MEMORANDUM TO: Troy H. Cribb Assistant Secretary for Import Administration

FROM: Jeffrey A. May Director Office of Policy

SUBJECT: Issues and Decision Memo for the Full Sunset Review of Grain-Oriented Electrical Steel from Italy; Final Results

Summary:

We have analyzed the comments of interested parties in the full sunset review of the countervailing duty order covering grain-oriented electrical steel ("GOES") from Italy. We recommend that you approve the positions we have developed in the Discussion of the Issues section of this memorandum. Below is the complete list of the issues in this full sunset review for which we received comments by interested parties:

1. Likelihood of continuation or recurrence of countervailable subsidies

A. Programs from the investigation

B. Changes in programs

C. Other Factors

2. Net countervailable subsidy likely to prevail

A. Net countervailable subsidy from the investigation

B. Adjustments to the subsidy

Background: On June 23, 2000, the Department of Commerce ("the Department") published in the Federal Register a notice of preliminary results of the full sunset review of the countervailing duty order on GOES from Italy (65 FR 39129) pursuant to section 751(c) of the Tariff Act of 1930, as amended ("the Act"). In our preliminary results, we found that revocation of the order would likely result in continuation or recurrence of dumping with net margins of 24.46 percent for all Italian GOES producers/exporters. On July 27, 2000, Acciai Speciali Terni S.p.A. and Acciai Speciali Terni USA, Inc. (together "AST") requested a hearing in the sunset review. On August 7, 2000, within the deadline specified in 19 CFR 351.309(c)(1)(i), we received a case brief on behalf of AST; on August 14, 2000, we received a rebuttal brief from domestic interested parties. The hearing was held on September 26, 2000.

Corporate History of AST: Prior to 1987, electrical steel in Italy was produced by Terni S.p.A. ("Terni"), a main operating company of Finsider. Finsider was a government-owned holding company which controlled all state-owned steel companies in Italy. In a restructuring of the Italian steel industry in 1982, Terni took over two plants, Lovere and Trieste, from Nuova Italsider, another Finsider-owned steel producer. As part of a subsequent restructuring in 1987, Terni transferred its assets to a new company, Terni Acciai Speciali ("TAS") which thereafter held all the assets for electrical steel production in Italy. As part of the restructuring, Lovere and Trieste became TAS' two principal subsidiaries.

In 1988, another restructuring took place in which Finsider and its main operating companies (TAS, Italsider, and Nuova Deltasider) entered into liquidation and a new company, ILVA, was formed. ILVA took over some of the assets and liabilities of the liquidating companies. With respect to TAS, part of its liabilities and the majority of its viable assets, including all the assets associated with the production of electrical steel, were transferred to ILVA on January 1, 1989. ILVA itself became operational on that same day. Part of TAS' remaining assets and liabilities were transferred to ILVA on April 1, 1990. After that date, TAS no longer had any manufacturing activities. Only certain non-operating assets (e.g., land, buildings, inventories), remained in TAS. From 1989 to 1994, ILVA consisted of several operating divisions. The Specialty Steels Division, located in Terni, produced the subject merchandise. ILVA was also the majority owner of a large number of separately incorporated subsidiaries. The subsidiaries produced various types of steel products and also included service centers, trading companies, an electric power company, etc. ILVA together with its subsidiaries constituted the ILVA Group. The ILVA Group was owned by the Istituto per la Ricostruzione Industriale ("IRI"), a holding company wholly-owned by the Government of Italy ("GOI"). As of January 1, 1994, ILVA entered into liquidation and its divisions formed three companies. ILVA's former Specialty Steels Division is now AST.

Discussion of the Issues: In accordance with section 751(c)(1) of the Act, the Department conducted these sunset reviews to determine whether termination of the countervailing duty orders would likely lead to continuation or recurrence of a countervailable subsidy. Section 752(c) of the Act provides that, in making this determination, the Department shall consider the net subsidy determined in the investigation and subsequent reviews, and whether any change in the program which gave rise to the net countervailable subsidy has occurred and is likely to affect that net countervailable subsidy. Section 752(b)(3) of the Act provides that the Department shall provide to the International Trade Commission ("the Commission") the net countervailable subsidy likely to prevail if the order is revoked.

