the total countervailing

duty rate calculated for Leclerc during the POI would be de minimis.

Therefore, we have not addressed the issue of whether these two

programs are export subsidies.



Creditworthiness



    In our Preliminary Determination, we treated Leclerc as

``creditworthy'' in 1993, 1994, and 1995. This decision was based on

information provided by Leclerc indicating that it had received



---- page 5203 ----



commercial financing or that commercial banks had agreed to provide it

with long-term financing in each of those years. For this final

determination, we are continuing to treat Leclerc as creditworthy in

1993 and 1994 because it received comparable loans from commercial

banks in those years. (For a further discussion of the comparability

issue, see ``Comparability'' of Commercial Loans Received section

below.) However, based on further information gathered at verification

regarding 1995, we have determined that the case-specific circumstances

surrounding the commercial financing agreed to and actually received in

that year indicate that this financing is not dispositive evidence of

Leclerc's creditworthiness. Accordingly, we have analyzed Leclerc's

financial condition and prospects in 1995 to determine whether the

company was creditworthy in that year. Based on our analysis, we have

determined that Leclerc was uncreditworthy in 1995 (see January 24,

1997 memorandum from David R. Boyland, Import Compliance Specialist,

AD/CVD Enforcement, Office 1, to Susan H. Kuhbach, Acting Deputy

Assistant Secretary, AD/CVD Enforcement, Group 1).



``Comparability'' of Commercial Loans Received



    In 1993 and 1994, Leclerc obtained commercial loans. The receipt of

such loans must be considered both in the context of the

uncreditworthiness allegation and selection of the appropriate

benchmark to use in measuring the countervailable benefit from the

government loans received. In 1995, Leclerc reached an agreement with a

commercial source to receive long-term financing. The circumstances

surrounding the 1995 financing are such that we have disregarded this

financing as dispositive evidence of creditworthiness or as a possible

benchmark. We now turn to the receipt by Leclerc of commercial loans in

1993 and 1994.

    Section 355.44(b)(6)(i) of the Proposed Regulations states that the

receipt of comparable long-term financing is normally dispositive

evidence that a company is creditworthy. Section 775(5)(E)(ii) of the

Act--a new provision added by the URAA--requires that when selecting a

benchmark loan to compare to the government loan for purposes of

measuring the potential benefit, the Department must select a loan

comparable to one the company could obtain commercially. We have

determined that the commercial loans received by Leclerc are

sufficiently comparable to the government loans to constitute

dispositive evidence that the company was creditworthy in 1993 and

1994. However, we have determined that the commercial loans received

are not sufficiently comparable to measure accurately any

countervailable benefits received from the government loans.

    When the Department examines whether a company is creditworthy, it

is essentially attempting to determine if the company in question could

obtain commercial financing. The analysis of whether a company is

creditworthy examines whether the company received comparable

commercial loans and, if necessary, the overall financial health and

future prospects of the company. Such an analysis is ``often highly

complex'' (see the preamble to the Proposed Regulations at 23370,

citing the Subsidies Appendix at 18019.) The fundamental question

however, is a general one; namely: was the company's financial health

such that it did not have meaningful access to long-term commercial

loans?

    Given the difficult question posed by a creditworthy inquiry and

our policy of seeking guidance from the judgments of the commercial

markets, the Department has historically relied heavily upon the

receipt of comparable commercial loans as dispositive evidence that the

company at issue is creditworthy. The ``comparability'' of any

commercial loans received has essentially been determined by examining

whether long-term loans (not guaranteed by the government) were

received from commercial sources in the same year as the government

loans. (See for example, Final Affirmative Countervailing Duty

Determinations: Certain Steel Products from Italy 58 FR 37327, 37329

(July 9, 1993) and Final Affirmative Countervailing Duty

Determinations: Certain Carbon Steel Products from Austria 50 FR 33369,

33372 (August 9, 1985).) If the commercial loans received were judged

comparable on this basis, the receipt of such loans has been considered

dispositive evidence that the company was creditworthy. Based on our

traditional interpretation of ``comparable'' in the creditworthy

context, the commercial loans received by Leclerc were comparable to

the government loans it received.

    We see no reason to change the policy of relying on commercial

loans or defining comparability as outlined above, because it answers

the general question posed by an uncreditworthiness allegation.

Specifically, it provides the most direct evidence that a company could

obtain loans from commercial sources. If a company is able to obtain

such financing, the marketplace has judged that the company at issue is

creditworthy. As noted above, in such instances, the Department will

normally defer to the decision of the market. The fact that the

commercial loans received may differ from the government loans with

respect to certain terms such as the level of security does not

necessarily speak directly to the question of whether the company was

creditworthy.

    Because of the facts of this particular case, specifically the

presence of the private sector in the financing of Leclerc's expansion,

and the otherwise general nature of the creditworthy analysis as

outlined above, we do not believe that the differences in other terms

between Leclerc's commercial loans and its government loans are great

enough to warrant a departure from the Department's normal practice of

finding the receipt of commercial loans to be dispositive evidence that

a company is creditworthy. Therefore, we determine that Leclerc was

creditworthy in 1993 and 1994.

    In contrast, we do not believe that Leclerc's commercial loans are

appropriate for use as benchmarks for purposes of the more exacting

exercise of measuring the benefit from the government loans received by

Leclerc. As noted above, the statute, as recently amended by the URAA,

requires that when selecting a benchmark interest rate to compare to

the government interest rate for purposes of measuring the potential

benefit, the Department must select a commercial loan comparable to one

the company could actually obtain on the market. The selection of the

benchmark interest rate under the new statute seeks to answer a very

specific question; namely: what is the benefit provided by the specific

government loans in question? In this context, the Department must take

into account, to the extent possible, differences in terms between the

government loans and the commercial loans offered for comparison

purposes which may substantially affect the accuracy of the benefit

calculated.

    When comparing the terms of the SDI and Subsidiary Agreement loans

with Leclerc's commercial loans, differences emerge with respect to the

level of security. Because we believe that the level of security can

significantly affect the interest rate charged by a commercial lender,

selection of benchmark financing with markedly different levels of

security may distort the measurement of the countervailable benefit.

    Although the specific terms of Leclerc's loans are proprietary, we

learned on verification that SDI takes on more risk than commercial

banks and



---- page 5204 ----



that there are significant differences with respect to the extent to

which commercial and SDI loan values could be recovered in the event of

Leclerc's default. Because of the differences between the commercial

loans and the SDI and Subsidiary Agreement loans, we have chosen a

benchmark interest rate which generally reflects the level of security

exhibited by the government loans.

    Although we have chosen a benchmark which generally reflects the

significant terms of the government-provided loans, we have not

adjusted for minor differences in terms or any differences which cannot

be reasonably be quantified because such an analysis is not practicable

and would not have a meaningful impact on our analysis. We consider

such adjustments to be appropriate only to the extent that they reflect

significant differences in terms and the record provides a reasonable,

practicable basis for doing so.



Subsidies Valuation Information



    Benchmarks for Long-term Loans and Discount Rates: We have

calculated the long-term benchmark interest and discount rate in 1993,

1994, and 1995 based on company-specific debt received by Leclerc. We

used this debt to estimate the appropriate benchmark interest rate in

1993-1995. For 1995, we added a risk premium, as described in section

355.44(b)(6)(D)(iv) of the Proposed Regulations to establish the

uncreditworthy benchmark interest and discount rate.

    Allocation Period: In the past, the Department has relied upon

information from the U.S. Internal Revenue Service on the industry-

specific average useful life of assets to determine the allocation

period for nonrecurring subsidies (see General Issues Appendix (GIA)

attached to the Final Affirmative Countervailing Duty Determination:

Certain Steel Products from Austria (58 FR 37217, 37226; July 9, 1993).

