[C-580-403]

Final Affirmative Countervailing Duty Determination; Cold-Rolled Carbon Steel Flat-Rolled Products From Korea; and Final Negative Countervailing Duty Determination; Carbon Steel Structural Shapes From Korea

Monday, December 3, 1984

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ACTION: Notice.

SUMMARY: We determine that certain benefits which constitute subsidies within the meaning of the countervailing duty law are being provided to manufacturers, producers, or exporters in Korea of cold-rolled carbon steel flat-rolled products. The net subsidy is 3.60 percent ad valorem. We also determine that no benefits which constitute subsidies within the meaning of the Act are being provided to manufacturers, producers, or exporters in Korea of carbon steel structural shapes. The net subsidy is de minimis, and therefore our final determination is negative. Accordingly, we are directing the U.S. Customs Service to continue to suspend liquidation of all entries of cold-rolled carbon steel flat-rolled products from Korea which are entered or withdrawn from warehouse, for consumption on or after September 18, 1984, and to require a cash deposit or bond on entries of cold-rolled carbon steel flat-rolled products in the amount equal to the net subsidy.

EFFECTIVE DATE: December 3, 1984.

FOR FURTHER INFORMATION CONTACT: Barbara Tillman, Rick Herring, or Tom Bombelles of the Office of Investigations, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitutional Avenue, NW., Washington, DC 20230; telephone: (202) 377-1785; 377-0187; or 377-3174.

SUPPLEMENTARY INFORMATION:

Final Determination

Based upon our investigation, we determine that the following programs confer subsidies on the products under investigation:

Short-term Export Financing under the Export Financing Regulations.

Tax Incentives for Exporters under Articles 22, 23 and 24 of the "Act Concerning the Regulation of Tax Reduction and Exemption."

Special Depreciation under the "Act Concerning the Regulation of Tax Reduction and Exemption."

Government Equity Infusions into POSCO.

Reductions in Port Charges.

Tariff Reductions on Plant and Equipment under Article 28 of the Customs Act of Korea.

The net subsidy for cold-rolled carbon steel flat-rolled products is 3.60 percent ad valorem. Therefore, we determine that certain benefits which constitute subsidies within the meaning of section 701 of the Act are being provided to manufacturers, producers, or exporters in Korea of cold-rolled carbon steel flat-rolled products. The net subsidy for carbon steel structural shapes is 0.37 percent ad valorem which is de minimis. Therefore, with respect to carbon steel structural shapes, we determine that no benefits constituting subsidies within the Act are being provided to manufacturers, producers, or exporters of carbon steel structural shapes.

Case History

On June 18, 1984, we received a petition from United States Steel Corporation on behalf of the carbon steel structural shapes and cold-rolled carbon steel flat-rolled products (shapes and sheet) industries. In compliance with the filing requirements of s 355.26 of our regulations (19 CFR 355.26), the petitioner alleged that manufacturers, producers, or exporters in Korea of shapes and sheet receive, directly or indirectly, benefits which constitute subsidies within the meaning of section 701 of the Act, and that these imports materially injure, or threaten material injury to, a U.S. industry.

We found that the petition contained sufficient grounds upon which to initiate countervailing duty investigations, and on July 3, 1984, we initiated investigations (49 FR 28294). We stated that we expected to issue preliminary determinations by September 11, 1984. On September 4, 1984, Chaparral Steel Company entered an appearance to become a party to the proceeding with

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Since Korea is a "country under the Agreement" within the meaning of section 701(b) of the Act, injury determinations are required for these investigations. On August 8, 1984, the U.S. International Trade Commission (ITC) determined that there is a reasonable indication that these imports materially injure, or threaten material injury to, a U.S. industry (49 FR 31781).

We presented questionnaires concerning the allegations to the government of Korea at its embassy in Washington, D.C., on July 13, and July 23, 1984. On August 17, August 20, and August 21, we received responses to these questionnaires. On August 20, we presented a second supplemental questionnaire to the government of Korea. We received a response to this questionnaire on August 31. We received another supplemental response on September 4. On July 19, August 31, and September 5, petitioner submitted additional information concerning the alleged subsidies and also alleged new subsidies. On September 18, 1984, we published our preliminary determinations that benefits constituting subsidies were being provided to manufacturers, producers, or exporters in Korea of cold-rolled carbon steel flat-rolled products, and that no benefits constituting subsidies are being provided to manufacturers, producers, and exporters of carbon steel structural shapes (49 FR 36538).

At the request of both petitioners and respondents, we held a hearing on October 31, 1984, to allow the parties an opportunity to address the issues arising in the investigations. Both petitioners, respondents, and other interested parties filed briefs before and after the hearing on these issues. They also filed briefs commenting on our verification.

In its pre-hearing brief filed on October 23, 1984, U.S. Steel made additional allegations of benefits received by manufactuerrs and exporters of shapes and sheet. These allegations were (1) Regional Tax Incentives, (2) Tax Incentives for Exporters, and (3) Special Foreign Exchange Loan System. In its post- hearing brief filed on November 14, 1984, U.S. Steel made another allegation with respect to cold-rolled carbon steel flat-rolled products. This allegation concerned government infrastructure aid to POSCO in the Pohang area. Since these allegations were made after our preliminary determinations and after the Commerce verification team returned from Korea, the allegations were made too late to be considered in these investigations. These additional allegations will be given consideration in the section 751 administrative review of the order on cold-rolled carbon steel flat-rolled products, if an order is issued.

Scope of the Investigations

The products covered by these investigations are carbon steel structural shapes and cold-rolled carbon steel flat-rolled products. The term "carbon steel structural shapes" covers hot-rolled, forged, extruded, or drawn, or cold-formed or cold-finished carbon steel angles, shapes, or sections, not drilled, not punched, and not otherwise advanced, and not conforming completely to the specifications given in the headnotes to Schedule 6, Part 2, Subpart B of the Tariff Schedules of the United States, Annotated (TSUSA), from blooms, billets, slabs, wire rods, plates, sheets, strip, wire, rails, joint bars, tie plates, or any tubular products set forth in the TSUSA, having a maximum cross- sectional dimension of 3 inches or more, as currently provided for in items s 609.8005, 609.8015, 609.8035, 609.8041, or 609.8045 of the TSUSA. Such products are generally referred to as structural shapes.

The term "cold-rolled carbon steel flat-rolled products" covers the following cold-rolled carbon steel products: cold-rolled carbon steel flat-rolled products are flat-rolled carbon steel products, whether or not corrugated or crimped; whether or not painted or varnished and whether or not pickled; not cut, not pressed, and not stamped to non-rectangular shape; not coated or plated with metal; over 12 inches in width, and 0.1875 inches or more in thickness; as currently provided for in item 607.8320 of the TSUSA; or over 12 inches in width and under 0.1875 inches in thickness whether or not in coil; as currently provided for in items 607.8350, 607.8355, or 607.8360 of the TSUSA.

There are three Korean producers of cold-rolled carbon steel flat-rolled products that exported to the United States during the period for which we are measuring subsidization: Pohang Iron and Steel Company (POSCO), Dongjin Steel Company (Dongjin), and Union Steel Manufacturing Company (Union). In addition, there are six trading companies that exported cold-rolled carbon steel flat- rolled products to the United States during the period for which we are measuring subsidization: Hyundai Corporation, Kukje-ICC Corporation, Sunkyong Limited, Samsung Co. Ltd., Daewoo Corporation and Hyosung Corporation. Inchon Iron & Steel Company (Inchon) is the only producer of carbon steel structural shapes that exported to the United States during the period for which we are measuring subsidization. Of the trading companies, only Hyundai Corporation exported carbon steel structural shapes to the United States during the period for which we are measuring subsidization.

Analysis of Programs

Throughout this notice, we refer to general principles applied to the facts of these investigations. These general principles are described in detail in the Subsidies Appendix to the "Final Affirmative Countervailing Duty Determination and Order: Cold-Rolled Carbon Steel Flat-Rolled Products from Argentina," published in the April 26, 1984 issue of the Federal Register (49 FR 18006).

For purposes of these determinations, we are calculating a country-wide rate. The period for which we are measuring subsidization is the 1983 calendar year, which corresponds to the most recent fiscal year for each of the Korean producers and exporters.

