65 FR 41051, July 3, 2000
C-580-842
Investigation
Public Document
DAS II/Office VI/EBG, TT
June 26, 2000
MEMORANDUM TO: Troy H. Cribb
Acting Assistant Secretary
for Import Administration
FROM: Holly A. Kuga
Acting Deputy Assistant Secretary
for Import Administration
SUBJECT: Issues and Decision Memorandum: Final Affirmative Countervailing
Duty Determination: Structural Steel Beams from the Republic of Korea -
(Period of Investigation: January 1, 1998 Through December 31, 1998)
Summary
We have analyzed the case and rebuttal briefs of interested parties in
the final affirmative countervailing duty determination of structural
steel beams from the Republic of Korea. As a result of our analysis, we
have made certain modifications to the net subsidy rates that were
previously calculated for Kangwon Industries Ltd. (Kangwon), Inchon Iron
and Steel Co., Ltd. (Inchon), and Dongkuk Steel Mill Co., Ltd. (DSM),
producers of subject merchandise, in the Preliminary Negative
Countervailing Duty Determination and Alignment of Final Countervailing
Duty Determination with Final Antidumping Determination: Structural Steel
Beams from the Republic of Korea, 64 FR 69731 (December 14, 1999)
(Preliminary Determination). Below are the "Methodology and Background
Information" and "Analysis of Programs" sections of this memorandum that
describe the conclusions made in this Decision Memorandum. Also below is
the "Analysis of Comments" section that contains the Department's
responses to the issues raised in the case and rebuttal briefs that we
received from interested parties. We recommend that you approve the
positions we have developed below in this memorandum.
Methodology and Background Information
I. Subsidies Valuation Information
A. Allocation Period
Section 351.524(d)(2) of the Department's Countervailing Duty (CVD)
regulations states that we will presume the allocation period for non-
recurring subsidies to be the average useful life (AUL) of renewable
physical assets for the industry concerned, as listed in the Internal
Revenue Service's (IRS) 1977 Class Life Asset Depreciation Range System
and updated by the Department of Treasury. The presumption will apply
unless a party claims and establishes that these tables do not reasonably
reflect the AUL of the renewable physical assets for the company or
industry under investigation, and the party can establish that the
difference between the company-specific or country-wide AUL for the
industry under investigation is significant.
In this investigation, no party to the proceeding claimed that the AUL
listed in the IRS tables did not reasonably reflect the AUL of the
renewable physical assets for the firm or industry under investigation.
Therefore, according to section 351.524(d)(2), we have allocated, where
applicable, all companies' non-recurring subsidies over 15 years, the AUL
listed in the IRS tables for the steel industry.
B. Treatment of Subsidies Received by Trading Companies
We required responses from trading companies with respect to the export
subsidies under investigation because the subject merchandise may be
subsidized by means of subsidies provided to both the producer and the
exporter of the subject merchandise. All subsidies conferred on the
production and exportation of subject merchandise benefit the subject
merchandise even if it is exported to the United States by an unaffiliated
trading company rather than by the producer itself. Therefore, the
Department calculates countervailable subsidy rates on the subject
merchandise by cumulating subsidies provided to the producer with those
provided to the exporter. See section 351.525(c) of the CVD Regulations.
During the period of investigation (POI), Kangwon exported the subject
merchandise to the United States through two trading companies, Hyosung
Corporation (Hyosung) and Sampyo Corporation (Sampyo). Inchon exported
subject merchandise through one trading company, Hyundai Corporation
(Hyundai). DSM exported subject merchandise through its trading company,
Dongkuk Industries Co. (DKI). Hyosung, Sampyo, Hyundai and DKI responded
to the Department's questionnaires with respect to the export subsidies
under investigation.
Pursuant to 19 CFR 351.107(b), when subject merchandise is exported to
the United States by a company that is not the producer of the
merchandise, the Department may establish a "combination" rate for each
combination of an exporter and supplying producer. However, as noted in
the "Explanation of the Final Rules" (the Preamble), there may be
situations in which it is not appropriate or practicable to establish
combination rates when the subject merchandise is exported by a trading
company. In such situations, the Department will make exceptions to its
combination rate approach on a case-by-case basis. See Antidumping Duties;
Countervailing Duties; Final Rule, 62 FR 27296, 27303 (May 19, 1997).
In the Preliminary Determination, we determined that it was not
appropriate to establish combination rates. This position was based on two
main facts: the majority of subsidies conferred upon the subject
merchandise was received by the producers; and the difference in the
levels of subsidies conferred upon individual trading companies with
regard to subject merchandise was insignificant. Thus, we preliminarily
determined that the combination rates would serve no practical purpose
because the calculated subsidy rate for any of the producers and a
combination of any of the trading companies would effectively have been
the same rate. See, Preliminary Determination, 64 FR 69731, 69733. No new
information, evidence of changed circumstances, or comments from
interested parties were presented in this investigation to warrant any
reconsideration of these findings.
Thus, in the Final Determination, we have continued to calculate rates
for the producers of subject merchandise that include the subsidies
received by the trading companies. To reflect those subsidies that are
received by the exporters of the subject merchandise in the calculated ad
valorem subsidy rate, we used the following methodology: For each of the
four trading companies, we calculated the benefit attributable to the
subject merchandise; we then factored that amount into the calculated
subsidy rate for the relevant producer. We determined the benefit received
by the trading companies for each export subsidy, and weighted the average
of the benefit amounts by the relative share of each trading company's
value of exports of the subject merchandise to the United States. These
calculated ad valorem subsidies were then added to the subsidies
calculated for the producers of subject merchandise. Thus, for each of the
programs below, the listed ad valorem subsidy rate includes
countervailable subsidies received by both the producing and trading
companies. See, e.g., Final Affirmative Countervailing Duty Determination:
Certain Cut-to-Length Carbon-Quality Steel Plate From the Republic of
Korea, 64 FR 73176, 73178 (December 29, 1999) (Cut-to-Length Plate).
C. Benchmark Interest Rates and Discount Rates
Benchmarks for Long-Term Financing: During the POI, the respondent
companies had both won-denominated and foreign currency-denominated long-
term loans outstanding which had been received from government-owned
banks, Korean commercial banks, overseas banks, and foreign banks with
branches in Korea. Some of these loans were received prior to 1992. In the
1993 investigation of Steel Products from Korea, the Department determined
that, through 1991, the Government of Korea (GOK) influenced the practices
of lending institutions in Korea and controlled access to overseas foreign
currency loans. (1) See Final Affirmative Countervailing Duty
Determinations and Final Negative Critical Circumstances Determinations:
Certain Steel Products from Korea, 58 FR 37338, 37339 (July 9, 1993)
(Steel Products from Korea), and the "Direction of Credit" section below.
In that investigation, we determined that the best indicator of a market
rate for long-term loans in Korea was the three-year corporate bond rate
on the secondary market. Therefore, in the Final Determination, we have
continued to use the three-year corporate bond rate on the secondary
market as our benchmark to calculate the benefits that the respondent
companies received from direct foreign currency loans and domestic foreign
currency loans obtained prior to 1992, and still outstanding during the
POI.
In the Final Negative Countervailing Duty Determination: Stainless Steel
Plate in Coils from the Republic of Korea, 64 FR 15530 (March 31, 1999)
(Plate in Coils) and the Final Affirmative Countervailing Duty
Determination: Stainless Steel Sheet and Strip in Coils from the Republic
of Korea, 64 FR 30636 (June 8, 1999) (Sheet and Strip), the Department,
for the first time, examined the GOK's direction of credit policies for
the period 1992 through 1997. Based on new information gathered during the
course of those investigations, the Department determined that the GOK
controlled directly or indirectly the lending practices of most sources of
credit in Korea between 1992 and 1997. In Cut-to-Length Plate, 64 FR
73176, 73180, the Department determined that the GOK still exercised
substantial control over lending institutions in Korea during 1998, and
found direction of credit countervailable through 1998, which is the POI
of this current investigation.
Based on our findings on this issue in prior investigations, we are using
the following benchmarks to calculate the subsidies attributable to
respondents' long-term loans obtained in the years 1992 through 1998:
(1) For countervailable, foreign-currency denominated long-term loans, we
used, where available, the company-specific weighted-average U.S. dollar-
denominated interest rates on the companies' loans from foreign bank
branches in Korea. For a small number of long-term loans denominated in
other foreign currencies, we were unable to find company-specific or other
commercial benchmarks. Therefore, as facts available, we had to rely on
the yield on long-term government bonds as reported by the International
Monetary Fund's (IMF) International Financial Statistics Yearbook. With
respect to Kangwon, the firm did not report any U.S. dollar loans from
foreign bank branches in Korea. Therefore, we had to rely on a U.S. dollar
loan benchmark that is not company-specific, but provides a reasonable
representation of industry practice, to determine whether a benefit was
provided to Kangwon from U.S. dollar loans received from government banks
and Korean domestic banks. In keeping with the methodology employed in
Sheet and Strip, 64 FR 30636, 30640, we used the weighted-average interest
rates on U.S. dollar loans from foreign bank branches in Korea received by
another respondent in this investigation, Inchon, as a benchmark for
Kangwon's U.S. dollar loans from government banks and Korean domestic
banks.
(2) For countervailable won-denominated long-term loans, where available,
we used the company-specific corporate bond rate on the companies' public
and private bonds. We note that this benchmark is based on the decision in
Plate in Coils, 64 FR 15530, 15531, in which we determined that the GOK
did not control the Korean domestic bond market after 1991, and that
domestic bonds may serve as an appropriate benchmark interest rate. Where
unavailable, we used the national average of the yields on three-year
corporate bonds as reported by the Bank of Korea (BOK). We note that the
use of the three-year corporate bond rate from the BOK follows the
approach taken in Plate in Coils, 64 FR 15530, 15532, in which we
determined that, absent company-specific interest rate information, the
corporate bond rate is the best indicator of a market rate for won-
denominated long-term loans in Korea.
We are also using, where available, the company-specific corporate bond
rate as the discount rate to determine the benefit from non-recurring
subsidies received between 1992 and 1998. Where unavailable, we are using
the national average of the three-year corporate bond rate.
Benchmarks for Short-Term Financing: For those programs requiring the
application of a won-denominated short-term interest rate benchmark, we
used as our benchmark a company-specific weighted-average interest rate
for commercial won-denominated loans outstanding during the POI. Kangwon,
Inchon, Hyundai, Hyosung and DKI reported company-specific, won-
denominated short-term loans outstanding during the POI. For those
programs requiring the application of a U.S. dollar-denominated short-term
interest rate, we used the average interest rate on lending rate loans for
the POI, as reported in the IMF's International Financial Statistics
Yearbook.