However, in British Steel plc. v. United States, 879 F. Supp. 1254 (CIT

1995) (British Steel), the U.S. Court of International Trade (the

Court) ruled against this allocation methodology. In accordance with

the Court's remand order, the Department calculated a company-specific

allocation period for nonrecurring subsidies based on the average

useful life (AUL) of non-renewable physical assets. This remand

determination was affirmed by the Court on June 4, 1996. See British

Steel, 929 F. Supp. 426, 439 (CIT 1996).

    The Department has decided to acquiesce to the Court's decision

and, as such, we intend to determine the allocation period for

nonrecurring subsidies using company-specific AUL data where reasonable

and practicable. In this case, the Department has determined that it is

reasonable and practicable to allocate all nonrecurring subsidies

received prior to, or during, the POI using Leclerc's AUL of 18 years.



FOB/CIF Adjustment



    The Department has deducted costs associated directly with the

transportation of subject merchandise from Leclerc's U.S. sales to

determine the correct FOB value for denominator purposes (see GIA at

37236, 37237). While the majority of these costs were originally

reported by respondents, additional information obtained at

verification has been incorporated where appropriate.

    Based upon the responses to our questionnaires and the results of

verification, we determine the following:



I. Analysis of Direct Subsidies



A. Programs Determined to Be Countervailable



1. Canada-Quebec Subsidiary Agreement on Industrial Development

    This Subsidiary Agreement, which spans five years, was jointly

funded by the GOC and GOQ on March 27, 1992. Under this agreement, the

GOC and GOQ established a program to improve the competitiveness and

vitality of the Quebec economy by providing financial assistance,

through the initial joint funding of the agreement, to companies for

major industrial projects. The following four types of activities are

eligible for contributions: (1) capital investment projects, (2)

product or process development projects involving a major investment or

leading to a capital investment, (3) studies required to assess the

feasibility of an investment project, and (4) municipal infrastructure

required for a major capital investment project.

    Leclerc received a long-term interest-free loan under the

Subsidiary Agreement. Although the Subsidiary Agreement was jointly

funded, the loan received by Leclerc was provided by the GOC from its

portion of the joint funding.

    We have determined that the loan received by Leclerc constitutes a

countervailable subsidy within the meaning of section 771(5) of the

Act. It is a direct transfer of funds from the GOC providing a benefit

in the amount of the difference between the benchmark interest rate and

the zero interest rate paid by Leclerc.

    We analyzed whether the Subsidiary Agreement is specific ``in law

or in fact,'' within the meaning of section 771(5A) of the Act. Funds

paid out by the GOC under this program are limited to companies in a

particular region of Canada (i.e., the Province of Quebec) and, hence,

regionally specific under section 771(5A)(D)(iv) of the Act.

    To calculate the countervailable benefit conferred on Leclerc, we

used the 1995 uncreditworthy benchmark interest rate described above

and followed our fixed-rate, long-term loan methodology (see January

24, 1997, Memorandum from Team to Susan H. Kuhbach, Acting Deputy

Assistant Secretary, AD/CVD Enforcement, Group 1). We then divided the

benefit attributable to the POI by Leclerc's LHF sales in the POI. (See

Comment 12.) On this basis, we determine the countervailable subsidy

for this program to be 0.29 percent ad valorem for Leclerc.



2. Industrial and Regional Development Program (IRDP)

    The IRDP was created by the Industrial and Regional Development Act

and Regulations in 1983 and was administered by the Canadian Department

of Regional Industrial Expansion. It was terminated on June 30, 1988.

No new applications for IRDP projects were accepted after that date.

    The goals of IRDP were to achieve economic development in all

regions of Canada, promote economic development in those regions in

which opportunities for productive employment are exceptionally

inadequate, and improve the overall economy in Canada. To accomplish

these objectives, financial support in the form of grants,

contributions and loans were provided to companies for four major

purposes: (1) establishing, expanding, modernizing production; (2)

promoting the marketing of products or services; (3) developing new or

improved products or production processes, or carrying on research in

respect thereof; and (4) restructuring so as to continue on a

commercially viable basis.

    Under this program, all of Canada's 260 census districts were

classified into one of four tiers on the basis of the economic

development of the region. The most economically disadvantaged regions

comprised Tier IV; the most advanced regions were classified as Tier I.

    Those districts classified as Tiers III and IV were authorized to

receive the highest share of assistance under IRDP (as a percentage of

assistance per approved project); those in Tiers I and II received the

lowest. For example, a grant toward the eligible costs of



---- page 5205 ----



modernizing or significantly increasing the production of companies in

Tiers I and II could not exceed 17.5 percent of the capital costs of

the project, while in Tiers III and IV grants could cover up to 25

percent of eligible costs.

    Nilus Leclerc Inc. was located in a Tier III district when it

received three grants under this program. We have determined that the

grants received by Leclerc constitute a countervailable subsidy within

the meaning of section 771(5) of the Act. The grants are direct

transfers of funds from the GOC and confer a benefit in the amount of

the portion of the grant that is in excess of the most favorable,

nonspecific level of benefits (i.e., Tiers I and II). (See section

355.44(n) of the Department's Proposed Regulations regarding programs

with varying levels of benefits.) Also, IRDP grants are regionally

specific within the meaning of section 771(5A) of the Act because the

preferential levels of benefits (i.e., contributions to Tiers III and

IV) are limited to companies in particular regions of Canada. This is

consistent with our prior determination in the Final Affirmative

Countervailing Duty Determination: Certain Fresh Atlantic Groundfish

from Canada, 51 FR 10041, 10045 (March 24, 1986).

    We have treated these grants as ``non-recurring'' subsidies based

on the analysis set forth in the Allocation section of the GIA at

37226. In accordance with our past practice, we have allocated over

time those grants which exceeded 0.5 percent of the company's sales in

the year of receipt.

    To calculate the countervailable subsidy, we used our standard

grant methodology. For those grants which were tied to the production

of both LHF and residential flooring, we divided the benefit

attributable to the POI by the total sales of Leclerc and Planchers

Leclerc (the company in the Leclerc group that produces residential

flooring) during the same period. Otherwise, for those grants which

benefited only the production of LHF, we divided the benefit

attributable to the POI by Leclerc's LHF sales during the same period.

On this basis, we determine the countervailable subsidy for this

program to be 0.04 percent ad valorem for Leclerc.



3. SDI: Expansion and Modernization Program

    Firms in Quebec can participate in the Expansion and Modernization

Program by meeting a requirement that ``the project (for which

financing is requested) is aimed at markets outside Quebec.'' An

alternative requirement for receiving assistance is that the market in

Quebec is inadequately served by businesses in Quebec and that the

supported production is expected to replace imported goods into Quebec.

Under either requirement, the market for the products to be supported

must have an expected growth rate that is above the average for the

manufacturing sector in Canada. In addition to these requirements,

which are contained in the regulations governing Expansion and

Modernization Program, the GOQ has stated that firms receiving SDI

loans must also receive financing from commercial sources.

    Loans under this program can be provided to companies involved in:

manufacturing, recycling, computer services, software or software

package design and publishing, contaminated soils remediation, the

operation of a research laboratory, and the production of technical

services for clients outside of Quebec. The regulations for this

program further indicate that businesses in other categories may be

considered ``in exceptional cases.'' The assistance may be used to

cover the following types of expenditures: (1) capital investments; (2)

the purchase and introduction of a new technology; (3) the acquisition

of information production or management equipment; (4) investments for

project-related training; and (5) other training investments related to

project start-up. Leclerc obtained loans under SDI's Expansion and

Modernization Program in 1993, 1994, and 1995. (For further information

regarding how we treated the 1995 loan, see Comment 17.) These loans

were part of a larger package of commercial and government financing

used to increase Leclerc's productive capacity.

    We have determined that the 1993 and 1994 loans received by Leclerc

constitute countervailable subsidies within the meaning of section

771(5) of the Act. They are a direct transfer of funds from the GOQ

providing a benefit in the amount of the difference between the

benchmark interest rate and the interest rate paid by Leclerc.

    Based on our review of the eligibility criteria, we determine that

the program is not de jure specific. However, as in our Preliminary

Determination, we have concluded that this program is in fact specific.