Petitioner alleged that POSCO is both unequityworthy and uncreditworthy. Although we did not initiate on these specific allegations we did request information in our questionnaries in order to review these allegations in accordance with the guidelines set out in the Subsidies Appendix. Even though government equity infusions into POSCO were found in the 1982 "Final Affirmative Countervailing Duty Determinations: Certain Steel Products from Korea" (47 FR 57535) not to be on terms inconsistent with commercial considerations, our standards have been revised by the Subsidies Appendix, and, thus, we must reexamine these allegations in these investigations.

We have consistently held that government provision of equity does not per se confer a subsidy. Government equity purchases bestow countervailable benefits only when they occur on terms inconsistent with commercial considerations. When there is no market-determined price for equity, it is necessary to determine whether the company is a reasonable commercial investment. POSCO's shares are not publicly traded and there is no market-determined price for its shares; therefore, we must determine whether POSCO is equityworthy. To make this determination, we reviewed and assessed POSCO's financial statements from 1972 through 1983. We also examined studies submitted by the government of Korea. In analyzing the financial statements, we considered the information from the viewpoint of an investor. The Department, when

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Rate of return on equity:

Debt to tangible net worth:

Percent of foreign-denominated debt:

Cash flow to principal repayment; and

Current ratio.

Based on our review of POSCO's financial statements and the responses from both POSCO and the government, our verification and comments by the parties to the proceeding, we determine that the government's equity infusions into POSCO were on terms inconsistent with commercial considerations from 1978 through 1980.

With respect to the allegation that POSCO is uncreditworty, we have determined that no long-term loans or loan guarantees are being provided to POSCO on terms that are inconsistent with commercial considerations. Thus, creditworthiness is only of secondary importance in this investigation. Because no long-term loan benchmarks are required, the creditworthiness determination only figures into the calculation of the discount rate for those subsidy programs used by POSCO in which the benefits are treated as grants.

To determine whether POSCO is creditworthy, we focused on the ability of the company to meet its interest obligations. In addition, an important measure of creditworthiness is whether foreign lenders are lending significant amounts of funds to the company. Accordingly, we also examined the percentage of POSCO's outstanding loans that are foreign loans. Our examination of these factors leads us to conclude that POSCO has been and continues to be creditworthy.

Based upon our analysis of the petition, the additional information filed by petitioner, the responses to our questionnaires, comments filed by the parties to the proceeding, and our verification, we determine the following:

I. Programs Determined to Confer Subsidies

We determine that subsidies are being provided to manufacturers, producers, or exporters in Korea of carbon steel structural shapes and cold-rolled carbon steel flat-rolled products under the following programs:

A. Short-term Export Financing Under the Export Financing Regulations
Petitioners alleged that the producers and exporters in Korea of shapes and sheet receive preferential short-term export financing under the following programs:

Export Loans under the 1972 Regulations for Export Financing;

Export loans provided under the Foreign Trade Act;

Deferred Payment Export Loans; and

Preferential Exchange Rates for Export Loans Based on Letter of Credit

Short-term export financing is authorized only through the 1972 Export Financing Regulations. Our determination with respect to the three other programs is discussed in the sections on "Programs Determined Not to Confer Subsidies" and "Programs Not in Existence."

Under the Export Financing Regulations, short-term export loans can be provided to the following:

Exporters in receipt of letters of credit;

Exporters concluding documents of acceptance or documents against payment contracts;

Exporters purchasing local supplies;

Exporters stockpiling raw materials;

Exporters with certificates based on past export performance;

Producers of raw materials for export; and

Companies awarded domestic projects based on international public tender.

To determine whether a subsidy exists with respect to short-term export loans under the Export Financing Regulations, we must determine whether the export loan program is intended to, or operates to, stimulate export rather than domestic sales, or is contingent on export performance. If there is a preference in a program's operation for export over domestic sales, we then must find an appropriate way to measure that preference.

Prior to June 28, 1982, short-term export loans provided under the Export Financing Regulations were charged a lower interest rate than short-term domestic loans. On June 28, 1982, the Monetary Board established a uniform rate of 10 percent for both export and domestic short-term financing provided by commercial banks. The interest rate in effect during the period for which we are measuring subsidization was 10 percent for short-term export loans. We verified that domestic short-term financing through commercial banks is the predominant short-term debt instrument in Korea (see, for example, the Federation of Korean Industries surveys obtained during verification and the Korean Chamber of Commerce Survey, submitted as Exhibit 13 of the Government of Korea's response, August 17, 1984, as well as Bank of Korea Monthly Statistical Bulletins).

If all other terms and conditions, as well as the administration, of the domestic and export loan programs were identical, we could not find that an export subsidy is being conferred because export loans are not at an interest rate that is preferential compared to the interest rate on the most comparable, predominant short-term debt instrument. However, we have found that there is a difference in the administration of domestic and export short-term loans programs. The Bank of Korea (BOK) sets different rediscount ratios for export and domestic short-term loans. As specified in the BOK's 1983 Annual Report, the rediscount ratio for export loans is 70 percent of the face value of the loan. The rediscount ratio on domestic commercial bills is 30 percent of the face value of the loan for large firms and the heavy and chemical industries. The rediscount ratio for small- and medium-sized firms is 70 percent. Small- and medium-sized firms are defined as companies with fewer than 300 employees. None of the steel companies producing the products under investigation is classified as a small- or medium-sized firm. The rediscount rate for both domestic and export short-term loans is 5 percent.

The higher rediscount ratio for export loans provides an incentive for banks to provide an export loan over a domestic loan when lending to a large company. Indeed, the banks' fee structure, which specifies lower fees on the letters of credit on which the short-term export loans are based, indicates that the banks encourage these borrowers to use export financing. Thus, we consider that the higher rediscount ratio for short-term export loans provides, in effect, a preference for export loans over domestic loans.

Because the most comparable, predominant short-term debt instrument (i.e., the 10 percent rate on short-term domestic bank loans) cannot measure this preference, we must find an alternative method of quantifying it. We know from the surveys published by the Korean Chamber of Commerce and by the Federation of Korean Industries, and from the Bank of Korea Monthly Statistical Bulletins, that companies do

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Therefore, the most appropriate way to measure the preference for export over domestic loans is to compare the 10 percent rate on short-term export credit with a weighted average of rates on short-term domestic credit. We have chosen this measure because it is the best approximation of what firms would pay for export financing if there were not a preference within the banking system for providing loans for export transactions.

The factors used to weight each of the four sources of short-term domestic credit were based on data from a number of sources, including the Monthly Statistical Bulletins of the Bank of Korea and the surveys published by the Federation of Korean Industries (FKI). The Monthly Statistical Bulletins provide the size of, and interest rates charged on, short-term financing by banks, investment and finance companies and commercial paper. The FKI surveys provide data on the proportion that curb market loans represent of total corporate borrowing for working capital. For the curb market interest rate, we have determined that the most appropriate rate to use is the average monthly rate for 1983 as published in the survey conducted by the Korean Chamber of Commerce, provided as Exhibit 13 to the response submitted by the Government of Korea. This rate is 2.6 percent, which, when compounded, yields an annualized rate of 36.1 percent. We are using the rate published by the Chamber of Commerce as the most appropriate measure of the average curb market rate in 1983, because it is the only independently-conducted study or survey of curb market rates that has been entered in the record of this investigation. We looked extensively for data on these rates at verification. We consider the Chamber survey to be the most accurate reflection of average curb market rates during the period for which we are measuring subsidization.

Using the data from all these sources, we calculated the weighted-average rate that we have determined is the most appropriate way to measure the preference for export over domestic loans. Comparing this weighted-average rate to the 10 percent rate on export loans, we calculate an export subsidy of 0.33 percent ad valorem for cold-rolled carbon steel flat-rolled products and 0.36 percent ad valorem for carbon steel structural shapes.

B. Tax Incentives for Exporters
Articles 22, 23, and 24 of the "Act Concerning the Regulation of Tax Reduction and Exemption" provide for the deduction from taxable income of a number of different reserves relating to export activities. These reserves cover export losses, overseas market development and price fluctuation losses. Under Article 22, a corporation may establish a reserve amounting to one percent of foreign exchange earnings, or 50 percent of net income in the applicable period, whichever is smaller. If certain export losses occur, they are offset from the reserve fund. If there are no offsets for export losses, the reserve is returned to the income account and taxed, after a one-year grace period, over a three-year period.