D. Creditworthiness
As explained in the Preliminary Determination, we found Kangwon to be
creditworthy in 1991 based on an analysis of its financial ratios and its
financial performance relative to that of Inchon, a company previously
found to be creditworthy during the same period. We also found Kangwon to
be creditworthy for the period 1992 through 1997 because Kangwon reported
that it issued long-term corporate bonds during each of those years. (2)
No new information, evidence of changed circumstances or comments from
interested parties were presented in this investigation to warrant any
reconsideration of these findings. Therefore, in the Final Determination,
we continue to find that Kangwon was creditworthy during the years 1991
through 1997.
In 1998, Kangwon entered a debt workout program with its creditor banks.
Company officials explained that during the end of 1997, Korea experienced
a foreign currency crisis that eventually plunged the country into an
economic recession. Kangwon was one of the first Korean companies to face
severe financial problems during the crisis. During verification, we
learned that Kangwon encountered these difficulties because it made large
investments in its production facilities during the 1995 through 1997
period. Company officials stated that Kangwon funded these investments
largely through the use of facility loans from the Korean Development Bank
(KDB). Thus, Kangwon incurred a large amount of debt, some of which was
denominated in foreign currencies, at approximately the same time that
Korea began to enter its economic crisis. Furthermore, we learned at
verification that most of Kangwon's products are sold to the construction
industry in the domestic Korean market. The domestic construction market
was hit particularly hard by the economic crisis, thus shutting off
Kangwon's most important market.
By the end of 1997, Kangwon began consulting with Chohung Bank (CHB), its
main bank, about the financial problems faced by the company. During the
next few months, the company considered various options including
bankruptcy, a court-ordered restructuring, and a debt workout program
conducted in conjunction with its creditor banks.
During verification, we learned that shortly before entering into a debt
restructuring, Kangwon attempted to solve its liquidity problems on its
own. However, it was not able to enlist any financial support from foreign
investors nor was it able to attract foreign capital during the POI. (3)
Moreover, Kangwon typically was only able to receive high interest-rate
call loans with terms of one to two days. (4) In addition, we learned
that, pursuant to the terms of its debt restructuring agreement, interest
payments on Kangwon's long-term debt, including any financial obligations
associated with the public and private bonds that it issued during the
POI, were suspended from July 18, 1999 to October 18, 1999. (5)
In spite of Kangwon's financial difficulties during the POI, Kangwon's
questionnaire response indicated that the company issued public and
private bonds during the year. Thus, in accordance with section
351.505(a)(4)(ii) of the Department's CVD Regulations, we found Kangwon to
be creditworthy in 1998 in the Preliminary Determination. However, the
information discovered during verification has led us to change our
preliminary finding.
Section 351.505(a)(3)(i) of the CVD regulations states that "in selecting
a comparable commercial loan that the recipient 'could actually obtain on
the market,' the Secretary normally will rely on the actual experience of
the firm in question in obtaining comparable commercial loans for both
short-term and long-term loans." At verification, we learned that
Kangwon's actual experience during the POI was that in order to avoid
bankruptcy it entered into a debt restructuring agreement with its
creditors, that, by its own admission, it was unable to obtain long-term
loans from commercial sources, that it could not repay the long-term debt
it had outstanding, and that its creditors temporarily suspended the
interest payments on the bonds that it managed to issue during the year.
Based on the information in Kangwon's questionnaire responses and on the
information we obtained during verification, we have determined that, for
the purposes of the Final Determination, Kangwon was uncreditworthy during
1998. See, section 351.505(a)(4) of the CVD regulations. Accordingly, we
have derived Kangwon's long-term benchmark interest rates for loans with
interest payments outstanding during the POI using the Department's
interest rate methodology for uncreditworthy companies, as described in
section 351.505(a)(3)(iii) of the CVD regulations. Therefore, we have
attached a risk premium to Kangwon's 1998 benchmark interest and discount
rates.
Regarding the derivation of Kangwon's uncreditworthy discount and
interest rates for 1998, we note that section 351.505(a)(3)(iii) of the
Department's CVD regulations states that the long-term interest rate that
would be paid by a creditworthy company shall be included among the
variables used to determine a company's uncreditworthy benchmark interest
rate. Though Kangwon was unable to fulfill its debt obligations for the
entire POI, it did manage to secure legitimate commercial financing for
part of the year prior to its entrance into the debt restructuring
program. Thus, although we have determined Kangwon to be uncreditworthy
during the POI, we find that the weighted-average interest rate of the
public bonds that it issued in 1998 most accurately reflects the
creditworthy interest rate that Kangwon would have paid on the market.
Therefore, in the Final Determination, we have used the weighted-average
interest rate of the public bonds that Kangwon issued during the POI when
calculating the risk premium that was added to Kangwon's 1998 benchmark
discount and interest rates.
Analysis of Programs
I. Programs Conferring Subsidies
A. The GOK's Direction of Credit Policies
1. The GOK's Credit Policies through 1991
As noted above in the "Subsidies Valuation Section" of this Decision
Memorandum, on October 1, 1999, the CAFC issued a decision regarding Steel
Products from Korea. See AK Steel, 192 F.3d 1367. Our review of the
decision indicates that the CAFC found that there was not sufficient
evidence on the record of Steel Products from Korea to determine that the
GOK directed credit through private commercial banks to the Korean steel
industry during the years 1985 through 1991. The CAFC accepted that the
GOK did direct credit specifically to the Korean steel industry in the
years prior to 1985. In addition, the CAFC stated that there was no
statutory basis to countervail loans provided to Korean companies from
offshore foreign banks. Prior to the Preliminary Determination, we placed
information not on the record of Steel Products from Korea onto the record
of this proceeding. In part, based on this new information, we determined
in the Preliminary Determination that the GOK's direction of credit
policies through private commercial banks provided a countervailable
benefit to the steel industry during the years 1985 through 1991. See the
Direction of Credit Pre-1992 Memorandum. Based on the information in the
memorandum, we preliminarily determined that all loans disbursed to
respondent companies through 1991 were countervailable. See Preliminary
Determination, 64 FR 69731, 69733. Since the Preliminary Determination, we
have supplemented this document with the Direction of Credit Memorandum,
as mentioned above in the "Benchmark Interest Rates and Discount Rates"
section of this decision memorandum. We note that the Direction of Credit
Memorandum contains additional evidence, not on the record of Steel
Products from Korea, that indicates that the GOK directed credit to the
Korean steel industry in a manner that was specific within the meaning of
section 771(5A)(D)(iii) of the Act. See, e.g., page 14 of the Direction of
Credit Memorandum. Subsequent to the Preliminary Determination, no new
information or evidence of changed circumstances was presented in this
investigation to warrant any reconsideration of these findings.
This issue was also extensively examined in Cut-to-Length Plate, where
the Department found that based upon new information that was not on the
record of Steel Products from Korea, the GOK provided a countervailable
benefit to the Korean steel industry in the form of directed credit during
this pre-1992 period. See Cut-to-Length Plate, 64 FR 73178, 73179 & 73187-
88. In addition, in Cut-to-Length Plate we also addressed the issue of the
countervailablility of foreign loans. Id at, 64 FR 73178, 73188.
In Cut-to-Length Plate, we noted that the CAFC's decision in AK Steel did
not disagree with our determination that the GOK controlled the provision
of foreign loans and that a disproportionate share of those foreign loans
were provided to the steel industry. The CAFC, instead, based its decision
on the statutory language as to when a loan provides a countervailable
subsidy. The CAFC stated the Department characterized the foreign loans as
subsidies on the ground that preferential access to those loans benefitted
the Korean steel industry. The CAFC concluded that this was an inadequate
basis under the then governing statute for determining that the foreign
loans constituted subsidies. Under the statute in effect during the period
pertinent to Steel Products from Korea, 19 U.S.C. 1677(5)(a)(ii)(1)
required that for a loan to be countervailable it must be provided "on
terms inconsistent with commercial considerations." The CAFC concluded
that the Department did not provide evidence to demonstrate the legal
requirement that the foreign loans were provided on "terms inconsistent
with commercial consideration."
Since the investigation of Steel Products from Korea, Congress has
amended the statute. With the enactment of the Uruguay Round Agreements
Act (URAA) in 1995, section 771(5)(E)(ii) of the Act provides that the
standard for determining whether a benefit has been provided is "in the
case of a loan, if there is a difference between the amount the recipient
of the loan pays on the loan and the amount the recipient would pay on a
comparable commercial loan that the recipient could actually obtain on the
market." Therefore, to determine whether the foreign loans received by the
respondents are countervailable, the Department must apply the standards
set forth in section 771(5)(E)(ii) of the Act.
As noted above, the CAFC did not disagree with our conclusion that the
GOK controlled the access to foreign loans, which were made on terms more
favorable than the loans available in the Korean domestic market. Absent
GOK approval, a company could not take out foreign loans and would have to
obtain financing in the more expensive domestic market. Pursuant to
section 771(5)(E)(ii) of the Act, a loan program provides a
countervailable benefit to the extent that the costs of the loan provided
under the government program are lower than the cost of a loan the
recipient could actually obtain in the market. Absent the approval from
the GOK to participate in this program, a Korean company would be unable
to obtain foreign lending and would only be able to obtain loans in the
Korean market. Therefore, pursuant to section 771(5)(E)(ii) of the Act,
the foreign loans received by respondents from Korean banks are
countervailable to the extent that the interest rates on these foreign
loans are less than the interest rates the companies could actually obtain
in the Korean financial market. Based upon the statutory requirements set
forth under 771(5)(E)(ii), we found foreign loans countervailable. See Cut-
to-Length Plate, 64 FR 73178, 73188.
Based on the information placed on the record prior to the Preliminary
Determination, the additional evidence contained in the Direction of
Credit Memorandum and the final determination of Cut-to-Length Plate, we
continue to determine that the provision of long-term loans via the GOK's
direction of credit policies was specific to the Korean steel industry
through 1991 within the meaning of section 771(5A)(D)(iii) of the Act. We
also continue to determine that the provision of these long-term loans
through 1991 conferred a benefit to the recipient to the extent that the
regulated loans were provided at interest rates less than the benchmark
rates, as described under the "Subsidies Valuation Information" section of
this decision memorandum, and resulted in a financial contribution, within
the meaning of sections 771(5)(E)(ii) and 771(5)(D)(i) of the Act,
respectively.