Below, we address the comments of the interested parties. Likelihood of Continuation or Recurrence of a Countervailable Subsidy

Comment 1: AST states that the Department did not find any causal relationship (according to the language of the World Trade Organization ("WTO") Subsidies and Countervailing Measures Agreement ("Subsidies Agreement")) between the subsidies it addressed in the preliminary determination and revocation of this order. AST argues that virtually all the subsidies addressed in the preliminary determination do not benefit AST because of the fair market value privatization of AST and, therefore, the Department must conclude that revocation of the order will not lead to continued or recurring subsidization. Moreover, AST contends that, even without AST's fair market value privatization, the Department could not make a required statutory finding. First, AST contends that there is no prospect of the resumption of subsidies and the Department has not found any likelihood of resumption on the basis of objective evidence. See August 7, 2000, Case Brief of AST at 2. Second, AST asserts that revocation cannot result in the continuation of pre-privatization subsidies for a company and its new owner after a fair market value change of ownership. Id. In their rebuttal, domestic interested parties assert that the statute does not contemplate, as AST suggests, that a new subsidy must be provided if revocation takes place, but rather contemplates that the continuation of past subsidies meets the statutory standard. See August 14, 2000, Rebuttal of domestic interested parties at 3. Moreover, nothing in the statute requires that the act of revocation itself must lead to continuation of the subsidy. Id. Specifically, domestic interested parties state that, pursuant to the Statement of Administrative Action ("SAA") where, as here, subsidies have been allocated over time and the fully allocated benefit stream continues after the end of the sunset review, that continued benefit supports a finding that revocation of the order would be likely to lead to continuation of the subsidy, irrespective of whether the program continues to exist. Id. Accordingly, domestic interested parties contend that the Department's preliminary determination is fully consistent with the statute, the SAA and the Sunset Policy Bulletin.

Department's Position: Drawing on the guidance provided in the legislative history accompanying the Uruguay Round Agreements Act ("URAA"), specifically the SAA, H.R. Doc. No. 103-316, vol. 1 (1994), the House Report, H.R. Rep. No. 103-826, pt.1 (1994), and the Senate Report, S. Rep. No. 103-412 (1994), the Department issued its Sunset PolicyBulletin providing guidance on methodological and analytical issues, including the bases for likelihood determinations. Policies regarding the conduct of Five-Year ("Sunset")Review of Antidumping and Countervailing Duty Orders: Policy Bulletin, 63 FR 18871 (April 16, 1998) ("Sunset Policy Bulletin"). In its Sunset Policy Bulletin, the Department indicated that determinations of likelihood will be made on an order-wide basis (see section II.A.2). Additionally, the Department normally will determine that revocation of a countervailing duty order is likely to lead to continuation or recurrence of a countervailable subsidy where (a) a subsidy program continues, (b) a subsidy program has been only temporarily suspended, or (c) a subsidy program has been only partially terminated. See section III.A.3.a of the Sunset Policy Bulletin. Exceptions to this policy are provided where a company has a long record of not using a program. See section III.A.3.b of the Sunset Policy Bulletin. AST argues that virtually all the subsidies addressed in the preliminary determination do not benefit AST because of the fair market value privatization of AST; therefore the Department can conclude that revocation of the order will not lead to continued or recurring subsidization. We disagree. As stated in our preliminary results, the privatization of AST does not eliminate prior subsidy programs. Rather, we agree with domestic interested parties that where subsidies have been allocated over time and the fully allocated benefit stream continues after the end of the sunset review, that continued benefit supports a finding that revocation of the order would be likely to lead to continuation of the subsidy irrespective of whether the program continues to exist. See SAA at 889. In addition, as stated in our preliminary results, without an administrative review, the Department cannot determine that the programs through which the subsidies were conferred in the original investigation have been terminated. Therefore, without evidence that the programs have been terminated, or that the benefits from programs for which benefits are allocated over time will not continue beyond this sunset review, we determine that revocation of the countervailing duty order is likely to lead to continuation or recurrence of a countervailable subsidy.