    Although loans were given to a large number and wide variety of

users under this program, the level of financing obtained by the wood

products industries group and by Leclerc was disproportionate. In 1993

and 1994, the wood products industries group was consistently among the

largest beneficiaries under the program. Leclerc's share of financing

as a percentage of total authorized financing was also large relative

to the shares received by other users. Taken together, these facts

support a determination that the assistance received by Leclerc was

disproportionate in 1993 and 1994.

    In order to calculate the benefit from long-term variable rate

loans, the Department normally calculates the difference during the POI

between the amount of interest paid on the subsidized loan and the

amount of interest that would have been paid on a comparable commercial

loan. However, in this case, the loans given under the Expansion and

Modernization Program include premia payments by Leclerc and stock

options for SDI. In addition, the SDI loans have variable repayment

schedules. Therefore, our normal methodology for long-term loans which

focuses only on differences in interest rates would not provide an

accurate measure of the benefit received by Leclerc. In order to

account for the value of the premia and the variable repayment

schedule, we have estimated a repayment schedule for the SDI loan and

compared the amount Leclerc would repay under that schedule with the

amount Leclerc would repay under a comparable commercial loan. Because

of the difficulty of assigning a value to the stock options, we have

not included them in our calculations. We note that if we were to

include the stock options, the amount of the benefit conferred by these

loans would be even less. Given that we have reached a negative

countervailing duty determination, it is not important that our subsidy

calculation reflects the lower benefit amount.

    We next determined the grant equivalent of these loans, i.e., the

present value of the difference between what would be paid under the

commercial loan and the SDI loan, using the discount rates described in

the Subsidies Valuation Information section above. We used the life of

the SDI loan as the allocation period because of the variable repayment

schedule on the SDI loans. The benefit allocated to the POI was then

divided by Leclerc's total sales of subject merchandise during the POI.

Using this methodology, we determine the countervailable subsidy from

the Expansion and Modernization Program to be 0.24 percent ad valorem.



4. Export Promotion Assistance Program (APEX)

    Under the APEX program, the GOQ shares certain costs incurred by a

Quebec company in the penetration of new foreign markets. Such costs

include missions to develop new markets or negotiate ``industrial

agreements,''



---- page 5206 ----



participate in trade fairs outside of Canada, adapt products to new

export markets, prepare bids with the assistance of consultants,

prepare marketing studies as well as strategies to enter foreign

markets, and hire an international marketing expert to develop the

firm's export sales (see Preliminary Countervailing Duty

Determinations: Pure and Alloy Magnesium From Canada 56 FR 63927, 63931

(December 6, 1991)).

    At the Preliminary Determination, the Department considered APEX to

be a non-used program based on the questionnaire responses received.

Prior to the start of verification, however, the GOQ stated, and we

confirmed, that Leclerc in fact used this program (see December 10,

1996 GOQ Verification Report at 12.)

    Because receipt of benefits under this program is contingent upon

export performance, we determine that it is an export subsidy within

the meaning of 771(5A)(B) of the Act. We have also determined that the

grants received by Leclerc constitute a countervailable subsidy within

the meaning of section 771(5) of the Act because they are direct

transfers of funds from the GOQ and confer a benefit to Leclerc in the

amount of the face value of the grant. We have treated the grant as a

``non-recurring'' subsidy based on the analysis set forth in the

Allocation section of the GIA at 37226. We have allocated the benefit

over the AUL of Leclerc's non-renewable physical assets using the grant

allocation formula outlined in section 355.49 (b)(4)(3) of the

Department's Proposed Regulations. The benefit allocated to the POI was

then divided by Leclerc's total export sales during the POI. Using this

methodology, we determine the countervailable subsidy from the APEX

program to be 0.00 percent ad valorem.



B. Program Determined To Be Not Countervailable, But Which Was Not

Considered At The Preliminary Determination



Program for the Development of Human Resources (PDHR) of the Societe

Quebecoise de Developpement de la Main-d'Oeuvre (SQDM)

    Prior to the start of verification, the GOQ reported that Leclerc

received assistance under the Program for the Development of Human

Resources (PDHR) which is administered by SQDM. PDHR was created in

1992 for the purpose of assisting businesses to develop or adapt their

human resource programs to protect and maintain existing jobs and to

support the creation of new jobs. The program is available to all

commercial enterprises, workers' unions, other groups of workers and

nonprofit organizations located in Quebec. The only eligibility

criterion is that a company is conducting business, or in the process

of establishing a business, in Quebec or is in the process of doing so.

The program focuses on assisting small and medium-size businesses: (1)

with human resources management and development needs; (2) facing a

difficult employment situation; and (3) active in priority economic

sectors at the local, regional and provincial levels.

    The financial assistance generally covers 50 percent of the costs

of the company's human resource projects with a maximum cap of $200,000

per year for up to three years. In general, funds may be used for:

``hiring an expert responsible for analyzing the manpower situation at

the company; paying the wages of employees involved in human resource

activities; other expenses related to training activities for human

resource development and/or hiring a training coordinator or a human

resource manager.'' We verified that Leclerc received a grant under

this program during the POI.

    We analyzed whether the program is specific ``in law or in fact,''

within the meaning of section 771(5A)(D)(i) and (iii) of the Act. Based

upon our review of the eligibility criteria for the program, we

determine that this program is not de jure specific.

    We next examined whether the program is de facto specific. During

the POI, we verified that assistance under the program was distributed

over a large number and wide variety of users representing virtually

every industry and commercial sector found in Quebec. Based on this

information, we have determined that the program is not specific based

on the number of users. We also examined evidence regarding the usage

of the program and found that neither Leclerc nor the wood products

industry was a dominant user or received a disproportionate share of

benefits distributed under this program. Because the number of users is

large and there is no dominant or disproportionate use of the program

by Leclerc, we do not reach the issue of whether administrators of the

program exercised discretion in awarding benefits. Thus, we conclude

that this program is not specific and has not conferred a

countervailable subsidy on Leclerc.



C. Programs Determined To Be Not Countervailable Which Were Considered

At The Preliminary Determination



    Based on verification, we continue to find these programs not

countervailable for the same reasons identified in the preliminarily

determination.



1. ``Programme d'appui a la reprise'' (PREP) program

2.Decentralized Fund for Job Creation Program of SQDM

3. Export Development Corporation (EDC)

4. Hydro-Quebec Electrotechnology Implementation Program

5. Societe de placement dans l'enterprise quebecoise (SPEQ)





D. Programs Determined to Be Not Used



    Based on the information provided in the responses and the results

of verification, we determine that the following programs were not

used:



1. Capital Gains Exemptions

2. Regional Investment Tax Credits

3. Performance Security Services through the Export Development Corporation

4. Working Capital for Growth from the Business Development Bank of Canada (BDC)

5. St. Lawrence Environmental Technology Development Program (ETDP)

6. Program for Export Market Development

7. Canada-Quebec Subsidiary Agreement on the Economic Development of Quebec

8. Quebec Stumpage Program

9. Programs Provided by the Industrial Development Corporation (SDI)

    Article 7 Assistance

    Export Assistance Program

    Business Financing Program

    Research and Innovation Activities Program

10. Private Forest Development Program (PFDP)





II. Analysis of Upstream Subsidies



    The petitioner alleged that Leclerc receives upstream subsidies

through its purchase of lumber from suppliers which harvest stumpage

from Quebec's public forest (``allegedly subsidized'' suppliers).

Section 771A(a) of the Act, defines upstream subsidies as follows:



    The term ``upstream subsidy'' means any subsidy * * * by the

government of a country that:

    (1) Is paid or bestowed by that government with respect to a

product (hereinafter referred to as an ``input product'') that is

used in the manufacture or production in that country of merchandise

which is the subject of a countervailing duty proceeding;

    (2) In the judgment of the administering authority bestows a

competitive benefit on the merchandise; and



---- page 5207 ----



    (3) Has a significant effect on the cost of manufacturing or

producing the merchandise.