Under Article 23 governing overseas market development, a corporation may establish a reserve fund amounting to one percent of its foreign exchange earnings in the export business for the respective business year. Expenses incurred in developing overseas markets are offset from the reserve fund. Like the export loss reserve fund, if there are no offsets for expenses, the reserve is returned to the income account and taxed, after a one-year grace period, over a three-year period.

A price fluctuation reserve fund may be established under Article 24. Under this Article, a corporation may establish reserves equivalent to five percent of the book value of the products and works in progress which will be exported by the close of the business year. This reserve may be used to offset losses incurred from the fluctuation of prices for export goods. These losses may be offset by returning an amount equivalent to the losses to the income account. If not so utilized, the reserve is returned to the income account the following business year.

The balance in all three reserve funds is not subject to corporate tax, although all monies in the reserve funds are eventually reported as income and subject to corporate tax either when they offset export losses or when the one- year grace period expires. We determine that these export reserve programs confer benefits which constitute export subsidies because they provide a deferral of direct taxes specifically related to export performance. Only certain trading companies exporting cold-rolled carbon steel flat-rolled products used these programs during the period for which we are measuring subsidization.

Because these export reserve funds constitute a deferral of tax liabilities, we treat the tax savings on these funds as interest-free loans to the corporation. Accordingly, we have quantified the benefits from the reserve funds by calculating the amount of tax savings and then applying a rate of interest which the firm would have had to pay for a short-term loan. Using this methodology, we calculate a benefit of less than 0.005 percent ad valorem for cold-rolled carbon steel flat-rolled products.

C. Special Depreciation Under the "Act Concerning the Regulation of Tax Reduction and Exemption
In our questionnaire, we requested information on a program that permits accelerated depreciation under Article 25 of the Act Concerning the Regulation of Tax Reduction and Exemption." Article 25 permits a firm earning more than 50 percent of its total proceeds in a business year from foreign exchange to increase its normal depreciation by 30 percent. As discussed in the section "Programs Determined Not To Be Used," we verified that no producers or exporters of shapes and sheet claimed accelerated depreciation under Article 25. However, POSCO did claim "special" depreciation under Article 11 of the "The Act Concerning the Regulation of Tax Reduction and Exemption." This special depreciation is provided to "a domestic person carrying on an important industry." The "important" industries include:

The naptha-cracking industry:

The iron and steel industry producing pig iron:

The machine industry:

The electronics industry:

The shipbuilding industry: and

The aerial industry.

Our review, during verification, of the Enforcement Decree for Article 11, indicated that only those enterprises within a designated industry that produce designated goods, are eligible for this special depreciation. We asked the administering authority for clarification concerning whether all firms or just certain firms within an industry could claim this special depreciation. The government of Korea did not provide any further documentation clarifying the eligibility requirements. Thus, because we have no evidence in the record of these investigations that this special depreciation for "important" industries

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To calculate the benefits from the special depreciation program for the period in which we are measuring subsidization (calendar year 1983), we determined the tax savings received in 1983 based on the special depreciation which had been deducted from the 1982 income taxes payable in 1983. The amount of tax savings received under this program was divided by the total value of all sales in 1983 to determine a subsidy of 2.41 percent ad valorem for cold- rolled carbon steel flat-rolled products.

D. Government Equity Infusions into POSCO
Petitioner alleged that equity infusions into POSCO by the government of Korea were on terms inconsistent with commercial considerations. As discussed in the "Analysis of Programs" section, we determine that POSCO was not a reasonable commercial investment (was unequityworthy) from 1978 through 1980, and thus the government equity infusions in each of those years were on terms inconsistent with commercial considerations. Therefore, we determine that these infusions confer benefits which constitute a subsidy. To calculate the benefit, we followed the rate of return shortfall methodology outlined in the Subsidies Appendix. The net subsidy if 0.71 percent ad valorem for cold-rolled carbon steel flat-rolled products.

F. Tariff Reductions on Plant and Equipment
Under Article 28 (Duty Abatement for Important Industries) of the Customs Act. "Customs duty may be abated with respect to goods which are designated by the notice of the Ministry of Finance from among machinery equipment for the use of such industries as designated by an Ordinance of the Ministry of Finance from among those falling under any of the following subparagraphs * * * which cannot be properly manufactured domestically * * *." The industries listed in the subparagraphs include the chemical industry, primary metal manufacture, general machinery manufacture, manufacuture of electric instruments, manufacture of transportation machinery, manufacture of scientific instruments, manufacture of machine parts, and electric railroad transportation. In our preliminary determinations, we found these tariff reductions to be a subsidy because eligibility for the reduction required government designation and because we did not know whether all the industries listed in the Act had been designated by the Ministry of Finance.

A. Medium- and Long-Term Credit
Petitioner alleged that producers of shapes and sheet, as part of the Korean steel industry, have received medium- and long-term financing through

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In order to investigate the first allegation, that credit is directed within the Korean economy, we have examined whether the Korean government mandates, explicitly or implicitly, that certain industries or exterprises receive credit at the expense of other borrowers. If there are explicit or implicit government mandates that certain industries or firms receive funds, then we would expect to find this reflected in the composition of the loan portfolios of all the lending institutions combined. Absent a finding that these key or major industries receive a disproportionate share of the medium- and long-term loans available in Korea, we cannot conclude that the Korean government is directing credit to the steel industry.

Medium- and long-term financing is provided through three types of financial organizations in Korea:

(1) Commercial banks;

(2) Specialized banks; and

(3) Development institutions (Korea Development Bank and the Export-Import Bank of Korea).

In addition, there are two government funds through which long-term financing is provided:

(1) The National Investment Fund; and

(2) The Fund for Expanding Export Facilities.

We have examined the three types of financial organizations and the two government funds that are the sources of medium- and long-term borrowing in Korea.

Viewing these institutions and funds in the aggregate, we determine that there is no government direction of medium- and long-term credit to the producers of shapes and sheet or to the broader steel sector. We have found that the lending institutions in Korea, when viewed as a whole, provide medium- and long-term loans to all sectors and all major industry groups, indeed to virtually all industries. Notwithstanding that certain of the sources have been created to provide credit to designated groups of recipients, these groups do not receive a disproportionate share of the total medium- and long-term credit available from all sources combined. Moreover, we determine that the steel industry does not receive a disproportionate share of funds from all these sources. Indeed, over the last 15 years, the steel industry has accounted for approximately 6 to 13 percent of GNP. During the same period the basic metals sector, which includes steel, has received 5 to 8 percent of medium- and long-term loans.

Although we have found that credit is not directed by the Korean government to producers of shapes and sheet or to the broader steel industry, we must still examine whether particular medium- and long-term loans from any of the individual institutions or funds confer benefits which constitute subsidies within the meaning of the countervailing duty law.

In order to determine that medium- and long-term loans are providing benefits which constitute domestric subsidies, we must find that the program is limited to a specific enterprise or industry or group of enterprises or industries, and that the loans are provided on terms inconsistent with commercial considerations. If either of these conditions is not met, then we cannot find that a domestic subsidy exists.

In making the determination on whether a program is limited to a specific enterprise or industry or group of enterprises or industries, we have consistently examined whether there is a de facto, as well as a de jure, limitation. In making the determination of whether a loan is inconsistent with commercial considerations, we examine whether the potentially countervailable loan offers more favorable terms than the firm would otherwise receive.

Based on our verification and information provided by the petitioners, the responses and the briefs submitted by parties to the proceeding, we have found the following with respect to each of the three types of financial organizations and the government funds:

1. Commercial Banks. Commercial banks, which until the early 1980's were either government-owned or government-controlled, consist of seven nationwide or "city" banks and 10 regional or "local" banks. The branches of 48 foreign banks are also included in the commercial bank category. The domestic commercial banks are authorized by the General Banking Act (G.B.A.) and provide the normal financial services that are usually offered by banks in all countries. There is no explicit listing in the G.B.A. that designates certain industries or sectors for receipt of commercial bank credit.

Bank of Korea statistics show the distribution of loans from the deposit money banks (DMB's). DMB's include both commercial and specialized banks. (Specialized banks are discussed in the following section.) Examination of the Bank of Korea statistics demonstrates that during both the 1970's and 1980's all sectors of the economy received loans through the DMB's and that steel did not receive a disproportionate share.

