51 FR 37938
NOTICES
DEPARTMENT OF COMMERCE
[C-508-603]
Preliminary Affirmative Countervailing Duty Determination: Certain Fresh Cut
Flowers From Israel
Monday, October 27, 1986
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AGENCY: Import Administration, International Trade Administration, Commerce.
ACTION: Notice.
SUMMARY: We preliminarily determine that benefits which constitute subsidies within the
meaning of the countervailing duty law are being provided to
producers or exporters in Israel of certain fresh cut flowers (cut flowers) as described in the
"Scope of Investigation" section of this notice. The estimated net subsidy is 8.63 percent ad
valorem.
We have notified the U.S. International Trade Commission (ITC) of our determination. We are
directing the U.S. Customs Service to suspend liquidation of all entries of cut flowers from Israel
that are entered, or withdrawn from warehouse, for consumption on or after the date of
publication of this notice, and to require a cash deposit or bond on entries of these products in the
amount equal to the estimated net subsidy. If this investigation proceeds normally, we will make
our final determination on or before January 5, 1987.
EFFECTIVE DATE: October 27, 1986.
FOR FURTHER INFORMATION CONTACT:Mary Martin or Barbara Tillman, Office of Investigations,
Import Administration, International Trade Administration, U.S. Department of
Commerce, 14th Street and Constitution Avenue, NW., Washington, DC 20230; telephone (202)
377-2830 or 377-2438.
SUPPLEMENTARY INFORMATION:
Preliminary Determination
Based upon our investigation, we preliminarily determine that there is reason to believe or suspect
that certain benefits which constitute subsidies within the meaning of section 701 of the Tariff Act
of 1930, as amended (the Act), are being provided to producers or exporters in Israel of cut
flowers. For purposes of this investigation, the following programs are preliminarily found to
confer subsidies:
- Investment and Drawback Grants Under the Encouragement of Capital Investments in Agriculture
Law 5741-1980 (ECILA)
- Preferential Accelerated Depreciation and Other Tax Benefits
- Exchange Rate Risk Insurance Scheme
- Export Promotion Financing Fund
We preliminarily determine the estimated net subsidy to be 8.63 percent ad valorem.
Case History
On May 21, 1986, we received a petition in proper form from the Floral Trade Council filed on
behalf of the U.S. industry producing cut flowers. In
compliance with the filing requirements of § 355.26 of the Commerce Regulations (19 CFR 355.26),
the petition alleged that producers or exporters in Israel of cut flowers receive, directly or
indirectly, benefits which constitute subsidies within the meaning of section 701 of the Act.
We found that the petition contained sufficient grounds upon which to initiate a countervailing
duty investigation, and on June 10, 1986, we initiated an investigation (51 FR 21956, June 17,
1986). We stated that we expected to issue a preliminary determination on or before August 14,
1986.
On June 25, 1986, the petitioner requested a full extension of the period within which a preliminary
countervailing duty determination must be made pursuant to section 703(c)(1)(A) of the
Act. On July 3, 1986, we issued a notice of postponement stating that the preliminary
determination would be made on or before October 20, 1986 (51 FR 25084, July 10, 1986).
Since Israel is a "country under the Agreement" within the meaning of section 701(b) of the
Act, the ITC is required to determine whether imports of the subject merchandise from Israel
materially injure, or threaten material injury to, a U.S. industry. On July 7, 1986, the ITC
determined that there is a reasonable indication that an industry in the United States is materially
injured by reason of imports from Israel of the subject merchandise (51 FR 25751, July 16,
1986).
On June 20, 1986, we presented a questionnaire to the Government of Israel in
Washington, DC, concerning petitioner's allegations. We received the government and company
responses from Agricultural Export Co., Ltd. (Agrexco), and R. Shemi, Ltd. (Shemi), on August 13,
1986. Agrexco and Shemi accounted for at least 60 percent of United States exports of cut flowers
during the review period. Additional information was supplied on August 26, September 3, 16, 22,
25 and 26, and October 9, 1986.
Scope of Investigation
The products covered by this investigation are fresh cut miniature (spray) carnations, currently
provided for in item 192.17 of the Tariff Schedules of the United States (TSUS) and gerbera,
currently provided for in item 192.21 of the TSUS.