Comment 2: AST states that Department's preliminary determination ignored the effect of the recent WTO Appellate Body decision in United States-Imposition of CountervailingDuties on Certain Hot-Rolled Lead and Bismuth Carbon Steel Products Originating in the United Kingdom, WTO/DS138/AB/R, May 10, 2000 ("Leaded Bar Report") on the outcome of this case. AST asserts that the Department cannot fulfill its statutory responsibility without addressing whether the WTO determination means that the subsidies in question are not countervailable under U.S. law. See August 7, 2000, Case Brief of AST at 3. In addition, AST contends that the Department must address the impact of the decision by the U.S. Court of Appeals for the Federal Circuit in Delverde, SrL. v. United States, 202 F.3d 1360 (Fed. Cir. 2000) ("Delverde") beyond the Department's statement in the preliminary results that it had not had a sufficient opportunity to determine how Delverde may affect this proceeding. Id. at 4. AST asserts that virtually all of the countervailing duties imposed on its products are based on pre-privatization subsidies to an unrelated predecessor, which do not provide any benefit to AST due to the 1994 fair market value privatization of AST. AST states that the real impact of the Leaded Bar Report is not how it will be implemented, but in the fact that it is a definitive interpretation of U.S. obligations under international law which constrains the Department's interpretation of the countervailing duty statute. Id. at 6. Further, AST contends that in Delverde, the Court of Appeals made clear that applicable U.S. law requires that the Department examine the particular facts and circumstances, including the terms of the transaction, as well as whether a benefit exists with regard to the private company under investigation and the Department may not simply presume that a benefit continues after a change in ownership. Id. Lastly, AST contends that the correct application of Delverde and WTO Leaded Bar Report should lead the Department to conclude that revocation of the GOES countervailing duty order would not be likely to lead to continuation or recurrence of a countervailable subsidy and, accordingly, the Department must revoke this order. In their rebuttal, domestic interested parties argue that AST's arguments regarding the WTO Leaded Bar Report and the Delverde decision ignore the Department's past treatment of these decisions, the Department's Sunset Policy Bulletin, and the requirements of the statute. See August 14, 2000, Rebuttal of domestic interested parties at 4. Referring to the Issues and Decision Memorandum for the SunsetReviews of the Countervailing Duty Orders on Certain Corrosion-Resistant Carbon SteelFlat Products, Cold-Rolled Carbon Steel Flat Products, and Cut-to-Length Carbon SteelPlate Products from Germany Final Results, 65 FR 47407 at Comment 7 (August 2, 2000) ("German Carbon Steel CVD Sunset Review"), domestic interested parties state that the Department recognizes that a sunset review is not the appropriate context in which to undertake the factual analysis required to determine if subsidies continue to pass-through to a company that has changed some (or all) of its owners. Id. at 5. Further, domestic interested parties state that the Department should not make the determination here because: (1) no final administrative review results have been issued in this case; (2) the benefit streams of many subsidy programs continue beyond the end of the sunset review; and (3) a change of ownership is at issue. In addition, domestic interested parties contend that the Department has evaluated the effects of the WTO Leaded Bar Report in several other CVD sunset review cases, including the German Carbon Steel CVD Sunset Review, and the Issuesand Decision Memorandum for the Sunset Reviews of the Countervailing Duty Order on Cut-to-Length Carbon Steel Plate from the United Kingdom Final Results, 65 FR 18304 at Comment 1 ("UK Carbon Steel CVD Sunset Review"), and found that because the benefit stream of AST's subsidies extends past the end of this sunset review, revocation would lead to the continuation or recurrence of countervailable subsidies. Id. at 6. Further, domestic interested parties assert that, even assuming arguendo, that AST was correct in suggesting that the WTO Leaded Bar Report requires a change in the Department practice in the treatment of subsidy pass-throughs, that practice may not be modified unless and until several steps occur in a coordinated U.S. government response to the Leaded Bar Report. Id. at 8. Domestic interested parties assert that if the Department's practice regarding subsidy pass-throughs is to be altered based on the WTO decision, then this sunset review is not the proper venue in which to make such changes. Id.