Kangwon and DSM had pre-1992 loans outstanding during the POI. Because
the terms, grace periods, and repayment schedules of Kangwon's long-term
fixed rate loans differed from those of the long-term fixed rate
benchmark, we applied, where applicable, the methodology provided for in
19 CFR 351.505(c)(3). Specifically, to derive the benefit, we did the
following: (1) using the benchmark interest rate, we calculated the net
present values of the repayment streams; (2) We subtracted the net present
value figures from the original loan amounts; and (3) we allocated the
differences (i.e. the grant equivalents) to the POI using the methodology
provided for in 19 CFR 351.524(d)(1). To determine the benefit from the
loans with variable interest rates, we applied the methodology provided
for in 19 CFR 351.505(c)(4). Therefore, for Kangwon and DSM's variable
rate loans, we calculated the difference in interest payments for the POI
based upon the difference in the amount of actual interest paid during
1998 on the regulated loans and the amount of interest that would have
been paid on a comparable commercial loan. Because we determined that
Kangwon was uncreditworthy in 1998, we applied a risk premium to its
variable benchmark interest rate using the methodology described in
section 351.505(a)(3)(iii) of the CVD regulations.
We note that during verification, we learned that the interest rate did
not remain constant on one of the loans that Kangwon reported as fixed. In
addition, we learned that several of the loans that Kangwon reported as
fixed had interest payments suspended during the POI. (6) Because the
repayment schedules of these loans did not remain constant during the
lives of the loans, we have calculated the benefit using the variable rate
methodology for this Final Determination.
Having derived the benefit amounts attributable to the POI for Kangwon's
and DSM's fixed and variable rate loans, we then summed the benefit
amounts from the loans and divided the total benefit by the companies'
respective total sales. On this basis, we determine the net subsidy to be
0.16 percent ad valorem for Kangwon and 0.04 percent ad valorem for DSM.
Inchon did not have any pre-1992 loans outstanding during the POI.
2. The GOK's Credit Policies from 1992 through 1998
In the Plate in Coils and Sheet and Strip investigations, the Department
determined that the GOK continued to control, directly, and indirectly,
the lending practices of most sources of credit in Korea through 1997. (7)
See Plate in Coils, 64 FR 15530, 15533, and Sheet and Strip, 64 FR 30636,
30642. The Department also determined in Plate in Coils and Sheet and
Strip that the GOK's regulated credit from domestic commercial banks and
government-controlled banks, such as the Korea Development Bank (KDB), was
specific to the steel industry. Further, the Department determined in
these investigations that these regulated loans conferred a benefit on the
producers/exporters of the subject merchandise to the extent that the
interest rates on these loans were less than the interest rates on
comparable commercial loans within the meaning of section 771(5)(ii) of
the Act.
We provided the GOK with the opportunity to present new factual
information concerning the government's credit policies during the 1992
through 1997 period, which we would consider along with our finding in the
prior investigations. The GOK did not provide new factual information that
would lead us to change our determination in Plate in Coils and Sheet and
Strip. Therefore, we continue to find lending from domestic banks and from
government-owned banks such as the KDB to be countervailable.
With respect to the POI, i.e. 1998, in this investigation, petitioners
allege that the GOK continued to control the practices of lending
institutions in Korea throughout this period, and that the steel sector
received a disproportionate share of low-cost, long-term credit, resulting
in countervailable benefits being conferred on the producers/exporters of
the subject merchandise. Petitioners assert, therefore, that the
Department should countervail all long-term loans received by the
producers/exporters of the subject merchandise that were still outstanding
during the POI.
In this investigation, the GOK asserted that it did not provide direction
or guidance to Korean financial institutions in the allocation of loans to
selected industries. The GOK stated that the lending decisions and loan
distributions of financial institutions in Korea reflect commercial
considerations. The GOK also stated that its role in the financial sector
is limited to monetary and credit policies as well as bank supervision and
examination.
According to the GOK, measures were taken in 1998 to liberalize the
Korean financial sector. For example, in January 1998, the GOK announced
closure of some banks, and in April 1998, launched the Financial
Supervisory Commission (FSC) to monitor the competitiveness of financial
institutions. In June 1998, the Regulation on Foreign Exchange Controls
was amended to further liberalize foreign currency transactions, and in
July, the GOK abolished the limit on purchasing foreign currency.
According to the GOK, the agreement also liberalized access to foreign
loans. For direct foreign loans to Korean companies, the approval process
under Article 19 of the Foreign Investment and Foreign Capital Inducement
Act and Article 21 of its enforcement decree were eliminated and replaced
with the Foreign Investment Promotion Act, effective in November 1998.
However, during most of the POI, access to direct foreign loans still
required the approval of the Ministry of Finance and Economy.
Regarding the GOK regulated credit from government-controlled banks such
as the KDB, the GOK reported that the KDB Act was amended in January 1998,
in response to the financial crisis in 1997. According to the GOK, under
the new Act, the KDB no longer allocates funds for various functional
categories; such as R&D, environment and technology. All functional loan
categories were eliminated and such loans were consolidated into a single
category for facility (equipment) loans. The GOK also stated that the KDB
strengthened its credit evaluation procedures by developing an objective
and systematic credit evaluation standard to prevent arbitrary decisions
on loans and interest rates. The KDB changed its Credit Evaluation
Committee to the Credit Deliberation Committee (CDC), and gave the CDC the
authority to make lending decisions. As a result, the KDB governor no
longer makes lending decisions without the approval of the CDC. The GOK
also stated that in 1997, the KDB used the prime rate plus a spread for
determining interest rates. Effective January 1, 1998, the KDB increased
the range of the credit spread to provide more flexibility in determining
interest rates based on creditworthiness and to allow the KDB to increase
its profits. However, respondents did not provide any evidence to
demonstrate that the KDB has discontinued the practice of selectively
making loans to specific firms or activities to support GOK policies.
The Department has previously noted conflicting information regarding the
GOK's direct or indirect influence over the lending decisions of financial
institutions. For example, the GOK policies appeared to be aimed, in part,
at promoting certain sectors of the economy, such as high technology,
which is defined to include the steel industry. See, e.g., Cut-to-Length
Plate, 64 FR 73176, 73179.
While the GOK started to plan and implement reforms in the financial
system during the POI as a result of the 1997 financial crisis, the record
evidence indicates that the GOK's previous attempts at removing or
reducing its control and influence over lending in the country have not
been successful. In the past ten years, the GOK has twice attempted to
reform its financial system. In 1988, the GOK attempted to deregulate
interest rates. However, the government deemed the 1988 liberalization a
failure. When the interest rates began to rise, the GOK canceled the
reforms by indirectly pressuring the banks to keep interest rates low. In
the early 1990s, the GOK attempted reforms again with a four-stage
interest rate deregulation plan. Again, the GOK deemed this attempt to
reform the financial system a failure. During 1998 and 1999, despite its
apparent liberalization attempts, the GOK threatened to cut off credit to
Korean companies unless the companies followed GOK policies. Also, during
the POI, the GOK took control of five large commercial banks due to the
financial crisis.
Moreover, in addition to the information discussed above, since the
publication of the Preliminary Determination, the Department has issued
the final determination of Cut-to-Length Plate, in which we determined
that the GOK continued to control, directly and indirectly, the lending
practices of sources of credit in Korea in 1998. See, Cut-to-Length Plate,
64 FR 73176, 73180.
In the Preliminary Determination, we determined that the GOK continued to
control, directly and indirectly, the lending practices of domestic banks
and government-owned banks through the POI. No new information, evidence
of changed circumstances, or comments from interested parties were
presented in this investigation to warrant any reconsideration of this
finding. Thus, based upon the information on the record of this
investigation and our determinations in Plate in Coils, Sheet and Strip,
and Cut-to-Length Plate, we continue to determine that the GOK controlled
directly, and indirectly, the lending practices of domestic banks and
government-owned banks through the POI.
With respect to foreign sources of credit, in Plate in Coils (64 FR
15530, 15533) and Sheet and Strip, (64 FR 30636, 30642), we determined
that access to foreign currency loans from Korean branches of foreign
banks (i.e. branches of U.S.-owned banks operating in Korea) did not
confer a benefit to the recipient as defined by section 771(5)(E)(ii) of
the Act, and, as such, credit received by respondents from these sources
was found not countervailable. This determination was based upon the fact
that credit from Korean branches of foreign banks was not subject to the
government's control and direction. Thus, in Plate in Coils and Sheet and
Strip, we determined that respondents' loans from these banks could serve
as an appropriate benchmark to establish whether access to regulated
foreign sources of credit conferred a benefit on respondents. Petitioners
have not provided any new information or evidence of changed circumstances
in this investigation to cause us to revisit this determination.
Therefore, we continue to determine that credit from Korean branches of
foreign banks were not subject to the government's control and direction.
As such, lending from this source continues to be not countervailable,
and, where available, loans from Korean branches of foreign banks continue
to serve as an appropriate benchmark to establish whether access to
regulated foreign currency loans from domestic banks confer a benefit upon
respondents.
With respect to loans provided under the Energy Savings Fund (ESF), in
Plate in Coils, 64 FR 15330, 15533, the Department found that these loans
were countervailable as directed credit on the grounds that they are
policy loans provided by banks that are subject to the same GOK influence
as described above. Inchon and Kangwon reported ESF loans outstanding
during the POI. Accordingly, in the Preliminary Determination, we found
these loans to be countervailable as directed credit, and included these
long-term loans in Inchon's and Kangwon's benefit calculations for
directed credit. See, Preliminary Determination, 64 FR 69731, 69735. No
new information, evidence of changed circumstances, or comments from
interested parties were presented in this investigation to warrant any
reconsideration of this finding. Therefore, we have continued to find
these loans countervailable in the Final Determination.
Similarly, in the Preliminary Determination, we determined that the long-
term loans provided under the Science and Technology Promotion Fund, which
are disbursed by the Korea Technology Bank, a GOK owned/controlled bank,
constitute loans subject to GOK influence and, therefore, were
countervailable as directed credit. No new information, evidence of
changed circumstances, or comments from interested parties were presented
in this investigation to warrant any reconsideration of this finding.
Therefore, we have continued to find these loans countervailable in the
Final Determination.
With respect to loans that Kangwon received under the industry technology
development fund, Kangwon stated in its questionnaire response that these
loans were for a research and development project that was tied to non-
subject merchandise. For this reason, in the Preliminary Determination, we
did not include these loans in our subsidy calculations. At verification,
we confirmed that these loans were tied to the production of non-subject
merchandise. Thus, in the Final Determination, we have not included these
loans in our subsidy calculations.
Finally, with respect to loans provided under Kangwon's debt
restructuring during the POI, we have determined that these loans are
countervailable under our direction of credit determination. There were
three categories of loans under Kangwon's 1998 debt restructuring program.