During verification, we obtained loan statistics directly form Hanil and Cho- Heung, two of the five largest commercial banks in Korea. The loan statistics are broken down by sector, major industry group and industry. The sectors are:

Agriculture and forestry;

Mining;

Manufacturing;

Electricity, gas and water;

Construction;

Wholsesalers;

Transportation and warehousing; and

Others (including social services).

Each of these sectors is then broken down by major industry group and by industry within each group. Steel production is included in the primary metals group within the manufacturing sector. This group includes, in addition to steel, categories for aluminum and others.

Our review of the loan statistics of these two banks for various years in the 1970's and 1980's shows that all sectors and major industry groups, indeed, virtually all industries, received loans. Furthermore, the statistics do not show that the steel industry received a disproportionate share of the loans.

2. Specialized Banks. There are seven specialized banks in Korea: Korea Exchange Bank, Medium Industry Bank, Citizens National Bank, Korea Housing Bank, National Agricultural Cooperatives Federation, National Federation of Fisheries Cooperatives and Members Cooperatives, and the National Livestock Cooperative Federation. Each of these banks is set up by its own Act, and, by their titles, these banks are explicitly chartered to service certain broad sectors of the Korean economy.

Like commercial banks, specialized banks are deposit money banks and, therefore, are included in Bank of Korea statistics on DMB loan distribution. As stated previously, the Bank of Korea statistics show that all sectors and industries have received loans through the DMB's and that steel has not received a disproportionate share of DMB loans. In addition, it is clear that the specialized banks have been set up to serve sectors of the economy besides steel. None has been set up specifically for the steel industry or even for the manufacturing sector or heavy industry or even for the manufacturing sector or heavy industry sector. We verified that the steel companies producing the products under investigation have only a few outstanding long-term loans from

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3. Development Institutions.-- a. Korea Development Bank (KDB). The KDB was established in 1954 to aid in the reconstruction of the country following the Korean War. Once reconstruction was completed, the bank shifted its resources to support the development of industries deeded important for long-term economic growth. The industries named in the KDB Enforcement Decree include electric power, coal mining, shipbuilding, iron and steel manufacturing, semiconductors and overseas marine and/or air transport. In addition to these industries, KDB also provides loans for agriculture, oil and gas, food and beverage, textiles, paper and paper products, chemicals, rubber and plastic products, non-metallic mineral products, fabricated metal products, machinery and equipment, construction, wholesale and retail trade, communications and financial services. Thus, while there is an explicit designation that the KDB will service certain industries, it also has provided loans to borrowers in numerous industries that were not designated.

During the 1970's and 1980's, the KDB accounted for approximately 45 percent of the medium- and long-term loans available. Prior to the June 1982 equalization of interest rates, these designated industries were charged a lower interest rate than KDB borrowers in other industries. The interest rates charged by KDB are set by the Ministry of Finance.

b. Export-Import Bank of Korea. Promulgated by Law No. 2122 in July 1969, the purpose of the Export-Import Bank of Korea (Eximbank) is "to promote the sound development of the national economy and economic cooperation with foreign countries by extending the financial aid required for export and import transactions, overseas investment and the development of natural resources abroad." The Enforcement Decree for the Act specifies the "major" raw materials that Eximbank should develop:

Coal, iron ore, copper, petroleum, and other mined materials;

Timber and other forest materials;

Grains, cotton, sugar, rubber and other agricultural materials; and

Other raw materials deemed necessary to secure stabilized long-term supply for the economy; however, this should be decided through a state meeting and announced through the Ministry of Finance

Thus, if there is any explicit designation of recipients of loans from the Eximbank, the designated group is raw material users.

During verification, we examined all export and overseas investment loans awarded from 1976 through 1982. During those seven years, only five loans were awarded to the steel industry; one in 1979, two in 1980 and two in 1982. None of these five loans was for the financing of exports of the products under investigation. Also, during each of these years, there were other projects financed in other industries. For example, in 1979, the other overseas investment loans went to a textile plant project, a manufacturing plant project, fishery development, a cement plant project, and vessel chartering. Thus, the Korea Eximbank finances projects in a wide number of industries. Moreover, the steel industry has not received a disproportionate share of Eximbank loan monies.

4. The National Investment Fund. On December 14, 1973, the government of Korea established the National Investment Fund (NIF) through Law No. 2635. The stated "purpose of this Act is to prescribe necessary matters for the establishment and effective management of the National Investment Fund on the bases of extensive nationwide savings efforts and participation, to secure and supply the investment and loan funds needed to promote the construction of major industries, including the heavy and chemical industries, as well as to help increase exports."

In the preliminary determinations, we determined that NIF loans were countervailable export subsidies because one of the express purposes stated in the Act was to help increase exports and because they were provided at preferential rates.

During verification, we found that there are two types of NIF loans, one to finance development and one to finance exports on a deferred payment basis. The NIF loans to finance exports on a deferred payment basis are managed by Eximbank. We verified that exports of the products under investigation are not eligible to receive NIF loans for exports on a deferred payment basis and that none of the companies producing shapes and sheet has financed exports of shapes and sheet through this program.

With respect to the other pool of NIF monies, our examination of loan files, as well as application and approval documents at the companies, did not reveal any export-related conditions on these NIF loans. Thus, we now conclude the NIF loans are not export subsidies.

Despite the fact that NIF loans would not be considered export subsidies, the law establishing the fund and the enforcement decree explicitly designate certain industries for receipt of these loans. In addition to "major industries, including the heavy and chemical industries," the enforcement decree names steel, nonferrous metals, shipbuilding, machinery, chemicals, electronics, food production, power, mining, cement, rural manufactured goods, projects to increase rural income, and fishing and Fisheries projects. NIF loans accounted for 25 to 30 percent of the medium- and long-term loans issued in the 1970's and 1980's.

5. Fund for Expanding Export Facilities. During verification at the companies we found several outstanding long-term loans received through the "Fund for Expanding Export Facilities." This fund was established in 1973 and abolished in 1982. Eligibility for these loans was limited to manufacturers building facilities for producing export goods or raw materials and purchasers of ocean-going vessels used for the fish export industry. Thus, this Act designates exporters as recipients.

Based on the findings reported above, we determine that because commercial banks and specialized banks provide medium- and long-term loans to all sectors and industries in the economy, and because the steel industry did not receive a disproportionate share, loans from these sources are not limited to a specific enterprise or industry or group of enterprises or industries and therefore do not provide benefits which constitute subsidies. Furthermore, based on our review of the Eximbank Act and the Enforcement Decree, and the distribution of the loans we find that there is no de jure or de facto limitation to an enterprise or industry or group of enterprises or industries. Accordingly, we determine that Eximbank loans do not provide benefits which constitute subsidies.

We also determine that loans provided to the shapes and sheet producers through the KDB and the NIF do not provide benefits which constitute subsidies, because the interest rates paid on these loans have been equal to the interest rate for all medium- and long-term loans in Korea since June 1982. Thus, these loans are not on terms inconsistent with commercial considerations.

To determine whether a loan is inconsistent with commercial considerations, we rely on the methodology in the Subsidies Appendix for long-term loans to companies

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After finding an appropriate benchmark loan, the next step in determining if a loan was given on terms inconsistent with commercial considerations is to calculate the payment differential between the benchmark loan and the loans at issue. Consistent with our methodology, when the long-term loans are at variabale interest rates, we calculate the benefit based on the differential between the interest rate for the loan at issue and the interest rate on the benchmark loans in the year for which we are measuring subsidization. As stated above, the rates on all medium- and long-term loans were equalized in 1982. Hence, for the year in which we are measuring subsidization, there is no interest differential between the loans at issue and the benchmark loans.

We note that using as the benchmark the 1983 interest rate on a variable rate long-term commercial loan is not a departure from prior practice. In our preliminary determinations we used a short-term interest rate as the benchmark for NIF loans. However, we stated that because we needed additional information in order to determine whether loans from commercial and specialized banks were subsidies, we could not use those variable rate long-term loans in establishing our benchmark. Thus, because we had no comparable commercial long-term loan experience with which to compare NIF loans, we used, as best information available, a short-term rate for purposes of measuring the benefit conferred by these loans.