Analysis of Programs
Throughout this notice we refer to certain general principles applied to the facts of the current
investigation. These general principles are described in the "Subsidies Appendix" attached to the
notice of Cold-Rolled Carbon Steel Flat-Rolled Products from Argentina: Final Affirmative
Countervailing Duty Determination and Countervailing Duty Order (49 FR 18006,
April 26, 1984).
Consistent with our practice in preliminary determinations, when a response to an allegation
denies existence of a program, receipt of benefits under a program, or the eligibility of a company
or industry under a program, and the Department has no persuasive evidence showing that the
response is incorrect, we accept the response for purposes of the preliminary determination. All
such responses are subject to verification. If the response cannot be supported at verification, and
the program is otherwise countervailable, the program will be considered a subsidy in the final
determination.
For purposes of this preliminary determination, the period for which we are measuring subsidies
(the review period) is fiscal year 1986. Based upon our analysis of the petition and the responses to
our questionnaire, we preliminarily determine the following:
I. Programs Preliminarily Determined to Confer Subsidies
We preliminarily determine that subsidies are being provided to producers or exporters in
Israel of cut flowers under the following programs:
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A. Investment and Drawback Grants Under the Encouragement of Capital Investments in
Agriculture Law 5741-1980 (ECILA)
According to the Government of Israel's response, the Encouragement of Capital Investments
Law 5719-1959 (ECIL) has not applied to agricultural enterprises, including flowers, since 1981.
The ECILA came into effect in April 1981 and is roughly similar to the industrial ECIL. The following
distinctions apply to ECILA: only agricultural producers are eligible for ECILA; a grant funds are
subject to the budgetary limitations of the development budget of the Ministry of Agriculture; and
there are no development zones in the ECILA. The object of ECILA is to encourage capital
investments in agriculture for the purposes of improving the balance of payments, seeking efficient
utilization of the agricultural sector, and encouraging the agricultural sector as a pioneering
security and social factor. According to the Government of Israel's response, all agricultural
producers in Israel are eligible for grants under the critieria of the law, subject to budget
limitations. The grants are of two types: Investment grants, which are based upon a percentage of
the investments; and drawback grants, which relate to taxes on investments. ECILA grants were
also referred to as "Cash Payments to Growers for Greenhouses" and "Cash Payments to Packing
Houses" in our notice of initiation.
Persons requesting approval of ECILA grants apply to the regional office of the Ministry of
Agriculture in their area. The regional office forwards the application together with its
recommendation to the national office of the
Ministry, which in turn makes its recommendation to the Agricultural Investment Authority. The
authority makes the ultimate decision on whether to approve the request. The grant is paid upon
completion of the project or in partial stages of completion.
Since the beginning of this program in 1981, producers and exporters of cut flowers have received
both investment and drawback grants. Although there are no development zones in the ECILA and,
therefore, the grants are not limited to a specific region or regions of the country, the Government
of Israel appears to have almost unfettered discretion in the decision making process of which
agricultural enterprises receive the grants. See for example: Certain Steel Products from the
Netherlands: Final Negative Countervailing Duty Determinations (47 FR 39372, 39373,
September 7, 1982). There is no evidence that all applications for grants were approved, and the
Government of Israel has provided no information on the specific, objective criteria for grant
approval. Therefore, there is the possibility that the government limits the use of the program to
specific enterprises. Accordingly, we preliminarily determine that such grants are countervailable.
To calculate the benefit from this program, we used our grant methodology and allocated the
grants received since inception of the program (1981) through fiscal year 1985 over 10 years (the
average useful life of agricultural assets). We expensed the grants received in the review period
because they
were less than .5 percent of all sales. Since we used aggregage data for this program, we could not
use a company-specific discount rate. Instead, because all the grants were given in shekels, we used
as the discount rate the short- term borrowing rate for shekels. We divided the value of the benefits
by the value of sales of Israeli cut flowers and calculated an estimated net subsidy of 0.97 percent
ad valorem.
B. Preferential Accelerated Depreciation and Other Tax Benefits
The ECILA provides tax benefits for approved enterprises. The responses gave no indication as to
which enterprises are eligible for this program or how the approval process works. Because
government approval is required, there is the possibility that the government limits this program
to specific enterprises. Thus, we preliminarily determine that it confers countervailable benefits to
producers or exporters in Israel of cut flowers.