First, many of Kangwon's short-term loans were converted into long-term
loans (Type I). Second, Kangwon received new three-year loans for
operating capital (Type II loans). Lastly, with respect to Kangwon's
previously disbursed long-term loans, the unpaid interest that accrued
prior to the applicable date of the restructuring agreement, October 18,
1998, was converted into new three-year loans (Type III loans). See
Preliminarily Determination, 64 FR 69731, 69736.
In the Preliminary Determination we only countervailed the Type III loans
because these loans were based upon loans originally provided during a
period in which we determined that the GOK directed credit specifically to
the Korean steel industry. For Type I and II loans, we conducted a
separate specificity analysis, and treated these loans separate from our
direction of credit determination. See, Preliminary Determination, 64 FR
69731, 69736. After the Preliminary Determination, we determined in Cut-to-
Length Plate that the GOK directed credit specifically to the steel
industry during 1998, the year in which Kangwon received its Type I and II
loans under its debt restructuring program. See, Cut-to-Length Plate, 64
FR 73176, 73180. Therefore, in this Final Determination, we determine that
Type I and II loans, like Type III loans, are countervailable under the
direction of credit program.
Inchon, Kangwon, and DSM received long-term fixed and variable rate loans
from GOK owned/controlled institutions during the years 1992 through 1998
that were outstanding during the POI. In order to determine whether these
GOK directed loans conferred a benefit, we employed the same methodologies
described in the "GOK's Credit Policies through 1991" section of this
Decision Memorandum. Because we determined that Kangwon was uncreditworthy
in 1998, we applied a risk premium to its variable benchmark interest rate
using the methodology described in section 351.505(a)(3)(iii) of the CVD
regulations. With respect to Inchon, during verification, we learned that
the interest rate did not remain constant on some of the loans that Inchon
reported as fixed. (8) Because the repayment schedules of these loans did
not remain constant during the lives of the respective loans, in the Final
Determination, we have calculated the benefit from these loans using the
Department's variable rate methodology.
Having derived the benefit amounts attributable to the POI for the
companies' fixed and variable rate loans, we then summed the benefit
amounts from the loans and divided the total benefit by each company's
respective total sales. On this basis, we determine the net
countervailable subsidy to be 3.59 percent ad valorem for Kangwon, 0.02
percent ad valorem for Inchon, and 0.13 percent ad valorem for DSM.
B. Reserve for Export Loss Under Article 16 of the Tax Exemption and
Reduction Control Act (TERCL)
Under Article 16 of the Tax Exemption and Reduction Control Act (TERCL),
a domestic person engaged in a foreign-currency earning business can
establish a reserve amounting to the lesser of one percent of foreign
exchange earnings or 50 percent of net income for the respective tax year.
Losses accruing from the cancellation of an export contract, or from the
execution of a disadvantageous export contract, may be offset by returning
an equivalent amount from the reserve fund to the income account. Any
amount that is not used to offset a loss must be returned to the income
account and taxed over a three-year period, after a one-year grace period.
All of the money in the reserve is eventually reported as income and
subject to corporate tax either when it is used to offset export losses or
when the grace period expires and the funds are returned to taxable
income. The deferral of taxes owed amounts to an interest-free loan in the
amount of the company's tax savings. This program is only available to
exporters.
In the Preliminary Determination, we found that this program conferred
countervailable subsidies on the subject merchandise of Inchon and DKI.
See, Preliminary Determination, 64 FR 69731, 69737. No new information,
evidence of changed circumstances, or comments from interested parties was
presented in this investigation to warrant any reconsideration of these
findings. Accordingly, the net subsidy for this program is 0.05 percent ad
valorem for Inchon. With respect to DKI, we used the methodology for
calculating subsidies received by trading companies, which is detailed in
the "Subsidies Valuation Information" section of this decision memorandum,
to derive a net subsidy of 0.05 percent ad valorem for DSM.
C. Reserve for Overseas Market Development Under Article 17 of the TERCL
Article 17 of the TERCL allows a domestic person engaged in a foreign
trade business to establish a reserve fund equal to one percent of its
foreign exchange earnings from its export business for the respective tax
year. Expenses incurred in developing overseas markets may be offset by
returning, from the reserve to the income account, an amount equivalent to
the expense. Any part of the fund that is not placed in the income account
for the purpose of offsetting overseas market development expenses must be
returned to the income account over a three-year period, after a one-year
grace period. As is the case with the Reserve for Export Loss, the balance
of this reserve fund is not subject to corporate income tax during the
grace period. However, all of the money in the reserve is eventually
reported as income and subject to corporate income tax either when it
offsets export losses or when the grace period expires. The deferral of
taxes owed amounts to an interest-free loan equal to the company's tax
savings. This program is only available to exporters.
In the Preliminary Determination, we found that this program conferred
countervailable subsidies on the subject merchandise of Kangwon, Inchon,
and DSM. See, Preliminary Determination, 64 FR 69731, 69737. No new
information, evidence of changed circumstances, or comments from
interested parties were presented in this investigation to warrant any
reconsideration of these findings. Accordingly, the net subsidy for this
program is less than 0.005 percent ad valorem for Kangwon and Inchon and
0.02 percent ad valorem for DSM.
D. Investment Tax Credits Under Article 25 of the TERCL
Under the TERCL, companies in Korea are allowed to claim investment tax
credits for various kinds of investments. If the tax credits cannot all be
used at the time they are claimed, the company is authorized to carry them
forward for use in later tax years. In Steel Products from Korea, we found
that investment tax credits were not countervailable (see Steel Products
from Korea, 58 FR 37338, 37351); however, there were changes in the
statute effective in 1995, which caused us to revisit the countervailable
status of the investment tax credits. See, Plate in Coils, 64 FR 15530,
15534, and Sheet and Strip, 64 FR 30636, 30645.
Inchon and DSM claimed tax credits under Article 25 in their fiscal year
1997 income tax returns which were filed during the POI. However, DSM did
not use the tax credits under Article 25 of the TERCL during the POI.
Under Article 25, a company normally calculates its authorized tax credit
based upon 3 or 5 percent of its investment, i.e., the company receives
either a 3 or 5 percent tax credit. However, if a company makes the
investment in domestically-produced equipment under Article 25, it
receives a 10 percent tax credit. Though the investment tax credit was
amended to eliminate the rate differential between domestic and foreign-
made equipment for investments that are made after December 31, 1997, the
differing rate remains in effect for investments made prior to that date.
Moreover, Article 25 tax credits on these investments can be carried
forward beyond the POI.
In the Preliminary Determination, we found that this program conferred
countervailable subsidies on the subject merchandise of Inchon. See,
Preliminary Determination, 64 FR 69731, 69737-38. No new information,
evidence of changed circumstances, or comments from interested parties
were presented in this investigation to warrant any reconsideration of
these findings. The respondents have stated that the Department made a
clerical error in the calculation of Inchon's benefit under this program.
See Comment 4. We agree and have corrected the error. Accordingly, the net
subsidy for this program is 0.05 percent ad valorem for Inchon.
E. Asset Revaluation Under Article 56(2) of the TERCL
Under Article 56(2) of the TERCL, the GOK permitted companies that made
an initial public offering between January 1, 1987, and December 31, 1990,
to revalue their assets at a rate higher than the 25 percent required of
most other companies under the Asset Revaluation Act. In the Preliminary
Determination and in Cut-to-Length Plate, we found this program
countervailable. See, Preliminary Determination, 64 FR 69731, 69739, and
Cut-to-Length Plate, 64 FR 73176, 73183. No new information, evidence of
changed circumstances, or comments from interested parties were presented
in this investigation to warrant any reconsideration of the
countervailablility of this program.
We have revised the methodology used in the Preliminary Determination to
calculate the benefit from the program to make it consistent with the
methodology used in the final determination of Cut-to-Length Plate. See
Comment 4. As a result, the benefit from this program is not the amount of
the revaluation surplus, but rather, the impact of the difference that the
revaluation of depreciable assets has on the company's tax liability each
year. For this Final Determination, we have now used the additional
depreciation in the tax return filed during the POI, which resulted from
the company's asset revaluation, and multiplied that amount by the tax
rate applicable to that tax return. We then divided the resultant benefit
for each company by their respective total sales. Accordingly, the net
subsidy for this program is 0.03 percent ad valorem for Inchon and 0.02
percent ad valorem for DSM.
F. Electricity Discounts Under the Requested Load Adjustment (RLA) Program
Under the RLA program, customers with a contract demand of at least 5,000
kilowatts (kw) that are able to curtail their maximum demand by 20 percent
or that are able to suppress their maximum demand by at least 3,000 kw,
are eligible to enter into a RLA contract with KEPCO. Customers who choose
to participate in this program must reduce their electricity consumption
upon KEPCO's request, or pay a surcharge to KEPCO.
Customers can apply for this program between May 1 and May 15 of each
year. If Korea Electric Power Company (KEPCO) approves the application,
KEPCO and the customer enter into a contract with respect to the RLA
discount. The RLA discount is provided based upon a contract for two
months, normally July and August. Under this program, a basic discount of
440 won per kw is granted between July 1 and August 31, regardless of
whether KEPCO makes a request for a customer to reduce its load.
In the Preliminary Determination, we found that this program conferred
countervailable subsidies on the subject merchandise of Kangwon and DSM in
a manner that was specific within the meaning of section 771(5A) of the
Act. See, Preliminary Determination, 64 FR 69731, 69739. No new
information, evidence of changed circumstances, or comments from
interested parties were presented in this investigation to warrant any
reconsideration of these findings. Accordingly, the net subsidy for this
program is 0.01 percent ad valorem for Kangwon and less than 0.005 percent
ad valorem for DSM.
G. Scrap Reserve Fund
The Scrap Reserve Fund is administered by the Supply Administration (SA),
a GOK agency that purchases certain industries' inputs to production and
then makes the inputs available to producers on credit. During the POI,
the SA purchased and made available on credit such commodities as scrap
metal, non-ferrous and scarce metals (aluminum, ferrosilicon, etc.),
forest products (pulp, rubber, etc.), and environmental materials (chip
board, steel billet, etc.). In order to reduce the burden on Kangwon and
DSM of holding large inventories during the POI, the SA purchased steel
scrap on behalf of the companies and then provided them with a five-month
repayment option in the form of a loan.
In the Preliminary Determination, we found that this program conferred
countervailable subsidies on the subject merchandise of Kangwon and DSM.
See, Preliminary Determination, 64 FR 69731, 69739-40. No new information,
evidence of changed circumstances, or comments from interested parties
were presented in this investigation to warrant any reconsideration of
these findings. Accordingly, the net subsidy for this program is 0.03
percent ad valorem for Kangwon and 0.01 percent ad valorem for DSM.