    Each of the three elements listed above must be satisfied in order

for the Department to find that an upstream subsidy exists. The absence

of any one element precludes the finding of an upstream subsidy. As

discussed below, we determine that a competitive benefit is not

bestowed on Leclerc through its purchases of allegedly subsidized

lumber. Therefore, we have not addressed the first and third criteria.



Competitive Benefit



    In determining whether subsidies to the upstream supplier(s) confer

a competitive benefit within the meaning of section 771A(a)(2) on the

producer of the subject merchandise, section 771A(b) directs that:



    * * * a competitive benefit has been bestowed when the price for

the input product * * * 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.



    The Department's Proposed Regulations offer the following hierarchy

of benchmarks for determining whether a competitive benefit exists:



    * * * In evaluating whether a competitive benefit exists

pursuant to paragraph (a)(2) of this section, the Secretary will

determine whether the price for the input product is lower than:

    (1) The price which the producer of the merchandise otherwise

would pay for the input product, produced in the same country, in

obtaining it from another unsubsidized seller in an arm's length

transaction; or

    (2) a world market price for the input product.



    In this instance, Leclerc purchases the input product, lumber, from

numerous unsubsidized (i.e., suppliers which do not harvest stumpage

from Quebec's public forest), unrelated suppliers in Canada. Therefore,

we have used the prices charged to Leclerc by these suppliers as the

benchmark.

    We compared the prices paid by Leclerc to its ``allegedly

subsidized'' suppliers with the prices paid to unsubsidized suppliers

on a product-by-product and aggregate basis (see October 10, 1996,

November 6, 1996 and January 24, 1997, Memoranda from Team to Susan H.

Kuhbach, Acting Deputy Assistant Secretary, Group 1, AD/CVD

Enforcement). Based on our comparison of these prices, we found that

the price of ``allegedly subsidized'' lumber was generally equal to or

exceeded the price of unsubsidized lumber. Therefore, we have

determined that Leclerc did not receive an upstream subsidy.



Critical Circumstances



    The petitioner alleged that critical circumstances exist with

respect to imports of subject merchandise. Because we have reached a

negative final determination, this issue is moot.



Interested Party Comments



Comment 1 (1995 Commercial Financing)

    Petitioner disagrees with the Department's use of a 1995 financing

arrangement between Leclerc and a commercial entity as a benchmark, as

well as dispositive evidence of Leclerc's creditworthiness. Petitioner

bases its claim on the fact that Leclerc did not actually receive the

loan in 1995, nor did it meet the preconditions for receiving financing

under the arrangement. Petitioner points out that section

355.44(b)(6)(i) of the Department's Proposed Regulations requires the

receipt of a comparable long-term commercial loan for dispositive

evidence of creditworthiness.

    Leclerc states that it received and accepted a loan offer from a

commercial source in 1995 and that the agreement was binding on both

parties. Leclerc notes that the Department's November 13, 1996

Creditworthy Analysis Memorandum emphasized the fact that the

Department's primary interest in considering the presence of commercial

financing in the context of a creditworthiness inquiry is whether a

company had access to such financing. According to Leclerc, the 1995

financing arrangement shows that the company had access to long-term

funds from commercial sources.

    Finally, regarding use of the 1995 financing arrangement as a

benchmark, Leclerc and the GOQ state that the statute focuses on a

``comparable commercial loan that the recipient could actually obtain

on the market'' (emphasis added). Because the 1995 financing

arrangement reflects financing that Leclerc could have obtained, the

circumstances surrounding the agreement should not disqualify it as a

benchmark.



DOC Position



    We disagree with respondents. As described in the December 10, 1996

Leclerc Verification Report, the circumstances surrounding the 1995

financing arrangement do not support the argument that this financing

arrangement should be considered dispositive evidence of Leclerc's

creditworthiness. These circumstances also indicate that the 1995

financing arrangement does not reflect an appropriate benchmark

interest rate. (Note: The details of the 1995 financing arrangement are

business proprietary (see January 24, 1997 memorandum from David R.

Boyland, Import Compliance Specialist, AD/CVD Enforcement, Office 1, to

Susan H. Kuhbach, Acting Deputy Assistant Secretary, Group 1, AD/CVD

Enforcement).)

Comment 2 (Creditworthiness)

    In addition to arguing that the commercial and government loans are

not comparable for purposes of determining Leclerc's creditworthiness,

petitioner asserts that other evidence indicates that Leclerc was not

creditworthy when it received the government financing under

investigation. Petitioner argues that Leclerc's financial ratios during

1993, 1994, and 1995 would have been clearly unacceptable to a private

lender. Petitioner further asserts that the Department must consider

the expanded repayment obligations of the enlarged Leclerc operation,

as opposed to simply determining whether the company historically met

its financial obligations. Petitioner argues that, in addition to being

unable to meet its future financing costs with its cash flow, specific

aspects of Leclerc's financial position in 1995 indicate that the

company was not meeting its financial obligations in that year.

According to petitioner, other factors such as Leclerc's decision to

abandon several of its LHF production lines in 1995 also indicate that

the company was not in a position to cover its financial obligations.

    Citing the Final Affirmative Countervailing Duty Determination:

Fresh and Chilled Atlantic Salmon from Norway, 51 FR 10041 (March 24,

1986) and section 355.44(b)(6)(i) of the Department's Proposed

Regulations, Leclerc argues that creditworthiness cannot be judged

retrospectively and that the Department can only consider

creditworthiness at the time the loans were actually made. Leclerc

cites positive information from its balance sheet and income

statements, the ITC preliminary determination in this case (Certain

Laminated Hardwood Flooring from Canada, Inv. No. 701-TA-367), and a

study of Leclerc's 1995 business plan by an outside consulting firm, to

support its position that lenders in Canada had every reason to loan it

money throughout the 1993-1995 period.

    Leclerc states that the approach in the Department's October 9,

1996



---- page 5208 ----



creditworthiness memorandum (i.e., in which a company can only be

considered uncreditworthy if it did not have sufficient revenues or

resources in the past to meet its costs and fixed financial

obligations) is consistent with the preamble to the Department's

Proposed Regulations and past cases. Because it did have sufficient

resources to meet its costs and fixed financial obligations, Leclerc

asserts that no creditworthiness inquiry should be conducted.

    With respect to petitioner's criticism of the company's financial

ratios, Leclerc argues that the Department must examine the individual

circumstances of the company. According to Leclerc, when the financial

ratios are considered in context, they do not reflect financial

instability nor do they indicate that the company was unable to cover

its costs and fixed financial obligations out of its revenue.



DOC Position



    As noted above, we believe that the commercial loans received by

Leclerc in 1993 and 1994 are comparable to the government-provided

loans in those years. Hence, we have determined that the company was

creditworthy in those years.

    We agree with petitioner that a number of aspects related to

Leclerc's financial position in 1995 would have troubled a commercial

lender and that Leclerc's financial position in 1995 reflected certain

imbalances (see January 24, 1997 memorandum from David R. Boyland,

Import Compliance Specialist, AD/CVD Enforcement, Office 1, to Susan H.

Kuhbach, Acting Deputy Assistant Secretary, Group 1, AD/CVD

Enforcement). Additionally, circumstances surrounding Leclerc's 1995

financing arrangements strongly suggest that Leclerc would not have

been able to obtain long-term commercial financing in that year (see

December 10, 1996 Leclerc Verification Report). It is on this basis

that we have determined Leclerc to be uncreditworthy in 1995.

    Regarding Leclerc's argument that the Department should not have

investigated the company's creditworthiness since it had sufficient

resources in the past to cover its costs and fixed financial

obligations, we disagree. As noted in our Preliminary Determination (61

FR 59080, 59079 (November 20, 1996)), while past indicators can provide

useful information about a company's future prospects, they should not

cause the Department to disregard information contemporaneous with the

granting of the loan that is relevant to the company's ability to meet

its future financial obligations.

Comment 3 (Disproportionality--Determining Specificity Based on POI

Benefits.)