For tax programs, we generally determine the value of the subsidy calculating the amount of the
benefit based on the tax return filed during the review period. According to the responses of
Agrexco and Shemi, their tax liability was not affected by the application of these benefits because
they have not shown an operative profit. Although we preliminarily determine that the preferential
accelerated depreciation program confers a countervailable benefit
to producers or exporters in Israel of cut flowers, the estimated net countervailable benefit is
zero.
C. Exchange Rate Risk Insurance Scheme
Petitioner alleges that producers or exporters in Israel of cut flowers benefit from the
Exchange Rate Risk Insurance Scheme (EIS) operated by the Israel Foreign Trade Risks
Insurance Corporation Ltd. (IFTRIC). The scheme insures exporters against decreased payments in
foreign-currency receivables resulting from delays in the devaluation of the shekel. According to
petitioner, the premiums charged under this program may be manifestly inadequate to cover the
long-term operating costs and losses of the program.
According to the response of the Government of Israel, the EIS is a mixture of exchange rate
risk insurance and cost escalation schemes. The main purpose of the EIS is to insure the exporter's
revenue (in domestic currency) when it lags behind increases in local costs due to unexpected
fluctuations between exchange rates and domestic price increases. During the period 1979-1985,
Israel experienced triple digit inflation rates. The rate of inflation has dropped since August
1985, but, according to the response, the rate of devaluation of the shekel still lags behind the rate
of inflation. Because of the problems encountered by the exporter when devaluation lags behind
inflation, the EIS aims to cover the exporter during this period.
The EIS is based on a weighted average of the U.S. dollar, French franc, German mark, Dutch
guilder and British pound. The program also insures the exporter against fluctuations between
those currencies. The scheme is optional and open to any exporter willing to pay a premium to
IFTRIC. Compensation to the exporters is calculated by the change in the rate of devaluation of the
shekel against the other foreign currencies and the change in the Consumer Price Index. If changes
in domestic prices are higher than changes in the rate of the shekel, the exporter is compensated by
an amount equal to the difference of the changes multiplied by the value-added of his exports. But,
if the rate of devaluation is higher than the change in the domestic price index, the exporter must
compensate IFTRIC. Since the premium is paid on the basis of the value-added of the exports, the
rate is the same for all industries.
IFTRIC functions under the assumption that fluctuations between changes in domestic prices and
the changes in the devaluation of the shekel will be in balance. According to the government
response, the acceleration of the rate of inflation in 1982 and in 1983 caused losses to EIS. This
acceleration was not foreseen by EIS when planning its policy. In 1984 and 1985, the weakening of
the European currencies against the dollar was also not accurately predicted by the EIS. The
government response indicates that
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losses in the EIS peaked in 1983, and losses continued in the two following years.
In determining whether an export insurance program provides a countervailable benefit, we look
to see if the premium rates charged are adequate to cover the program's long-term operating costs
and losses. We examined this program in the countervailing duty investigation regarding
Potassium Chloride from Israel: Final Affirmative Countervailing Duty Determination
(49 FR 36122 September 14, 1982). At that time, there were insufficient data to determine that the
premiums charged were manifestly inadequate to cover long-term operating costs. We indicated,
however, that EIS was in a loss situation and that we were not making a conclusive determination
on the program's countervailability at that time.
In this case, the response indicates that the program was in a loss position through 1985. This,
combined with the fact that no data were provided on the program's premium collections,
indemnity payments, or operating costs, lead us preliminarily to determine that the premiums
charged are manifestly inadequate to cover the long-term operating costs of this program and that
this program confers a countervailable benefit on producers or exporters in Israel of cut
flowers.
We calculated the benefit from this program on the basis of the best information available by
allocating the amount of compensation Agrexco and Shemi received from IFTRIC, after deducting
its premiums paid, over the companies' relevant exports during the review period. The calculation
was
based upon all non-European exports for Shemi and all exports to all markets for Agrexco for the
period October 1985 to May 1986. This resulted in an estimated net subsidy of 6.61 percent ad
valorem.
D. Export Promotion Financing Fund
The Foreign Trade Center of the Ministry of Agriculture operates the Export Promotion Financing
Fund to promote the development of export markets for fresh Israeli produce.