H. Export Industry Facility Loan (EIFLs)
In Steel Products from Korea, 58 FR 37338, 37328, the Department
determined that export industry facility loans (EIFLs) are contingent upon
export and are, therefore, export subsidies to the extent that they are
provided at preferential rates. The decision in Steel Products from Korea
was later reaffirmed in Sheet and Strip, 64 FR 30636, 30644.
In the Preliminary Determination, we found that this program conferred
countervailable subsidies on the subject merchandise of Kangwon. See,
Preliminary Determination, 64 FR 69731, 69740. No new information,
evidence of changed circumstances, or comments from interested parties
were presented in this investigation to warrant any reconsideration of
these findings. However, we note that information obtained at verification
regarding changes to one of the interest payments Kangwon made on its
fixed-rate export industry facility loan has led us to slightly revise the
benefit calculation for this program. (9) Accordingly, the net subsidy for
this program is 0.09 percent ad valorem for Kangwon.
I. Special Cases of Tax for Balanced Development in Selected Areas Under
Article 43 of the TERCL
TERCL Article 43 allows a company to claim a tax reduction or exemption
for income gained from the disposition of factory facilities when
relocating from a large city to a rural area. On December 29, 1995, DSM
sold land from its Pusan factory and, within three years from the sales
date, began production at its Pohang plant. In accordance with Article 16,
paragraph 7 of the Addenda to the TERCL, DSM was entitled to receive an
exemption on its income tax for the capital gain. No other respondent
company used this program.
Payment for the Pusan facilities is on a longer-term installment basis,
the income tax on the capital gain is payable when DSM actually receives
payment or transfers the title of ownership. The capital gain in the tax
year can not exceed DSM's total taxable income. The maximum tax savings
permitted is 100 percent of the taxable income; however, this program is
also subject to the minimum tax. This program does not allow carrying
forward of unused benefits in future years.
In the Preliminary Determination, we found that this program conferred
countervailable subsidies on the subject merchandise of DSM in a manner
that was specific within the meaning of section 771(5)(D)(iv) of the Act.
See, Preliminary Determination, 64 FR 69731, 69740. No new information,
evidence of changed circumstances, or comments from interested parties
were presented in this investigation to warrant any reconsideration of
these findings. Accordingly, the net subsidy for this program is 0.60
percent ad valorem for DSM.
Price Discount for DSM Land Purchase at Asan Bay
This program was not addressed in the Preliminary Determination because
information on this program was gathered during the verification of Cut-to-
Length Plate. This information is now on the record of this investigation.
In 1995, DSM purchased land at the Asan Bay Industrial Site, a GOK
constructed industrial estate. DSM began making land payments in 1995 and
continued until the last payment in December 1998. The original total land
costs to the Korea Land Development Corporation (KLDC) included land,
management fees, and land development costs. During the period of the
contract from 1995 to 1998, a variety of cost and fees changed. For
instance, DSM decided to have a private company perform land development,
thus reducing the original total amount of land cost. Also, the management
fee to West Area Industrial Site Management Corporation (WAISM) was waived
and the GOK reduced the land cost by a ten percent Competitiveness
Increase Movement amount.
During the verification of Cut-to-Length Plate, the Department noted a
difference between the total cost of land amount after changes and what
DSM actually paid. This difference occurred because the GOK reduced the
amount by ten percent and waived a management fee owed to WAISM. Based
upon section 771(5A)(D)(iii)(I) of the Act, this price reduction was
specific to DSM. Because the GOK issued this price reduction, this confers
a benefit pursuant to section 771(5)(D)(ii) of the Act, because the GOK
foregoes revenue that it normally would collect. See, Cut-to-Length Plate,
64 FR 73176, 73184.
To calculate the benefit from this program, the Department first took the
original amount of the land cost and deducted the amount that was to be
paid to the KLDC for land development, to obtain the new price of the
land. Next, to derive the amount DSM paid for the land, we took the actual
amount paid and added the prepaid interest. The Department then took the
difference between the new price of the land and the calculated amount
paid by DSM. We treated the difference as a grant as described in 19 CFR
351.504 of the CVD regulations. Although this program confers a non-
recurring benefit, the amount of the benefit is less than 0.5 percent of
DSM's total sales, therefore, we have expensed this benefit in the year of
receipt, which was the POI, pursuant to section 351.524(b)(2) of the CVD
regulations. On this basis, we have calculated a net countervailable
subsidy rate of 0.47 percent ad valorem for DSM.
K. R&D Grants under The Korea New Iron & Steel Technology Research
Association (KNISTRA)
The Korea New Iron & Steel Technology Research Association (KNISTRA) is
an association of steel companies established for the development of new
iron and steel technology. KNISTRA is a member based R&D agency that
supports R&D projects through private and public contributions. KNISTRA
acts as a coordinating organization for R&D. While individual companies
provide a portion of the funding, the GOK also contributes funds to these
projects.
If the research is deemed successful, 50 percent of the GOK's
contribution will be repaid in proportionate amounts from each individual
participating company. Inchon, Kangwon and DSM are all members of KNISTRA
and participated in an R&D project during the POI. The current project is
used in the production of subject merchandise. This project began in 1995,
and continued in 1996 and 1998 (POI).
In the Preliminary Determination, we found that this program conferred
countervailable subsidies on the subject merchandise of Inchon, Kangwon,
and DSM. See, Preliminary Determination, 64 FR 69731, 69740. No new
information, evidence of changed circumstances or comments from interested
parties were presented in this investigation to warrant any
reconsideration of these findings. Accordingly, the net subsidy for this
program is less than 0.005 percent ad valorem for Inchon, Kangwon, and
DSM.
II. Programs Determined To Be Not Countervailable
A. Tariff Reductions on Imported Machinery Equipment
Subsequent to the issuance of the Preliminary Determination, we received
a supplemental questionnaire response from the GOK indicating the
existence of a program that provides tariff reductions on imported
machinery equipment. This program is administered by the Korean Customs
Service. Pursuant to Article 28-7 of the Customs Duties Act, the program
provides tariff reductions on four categories of imported machines,
provided that the machinery or equipment is not made in Korea: (1)
machines and equipment used for preventing pollution; (2) machines and
equipment used for the disposal of waste; (3) machines and equipment
related to industrial safety; and (4) machines and equipment used for
factory automatization. The Ministry of Finance and Economy (MOFE) is the
agency that decides which types of equipment will qualify for the tariff
reductions.
There are two methods in which machinery not produced in Korea can be
included in the MOFE's list of eligible equipment. First, the various
trade associations in Korea submit a list of equipment to MOFE on behalf
of their members. The other method is that a company may make a direct
request to MOFE to include a type of equipment on the eligible list. Most
requests, however, come from the trade associations. Once the request is
submitted to MOFE, the GOK checks to ensure that the equipment or
machinery in question is not produced in Korea. If the equipment/machinery
is not produced in Korea then MOFE identifies the eligible items. Once
MOFE identifies the eligible items, it releases its results to the public
in a document entitled, "The List of Import Duty Reductions on Automated
Equipment." This list contains separate categories for each of the four
types of equipment covered by the program.
When companies import machinery covered by the program, they submit an
application to the Korean Customs Service indicating the category under
which the item qualifies for the tariff reduction. The Korea Customs
Service then reviews the application, making sure that the piece of
machinery is, in fact, on the list and then automatically grants the
tariff reduction. After the companies import the machinery, the Korean
Customs Service performs inspections in order to ensure that companies
participating in the program have in fact installed and used the
machinery/equipment in the manner indicated on their application.
Repayment of the duty reduction and a penalty can be charged if the Korean
Customs Service determines that companies have not installed or used the
machinery within a reasonable period of time. Moreover, a penalty of ten
times the amount of the original duty is charged if the Korea Customs
Service determines that the importer has resold the imported machinery.
During the POI, Inchon, Kangwon, and DSM received tariff reductions on
imported machinery used for factory automatization.
In order to determine whether the use of this program bestowed
countervailable subsidies upon the producers of subject merchandise, we
analyzed whether the tariff reductions were de jure or de facto specific
within the meaning of section 771(5A)(D)(i) and (iii) of the Act.
First, we examined Article 28-7 of the Customs Duties Act and other
relevant legislation under which the GOK enacted this program in order to
determine whether the program was de jure specific. Our review of the
controlling legislation indicated that the program did not explicitly
limit eligibility to a specific enterprise, industry or group or make
eligibility contingent upon export performance. We also examined the
tariff reduction application for signs of de jure specificity. Again, we
found no indication that the application limited eligibility to a specific
enterprise, industry or group or that eligibility was contingent upon
export performance. Next, we examined the types of machinery that were
covered under category four (i.e. machinery and equipment used for factory
automatization), which was the category under which the subject producers
received the tariff reductions. Using the tariff numbers included on this
list, we found that category four included numerous tariff reductions on
machinery used by a broad range of industries. Thus, based on this
information, we determine that the tariff reductions on imported machinery
equipment program is not de jure specific within the meaning of section
771(5A)(D)(i) of the Act.
Next, we examined the distribution of the tariff reductions received by
participating companies during the POI in order to determine whether the
program meets the criteria for de facto specificity under section
771(5A)(D)(iii) of the Act. During verification, we collected a chart
indicating the amount of tariff reductions Inchon, Kangwon, and DSM
received during the POI under the tariff reduction program. We also
obtained a chart listing the total amount of tariff reductions received by
all companies during the POI under the program. Comparing the two lists,
we found that the respondent companies were not dominant users of the
program, nor did they receive a disproportionate share of benefits under
the program. On this basis, we find that this program is not de facto
specific. Because the program does not meet the specificity criteria of
section 771(5A) of the Act, we determine that the tariff reductions
received under this program do not confer a subsidy and, thus, are not
countervailable.
III. Programs Determined To Be Not Used
In the Preliminary Determination, we found the following programs listed
below to be not used by respondents. No new information, evidence of
changed circumstances or comments from interested parties were presented
in this investigation to warrant any reconsideration of these findings.
Accordingly, in the Final Determination, we continue to find these
programs to be not used.