Finally, we determine that loans received by the shapes and sheet producers under the Fund for Expanding Export Facilities do not confer benefits that constitute export subsidies. Assuming, as we do, that eligibility for these loans is contingent upon export performance, to quantify any benefit arising from these long-term export-related loans, we must compare the terms of these loans to the cost of comparable commercial domestic long-term loans.

We know that all loans from the Fund for Export Facilities that were still outstanding during the period for which we are measuring subsidization were charged 10 percent interest after the June 1982 equalization of interest rates. Thus, since June 1982 the cost to the borrower on these loans is the same as the cost of comparable domestic long-term loans. As a result, we find that no benefit is conferred by these long-term export-related loans.

B. Import Duty Deferrals
Article 36 of the Customs Act of Korea permits the Ministry of Finance to designate an industry as eligible to pay customs duties on an installment basis, rather than upon entry. In our preliminary determinations, we determined this program to confer a subsidy because the government of Korea did not provide us with any information demonstrating that during the period for which we are measuring subsidization this program was not limited to a specific enterprise or industry or group of enterprises or industries. A program may be available, in principle, to a wide group of industries, but when there appears to be some discretion on the part of the government in the granting of benefits under the program, we must determine whether that discreation effectively limts the program to specific enterprises or industries.

During verification, we found that twenty-four industries were eligible to receive duty deferrals including industries as disparate as mining, cement, fertilizers, chemicals, machine tools, steel works, and plywood. Once an industry is considered eligible, each company within that industry may request deferral status by submitting an application to the Tariff Administration Office of the Office of Customs Administration. We examined this program to determine if only certain companies within each of the twenty-four industries had their application for duty deferral status approved. We found that in practice there appears to be no limitation to the companies within the tweny- four industries which receive duty deferrals, and that any company which applies is granted that status. Therefore, we determine that this program is not limited to a specific enterprise or industry or group of enterprises or industries, and, therefore, does not constitute a subsidy.

C. Investment Tax Credit
Petitioner alleged that producers and exporters of shapes and sheet may receive preferential tax benefits under Article 72 of the "Act Concerning the Regulation of Tax Reduction and Exemption," which provides for a temporary investment tax credit when the government deems it necessary for adjustment of economic activities. During the period from January 1, 1982, through December 31, 1982, Article 57-2 was the enforcement decree for Article 72. Article 57-2 specifies that the investment tax credit was available for the acquisition of fixed assets used directly for the manufacturing or mining business. Consistent with past practice, programs available to all industries in the manufacturing and mining sectors are not limited to "a specific enterprise or industry, or group of enterprises or industries," and thus do not provide domestic subsidies. Since the tax credit is not contingent on export performance, it does not provide an export subsidy. Thus, we detemine that this program does not constitute a subsidy.

D. Equity Infusions Into DongJin
Petitioner alleged that POSCO equity infusions into DongJin were on terms inconsistent with commercial considerations. DongJin was established on October 27, 1982, by POSCO. At the time of DongJin's formation, POSCO invested funds in order to provide cash for the purchase of the assets of Llssin Steel Company and working capital for DongJin's future operations. POSCO also guaranteed the notes of DongJin used for the purchase of Ilssin's assets.

Ilssin Steel Company was a bankrupt company, owned and operated by its two major creditors, Korea Exchange Bank (KEB) and Commercial Bank of Korea (CBK). In accordance with Korean law, at the time of bankruptcy the courts foreclosed upon Ilssin's assets and offered the assets for sale at public auction. Because there were no other bidders for the assets at the appraised value or above, the banks, which were the highest bidders, purchased the assets at auction. These assets were then sold to DongJin for cash and notes.

According to the banks: (1) The price offered by DongJin was the highest price which they could obtain. (2) the banks' operations of Ilssin were resulting in a cash drain on them, and (3) it was in the bank's interest to sell the assets as a package, so as not to significantly decrease the value of the total package. Because there were no bidders, at auction, which would have paid the appraised value of the assets, and because it was in the banks' interest to minimize their losses, the sale of Ilssin by the banks can be characterized as a distress sale.

Although the banks were eager to sell, the purchase of Ilssin's assets by DongJin presented certain advantages to POSCO. Ilssin had been a major supplier to POSCO. POSCO had knowledge and management expertise to operate Ilssin and under the

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To determine whether POSCO's equity infusion into DongJin was on terms inconsistent with commercial considerations, we analyzed the terms compared to ordinary commercial considerations. The Department did not find this transaction inconsistent with commercial considerations for the following reasons.

First, we found no evidence that the government directed the banks to sell the assets to DongJin on favorable terms. Second, the cash investment into a newly created subsidiary by a parent company, and the guaranteeing of subsidiary's notes, when the subsidiary is still a "shell" organization, are normal business practices. Third, because of the commercial advantages to both the seller and the purchaser in this transaction, and the apparent lack of interest by any other party to purchase Ilssin's assets, we determine that the transaction was not on terms inconsistent with commercial considerations. Moreover, we do not consider POSCO's guarantee of DongJin's notes payable to be a subsidy, because no evidence has been submitted that a parent company's guarantee of a wholly- owned subsidiary's loan is inconsistent with commercial considerations.

E. POSCO's Purchases of Domestic Iron Ore
In its July 9 submission, petitioners alleged that, under the Steel Industry Promotion Act (No. 2181 and Enforcement Decree No. 5366), suppliers of iron ore to a domestic steel mill are treated like exporters of the ore and thus are eligible for export financing. In addition, petitioner alleged that, since exports are exempt from the value-added tax (VAT), domestic iron ore sales are as well. We collected information on domestic iron ore sales during verification in conjunction with the allegation that steel companies receive financial and technical assistance in purchasing raw materials (see the section on "Programs Determined Not To Be Used").

At verification, we found that the government sets the prices on domestic iron ore, and that POSCO, the only fully integrated steel mill in Korea, buys virtually all domestic iron ore production. We verified that the price paid by POSCO to the domestic iron ore suppliers was higher than the price paid to numerous unrelated foreign suppliers, none of whom we have found to be subsidized. Consequently, we determine that no competitive benefit is received by POSCO on its purchases of iron ore. Section 613 of the Trade and Tariff Act of 1984, signed by the President on October 30, codifies the standards for determining upstream subsidies. This section generally codifies Department practice. Our investigation was consistent with both Department practice and the newly codified standards.

With respect to petitioner's allegation that POSCO receives an exemption from VAT on its domestic iron ore purchases, we did receive documents, at verification, which indicate that POSCO has been paying VAT on its domestic iron ore purchases. Because POSCO pays VAT on its domestic iron ore purchases and because no competitive benefit is being received by POSCO through its purchases of domestic iron ore, we determine that no countervailable benefits are being provided to POSCO on its purchases of domestic iron ore.

III. Programs Determined Not To Be Used

We have determined that manufacturers, producers, or exporters in Korea of shapes and sheet do not use the following programs that were identified in the notice of "Initiation of Countervailing Duty Investigations of Carbon Steel Structural Shapes and Cold-Rolled Carbon Steel Flat-Rolled Products from Korea":

A. Accelerated Depreciation Under Article 25 of the "Act Concerning the Regulations of Tax Reduction and Exemption"
Article 25 of the "Act Concerning the Regulation of Tax Reduction and Exemption" permits a firm earning more than 50 percent of its total proceeds in a business year from foreign exchange to increase its normal depreciation by 30 percent. If the corporation has received less than 50 percent of its total proceeds from foreign exchange, it can still claim some accelerated depreciation, determined by a formula based on the firm's foreign exchange earnings and total business earnings. We verified that none of the producers or exporters of shapes and sheet claimed accelerated depreciation under Article 25 during the period for which we are measuring subsidization.

B. Free Export Zone Program
Petitioner alleged that producers and exporters of shapes and sheet receive tax benefits based upon location in a free export zone. We verified that none of the producers or exporters of shapes and sheet is located in a Free Export Zone.

C. Foreign Capital Inducement Law
Petitioner alleged that producers and exporters of shapes and sheet may be receiving financial and tax benefits under the Foreign Capital Inducement Law. The producers and exporters of shapes and sheet are not eligible for any benefits under this program because they have no foreign ownership.

D. Export Credit Insurance
Petitioner alleged that the government of Korea provides annual contributions to an export insurance program. We verified that export credit insurance was not used to insure exports of shapes and sheet to the United States.