Exporters submit a request for participation in promotional activities, and the Ministry determines
on the basis of the development potential and in view of budget availability whether to approve the
request. Approved proposals receive reimbursements of up to 50 percent of actual expenses.
According to the responses, funds for Agrexco were specifically budgeted and allocated on a
country-by-country basis. Funds for smaller exporters, like Shemi, are not always budgeted on a
country-by-country basis since the amounts are small. During the period of review, Shemi received
funds for general advertising of all products in all markets, and Agrexco received funds for
promotion of all flowers in the United States.
Because these grants are available only to exporters, we preliminarily determine they are
countervailable. To determine the benefits Shemi received
on exports to the United States, we multiplied the value of the funds Shemi received for export
promotion for all markets by the ratio of Shemi's U.S. exports to its total exports. We calculated the
benefit from this program by dividing the compensation Shemi and Agrexco received on their
exports to the United States by the value of their U.S. exports during the review period. This
resulted in an estimated net subsidy of 1.05 percent ad valorem.
II. Programs Preliminarily Determined Not To Confer Subsidies
We preliminarily determine that subsidies are not being provided to producers or exporters in
Israel of cut flowers under the following programs:
A. Export Financing Program
Petitioner alleges that the Government of Israel provides preferential export financing to
producers or exporters in Israel of cut flowers through three export credit funds administered
by the Bank of Israel. The Export Production Fund provides loans to exporters to enable them
to finance export production. The Export Shipments Fund provides loans to exporters to enable
them to extend credit in foreign currency to their overseas customers. Under the Imports-for-
Exports Fund, exporters received loans denominated in foreign currency in order
to finance imported materials used for export production. The export financing program was
referred to in our notice of initiation as the "Export Credit Fund."
Since July 1985, the Bank of Israel authorizes commercial banks to lend specified levels of
foreign currency to exporters. The interest rate charged by the commercial banks is LIBOR plus
two percent.
During the review period, Agrexco and Shemi received export financing loans. Because only
exporters are eligible for these loans, we preliminarily determine that they are countervailable to
the extent that they are provided at preferential rates. For this preliminary determination, as best
information available, we used as our benchmark for these funds the foreign currency benchmark
of LIBOR plus two percent based on the Government of Israel's representation that this was a
commercial rate at which Israeli banks are able to raise funds and relend on a profitable basis.
Accordingly, we preliminarily determine, subject to verification, that the loans were not provided
at preferential rates and are not countervailable.
B. Property Tax Exemptions on Equipment
Petitioner alleges that producers or exporters in Israel of cut flowers may benefit from tax
benefits under the ECIL that allow eligible enterprises a 10-
year exemption from payment of one-sixth of property taxes on equipment. The Government of
Israel's response states that property taxes were abolished for all taxpayers in Israel as of
April 1, 1981. Accordingly, no property taxes were assessed against any company in Israel
from 1981 through 1984. A new special temporary property levy was introduced for budgetary
reasons on April 1, 1985, and was enacted in August 1985 under the Property Levy Law
(temporary order), 5745-1985. These taxes were applicable to all companies in Israel, and no
one was exempt from the tax. No property taxes are currently in effect with respect to any
company in Israel.
C. Development Loans
Development loans were the primary source of institutional long-term credit in the agricultural
sector until they were abolished in 1985. This program is also referred to in the notice of initiation
as "Long-Term Loans to Packing Houses/Exporters." Development loans in the agricultural sector
were provided in the framework of the development budget of the Ministry of Agriculture.
The company responses indicate that both Agrexco and Shemi had development loans outstanding
during the review period. The Government of Israel's response states that development loans
were given on the same terms to many
different sectors of agriculture irrespective of regions or development zones and irrespective of
export performance. Because this program does not appear to be limited to a specific enterprise or
industry, or group of enterprises or industries, we preliminarily determine that the program is not
countervailable.
D. General Research and Development Programs
Petitioner believes that exporters of cut flowers are benefitting from research and development
programs funded by the Government of Israel.
The Government of Israel's response states that it sponsors and carries out a great deal of
agricultural research in all fields. Results of basic and general research are widely published in
Israel and abroad for the benefit of the general public. Research which is funded by the
government and which has direct commercial application, is sold or licensed to interested
commercial parties in Israel or abroad. Since the results of these research and development
grants are made available for public use, we preliminarily determine that these programs are not
countervailable.