    The GOQ argues that the Department incorrectly found that SDI loans

were de facto specific on the grounds that there was disproportionate

use. The GOQ maintains that the amount of benefits approved in any one

year should not be the basis upon which the Department makes a

disproportionality determination. Instead, the GOQ argues that the

Department should make its disproportionality determination for the POI

based on the SDI benefits allocated to the POI. In other words, all

benefits bestowed over the life of the SDI program should be allocated

over time, and the Department's specificity analysis should be based on

the distribution of allocated benefits in the POI. To support this

argument, the GOQ cites the Final Results of Countervailing Duty

Administrative Review; Live Swine from Canada (Live Swine from Canada)

56 FR 28531, 28534 (June 21, 1991) which states ``[i]n analyzing de

facto specificity, the Department looks at the actual number of

commodities covered during the particular period under review.''

    Petitioner argues that the GOQ has offered no support in the law or

in past case precedent showing that a disproportionality finding

requires a specificity analysis based on a POI-allocated benefit

analysis. Furthermore, according to petitioner, the GOQ approach is not

feasible.



DOC Position



    We disagree with the GOQ's assertion that the Department's

disproportionality analysis must focus solely on the benefits allocated

to the POI. Such an approach confuses the initial specificity

determination, which is based on the action of the granting authority

at the time of bestowal, with the allocation of the benefit over time.

Because these are two separate processes, the portions of grants

allocated to further periods of time using the Department's standard

allocation methodology is not relevant in determining the actual

distribution of assistance at the time of bestowal.

    As regards Live Swine from Canada cited by Leclerc, the benefits

analyzed in that proceeding are recurring subsidies. Hence, in

performing its review period-by-review period analysis, the Department

is looking at separate and distinct disbursals each year, and not at

subsidies which have been allocated over time.

Comment 4 (Disproportionality--Aggregation)

    The GOQ argues that the Department's reference to the wood products

industries is inconsistent with the law because the Department should

first consider whether the enterprise itself has received a

disproportionate share, and then whether the industry similarly

benefitted. The GOQ also argues that the Department should compare the

benefit received by the hardwood trailer flooring industry--of which

Leclerc is the sole member--to the total value of SDI loans.

    Petitioner argues that requiring the Department to compare benefits

received by the hardwood trailer flooring industry to other such

industries at the same level of aggregation is impractical and is

directly contrary to section 771(5A) of the Act and section 355.43(b)

of the Proposed Regulations which allows the Department to choose from

various levels of aggregation for comparison purposes.



DOC Position



    We disagree with the GOQ that the Department considered the wrong

industry level when analyzing disproportionality. In its May 20, 1996

questionnaire, the Department requested that the GOQ provide the annual

``industry distribution'' of authorized benefits under the Investment

Assistance Program for both Expansion and Modernization Program and

PREP. Our determination of disproportionality was based, in part, on an

analysis of the industry distribution maintained by the GOQ and

reported in their questionnaire response. Although other GOQ

organizations such as SQDM provided information at a more detailed

level, the Department presumed that the information provided for SDI's

Investment Assistance Program represented the most detailed information

available to the GOQ. Moreover, we did not perceive the information to

be incorrect.

    In our disproportionality analysis, we determined, for both Leclerc

and the wood products industry, the percentage of total annual

authorized financing. We examined how these percentages compared to the

average transaction by industry, as well as the percentage of total

assistance accounted for by the other industry participants identified

by the GOQ. While the ``wood products industry'', as originally

reported by the GOQ in its supplemental questionnaire response, can be

broken down into more discrete units, we do not agree that we are

precluded from examining



---- page 5209 ----



disproportionality at the level of detail originally provided by the

GOQ. As the GOQ acknowledged in the hearing, ``the statute * * *

confers upon [the Department] discretion to determine what is the

appropriate level of aggregation'' (see page 70 of January 7, 1996

hearing transcript). In this case, the Department relied on information

provided by the GOQ to compare the distribution of benefits to Leclerc

and the group of wood product industries to other groups of industries

that received assistance under this program. Based on this comparison,

we determined that Leclerc received a disproportionate amount of

assistance under this program.

Comment 5 (Disproportionality--Considering Only Disbursed Financing)

    The GOQ asserts that for purposes of determining disproportionality

the Department should look at loans that were actually disbursed rather

than loans that were authorized. According to the GOQ, if the

Department considers the amount actually disbursed in 1995, the share

of SDI financing accounted for by the wood products industries in that

year is less than that received by the plastics and rubber industries

and is ``on par'' with disbursements to the chemical and metal products

industries.

    Petitioner disagrees with the GOQ's argument that the Department

should base its disproportionality analysis on loans actually

disbursed, as opposed to loans authorized. According to petitioner, the

level of authorized financing reflects the GOQ's intent during a

particular period and is, therefore, an appropriate measure for

determining disproportionality. Petitioner also notes that the only

record evidence in this case regarding industry-by-industry assistance

under the Expansion and Modernization Program is based on SDI

authorized loans.



DOC Position



    We disagree with the GOQ that authorized SDI financing cannot be

used in the Department's disproportionality analysis. The only data we

have on shares received by industries/enterprises other than Leclerc is

derived from authorized amounts. To use the amount disbursed for

Leclerc and the amounts authorized for other industries/enterprises to

calculate their relative shares would be inappropriate given the

inconsistency inherent in comparing such data. (See also Comment 17.)

Comment 6 (Disproportionality--Magnitude)

    The GOQ argues that the Department has never found

disproportionality in a case with facts resembling the facts here. In

the Final Affirmative Countervailing Duty Determinations: Certain Steel

Products from Brazil 58 FR 37295 (July 9, 1993)), the steel producers

received more than 50 percent of the ``benefits'' under the examined

program, two-and-a-half times more than the second largest recipient

industry. The GOQ also cites Final Affirmative Countervailing Duty

Determination: Grain-Oriented Electrical Steel from Italy 59 FR 18357

(April 18, 1994) and Final Results of Countervailing Duty

Administrative Review: Live Swine from Canada 59 FR 12243 (March 16,

1994) as examples in which the Department found disproportionality

based on large industry usage of a program. While the Department

determined 16.9 percent to be disproportionate in Final Affirmative

Countervailing Duty Determinations: Certain Steel Products From Belgium

(Certain Steel Products From Belgium) 58 FR 37273 (July 9, 1993)), the

GOQ alleges that the Department was examining a single industry (the

steel industry), as opposed to a group of industries. The GOQ also

cites Final Results of Countervailing Duty Administrative Reviews:

Antifriction Bearings (Other Than Tapered Roller Bearing) (AFBs) from

Singapore 60 FR 52377 (October 6, 1995) in which the group of

industries in which AFBs belongs received a large percentage of

assistance, while AFBs themselves received a small percentage.

    Petitioner states that the Department analyzed specificity at both

an industry and company-specific level and reasonably found that there

was disproportionate use. Although petitioner agrees that the cases

cited by the GOQ indicate that greater levels of usage have been the

basis for a finding of disproportionality in some instances, petitioner

asserts that this does not mean the Department's disproportionality

analysis in the instant case is unreasonable or faulty.



DOC Position



    We agree with petitioners. Disproportionality is fact-specific and

determined on a case-by-case basis. The shares found to be

disproportionate in previous cases do not represent a floor below which

the Department cannot determine disproportionality to exist. Our

determination in this case was based both on usage by the group of

industries to which Leclerc belongs and usage by Leclerc. As discussed

above, the wood products industries were among the top of users of the

Expansion and Modernization Program and Leclerc, as an individual

enterprise within this group, also received a relatively large

percentage of financing under this program. On this basis, we

determined that Leclerc received disproportionate amounts under this

program.