E. Training Aid
Petitioner alleged that the steel industry has received training aid from the government of Korea. We verified that the steel companies producing the products under investigation have not received training grants or other training funds from the government of Korea.

F. Financial and Technical Assistance for Raw Material Purchases
Under the Iron and Steel Promotion Act, financial and technical assistance to purchase raw materials is authorized. However, we found no evidence that steel companies producing the products under investigation receive assistance from the government in purchasing raw materials.

G. Preferential Utility Rates
Petitioner alleged that "designated companies" under the Iron and Steel Industry Rehabilitation Order are eligible on a case-by-case basis to receive discounts from regular utility charges. Under Article 7 of the Iron and Steel Industry Promotion Act reductions on utility charges are authorized. The steel industry make a request to the Korean Electric Company seeking reduced rates but the Electric Company turned down the request and the reductions were never granted. We also found no evidence that the steel companies producing the products under investigation received reductions or other assistance on any other utility rates.

H. Development of Kwangyang Bay Industrial Zone
Petitioner alleged that the government of Korea is constructing a port at Kwangyang Bay to facilitate the importation of coal and iron ore. It is

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We verified that neither the port nor any other infrastructure in the zone has been used to produce or export the products under investigation. Accordingly, we determine that no countervailable benefits were bestowed upon the products under investigation during the period for which we are measuring subsidization.

Programs Not in Existence

We determine that the following programs are not in existence or have been abolished:

A. Preferential Exchange Rates for Export Loans
Petitioner alleged that producers and exporters of shapes and sheet receive preferential exchange rates for export loans based on letters of credit. Petitioner alleged that the exchange rate used for loans based on letters of credit was 10 percent more favorable to Korean exporters than the actual exchange rate. There is no preferential exchange rate used to convert export financing. For export loans granted under the Export Financing Regulations, a Won/U.S. dollar conversion factor which is lower than the official exchange rate is utilized when a loan is received against a letter of credit. Therefore, we determine that there is no program of preferential exchange rates for export loans that provides countervailable benefits to shapes and sheet producers and exporters.

B. Export Financing under the Foreign Trade Transaction Act
Petitioner alleged that the government of Korea provides the steel industry with preferential short-term export financing under the Foreign Trade Transaction Act. The Foreign Trade Transactions Act has been repealed and was not in effect during the period for which we are measuring subsidizaion.

C. Steel Industry Development Scheme
Petitioner alleged that the Korean Ministry of Trade and Industry is sponsoring a steel industry development scheme in which the government will spend 210 billion won on POSCO's plant expansion project. At verification we established that the Ministry of Trade and Industry is not sponsoring such a scheme.

D. Wage Controls
Petitioner alleged that the government of Korea controls wages for government- run firms such as POSCO, resulting in lower production costs for this segment of Korean industry. It was further alleged that DongJin may benefit from government wage controls by virtue of its status as a wholly-owned subsidiary of POSCO. The rates paid by POSCO and DongJin to their workers are comparable to the rates paid by other steel manufacturers. We also found no evidence that the government of Korea has a wage control system under which DongJin or POSCO must operate.

E. Joint Facilities for Industrial Complexes Scheme
Petitioners in the OCTG investigation alleged in their August 20 submission that the government of Korea was providing funding for joint facilities in industrial complexes, and that the steel industry was one of the industries targeted for such funding. In 1981 such a program was discussed between the Federation of Small and Medium Industry Cooperatives and the government of Korea. The project was to be located near Kimpo Airport in Seoul. However, in January 1982 the proposed project was cancelled due to lack of funding.

F. Equipment Funds for Export Strategy Industries and Funding for Industrialization of New Technology
The Ministry of Trade and Industry (MTI) is presently studying proposals concerning these two projects but there has been no final decision on whether to set them up. The Korea Development Bank has received a loan from the Asian Development Bank to fund one of the programs. However, we verified that the only industries eligible to receive loans from this fund are companies producing machines and machine parts.

G. Assistance for Trading Companies
Petitioners in the OCTG investigation alleged that the government of Korea provided benefits to trading companies by allowing them to increase their foreign exchange holdings and by allowing them to increase their reserve funds to cover export losses in foreign markets. With regard to the first allegation, trading companies are authorized to maintain foreign currency accounts of over $300,000. However, we found no evidence that other companies are limited in their foreign exchange holdings or any other evidence to suggest that this allowance for foreign exchange holding provides a countervailable benefit to trading companies. Regarding the allegation on export reserves, we verified at the trading companies that there are no special provisions allowing them to claim additional export loss reserves. Even if there were such provisions, we have verified all the outstanding export reserves held by the trading companies.

H. Import Duty Reductions or Exemptions for Raw Materials
Petitioner alleged that producers and exporters of shapes and sheet receive reductions or exemptions of import duties on iron ore and coking coal. The 1983 Tariff Schedules of Korea show that imports of iron ore and coking coal were not subject to any import duties. Therefore, we determine that there was no program providing a reduction or exemption of import duties on iron ore and coal that provides countervailable benefits to shapes and sheet producers or exporters during the period for which we are measuring subsidization.

I. Coal Import Funds
Petitioner alleged that the government of Korea subsidizes the importation of coal through a specific fund for that purpose. We found that there are no coal import funds or programs that relate to the importation of coking coal used to produce steel. Furthermore, respondents indicate that all imported coking coal is purchased on a commercial basis and that world market prices are paid. Therefore, we determine that there is no coal import fund or program that provides countervailable benefits to shapes and sheet producers.

Petitioner's Comments

Comment 1: Petitioner argues that the commercial bank interest rate, which was averaged with other rates to

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DOC Position: Petitioner is reading our prior determinations and the Subsidies Appendix too narrowly. For example, in seeking a "commercial" benchmark interest rate, we are seeking the alternative financing that is available to the firm in the lending marketplace of that country. We are asking if the interest rate paid on the allegedly preferential loan is less than what the average firm in that country would otherwise be paying. Similarly, in looking to market prices, we are seeking the prices that exist in that country's marketplace.

Typically, the marketplace is not the perfectly competitive market envisaged by economists. Instead, it is the commercial environment facing the firm. The Commercial environment facing the firm. The commercial environment includes any distortions to relative prices that arise from government actions such as government regulation of the banking system, tax systems, customs duties or minimum wage laws. So long as profit-maximizing firms compete within that system, a marketplace exists and our benchmarks for identifying and valuing subsidies are prices in that marketplace.

Comment 2: Petitioner argues that the benchmark interest rate used in the Department's preliminary determination, a weighted average of the interest rates charged by all sources of short-term commercial financing in Korea, does not reflect what a company would pay a normal commercial lender and is thus inconsistent with the principles enunciated by the Department for quantifying subsidies. Petitioner further argues that it is the curb market's unregulated interest rate which reflects the real cost of credit in Korea, and thus, pursuant to the principles enunciated in the Department's Subsidies Appendix, the curb market interest rate should be used as the benchmark interest rate in this case.

DOC Position: The Department believes that the correct benchmark for short- term lending normally is the most comparable, predominant form of short-term financing in the country under investigation. However, as explained in the section of the notice on "Short-Term Export Financing Under the Export Financing Regulations", the Department has found an incentive for banks to lend for export transactions at the expense of domestic financing. Using best information available, the Department has measured this preference for export lending by comparing the cost of export loans with the weighted-average cost of all forms of short-term domestic financing.

In the case of long-term loans, the Department has followed its standard practice of comparing the terms of loans under examination with the terms of comparable commercial long-term loans (see the section of the notice on "Medium- and Long-Term Credit"). In reaching these determinations, we believe we have been faithful to the principles enunciated in our Subsidiaries Appendix.

Comment 3: Petitioner contends that, assuming arguendo, the weighted-average benchmark is the correct benchmark, the Department's weighted-average benchmark understates the proportional size of the curb market and overstates the proportional size of bank credit as sources of domestic credit.

DOC Position: As explained in the section of the notice on "Short-term Export Financing Under the Export Financing Regulations," we are using a weighted-average of short-term domestic financing costs in order to quantify the banking system's preference for export loans. This weighted-average credit pool comprises short-term domestic bank credit, investment and finance company credit, commercial paper, and the curb market. Our weights are based on the most reliable data entered in the record of this investigation, including the Bank of Korea's Monthly Statistical Bulletin, the Federation of Korean Industries' biannual surveys of corporate financing, and the Korea Chamber of Commerce's annual survey of the curb market.