III. Programs Preliminarily Determined Not To Be Used
We preliminarily determine, that the producers or exporters in Israel of cut
flowers did not use the following programs:
A. Government Support of the Flower Board
Petitioner alleges that the Government of Israel may provide funds directly to the Ornamental
Plants Production and Marketing Board (Flower Board) or may reduce the Flower Board's expenses
by providing staff. The Flower Board is a statutory body established by the Ornamental Plants
Production and Marketing Board Law of 1976. The Flower Board is administered by the
Government Cabinet acting through the Ministers of Agriculture, Treasury, Commerce, and
Industry.
The Government of Israel's response states that no payments were made to the Flower Board
during the review period, and the government does not provide any staff, services, or assets to the
Flower Board.
B. Interest Subsidy Payments
Petitioner alleges that beginning on July 1, 1985, exporters in Israel of cut flowers receive
under the ECIL program, grants from the Government of Israel for the rebate of interest on
loans provided by commercial banks.
In its response, the Government of Israel states that this program is not included in the ECILA
and is not available to agricultural enterprises.
C. Government-Guaranteed Minimum Price Program
The Ministry of Agriculture operates a program to guarantee a minimum income to farmers on
their crops in case of bad marketing conditions and to enable growers to sign marketing contracts
with exporters with knowledge of their minimum expected returns. The government determines a
national level of production to be covered by the guarantee program, sets a minimum price
according to expected market conditions, and pays half of the difference between the guaranteed
price and the actual average market price, if the market price is lower than the guarantee. The
other half of the difference may be paid by the exporter, from funds he may deduct from the
consignment revenues of the growers. The program is authorized annually by the Ministry of
Agriculture and the Treasury. Before the beginning of the exporting season, the Ministry of
Agriculture informs exporters and growers of the minimum prices for the coming season. At the
end of the period for which the guaranteed price applies, exporters submit their figures for average
export prices received throughout the period for each type of flower. The Ministry need not pay
each exporter the full difference between the guarantee and the exporter's average returns, but
may instead set an industry base level, so as not to pay a premium to exporters who sold below the
average industry level. The program guarantees
prices for the export season, and after mid-May, there are no guaranteed prices. All flower growers
who export flowers are eligible for the program.
The Government of Israel's response states that no claims or payments were made for
carnations or gerbera for the review period.
D. Capital Fund for Agrexco
Agrexco's 1978/1980 financial statement shows that a capital fund for Agrexco was created from
Ministry of Agriculture investment grants. Agrexco's response states that its capital fund was
created in 1968, it has not received any investment grants since then.
According to our grant methodology, grants bestowed in 1968 only bestow benefits for ten years.
As a result, they did not confer benefits during the review period.
E. Export Insurance Premiums
Petitioner Alleges that exporters of cut flowers receive rebates of export insurance premiums from
the Government of Israel. The response from the Government of Israel states that none of
the exporters of the subject merchandise were insured during the review period.
F. Encouragement of Industry (Taxes) Law 5729-1969
The Government of Israel's response states that this law is not applicable to the agricultural
sector. This law is applicable only to "industrial companies." The term "industrial company" does
not include the companies under investigation.
G. Other Benefits Referenced in the ECIL
The foreward to the ECIL makes reference to benefits in the form of labor training supported by the
Ministry of Labor.
The Government of Israel's response states that it is not aware of any labor training loans being
used in the agricultural sector. Shemi and Agrexco's responses stated that they did not receive any
benefits from the Ministry of Labor.
H. Fuel Grants and Low Cost Credit
In 1982, the Israeli Institute for Farm Research published a survey on the profitability of rose
production in the 1980/81 season. This study states
that gross income for rose growers included grants for fuel expenses and interest savings on
low-cost credit. Petitioner alleges that growers, packers, and exporters of cut flowers may receive
benefits under this program.
The Government of Israel's response states that there are no fuel grants and the so called
"low-cost credit" apparently refers to the shekel loans under the Bank of Israel Credit Funds
before 1985 discussed above at section II.A.
I. Specific Research and Development Funding
The Government of Israel's response states that research undertaken under contract with
outside parties is disseminated according to the terms of the contract with the funding party. The
responses from Agrexco and Shemi indicate that they have not participated in any government
sponsored research and development programs.