A. Private Capital Inducement Act
B. Tax Credit in Equipment to Develop Technology and Manpower Under
Article 10 of the TERCL
C. Tax Credits for Vocational Training Under Article 18 of the TERCL
D. Exemptions of Corporate Tax on Dividend Income from Overseas Resources
Development Resources Act Under Article 24 of the TERCL
E. Tax Credits for Investments in Specific Facilities Under Article 26
of the TERCL
F. Tax Credits for Temporary Investments Under Article 27 of the TERCL
G. Social Indirect Capital Investment Reserve Funds Under Article 28 of
the TERCL
H. Energy-Savings Facilities Investment Reserve Funds Under Article 29
of the TERCL
I. Tax Credits for Specific Investments Under Article 71 of the TERCL
J. Mining Investment Reserve Funds Under Article 95 of the TERCL
K. Grants Under the Technology Development Promotion Act
L. Highly Advanced National Project Fund Industry Technology Development
Fund
M. Short-Term Export Financing
N. Korean Export-Import Bank Loans
O. Tax Incentives for Highly Advanced Technology Businesses
P. Special Depreciation of Assets Based on Foreign Exchange Earnings
Q. Steel Campaign for the 21st Century
R. Excessive Duty Drawback
S. Reserve for Investment
T. Export Insurance Rates By The Korean Export Insurance Corporation
U. Special Cases of Tax for Balanced Development among Areas (TERCL
Articles 41, 42, 44, and 45)
V. Reserve for Investment
W. Overseas Resource Development Loan
IV. Analysis of Comments
Comment 1: Kangwon's Creditworthiness from 1991 through 1998
Petitioners argue that the Department should find Kangwon uncreditworthy
for all years during the period 1991 through 1998. Petitioners argue that
in the Preliminary Determination the Department incorrectly characterized
Kangwon's issuance of commercial bonds during the period 1991 through 1998
as constituting dispositive evidence that the firm was creditworthy during
those years. Petitioners point out that the Department's decision in the
Preliminary Determination to find Kangwon creditworthy during the period
1991 through 1998 based on the fact that the company issued commercial
bonds during those years conflicts with its statements in the Direction of
Credit Memorandum. Specifically, petitioners claim that, in the Direction
of Credit Memorandum, the Department states that the GOK's promotion of
the steel industry effectively amounts to the granting government
guarantees and, thus, the receipt or issuance of any commercial debt
should not be used to find a company creditworthy. Furthermore, with
respect to 1998, petitioners argue that, as evidenced by the Direction of
Credit Memorandum, Kangwon was not able to manage its long-term debt
obligations in 1998 and, thus, should be found uncreditworthy during the
POI.
Respondents contend that Department has previously determined in Plate in
Coils that the GOK does not control the domestic bond market. Therefore
since that bond market is a legitimate source of commercial financing, the
issuance of commercial bonds can be used to establish Kangwon's
creditworthiness for the years after 1991. With respect to 1991, the
respondents point out that the Department used an analysis of Kangwon's
financial ratios for the period 1988 to 1990 to correctly determine that
Kangwon was creditworthy for 1991.
Department's Position: We disagree with petitioners' argument that the
Department should have determined Kangwon to be uncreditworthy during the
years 1991 through 1997. Regarding our decision in the Preliminary
Determination to find Kangwon creditworthy in 1991, we note that contrary
to petitioners' contention, we did not base our decision on the fact that
Kangwon issued commercial bonds during that year. As explained in our
Preliminary Determination, because we determined that the Korean bond
market was controlled by the GOK prior to 1992, we could not use Kangwon's
issuance of bonds to establish whether the company was creditworthy for
the period prior to 1992. As a result, we considered Kangwon's past and
present financial health, as reflected in various financial indicators
calculated from the firm's financial statement and accounts, in making a
determination on whether Kangwon was creditworthy in that year. See,
Preliminary Determination, 64 FR 69731, 69733. Based upon this analysis of
Kangwon's financial indicators for the years 1988 through 1991, we did not
find that the company would be unable to meet its debt obligations. Id. at
69733. Petitioners have provided no new information, evidence of changed
circumstances, or comments in their case briefs to warrant any
reconsideration of our analysis of Kangwon's financial ratios. Thus, for
the purposes of the Final Determination, we continue to find that Kangwon
was creditworthy in 1991.
Regarding our decision in the Preliminary Determination to find Kangwon
creditworthy during the years 1992 through 1997, we based our creditworthy
finding, as noted by petitioners, on the fact that the company issued
commercial bonds during those years. We note that in Plate in Coils, 64 FR
15530, 15531, we determined that the Korean bond market was not controlled
by the GOK during the period 1992 through 1997, and that domestic bonds
can serve as an appropriate benchmark interest rate. We note that though
the Department's Direction of Credit Memorandum provides evidence
indicating that the GOK directs credit specifically to the Korean steel
industry, it does not contain, as petitioners contend, any specific
information that overturns the Department's prior determination in Plate
in Coils concerning the Korean bond market. Thus, we disagree with
petitioners' argument that the Direction of Credit Memorandum undermines
the Department's finding in Plate in Coils that the Korean commercial bond
market can serve as a legitimate benchmark during the years 1991 through
1997. Therefore, we continue to find Kangwon creditworthy during the years
1991 through 1997 because it was able to issue debt on the market during
those years.
However, we agree with petitioners' argument that Kangwon was
uncreditworthy during 1998. As noted in the "Creditworthiness" section of
this memorandum, Kangwon was experiencing financial difficulties during
the POI that forced the company to enter into a debt restructuring
agreement with its creditors. Furthermore, prior to and during the debt
restructuring, Kangwon was not able to attract foreign capital nor was it
able to obtain long-term financing from commercial sources. Moreover, at
verification we learned that, pursuant to the terms of Kangwon's debt
restructuring program, interest payments on its long-term debt, including
any financial obligations associated with the public and private bonds
that it issued during the POI, were suspended for three months. Therefore,
for the purposes of this Final Determination, we have determined, pursuant
to section 351.505 (a)(4) of the Department's CVD regulations, that
Kangwon was uncreditworthy for 1998.
Comment 2: Countervailability of Kangwon's Debt for Equity Swap
In March of 2000, Kangwon merged with Inchon. As part of the terms of the
merger, Kangwon transferred part of its ownership, via shares, to its
creditor banks in exchange for the forgiveness of the company's debt.
Petitioners argue that, due to Kangwon's poor financial health as of the
time of the merger, the company should be found unequityworthy.
Petitioners further argue that, having found Kangwon unequityworthy, the
Department should find the debt-for-equity swap countervailable on the
grounds that the transaction was inconsistent with the usual investment
practice of private investors.
Respondents state that this new subsidy allegation should be rejected by
the Department because the information on the records demonstrates that
(1) the KDB participated in the debt-equity swap on the same terms as
other commercial banks, (2) the share price at which the debt was
converted to equity was based on the prevailing market share price, and
(3) this debt-equity swap was not finalized until March 2000, upon
completion of the merger between Inchon and Kangwon, which was well
outside the POI.
Department's Position: We disagree with petitioners. The exchange of
Kangwon's debt for equity occurred shortly before Kangwon's merger with
Inchon that took place in March 2000. Pursuant to section 351.204(b)(2) of
the Department's regulations, the POI in this proceeding is calendar year
1998 and, therefore, the Department relied on information pertaining to
the calendar year 1998 in making this Final Determination. This event
transpired during the year 2000, two years after the POI and, therefore,
any benefits that may have been bestowed as a result of the debt-for-
equity swap cannot be attributed to the time period covered by this
investigation. If this Final Determination results in a countervailing
duty order, the Department will examine this issue in any subsequent
administrative proceeding.
Comment 3: Department Selection of Benchmarks
Petitioners contest the Department's use of company-specific benchmark
interest rates that are based on the weighted-average of respondent
companies' commercial bonds issued during the years 1992 through 1998.
Petitioners argue that the Department's Direction of Credit Memorandum
demonstrates that the GOK's direction of credit policies do not operate
according to market forces and that the Korean financial sector is thereby
tainted by the GOK's intervention. Therefore, petitioners argue that the
issuance of commercial bonds in Korea should not be considered as a
legitimate source of commercial financing and, as a result, should not be
used as respondent companies' benchmark interest rates.
Respondents assert that the specific benchmarks used by the Department
were previously determined by the Department not to be subject to GOK
control.
Department's Position: We disagree with petitioners. As stated in Plate
in Coils, the Department determined that long-term borrowings in the
Korean commercial bond market can serve as legitimate commercial
benchmarks. See, Plate in Coils, 64 FR 15530, 15531. Also, as stated above
in response to Comment 1, the Department's Direction of Credit Memorandum
is not inconsistent with the Department's prior determination in Plate in
Coils regarding the legitimacy of the Korean bond market subsequent to
1991. Therefore, for this Final Determination, the Department continued to
use, where applicable, the weighted-average of respondents' commercial
bonds as the long-term benchmark interest rate.
Comment 4: Calculation Errors in Preliminary Determination
Respondents argue that the Department incorrectly calculated the benefit
under Articles 25 and 56(2) of the TERCL. Regarding the benefit from
investment tax credits attributed to Inchon under Article 25 of the TERCL,
respondents state that the calculation method used in the Department's
Preliminary Calculation Memorandum did not conform with the proper method
described in the Preliminary Determination. (10) Respondents argue that
the method utilized in the Preliminary Calculation Memorandum calculated
the subsidy based upon the total amount of the tax credit Inchon claimed
in 1997 rather than calculating the benefit based on the difference
between the ten percent tax credit Inchon received and the regular three
percent tax credit, as described in the Preliminary Determination.
Petitioners argue that the Department correctly calculated the benefit
under Article 25 of the TERCL and, thus, should continue to find
countervailable all ten percent of the tax credit that Inchon received
under this program.
Regarding the benefit from asset revaluations attributed to Inchon and
DSM under Article 56(2) of the TERCL, respondents argue that the
Department should revise the calculation method used in the Preliminary
Determination so that it is consistent with the method used in Cut-to-
Length Plate.
Petitioners contend that the Department correctly calculated the benefit
under Article 56(2) of the TERCL. Petitioners argue that the Department's
calculations made in another investigation are not relevant to this
investigation. Petitioners further argue that respondents have not pointed
to any errors in the Department's calculations with regard to the benefits
received under this program. For these reasons, petitioners argue that the
Department should continue to calculate the benefit using the methodology
employed in the Preliminary Determination.
Department's Position: We agree with respondent's argument that the
calculation method employed by the Department in the Preliminary
Calculation Memorandum did not reflect the method described in the
Preliminary Determination. Accordingly, for the purposes of the Final
Determination, we have revised our calculation method so that it conforms
with the method described in the Preliminary Determination. Specifically,
to calculate the benefit to Inchon from the tax credit program under
Article 25 of the TERCL, we determined the value of the tax credits Inchon
deducted from its taxes payable for the 1997 fiscal year. In Inchon's 1997
income tax return filed during the POI, it deducted from its taxes
payable, credits earned prior to and during 1997, which were carried
forward and used in the POI. We first reviewed those tax credits which
were claimed based upon the investment in domestically-produced
facilities. We then calculated the additional amount of tax credits
received by the company because it earned tax credits of 10 percent on
investments in domestically-produced facilities rather than the regular 3
or 5 percent tax credit. Next, we calculated the amount of the tax savings
received through the use of these tax credits during the POI, and divided
that amount by Inchon's total sales for the POI.