Comment 7 (Disproportionality--Addressing GDP)

    The GOQ argues that the CIT has determined that the Department

cannot rely on a mechanical, per se test for disproportionality and

that it has a further obligation to address the reasons that may

explain why an industry has received a relatively large share (see

British Steel at 1326). In addition to comparing the industry's share

of government benefits over time to the industry's share of gross

domestic product (GDP), the GOQ also argues that the CIT has stated

that the receipt of large benefits may also be explained by the fact

that the industry was expanding, or that there was an increased demand

for capital investment. According to the GOQ, when the Department

considers GDP, it must request and consider other evidence which the

Department did not do in this case.

    The GOQ states that information provided to the Department at

verification demonstrated that the share of loans received by the wood

products industries is virtually identical to their share of total

shipments of manufactured goods in Quebec. Additionally, the GOQ notes

that during the 1993-1995 period, North America was emerging from a

recession. In this economic environment, the laminated hardwood trailer

flooring industry, along with other wood products industries, was

experiencing sustained growth and, thus, was in need of capital.

    Petitioner disagrees that the Department should use a GDP analysis

in this case because the GDP figures relied upon by the GOQ are based

on manufacturing GDP. Therefore, they do not represent Canada's GDP and

they do not match the scope of SDI's lending authority which goes

beyond the manufacturing sector. Petitioner also rejects the GOQ's

argument that the CIT decision in British Steel stands for the

proposition that the Department must perform a GDP analysis and examine

factors explaining why an industry received a relatively large share of

assistance under a particular program. According to petitioner, British

Steel requires the Department to examine the above-referenced

information only when it relies on indirect factors to determine

disproportionality. Since the indicators used in the instant case were

directly related, as opposed to indirectly



---- page 5210 ----



related, petitioner argues that the CIT's finding in British Steel is

irrelevant.



DOC Position



    We disagree with the GOQ that a finding of disproportionality

requires the Department to examine reasons that may explain why the

industry at issue received a disproportionate share of the benefits.

The statute does not require the Department to determine the cause of

any de facto specificity that occurs as a result of the government

action. To the contrary, the statute provides that the Department may

impose a countervailing duty if it determines that a benefit provided

by a government action is conferred upon a specific industry. No intent

or purposeful government action is required to show that a specific

industry is receiving the benefit, as acknowledged by the Court in

British Steel. See also, Final Affirmative Countervailing Duty

Determination: Certain Softwood Lumber Products from Canada, 57 FR

22570, 22580-81 (1992).

    In response to the Court's remand instructions in British Steel,

the Department stated that it is not required to analyze the causal

relationship between the benefit conferred and the specificity of the

benefit. Furthermore, ``imposing the requirement of an affirmative

showing that de facto specificity is the result of particular

government actions is contrary to the statute, the intent of Congress,

and past judicial precedent.'' See Final Results of Redetermination

Pursuant to Remand British Steel Plc. v. United States (February 9,

1995) at 12. The Department's redetermination was upheld by the Court

(see British Steel PLC v. United States 941 F. Supp. 119, 128, (CIT

1996)).

    The same point is made in the Uruguay Round Trade Agreements

Statement of Administrative Action (SAA) at 262. The SAA states that

evidence of government intent to target or otherwise limit benefits is

irrelevant in de facto specificity analysis.

Comment 8 (Disproportionality--Considering SDI as Only One Program)

    The GOQ argues that the Department incorrectly limited its

examination of funds received by Leclerc and the wood products

industries to the Expansion and Modernization Program, as opposed to

total loans received under all SDI programs. The GOQ states that the

latter approach is correct because all SDI loans come from the same

pool of monies, they are disbursed under different ``programs'' only

for administrative purposes, and that program distinctions make no

difference in the loan criteria, terms, essential eligibility, or

participation. Also, they are administered by the same loan officers

and the customized terms for all SDI loans and loan guarantees are

essentially the same. This information indicates that the hardwood

trailer flooring industry received only a fraction of all SDI loans

between 1993 and 1995.



DOC Position



    We do not agree that all SDI programs should, in effect, be

considered integrally linked and, therefore, a single program for

purposes of determining specificity. Section 355.43(b)(6) of the

Department's Proposed Regulations states that in determining whether

two or more programs are integrally linked ``the Secretary will

examine, among other factors, the administration of the programs,

evidence of a government policy to treat industries equally, the

purposes of the programs as stated in their enabling legislation, and

the manner of funding the programs.'' In the Final Affirmative

Countervailing Duty Determination: Pure Magnesium and Alloy Magnesium

From Canada 57 FR 30946 (July 13, 1992) (Magnesium from Canada), the

Department applied this standard when it found that SDI Article 7

assistance was not integrally linked to ``general SDI programs.'' In

making this determination, the Department noted that ``[t]he * * *

programs offer different types of assistance and have been established

for different purposes.'

    Each SDI program under investigation in this case (e.g., Expansion

and Modernization Program and PREP) operates under separate regulations

and directives. Each program is also different with respect to

objective and level of benefit. For example, PREP was a temporary

program established to alleviate cash flow problems experienced by

Quebec companies during the recession of the early 1990s. Under PREP,

SDI guaranteed a percentage of loans that could range between

CD$100,000 and CD$1,000,000. The Expansion and Modernization Program,

on the other hand, was a long-term program which provided businesses

with loans for the establishment or expansion of facilities. Although

the floor for assistance under Expansion and Modernization Program is

also CD$100,000, there is no stated cap.

    While we acknowledge the overlap that the GOQ refers to with

respect to the administration of its programs, these programs are not

integrally linked because they are separated for legal purposes by

different regulations. They also have different objectives and benefit

levels. For these reasons, we have continued to examine these programs

individually for the final determination.

Comment 9 (Subsidiary Agreement: Including Amount not Disbursed in POI

to Determine Benefit)

    Petitioner claims that the Department's preliminary ad valorem

calculation regarding the Subsidiary Agreement was understated because

the Department failed to include funds disbursed to Leclerc after the

POI.

    The GOQ contends that petitioner's argument ignores the legal

requirement that the Department determine whether countervailable

benefits were provided during the POI. According to the GOQ, events

occurring after the POI can have no relevance to the Department's

determination of whether benefits were received during the POI.

    Leclerc notes that the Department correctly treated the Subsidiary

Agreement assistance as a variable rate, long-term loan. Thus, in

accordance with section 355.49(d)(1) of the Proposed Regulations,

Leclerc argues that the Department must determine the amount of the

benefit attributable to a particular year under a variable rate, long-

term loan by calculating the difference between what the firm paid

during the year under the government loan and what the firm would have

paid during the year under the benchmark loan.



DOC Position



    We disagree with petitioner. In accordance with section 355.48 of

the Proposed Regulations, a countervailable benefit is deemed to have

been received at the time that there is a cash flow effect on the firm

receiving the benefit. In the case of a loan, the cash flow effect is

normally deemed to have occurred at the time a firm is due to make a

payment on the benchmark loan. Therefore, because Leclerc would not

have been required to make a payment during the POI on the benchmark

loan for the disbursement in question, that disbursement could not have

conferred a benefit on the firm during the POI.

Comment 10 (Benchmark Interest Rate Based on Adverse Facts Available)

    Petitioner argues that the benchmark interest rate for the loan

under the Subsidiary Agreement should be 20 percent, based on adverse

facts available. Petitioner contends that the use of adverse facts

available is warranted because the GOC did not provide the verification

team with certain documents.



---- page 5211 ----



    The GOC argues that the requested analysis/approval documents were

provided to the verification team (see GOC Verification Report at page

2). Accordingly, no grounds exist for the Department to consider the

punitive measures petitioner proposes.



DOC Position



    We agree with the GOC that application of adverse facts available

is not warranted with respect to the Subsidiary Agreement loan. As

noted in the GOC verification report, while the GOC initially could not

provide the analysis/approval documents because of concerns regarding

the proprietary nature of the documents, the GOC made available certain

approval documents to the verification team on November 28, 1996. Thus,

no grounds exist for the Department to consider the use of adverse

facts available.