Comment 4: Petitioner contends that exporters and/or steel producers of shapes and sheet benefit from a lower effective interest rate on domestic bank loans because they, unlike other borrowers, are not subject to compensating balance requirements.

DOC Position: Bank of Korea regulations specifically prohibit domestic banks from requiring compensating balances. During verification, we found no evidence that domestic banks require compensating balances or other borrowers, while not requiring them of exporters and/or steel producers.

Comment 5: Petitioner argues that the Korean government allocates the heavily subsidized credit of the "tightly government controlled-banking system" to select priority, export industries. All others must rely on the curb market for funds. Commercial bank loans have especially focused on the Korean steel industry, and loan decisions are based on political, not creditworthiness considerations. U.S. Steel contends that commercial bank loans were not generally available either prior to or during 1983-1984.

DOC Position: For an explanation of our treatment of medium- and long-term loans, see the section of this notice entitled "Medium- and Long-term Credit".

Comment 6: Petitioner contends that the National Investment Fund (NIF) provides preferential loans to producers of shapes and sheet.

DOC Position: We have found that NIF loans do not constitute subsidies during the period for which we are measuring subsidization (see the section of this notice entitled "Medium- and Long-Term Credit").

Comment 7: Petitioner contends that the NIF provided loans to producers of shapes and sheet at interest rates below those paid on NIF deposits. This differential in the cost of their funds and the return on their funds was assumed by the government, and constitutes an additional subsidy to producers of shapes and sheet.

DOC Position: During the period for which we are measuring subsidization, interest rates on long-term variable-rate NIF loans outstanding were not below interest rates on long-term variable-rate NIF deposits outstanding. Therefore, no government assumption of interest charges is indicated during the period for which we are measuring subsidization.

Comment 8: Petitioner argues that Korean Development Bank (KDB) loans are not generally available and should therefore be countervailed.

DOC Position: We have found that KDB loans do not constitute subsidies during the period for which we are measuring subsidization (see the section of this notice entitled "Medium- and Long-Term Credit").

Comment 9: Petitioner alleges that the Export-Import Bank of Korea (Eximbank) has provided loans for POSCO's coking coal development projects abroad-- projects which provided the coking coal input for steel production. Given the "government compensation for interest losses" of the Eximbank, these loans are undoubtedly highly preferential.

DOC Position: We determine that Eximbank loans are not limited to a specific enterprise or industry or group of enterprises or industries. Because this

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Comment 10: Petitioner argues that a 3.5 percent loan to POSCO, given by the Korean government with funds obtained from the Japanese government, is a countervailable subsidy.

DOC Position: We did not initiate an investigation of this loan. This loan was examined in the 1982 investigation of certain steel products from Korea (see "Final Affirmative Countervailing Duty Determinations: Certain Steel Products From the Republic of Korea," 47 FR 57535), and found not to be countervailable. After examining the information submitted by petitioner in these investigations, and the record of the 1982 case, we determined that no new information had been presented, merely a restatement of the existing evidence which we had used to determine that the 3.5 percent loan did not confer a subsidy upon POSCO.

Comment 11: Petitioner argues that the respondent's non-responsiveness to questions in the Department's questionnaire concerning both commercial banks and NIF dictates that the Department make all inferences against respondents.

DOC Position: We have found respondents responsive to our requests for information throughout this investigation considering the time constraints under which all parties were operating. Furthermore, we obtained information on the commercial banks and NIF during our verification and petitioner was given an opportunity to comment on the reports of our verification which discuss commercial banks and the NIF in detail.

Comment 12: Petitioner contends that Korean producers of shapes and sheet benefit from government loan guarantees. In particular, petitioner argues that industry-specific, government loan guarantees permitted POSCO to borrow funds in the European bond market at lower rates than would be possible without government guarantees.

DOC Position: In the course of our investigations, we determined that loan guarantees from both government-owned and privately-owned financial institutions are a standard commercial practice in Korea. The Bankers' Association sets the guarantee fees, and all Korean banking institutions charge those fees. The fee structure for loan guarantees does not differentiate by industry or class of transaction (i.e., export or domestic). It does distinguish between won and foreign currency loans. As explained at verification by both foreign and Korean bankers, foreign banks, unlike Korean banks, cannot require collateral on their loans. Thus, foreign bankers generally require a loan guarantee. Korean banks usually require guarantees when a company has no unpledged collateral. We found that the steel companies producing the products under investigations paid the fees specified by the Bankers' Association for those guarantees that they had on their domestic and foreign currency loans. Thus, we do not consider that these guarantees are on terms inconsistent with commercial considerations.

Comment 13: Petitioner contends that the Department's verification reports indicate that preferential port charges for exports exist in Korea, based on the per ton differential in port charges for exporting, importing and domestic shipping.

DOC Position: The Korea Maritime and Port Administrative (KMPA) establishes the rates for port charges. Rates vary according to port and also to the type of port activity. Port charges are higher for importers than for exporters; however, the charges for domestic shipping are the lowest. For the port at Pusan the rate is 22 cents a ton for exporting, 37 cents a ton for importing, and 68 won a ton for shipping to another Korean port. The rate of 68 won for domestic shipping is much lower than the 22 cents a ton rate charged to exporters. Since an exporting activity is not favored over a domestic activity, we find no countervailable benefit being provided to producers or exporters of shapes and sheet.

Comment 14: Petitioner notes that the Department's verification report on DongJin indicates that opening charges on letters of credit for loans for purchasing foreign raw materials for domestic use are higher than for loans purchasing foreign raw materials for export use. They consider this to be an export subsidy.

DOC Position: As discussed in the section of the notice on "Short-term Export Financing Under the Export Financing Regulations," we consider that the fee structure, which specifies lower charges for opening those letters of credit used to purchase imports of raw materials used in export production, is a manifestation of the preference built into the government's rediscount mechanism on short-term export loans. We consider that we have captured any benefit from this fee structure in our comparison of the weighted-average interest rate on short-term domestic loans with the 10 percent interest rate on short-term export loans.

Comment 15: Petitioner contends that Pohang Iron and Steel Company's (POSCO) equity infusions into DongJin are a countervailable subsidy because no private investor would have been willing to invest in DongJin.

DOC Position: Our determination with respect to the formation of, and equity investment in, DongJin is set forth in the section entitled "Equity Infusions into DongJin."

Comment 16: Petitioner claims that suppliers of iron ore to domestic steel mills receive subsidies in the form of highly preferential export financing and exemption from value-added tax. Because these subsidies are available to every supplier of iron ore, economic forces cause the iron ore producers to pass subsidies through to the purchasers, (i.e. steel producers).

DOC Position: We have found that POSCO does not receive a competitive benefit from its purchases of domestic iron ore. Our determination is in accordance with section 613 of the Trade and Tariff Act of 1984. With respect to the exemption of VAT on its domestic iron ore purchases, the evidence on the record indicates that POSCO does pay VAT on its domestic iron ore purchases.

Comment 17: Petitioner argues that because tariff reductions on plant and equipment are treated as grants, the DOC should consider the extent to which producers of the products under investigation benefited from tariff reductions over the last 15 years.

DOC Position: We have employed our standard grant methodology with respect for both tariff reductions and port charges. In any given year when the sum of the grants received was greater than 0.5 percent of total sales, we allocated the grants over 15 years to determine the amount of the benefit accruing to the year for which we are measuring subsidization.

Comment 18: Petitioner argues that government equity infusions into POSCO between 1978 and 1980 as well as other equity infusions from 1973 to the present were inconsistent with commercial considerations. In support of this argument, petitioner cites the following factors: (1) Inadequate rate of return on equity, (2) unfavorable economic environment, and (3) lack of dividend payments by POSCO.

DOC Position: In order to determine whether government equity infusions are inconsistent with commercial considerations, we analyze the company's operations to determine the potential of the company to yield an adequate rate of return to an investor. Consistent with the Subsidies Appendix,

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After considering all pertinent factors relevant to each year from 1969 through 1983, including rate of return on equity, economic environment, domestic and export markets and the ability to pay dividends, we concluded that the government's equity infusions into POSCO were inconsistent with commercial considerations from 1978 through 1980.

Comment 19: Petitioner states that it is their understanding that POSCO strongly objected to becoming a public corporation because it did not wish to pay dividends. Petitioner argues that POSCO's non-payment of dividends supports petitioner's position that POSCO is unequityworthy.