Regarding arguments made on the calculation of the benefit under Article
56(2) of the TERCL, we agree with respondents. As discussed in the
"Analysis of Programs" section of this decision memorandum, we have
revised the calculation method used in the Final Determination to conform
with the methodology employed in the recently completed investigation of
Cut-to-Length Plate. We note that in the Preliminary Determination, we
followed the methodology used in the Preliminary Affirmative
Countervailing Duty Determination and Alignment of Final Countervailing
Duty Determination with Final Antidumping Duty Determination: Certain Cut-
to-Length Carbon-Quality Steel Plate from the Republic of Korea, 64 FR
40445 (July 26, 1999) (Preliminary Determination of Cut-to-Length Plate).
However, after the issuance of the Preliminary Determination, the
Department, in Cut-to-Length Plate, revised its approach to this program
so that it more accurately calculates the benefit attributable to this
program. See, Cut-to-Length Plate, 64 FR 73176, 73183. Thus, because the
calculation method used in the Cut-to-Length Plate more accurately
measures the benefit, we have adopted the same methodology in this
investigation.
Comment 5: The Suspension of Kangwon's Interest Payments Following the
Company's Debt Restructuring and Its Affect on Kangwon's Benefit
Calculations
Respondents argue that the Department double counted the interest
payments on Kangwon's long-term loans as a result of the suspension of
debt payments that accompanied the company's debt restructuring.
Respondents explain that at verification, the Department found that
Kangwon's interest payments were suspended during the period July 18,
1998, through October 17, 1998, and that the interest that accrued on
Kangwon's long-term loans during the three-month suspension period was
rolled over into new loans (i.e. Type III loans). Respondents argue that
in performing its benefit calculations in the Preliminary Determination,
the Department failed to segregate the accrued interest that was rolled
over into Type III loans from the benefit calculations performed on
Kangwon's other long-term loans outstanding during the POI.
Respondents further argue that since, according to the Department's long-
standing practice, a benefit on a loan is not received until the time the
interest payment is due, the Department cannot properly find a
countervailable benefit from interest payments not made during the
suspension period because, pursuant to the terms of Kangwon's
restructuring agreement, no interest payments were due during that time.
Furthermore, respondents point out that, in conceding this point, the
Department, should it find the GOK's direction of credit policies
countervailable, will not allow Kangwon to escape accountability for these
suspended interest payments because any benefits arising from the interest
payment suspension would be captured by countervailing as a separate
program the Type III loans that were issued under Kangwon's debt
restructuring program. Thus, respondents argue that the Department should
recalculate the benefits on the long-term loans, where payments were
suspended, to exclude the interest accrued during the suspension period.
Petitioners did not comment on this issue.
Department's Position: We first note that we disagree with respondents'
statement that the suspension period on interest payments received by
Kangwon is not countervailable because a benefit on a loan is only
conferred at the time interest is paid. Here the benefit from the
suspension is separate from the benefit provided by the terms of the loan,
i.e., the fact that the interest rate on the loan is less than the rate
Kangwon would have paid on a comparable commercial loan. That benefit was
established when the loan was originally approved. However, Kangwon's
ability to suspend interest payments provides a separate benefit to the
company. This benefit is in the form of a deferred liability. Kangwon
should have made a payment on this loan, but with the suspension of all
interest payments under its debt restructuring program, it did not have to
make any payments until a later period. This deferral provided an
additional benefit to the company.
However, we do agree with respondents that we should revise the manner in
which the benefits associated with Kangwon's debt restructuring and
interest payment suspension are calculated. As stated above, Kangwon's
interest payments were suspended for three months during the POI. In the
Preliminary Determination, we included the time period covered by the
interest payment suspension when calculating the benchmark interest
payments on Kangwon's countervailable long-term loans. In the Preliminary
Determination, we also calculated a benefit for the Type III loans that
Kangwon received under its debt restructuring program. As respondents
point out, the methodology in the Preliminary Determination does lead to a
certain double counting of Kangwon's benefit in that the methodology
treats Kangwon's long-term loans as interest-free loans (i.e., loans where
no payments were ever made to account for the three-month interest
payment) when, in fact, the suspended interest payments were accounted for
by the issuance of the Type III loans.
Therefore, for the purposes of the Final Determination, we have
calculated the benefit from the interest payment suspension that Kangwon
received on its countervailable long-term loans using a methodology
similar to the one employed in the benefit calculation under the Reserve
for Export Loss program (i.e., Article 16 of the TERCL). We used this
methodology because the suspension period, like the Reserve for Export
Loss program, did not forgive the payment, but rather deferred the payment
to a future period. Therefore, we treated the interest payments affected
by the payment suspension as short-term interest free loans. For those
interest payments not affected by the payment suspension, we used the
Department's regular benefit calculation for long-term variable rate
loans. We then divided the benefit by Kangwon's total sales to derive the
net subsidy attributable to the loans. As a result of this methodology
change, we have correctly calculated the benefit on the loans as well as
the benefit attributable to the suspension of Kangwon's interest payments.
For more information on the calculation method discussed above, see page 7
of the June 26, 2000, memorandum to the File from the Team, "Memorandum
and Accompanying Calculations for the Final Countervailing Duty
Determination: Structural Steel Beams from the Republic of Korea (Period
of Investigation: Calendar Year 1998)," the public version of which is on
file in Room B-009 of the Department of Commerce.
Comment 6: The Department's Finding Regarding Direction of Credit to the
Steel Industry Is Not Supported By Substantial Evidence Or Otherwise in
Accordance With Law
Respondents argue that, in light of the guidance provided by the CAFC in
AK Steel, the new evidence depended on by the Department in its direction
of credit analysis for the years 1985 through 1991 and 1992 through 1998
must be evaluated independently from Steel Products from Korea, Plate in
Coils and Sheet and Strip, to determine if the information on the record
of this investigation is sufficient for sustaining the Department's
finding in the Preliminary Determination. Moreover, respondents contend
that in order to be able to find the GOK's direction of credit policies
countervailable, the Department must point to substantial and independent
new evidence, beyond that rejected by the CAFC in AK Steel as
insufficient, that the GOK carried out a policy to direct credit to the
steel industry during the period covering 1985 through 1998. Respondents
claim that in this investigation the Department has not provided the
information necessary to reach such a conclusion.
Additionally, respondents contest the Department's characterization of
Pohang Iron & Steel Company, Ltd.'s (POSCO) project at Kwangyang Bay as a
government-directed program that further demonstrates the continuation
into the 1990s of the GOK's steel-specific direction of credit policies.
Respondent argue that apart from the fact that POSCO is not a party to the
current investigation, the Department does not provide sufficient evidence
to establish that POSCO and its dealings with the GOK can somehow be used
as a surrogate for the entire Korean steel industry.
Respondents also argue that the references cited by the Department in its
Direction of Credit Memorandum directly contradict its conclusion that the
GOK directed credit specifically to the Korean steel industry.
Respondents conclude by contending that while there may be particular
loans under specific programs that warrant the Department's examination,
the Department should not simply lump all long-term loans to the Korean
steel industry into a single overriding program, as the Department did in
the Preliminary Determination.
Petitioners contend that the Department's record evidence establishes
plainly that the GOK's direction of credit programs resulted in a benefit
to the Korea steel industry.
Department's Position: We first note that respondents are incorrect when
they state that based on the CAFC's decision in AK Steel, the Department
cannot rely upon prior determinations regarding the countervailability of
the GOK's direction of credit policies. The CAFC's decision in AK Steel,
with respect to domestic credit provided to the Korean steel industry from
private commercial banks during the years 1985-1991, was based on the
evidence on the record in Steel Products from Korea. In Cut-to-Length
Plate, which went to a final determination shortly after the CAFC's
decision in AK Steel, the Department specifically enumerated the new
evidence on the record with respect to the pre-1992 period for direction
of credit. See, Cut-to-Length Plate, 64 FR 73176, 73187-88. In Plate in
Coils and Sheet and Strip, the Department found that the GOK directed
credit to the steel industry in the years 1992-1997, and in Cut-to-Length
Plate the Department determined that the GOK directed credit to the steel
industry through 1998. In each of these investigations, there was
substantial evidence on the record to support these determinations,
evidence that was not on the record in Steel Products from Korea.
Therefore, Plate in Coils, Sheet and Strip, and Cut-to-Length Plate are
appropriate case precedents supporting the decision in this Final
Determination that the GOK has provided a countervailable subsidy to the
Korean Steel industry through its direction of credit policies during the
years 1992 through 1998.
In addition to prior case precedent on the countervailability of the
GOK's direction of credit to the Korean steel industry, the Department has
supplemented the record of this investigation with extensive new evidence
of the GOK's direction of credit policies. This information was set forth
in the Direction of Credit Memorandum. The information and evidence
provided in and attached to the Direction of Credit Memorandum supports
the determination in the Final Determination that the GOK provided a
countervailable subsidy to the Korean steel industry through direction of
credit not only in the years 1985 through 1991, the years at issue in AK
Steel, but also in the years not affected by the CAFC's decision in AK
Steel, 1992 through 1998. Respondents argue that references cited to in
the Direction of Credit Memorandum do not support our determination
regarding the countervailability of the GOK's direction of credit program.
We disagree with respondents' statement. The evidence and cited references
in the Direction of Credit Memorandum document the countervailability of
the GOK's direction of credit program. See, e.g., Direction of Credit
Memorandum at page 5 and 14.
Respondents also contest the Department's citation to the building of the
country's second integrated steel mill at Kwangyang Bay in the Direction
of Credit Memorandum. They also state that Kwangyang Bay involved POSCO, a
company which is not a respondent in this current investigation. With
respect to these comments, we first note that the Department is
investigating direction of credit to the steel industry. Therefore, the
provision of directed credit to all steel companies in Korea is relevant
to our determination. Moreover, in AK Steel, the building of the Kwangyang
Bay steel mill was of central importance in the CAFC's decision that the
record evidence in Steel Products from Korea did not support the
Department's determination that the GOK directed credit to the steel
industry during the years 1985 through 1991. Indeed, the CAFC stated:
If Commerce is correct in describing Kwangyang Bay as essentially a
government project, Commerce can plausibly contend that a de jure
preference program was replaced with a de facto system under which
industry credit requirements and supplies were both managed by the
government. If that premise is incorrect, however, the aggressive
targeting theory is clearly unsupported.