Comment 11 (Upstream Subsidy)

    Petitioner states that the Department's verification of Leclerc's

lumber purchasing records incidentally confirmed that Leclerc paid

widely varying prices for the same species and grade purchased at the

same time, that it paid higher prices for lower quality lumber

purchased at the same time, and that it was able to buy lumber, a

commodity product, at prices below what other buyers were willing to

pay. Thus, petitioner contends that because the Department failed to

address the issues regarding the credibility of Leclerc's lumber

purchasing records, the Department must disregard Leclerc's prices.

    Both the GOQ and Leclerc note that the factual record in this case

fully supports the Department's Preliminary Determination that no

competitive benefit was bestowed on Leclerc through its purchases of

allegedly subsidized lumber. Respondents note that the Department twice

verified the actual prices paid by Leclerc for purchases of lumber and

the sources of Leclerc's lumber. Moreover, respondents state that the

Department's verification reports confirm that Leclerc and the GOQ

accurately reported all the relevant competitive benefit data.

Respondents add that the Department analyzed the verified data and

correctly concluded that no competitive benefit was bestowed upon

Leclerc.



DOC Position



    We agree with respondents. We thoroughly examined and verified

Leclerc's lumber purchasing records for the POI, as well as GOQ records

which confirmed the sources from which Leclerc's suppliers obtained

timber (see August 26, 1996 Verification Reports of Leclerc and the GOQ

and December 10, 1996 Verification Reports of Leclerc and the GOQ).

Moreover, many concerns raised by petitioner prior to verification were

addressed at verification. This verified record information was then

analyzed using several approaches. Based on our analysis, we have

determined that the company did not receive a competitive benefit

through its lumber purchases from allegedly subsidized suppliers.

    Comment 12 (Denominator Issue: Subsidiary Agreement and SDI)

    Leclerc contends that the financing received under the Subsidiary

Agreement and SDI benefited the company's total production and,

therefore, the denominator used to calculate the ad valorem subsidy

rate should be total sales. Leclerc adds that the Department's

verification reports of Leclerc and the GOC further confirm that the

assistance benefited total sales, not just subject merchandise.

    Petitioner contends that Leclerc's argument is misplaced because

the GOC and GOQ provided the assistance solely to support the

production of LHF. Petitioner notes that the financing received through

SDI and the Subsidiary Agreement was received by the two companies in

the Leclerc group of companies which produce LHF, and that other

members of the group which produce other items did not receive this

financing. Finally, petitioner claims that Leclerc has failed to

produce documentation showing that the governments intended their

financing to go beyond LHF production at the time it was granted.



DOC Position



    We agree with petitioner that the assistance provided to Leclerc

under these programs was ``tied'' to the production of subject

merchandise. Consistent with the Department's traditional tying

analysis, we have determined that our inquiry should focus on the

subsidy givers'' (i.e., the GOC and GOQ) intended use for the subsidies

prior to or at the point of bestowal. Namely, a subsidy is considered

to be tied to a particular product when the intended use is

acknowledged prior to or concurrent with the bestowal of the subsidy

(see GIA at 37232). With respect to the financing in question, all

available documentary record evidence generated by the GOC, GOQ and

Leclerc prior to the point of bestowal (e.g., applications, analysis

reports, recommendation documents, and contracts) demonstrate that the

governments only considered the expansion and/or creation of LHF

facilities as the project for which the assistance was provided.

    Additionally, as noted by petitioner, the Department verified that

the financing in question was provided to Nilus Leclerc, Inc. and

Industries Leclerc, Inc., the LHF producers in the Leclerc group of

companies. Members of the Leclerc group of companies which produce non-

subject merchandise were not considered in the above-referenced

government documents as beneficiaries of the financing in question.

Therefore, we have determined that the financing received under the

Subsidiary Agreement and SDI solely benefited the production of LHF.

Comment 13 (SDI: Calculation Errors)

    The GOQ and Leclerc contend that the Department erred in

calculating the net present value of the 1995 and 1994 SDI loans by

incorrectly calculating the present value of some cash flows. The GOQ

and Leclerc assert that when these errors are corrected, there is no

benefit from the SDI loans during the POI.



DOC Position



    We agree with the GOQ and Leclerc that errors were made in

calculating the present value interest factor for the SDI loans. These

errors have been corrected.

Comment 14 (The Department Must First Find a Benefit)

    According to the GOQ, the statute requires the Department to find

first that a payment is a subsidy, and only subsequently can it analyze

whether the subsidy is countervailable. The GOQ and Leclerc assert that

if the Department had not erred when it determined that the SDI loans

conferred a benefit, it would never have analyzed the specificity of

the SDI loans.



DOC Position



    We disagree with the assertion that the Department first must find

a benefit from a particular program that is used in order to analyze

the specificity of such program. Programs can be found to be specific

on different grounds, which in turn dictate the method for calculating

the benefit. For example, if a program is found to be an export

subsidy, rather than a specific domestic subsidy, the denominator used

to calculate the benefit is export sales rather than total sales, which

can affect the finding of a benefit. Additionally, because the

Department cumulates the benefit from all countervailable programs in

order to determine if the aggregate benefit is greater than de minimis,

the Department must assess the countervailability of any program



---- page 5212 ----



where the benefit may be greater than zero.

Comment 15 (Using 1996 Information to Calculate the Benefit)

    According to the GOQ, were we to consider events subsequent to the

POI, there would be no benefit to Leclerc from any of the loans.

However, both the GOQ and Leclerc also argue that information

concerning events subsequent to the POI cannot be used retrospectively

to determine a countervailable benefit.

    Petitioner claims that the Department did not verify important

elements of these events and, therefore, cannot rely on them to

calculate a benefit. In rebuttal, Leclerc argues that the events are on

the record and verified.



DOC Position



    We disagree with respondents that our calculation of the benefit

conferred by a long-term loan during the POI cannot reflect events

subsequent to the POI. For example, if we learn during verification

that scheduled payments on the loan were missed during the year

following the POI, it is appropriate to reflect those missed payments

in our calculation. This is because when we are calculating the grant

equivalent of a long-term loan we necessarily include information about

expected payments under the loan. Where actual payments differ from

expected payments, we reflect the actual payments to increase the

accuracy of our calculation.

    Our examination of the post-POI information was sufficient to

determine that the information provided is generally consistent with

information submitted in Leclerc's questionnaire, as well as other

information provided by the GOQ, which was fully verified. Therefore,

as facts available, we have decided to use the post-POI information to

achieve accurate calculations of the benefits conferred by these loans.

Comment 16 (The Department Should Use its Long-term, Variable-rate

Methodology for SDI Loans)

    Leclerc maintains that the Department's approach to calculating the

benefit under the SDI and Subsidiary Agreement programs is internally

inconsistent, and that the variable rate methodology could be used for

the SDI loans. While Leclerc notes that we changed our methodology in

order to account for the premia, they state that the underlying loans

are actually variable rate loans. Furthermore, Leclerc notes that the

first option in the Department's long-term, variable-rate benchmark

hierarchy is to use the interest rate on a variable-rate, long-term

benchmark loan.

    The GOQ notes that the Department prudently deviated from its

traditional methodology to account for the full costs to the borrower.

However, the GOQ notes that the Department might choose to revert to

its traditional methodology.

    Petitioner contends that the SDI loans cannot be treated as

variable rate loans because of events subsequent to the POI that

preclude the use of the Department's long-term, variable-rate

methodology.



DOC Position



    We disagree with Leclerc that the Department should revert to using

its long-term, variable-rate methodology. As we explained in our

Preliminary Determination, there are several features of these loans

that lead us to conclude that our variable-rate loan methodology is not

capable of measuring the benefits conferred by these loans. Therefore,

we have continued to apply our long-term, fixed-rate loan methodology.