Department's Position: As stated in our preliminary results, we disagree with respondent interested parties' arguments regarding the WTO Leaded Bar Report and the Delverde decision. Although these decisions relate to the Department's privatization methodology, a sunset review is not the appropriate proceeding in which to examine a complicated privatization transaction and to consider our privatization methodology. In light of the complexity and fact-intensive nature of these issues, it is imperative that these issues be fully developed on the record in an administrative review. In this regard, we note that there is an administrative review of the CVD order on GOES from Italy underway at the present time and that the parties have raised these same arguments in that proceeding. The Department is addressing privatization in the context of that proceeding in light of the recent decisions. Thus, for the purposes of this sunset review, we are following our past practice and are continuing to treat a portion of subsidies bestowed on a government-owned company prior to privatization as benefitting the production of the privatized company.

Net Countervailable Subsidy Likely to Prevail

Comment 3: AST asserts that the Department incorrectly determined that the net countervailable subsidy that is likely to prevail if the order is revoked is the original countervailing duty rate determined in the investigation. AST argues that the Department's Policy Statement does not exclude consideration of the effect of intervening events on the applicable rate that would prevail if the order were revoked. See August 7, 2000, Case Brief of AST at 8-9. AST states this case calls for an exception to the normal Department rule because (1) AST did not even exist at the time of the institution of the investigation in this case, and (2) AST was purchased at arm's length for fair market value in 1994, and the Court of Appeals and the WTO Appellate Body have recently ruled, in circumstances very similar to those presented here, that AST does not benefit from any subsidies previously bestowed upon predecessor entities. Id. Specifically, AST argues that the Delverde and WTO Leaded Bar Report make clear that, as a result of the privatization of AST, the fully allocated benefit stream of the majority of the programs at issue will clearly not continue after the end of the review. Id. at 8-9. In addition, AST asserts that the Department must provide the Commission with more current evidence of the level of subsidization; namely, the calculated countervailing duty rate of 12.44 percent from the Department's recently issued preliminary administrative review results on this product. Id. at 9. AST notes that, unlike the rate from the GOES investigation, this is an AST-specific rate. Further, AST states that the Department also has available its final determinations in the stainless steel plate and stainless steel sheet and strip from Italy investigations in which the margins were determined to be 15.16 percent and 12.22 percent, respectively. Id. AST states that those determinations are directly relevant to this proceeding and, because they involved investigation rates, they represent the Department's view of the behavior of the foreign government without the discipline of the order in place. Id. at 10. In their rebuttal, domestic interested parties assert that the Department correctly found the net countervailable subsidy likely to prevail to be 24.2 percent because (1) there has been no administrative review of this order and; (2) it is the only calculated rate that reflects the behavior of Italian producers/exporters without the discipline of the order. With respect to the effect of the WTO Leaded Bar Report and the Delverde case, domestic interested parties note that the Department has determined that sunset reviews are not the appropriate context in which to undertake the factual investigation necessary to determine if those decisions affect subsidy pass-though when a company changes some of its owners. See August 14, 2000, Rebuttal of domestic interested parties at 9. Regarding AST's suggestion that the Department rely on a preliminary review rate in the first administrative review of the GOES CVD order that is currently underway, domestic interested parties assert that the preliminary rate was found against the backdrop of the existing CVD order against GOES that is currently under review in this proceeding. Id. Moreover, they note that this is merely a preliminary rate that is under analysis by the Department and it is, therefore, not as reliable as the fully evaluated investigation final rate. Regarding AST's recommendation that the Department adopt a CVD rate from two stainless steel CVD investigations, domestic interested parties assert that these investigations occurred while the GOES countervailing duty order was in place against AST, and they, therefore, do not represent the Department's view of the behavior of the foreign government without the discipline of an order in place. Id at 10. In addition, domestic interested parties state that because the subsidy benefits received by AST benefitted all, or virtually all of AST's production, selecting one of the two rates from the stainless steel investigations would not reflect the GOI's or the European Union's ("EU's") behavior without the order in place. Id. Furthermore, domestic interested parties note that AST neither suggests which of the two substantially different rates obtained in the stainless steel cases (15.16 percent and 12.22 percent) should be selected, nor explains how the Department could justify the use of a rate from a completely different proceeding. Id. Therefore, the Department should apply its consistent policy of relying on the investigation rate when no administrative review has occurred.