IV. Program For Which We Need Additional Information
For the following program, the information submitted by respondents is insufficient to determine if
a subsidy has been provided to producers or exporters in Israel of cut flowers. Therefore, we
determine that additional information is needed on the following program.
Government Funding of Agrexco and Purchase of Agrexco Shares
Petitioner alleges that Government of Israel provided funds, in the form of cash grants or
purchases of equity, to Agrexco.
The responses from the Government of Israel and Agrexco indicate that the government's
funding of Agrexco consisted of government purchases of shares in the company prior to and
during the review period. Although Agrexco is a non- profit making company, it is classified as a
private company under Israel law. According to the response, the Government of Israel
considers the purchase of Agrexco's shares to be equity purchases not inconsistent with
commercial considerations. The government believes that the value of its investment is justified by
the real assets of Agrexco, by its logistics and sales organization, by the goodwill of its reputation,
and by its "Carmel" brandname. Moreover, the Government of Israel has in the past sold its
equity in commercial companies, includting other not-for-profit companies. The Government
contends that it could realize a reasonable rate of return on its investment in Agrexco by sale of its
equity to other parties.
We have consistently held that government provision of equity does not per se confer a
countervailable benefit. Government equity infusions bestow countervailable benefits only when
they occur on terms inconsistent with
commercial considerations. While the government's response states that it considers the purchases
of Agrexco's shares to be equity purchases, in a similiar situation, in Fresh Cut Roses from
Israel; Final Results of Administrative Review of Countervailing Duty Order (49 FR 924,
January 6, 1984), the government was unable to provide sufficient evidence to support the
contention that the funds it provided to Agrexco were purchases of equity rather than grants. At
verification in this case, the Department will examine the government's evidence in this regard.
Suspension of Liquidation
In accordance with section 703(d) of the Act, we are directing the U.S. Customs Service to suspend
liquidation of all entries of cut flowers from Israel which are entered, or withdrawn from
warehouse, for consumption on or after the date of publication of this notice in the Federal
Register, and to require a cash deposit or bond for each entry of this merchandise equal to 8.63
percent ad valorem. This suspension will remain in effect until further notice.
Verification
In accordance with section 776(a) of the Act, we will verify the information
used in making our final determination.
ITC Notification
In accordance with section 703(f) of the Act, we will notify the ITC of our determination. In
addition, we are making available to the ITC all non privileged and nonproprietary information
relating to this investigation. We will allow the ITC access to all privileged and proprietary
information in our files, provided the ITC confirms that it will not disclose such information, either
publicly or under an administrative protective order, without the written consent of the Deputy
Assistant Secretary for Import Administration.
If our final determination is affirmative, the ITC will determine whether these imports materially
injure, or threaten material injury to, a U.S. industry within 45 days after the Department makes its
final determination.
Public Comment
In accordance with § 355.35 of the Commerce Regulations, (19 CFR 355.35), we will hold a public
hearing, if requested, to afford interested parties an opportunity to comment on this preliminary
determination at 2:00 p.m. on December 3, 1986, at U.S. Department of Commerce, Room 3708,
14th Street and
Constitution Avenue NW., Washington, DC 20230. Individuals who wish to participate in the
hearing must submit a request to the Deputy Assistant Secretary for Import Administration, Room
B-099, at the above address within ten days after publication of this notice in the Federal Register.
Requests should contain: (1) The party's name, address, and telephone number; (2) the number of
participants; (3) the reason for attending; and (4) a list of the issues to be discussed. In
addition ten copies of the proprietary version and seven copies of the nonproprietary version of the
pre-hearing briefs must be submitted to the Deputy Assistant Secretary by November 26, 1986.
Oral presentations will be limited to issues raised in the briefs. In accordance with 19 CFR
355.33(d) and 355.34, written views will be considered if received not less than 30 days before the
final determination is due or, if a hearing is held, within ten days after the hearing transcript is
available.
This determination is published pursuant to section 703(f) of the Act [19 U.S.C. 1671b(f)].
October 20, 1986.
Gilbert B. Kaplan,
Deputy Assistant Secretary for Import Administration.
[FR Doc. 86-24179 Filed 10-24-86; 8:45 am]
BILLING CODE 3510-DS-M