Comment 17 (Extent to Which the 1995 SDI Loan Provided a 1995 Benefit

to Leclerc)

    The GOQ and Leclerc argue that the authorized portion of the 1995

SDI loan disbursed during the POI should not have been countervailed

because no payments were due or would have been due under comparable

financing during the POI. The GOQ and Leclerc state that the

Department's Proposed Regulations and prior practice dictate that it

countervail a benefit ``at the time a firm is due to make a payment on

the loan.'' (See Proposed Regulations, 355.48(a), (b)(3)). Leclerc

cites, among others, Final Results of Countervailing Duty

Administrative Review: Certain Iron-Metal Casings From India, 61 FR

64687 (December 6, 1996) in which the Department calculated the benefit

as having been received when the first interest payment was made,

despite the fact that interest had accrued in the prior year.

    If the Department continues to assign a benefit to 1995 from the

1995 SDI loan, the GOQ and Leclerc argue that the Department should not

include amounts that were authorized, but not disbursed during 1995.

Including the amounts that were not disbursed would violate Article 19

of the Uruguay Round Agreement on Subsidies and Countervailing Measures

because, Leclerc argues, it could not have benefited during the POI

from funds that were not disbursed.

    Petitioner claims that the Department was consistent with its

regulations in finding a benefit from the 1995 SDI loan because it

calculated the loan's grant equivalent. Petitioner notes that section

355.48(b) of the Department's Proposed Regulations state that ``{the

benefit} occur{s} in the case of a grant * * * at the time a firm

receives the grant or equity infusion.'' Thus the benefit on the 1995

loan occurred at the time of receipt (i.e., during the POI). Petitioner

further argues that the cases cited by the GOQ and Leclerc do not apply

to the loan in question because in all the cited cases the loans in

question are short-term loans, in which the Department does not

calculate a grant equivalent. Moreover, Petitioner contends that the

methodology proposed by the GOQ and Leclerc is not consistent with

economic logic because it would preclude the Department from finding a

benefit on a loan with lengthy payment deferrals if the recipient could

show that it obtained a similar loan from commercial lenders.



DOC Position



    We agree with respondents. While we have calculated a grant

equivalent for the SDI loans, the underlying instrument continues to be

a loan. If there is no effect on the recipient's cash flow during the

POI (i.e., no payment would have been made on the benchmark loan during

the POI), there is no benefit attributable to the POI. (See Final

Affirmative Countervailing Duty Determinations: Certain Steel Products

from France, 58 FR 37304 (July 9, 1993) and Final Affirmative

Countervailing Duty Determination: Brass Sheet and Strip from France,

52 FR 1218, 1221 (January 12, 1987).)

    Furthermore, based on the Department's practice of calculating a

benefit at the time a payment is due on the benchmark loan, we have

found, in this instance, that the benefit conferred by the SDI loans

should be attributed to the year subsequent to disbursement because no

payments were due on the benchmark loans until that time.

    Because we have decided that a benefit should not be calculated for

the 1995 SDI loan, we do not reach the countervailability of the

undisbursed amount.

Comment 18 (SDI Loans Should be Treated as Grants or the Methodology

Should be Revised)

    As adverse facts available, petitioner asserts that the SDI loans

should be treated as grants offset only by verified payments. If the

Department does not treat the SDI loans as grants, it should: (1) use

only verified payments in the repayment stream; (2) consider principal

outstanding at the end of the



---- page 5213 ----



loan term to be forgiven; (3) use a benchmark interest rate of 20

percent; (4) assume there will be no extension of due dates; (5) assume

any shares of Leclerc that SDI might acquire will have no value; and

(6) treat the SDI loans as export subsidies.

    Such measures are justified, according to petitioner, because

Leclerc failed to provide the Department with pertinent information

about the SDI loans prior to verification. This omission constitutes a

serious material misrepresentation, in petitioner's view. Despite being

requested by the Department in the questionnaire to provide such

information, Leclerc failed to do so. Petitioner asserts that it is

Department practice to use facts available when a party ``withholds

information that has been requested'' (see 776(a) of the Act).

Additionally, because the SDI regulations state that it can enter into

agreements with distressed borrowers, any SDI loan terms are suspect

and, thus, cannot be used for benefit calculations.

    Leclerc argues that petitioner's insistence on the use of adverse

facts available is without merit because Leclerc has cooperated fully

with the Department. The Department has conducted two successful

verifications with the GOQ, the GOC and Leclerc. Leclerc claims that

its voluntary submission of minor additional information discovered

during the course of preparing for verification substantiates its

cooperation. Specifically, Leclerc states that the Department's

standard questionnaire simply asks that parties report differences

between what the loan agreement requires and what a party actually

paid.

    Additionally, Leclerc claims that there is no legal precedent or

argument that would justify treating the SDI loans as grants, and that

there is no evidence on the record that the loans are grants. Thus, the

Department should continue to analyze the SDI financing as loans.

Leclerc and the GOQ argue that Leclerc continues to have a legal

obligation to repay its SDI loans, thus no forgiveness has occurred.

Moreover, section 355.44(k) of the Proposed Regulations requires the

Department to recognize loan forgiveness as a grant ``at the time of

the assumption or forgiveness.'' Leclerc asserts that petitioner's

other methodological suggestions are groundless. The events subsequent

to the POI affecting the SDI loans are indeed on the record and

verified, but these events are irrelevant because they occurred after

the POI.



DOC Position



    In this instance, we do not believe that Leclerc's late submission

of information concerning events subsequent to the POI requires that

the Department use adverse facts available. While we have included the

post-POI information in our calculations to make them more accurate,

our investigation has clearly focussed on information from years prior

to and including the POI.

    Further, we agree with Leclerc and the GOQ that the Proposed

Regulations state that a benefit from loan forgiveness usually occurs

when the loan is forgiven. We disagree with petitioner that the loans

should be treated as grants simply because SDI can renegotiate loan

terms with its clients. Commercial lenders also typically have the

freedom to change the terms when dealing with a distressed borrower.

    Regarding treating the SDI financing as a grant, the Department's

GIA at 37255 sets out the standard for determining whether an

instrument should be considered a grant:



    We have distinguished grants from both debt and equity by

defining grants as funds provided without expectation of a: (1)

Repayment of the grant amount, (2) payment of any kind stemming

directly from the receipt of the grant, or (3) claim on any funds in

case of company liquidation. (parenthesis omitted)



    Based on the above, the SDI loans should not be considered grants

because the SDI financing does not meet any of the three criteria.

Moreover, in distinguishing between equity and loans, the GIA at 37255

states:



    Loans typically have a specified date on which the last

remaining payments will be made and the obligation of the company to

the creditor is fulfilled. Even if the instrument has no pre-set

repayment date, but a repayment obligation exists when the

instrument is provided, the instrument has characteristics more in

line with loans than equity.



    While certain aspects of repayment under the SDI loans are more

flexible than that of a standard commercial bank loan, as reflected in

its financial statements, Leclerc had a repayment obligation to SDI

during the POI. Thus, we find no basis on which to consider the SDI

loans to be a grant.



Summary



    Based on the four countervailable programs described above, the

aggregate ad valorem rate is 0.57 percent. This rate is de minimis,

pursuant to 703(b)(4) of the Act. Therefore, we determine that no

benefits which constitute bounties or grants within the meaning of the

countervailing duty law are being provided to manufacturers, producers

or exporters of LHF in Canada.



Verification



    In accordance with section 782(i) 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, and examination of relevant accounting records and

original source documents. Our verification results are outlined in

detail in the public versions of the verification reports, which are on

file in the Central Records Unit (Room B-099 of the Main Commerce

Building).



Return or Destruction of Proprietary Information



    This notice serves as the only reminder to parties subject to

Administrative Protective Order (APO) of their responsibility

concerning the return or destruction of proprietary information

disclosed under APO in accordance with 19 CFR 355.34(d). Failure to

comply is a violation of the APO.

    This determination is published pursuant to section 705(d) of the

Act.



    Dated: January 27, 1997.

Robert S. LaRussa,

Acting Assistant Secretary for Import Administration.

[FR Doc. 97-2715 Filed 2-3-97; 8:45 am]

BILLING CODE 3510-DS-P



The Contents entry for this article reads as follows:



International Trade Administration

NOTICES

Countervailing duties:

  Laminated hardwood trailer flooring from--

    Canada, 5201