See, the "Department's Position" to Comment 1 in Cut-to-Length Plate, 64
FR 73176, 73187. Therefore, the evidentiary concerns of the CAFC with
respect to the building of Kwangyang Bay have been addressed in the
Direction of Credit Memorandum. Evidence on the record in the Final
Determination, evidence which was not on the record in Steel Products from
Korea, supports the conclusion that the decision to build the Kwangyang
Bay steel mill was a GOK decision. See, Direction of Credit Memorandum at
page 8-9.
Finally, we address respondents' comment that the Department cannot find
a single overriding direction of credit program. With respect to this
issue we note that in Cut-to-Length Plate, we determined that the GOK
directed credit to the steel industry through both domestic commercial
banks and through government-owned banks. The evidence on the record in
Cut-to-Length Plate supported this determination. Similarly, in this
investigation the record evidence and the evidence and information in the
Direction of Credit Memorandum supports the determination that the Korean
steel industry received countervailable benefits through both GOK-owned
banks such as the Korean Development Bank and through the GOK directing
private commercial banks to provide credit to the Korean steel industry.
Whether direction of credit is considered to be one single overriding
program or a number of individual programs consisting of credit from
government banks, from government funds, and loans directed to the Korean
steel industry through private commercial banks is irrelevant. The
information on the record and the evidence provided in the Direction of
Credit Memorandum demonstrate that the GOK has provided countervailable
subsidies to the Korean steel industry through government funds,
government banks and through private commercial banks.
Comment 7: Whether the Department Must Find a "Causal Nexus" to Determine
Direction of Credit to the Steel Industry Countervailable
Respondent's argue that AK Steel established the evidentiary standard
that the Department must fulfill in order to determine that the GOK's
direction of credit policies bestowed a benefit upon Korean steelmakers
during the years 1985 through 1998. They argue that this evidentiary
standard requires more than merely demonstrating the GOK's general control
of the Korean financial system. Instead, they contend that AK Steel
directs the Department to establish the existence of a causal nexus
between the GOK's control of the financial system and the domestic loans
received by Korean steel makers. Respondents argue that, as was the case
in Steel Products from Korea, the Department in the current investigation
has proffered evidence pertaining to the GOK's general control of the
financial system but has failed to provide sufficient evidence linking
this general control to Korean steelmakers' access to credit from private
and GOK owned/controlled banks. For example, respondents argue that in the
Direction of Credit Memorandum, the Department has not adequately
addressed the issue of causal nexus nor has the new information the
Department included in the memorandum successfully demonstrated that the
GOK's direction of credit policies are specific to the Korea steel
industry.
Petitioners disagree with the contention that the Department's factual
record evidence regarding direction of credit fails to meet the burden of
establishing a causal nexus between the government program and the
provision of a benefit to the Korean steel industry. Petitioners contend
that the Department's Direction of Credit Memorandum provides ample
evidence that the GOK targeted companies within the steel industry for
promotion, even though these companies were in poor financial health and
would otherwise have been considered risky investments. Thus, petitioners
argue that the Department wholly met its burden in establishing that the
GOK directed credit to the steel industry, and, therefore, should continue
to find countervailable those loans affected by the GOK's direction of
credit policies.
Department Position: Based on the pre-URAA statute and on the evidence on
the record regarding direction of credit in Steel Products from Korea, the
Court required the Department in AK Steel to demonstrate the existence of
a "causal nexus" between the GOK's general control of the financial system
and preferential access to credit by the Korean steel industry.
Respondents thus have argued that under AK Steel, the Department must
establish this nexus in this Final Determination. We first note that after
Steel Products from Korea, the URAA was enacted by Congress. One of the
changes in the Tariff Act of 1930 enacted by the URAA was in section
771(5)(B)(iii) whereby a subsidy may be conferred when a government makes
a financial contribution or "entrusts or directs" a private entity to make
a financial contribution. Pursuant to section 771(5)(C) of the Act, a
subsidy may still be provided "directly or indirectly." The "entrusts or
directs" language was not in the pre-URAA statute and thus was not
addressed in Steel Products from Korea or in AK Steel.
There has been little precedent with respect to the meaning of the phrase
"entrusts and directs" and on the relationship between that phrase and the
fact that a subsidy can be provided directly or indirectly. However, it is
established policy and the Court has agreed that only in the case of an
indirect subsidy is there a requirement of a linkage or nexus between the
program and the benefit. See, e.g., AK Steel at 1372. Because the
"entrusts or directs" language was not in the statute at the time of Steel
Products from Korea, the CAFC in AK Steel did not rule on this language or
provide guidance as to its interpretation.
In Steel Products from Korea, the Department relied on the GOK's informal
control over loan allocations of commercial banks in Korea in finding an
indirect subsidy to the steel industry. Thus, the Department examined the
GOK's general control of the financial system to determine that benefits
were provided to the steel industry in a manner that was specific.
However, for this Final Determination there is information on the record
in which the GOK specifically acknowledges directing credit and in
selectively allocating credit. See, Direction of Credit Memorandum at page
5. Therefore, unlike Steel Products from Korea, there is evidence of the
GOK's direct control over loan allocation of commercial banks in Korea.
This information was not on the record of Steel Products from Korea.
As noted above, after Steel Products from Korea, there was a change in
the statute with the enactment of section 771(5)(B)(iii) whereby a subsidy
may be conferred when a government makes a financial contribution or
"entrusts or directs" a private entity to make a financial contribution.
Furthermore, unlike the record in Steel Products from Korea, there is
information on the record in this Final Determination which demonstrates
that the GOK has acknowledged its direct control of selective credit
allocation in the private commercial lending market in Korea.
Notwithstanding these factual changes from Steel Products from Korea, the
Direction of Credit Memorandum demonstrates that the evidentiary standard
for determining direction of credit countervailable as set forth in AK
Steel is met in this Final Determination.
Comment 8: Countervailability of the Tariff Reductions on Imported
Machinery Equipment Program
Respondents argue that the Department should not find the Tariff
Reductions on Imported Machinery Equipment Program Countervailable on the
grounds that the program is not de jure or de facto specific.
Additionally, respondents argue that if the Department determines that the
program is specific and, thus, countervailable, the net subsidy calculated
for Inchon and DSM will be negligible.
Department Position: As explained in the "Analysis of Programs" section
of this Decision Memorandum, we have determined that this program did not
meet the specificity criteria under section 771(5A) of the Act and, thus,
is not countervailable.
Recommendation
Based on our analysis of the comments received, we recommend adopting all
of the above positions and adjusting all related subsidy calculations
accordingly. If these recommendations are accepted, we will publish the
final determination of this countervailing duty investigation in the
Federal Register with the following results:
Company Net Subsidy Rate
---------------------------------------------------------------------
Inchon 0.15 percent ad valorem
Kangwon 3.88 percent ad valorem
DSM 1.34 percent ad valorem
All Others Rate 3.87 percent ad valorem
---------------------------------------------------------------------
_______ _______
Agree Disagree
_____________________
Troy H. Cribb
Acting Assistant Secretary
for Import Administration
_____________________
Date
_________________________________________________________________________
footnotes:
1. On October 1, 1999, the United States Court of Appeals for the Federal
Circuit (CAFC) issued a decision regarding Steel Products from Korea. See
AK Steel Corp v. United States, 192 F.3d 1367 (AK Steel). Our review of
the decision indicates that the CAFC found that there was not sufficient
evidence on the record of Steel Products from Korea to determine that the
GOK directed credit to the Korean steel industry through private
commercial banks. In this investigation, we have additional information on
the record indicating that the GOK's direction of credit prior to 1992
provided a countervailable benefit to the Korean steel industry. See, the
June 7, 2000 memorandum to the file, "Direction of Credit in Korea:
Structural Steel Beams from the Republic of Korea" to Holly A. Kuga,
Acting Deputy Assistant Secretary for Import Administration from Melissa
G. Skinner, Director of Office of AD/CVD Enforcement VI, (Direction of
Credit Memorandum), the public version of which is on file in the Central
Records Unit (CRU), Room B-099, and the December 6, 1999 public memorandum
to Holly A. Kuga, "Direction of Credit Pre-1992" which is also on file in
the CRU (Direction of Credit Pre-1992 Memorandum). Therefore, the
selection of long-term benchmarks cited to in Steel Products from Korea is
appropriate for this current investigation. For further information on
direction of credit prior to 1992, see the "Direction of Credit" section
of this Decision Memorandum.
2. As noted in the "Benchmark Interest Rates and Discount Rates" section
of this Decision Memorandum, in Plate in Coils, 64 FR 15530, 15531, the
Department determined that, as of 1992, the domestic bond market in Korea
was not controlled by the GOK and, thus, represented a legitimate source
of commercial financing.
3. See page 4 of the April 19, 2000 memorandum, "Verification Report for
Kangwon Industries Ltd. in the Countervailing Duty Investigation of
Structural Steel Beams from the Republic of Korea," to Melissa Skinner,
Director of AD/CVD Enforcement VI, from Eric B. Greynolds and Tipten
Troidl, the public version of which is on file in the Central Records
Unit, Room B-099 of the Main Commerce Building (Kangwon Verification
Report).
4. Id at page 4.
5. Id at page 2.
6. For more information on the changes to these won denominated fixed
rate loans, see page 8 of the Kangwon Verification Report.
7. In the Plate in Coils and Sheet and Strip investigations, the
Department based its affirmative direction of credit determination for the
period 1992 through 1997 on record evidence covering a time period
different than that covered by the CAFC's decision in Steel Products from
Korea. Moreover, in its decision, the CAFC did not reject the notion of
the GOK directing credit specifically to the Korean steel industry but
rather took issue with the evidence upon which the Department based its
affirmative finding. Thus, because the Department based its affirmative
direction of credit determination for the years 1992 through 1997 on
evidence that was not before the CAFC at the time of its decision in AK
Steel, that case does not preclude a finding of directed credit during
this later time period.
8. For more information on the changes to these won denominated fixed-
rate loans, see page 4 of the April 19, 2000 memorandum, "Verification
Report for Inchon Ltd. in the Countervailing Duty Investigation of
Structural Steel Beams from the Republic of Korea," the public version of
which is on file in the Central Records Unit, Room B-099 of the Main
Commerce Building ("Inchon Verification Report").
9. For more information on the changes to Kangwon's repayment schedule
under the EIFL program, see page 9 of the Kangwon Verification Report.
10. See, the December 6, 1999, memorandum, "Memorandum Accompanying the
Calculations for the Preliminary Countervailing Duty Determination:
Structural Steel Beams from the Republic of Korea," the public version of
which is on file in Room B-099 of the main Commerce Building (Preliminary
Calculation Memorandum).