Department's Position: In the Sunset Policy Bulletin, the Department stated that, consistent with the SAA and House Report, the Department normally will select a rate from the investigation as the net countervailable subsidy likely to prevail if the order is revoked, because that is the only calculated rate that reflects the behavior of exporters and foreign governments without the discipline of an order or suspension agreement in place. However, this rate may not be the most appropriate rate if, for example, the rate was derived from subsidy programs which were found in subsequent reviews to be terminated, there has been a program-wide change, or the rate ignores a program found to be countervailable in a subsequent administrative review. Additionally, where the Department determined company-specific countervailing duty rates in the original investigation, the Department normally will report to the Commission company-specific rates from the original investigation or where no company-specific rate was determined for a company, the Department normally will provide to the Commission the country-wide or "all-others" rate. See Sunset Policy Bulletin at section III.B.2. We agree with domestic interested parties that the investigation rate of 24.2 percent is an appropriate rate to provide to the Commission because the Department has not conducted a full administrative review of this order and this is the only rate that reflects the behavior of Italian producers/exporters without the discipline of the order. The Department cannot determine that the subsidies conferred in the original investigation have been terminated on the record of this sunset review. Furthermore, as stated in our preliminary results, the privatization of AST does not necessarily eliminate the prior subsidy programs. We note that the Department normally will not make adjustments to the net countervailable subsidy rate for programs that still exist, but were modified subsequent to the order, as applicable, to eliminate exports to the United States from eligibility. Although AST asserts that producers/exporters of subject merchandise no longer receive countervailable benefits, AST did not provide substantive evidence to the Department with respect to the termination of these programs. Finally, for the reason noted above in our position on the issue of continuation or recurrence of a countervailable subsidy, we disagree with the respondent interested parties that the WTO Leaded Bar Report or the Delverde decision presently requires the Department to alter its approach to privatization in the instant proceeding. Indeed, as mentioned in our preliminary results, we have determined that sunset reviews are not the appropriate venue in which to undertake the factual investigation necessary to determine if those decisions affect subsidy pass-throughs when a company changes some of its owners. We also reject AST's suggestion that the Department rely on a preliminary review rate in the first administrative review of the GOES CVD order that is currently underway. Because this rate is merely a preliminary rate that is under analysis by the Department, we will not use the rate in evaluating the margin to report to the Commission. Further, we will not use a rate from another proceeding involving stainless steel, as suggested by AST, because those rates do not involve subject merchandise and those investigations were conducted at a time when the Department had already imposed CVD orders on steel products from Italy that benefitted from some of the same subsidy programs. As such, the Department will report to the Commission the original margins from the final determination as the magnitude of the margin likely to prevail if the order were revoked, as contained in the Final Results of Review section of this decision memo.

Nature of the Subsidy: In the Sunset Policy Bulletin, the Department states that, consistent with section 752(a)(6) of the Act, the Department will provide to the Commission information concerning the nature of the subsidy, and whether the subsidy is a subsidy described in Article 3 or Article 6.1 of the Subsidies Agreement. None of the programs at issue is a subsidy described in Article 3 of the Subsidies Agreement. Final Results of Review We determine that revocation of the countervailing duty order on GOES from Italy would be likely to lead to continuation or recurrence of a net countervailable subsidy at the rate below:

Manufacturer/Exporter Margin All Italian producers/exporters 24.2 percent

Recommendation: Based on our analysis of the comments received, we recommend adopting all of the above positions. If these recommendations are accepted, we will publish the Final Results of Reviews in the Federal Register.

AGREE____ DISAGREE____ /S/

______________________ Troy H. Cribb Assistant Secretary for Import Administration

October 26, 2000 (Date)