DOC Position: The Department's analysis indicated that, in most years, POSCO's cash position was sufficient to pay dividends. Since POSCO was not a public corporation attempting to attract equity funds in the public market, and therefore was not required to pay dividends, the use of internally generated funds by POSCO for expansion purposes was a business decision that can be considered a normal commercial practice.

Comment 20: Petitioner claims that studies conducted in 1969 and 1971 should not be used to determine the equityworthiness of POSCO in 1973 and 1974; rather, the most recent experience should be used for the determination.

DOC Position: We analyzed the most recent feasibility studies if available, as well as POSCO's financial position and other relevant factors in our determination of equityworthiness in 1973 and 1974. We agree that studies conducted in 1969 and 1971 would generally not include information pertinent to a 1973 and 1974 determination.

Comment 21: Petitioner claims that technological efficiency does not necessarily mean economic efficiency, and thus should not be a major factor in our equityworthiness determination.

DOC Position: While technological efficiency clearly has a bearing on the company's ability to produce, efficient production is not the only factor which influences the financial return to the investor.

Comment 22: As argued previously, petitioner claims that, before DOC can determine whether government equity infusions are counteravailable, it must subtract out other domestic government subsidies from the firm's reported profits (losses) to determine a firm's true profitability.

DOC Position: We have maintained consistently that the Department should use the same basis as a private investor to determine equityworthiness. When deciding to invest, a private investor will assess the financial position of the firm at that point in time (see the Subsidies Appendix, 49 FR 18006).

We use the actual experience of the company as presented by generally accepted accounting principles in the country in which the company is located for determining the equityworthiness of the company. This provides a consistent standard for comparison to other companies which are conducting business in that country.

We already account for subsidies, other than equity, which the company received from the government by using methodologies specifically designed by the Department to calculate the benefit from these subsidies. If we countervailed these subsidies again when measuring the benefits to the company from the equity investment by the government, we would be double counting.

Comment 23: The petitioner claims that the Department should amend its methodology for quantifying the subsidy from government equity infusions by considering the riskiness of the investment in POSCO and comparing its rate of return on equity to a similarly risky investment. Consequently, the comparison should not be made to the average rate of return on equity, but to a rate of return on equity which includes a risk premium.

DOC Position: A company is considered to be equityworthy when it indicates the ability to generate a reasonable rate of return within a reasonable time period. We define this rate as the national average rate of return on equity. If the Department decides that a company is unequityworthy (i.e., not likely to yield this average rate), then we find the equity infusion to be inconsistent with commercial considerations. This is not equivalent to saying that the investment is risky. Nor would we have any reasonable basis for determining the degree of risk involved in an investment. Moreover, if we chose to view such an investment as a "risky investment", we would have to reformulate our equityworthiness analysis because investors willing to bear a higher risk would evaluate these financial criteria differently. Therefore, in valuing the benefit from equity infusions that are found to be inconsistent with commercial consideration, we compare the rate of return of the firm under investigation to the national average rate of return on equity, and do not add a risk premium.

Respondents; Comments

Comment 1: Responders argue that the Department was incorrect in not using the interest rate for short-term borrowings from commercial banks as the most appropriate national average commercial method of short-term financing. Bill discounts, overdrafts, and general term loans are the domestic equivalents of short-term export financing, and are the alternative financing to export loans. Department precedent has always been to select the most comparable and commonly used alternative source of financing in a given country.

DOC Position: We agree that the correct benchmark for short-term lending normally is the most comparable, predominant form of short-term financing in the country under investigation. However, as explained in the section of the notice on "Short-Term Export Financing Under the Export Financing Regulations", the Department has found an incentive for banks to lend for export transactions at the expense of domestic financing. Using best information available, the Department has measured this preference for export lending by comparing the cost of export loans with the weighted-average cost of all forms of short-term domestic financing.

Comment 2: Respondents contend that the Department was incorrect in determining that long-term loans provided by the National Investment Fund (NIF) constitute export subsidies. NIF loans are in no way contingent on export performance. Respondents further contend that NIF loans are also not domestic subsidies because they are generally available. In any case, given the Department's methodology for evaluating long-term variable rate loans, no new NIF loans or NIF loans outstanding have been at preferential interest rates since NIF rates were equalized with the commercial bill discount rate in late 1981.

DOC Position: We agree that NIF loans do not constitute an export subsidy. We have also found that they do not constitute a domestic subsidy because interest rates on NIF loans during the period under investigation were not on terms inconsistent with commercial considerations. The correct long-term benchmark rate, however, is not that which exists on short-term commercial bills; rather, it is the rate on

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Comment 3: Respondents note in their comments on the Government Verification Report that, in the Ministry of Trade and Industry's requirements submission for NIF loans, a number of different companies from industries other than steel are listed and that not only steel companies were specifically listed.

DOC Position. We agree that companies from other industries were listed in the submissions.

Comment 4: Respondents argue in their comments on the DongJin Verification Report that the sale of assets by the banks to POSCO was incorrectly characterized as a loan. They argue that the transaction between POSCO and the banks is a purchase contract between the owners of the assets (the banks) and the purchaser (POSCO).

DOC Position. Our determination with respect to this transaction is set forth in the section of the notice on "Equity Infusions in DongJin."

Comment 5: Respondents not in their comments on the DongJin Verification Report, that the charges paid for opening letters of credit are unrelated to the short-term loans themselves.

DOC Position. We believe that we have captured any benefit to short-term export loans provided by this fee structure in our calculation of the subsidy on the short-term export loans. For further discussion of this issue, see our response to petitioner's Comment 14.

Comment 6: Respondents argue in their comments on the Government Verification Report that the central bank rediscount mechanism was established to ensure that financing reached the productive sector of the economy by tying the financing to commodities and transactions, and the volume of domestic financing under this mechanism far exceeds export financing if overdrafts and general term loans are included. They also argue that because domestic commercial bills finance 100 percent of the bills, value, while export loans are eligible for only 80 percent, the rediscount mechanism does not alter the value of financing reaching the borrower.

DOC Position: We disagree. In 1983, the volume of short-term domestic financing eligible for rediscount at the Bank of Korea was less than the volume of short-term export financing eligible for rediscount at the Bank of Korea. We believe this is a manifestation of the preference for export financing over domestic financing. Although a large company's domestic transactions are eligible for financing equal to 100 percent of transaction value, the bank which provides this financing may only rediscount 30 percent of that 100 percent at the Bank of Korea. At the same time, although all firms, export transactions are only eligible for financing equal to 80 percent of transaction value, the bank which provides this financing can rediscount 70 percent of the 80 percent at the Bank of Korea. Thus, the Bank of Korea supplies credit which covers only 30 percent of the value of a domestic transaction as compared to 56 percent of the value of an export transaction.

This preference for export credit is a subsidy, and we have countervailed it (see the section of this notice entitled "Short-term Export Financing Under the Export Financing Regulations.")

Comment 7: Respondents contend that tariff reductions on plant and equipment are generally available. They claim that DOC has sufficient evidence, obtained at verification, to find that tariff reductions on imported equipment are available to a large number of industries and, thus, are generally available.

DOC Position: We determined that tariff reductions on plant and equipment, unlike import duty deferrals on plant and equipment, confer benefits which constitute subsidies because this program operates to provide higher tariff reductions to certain enterprises within the industries designated as eligible for tariff reductions. Thus, the benefit equals the differential between the higher tariff reductions for certain enterprises and the tariff reduction allowed for all the other designated industries.

Comment 8: Respondents argue that DOC should calculate company- specified rates for cold-rolled carbon steel flat-rolled products.

DOC Position: It is the Department's policy to issue country-wide rates unless separate enterprises have received significantly different benefits. In this case, although one producer under investigation receives benefits under all six programs found to confer subsidies, while the other producers and exporters receive benefits under only two of the programs, the level of benefits received is not significantly different. Thus, we do not believe that company-specific rates are appropriate.

Comments 9: Respondent claims that the Department erred in its preliminary determination by using U.S. "generally accepted accounting principles" instead of Korean "generally accepted accounting principles" to review the financial results of POSCO. Respondent contends that the Department must view the equityworthiness of the company in the country where it is located. Specifically, respondent claims that in conducting the equityworthiness analysis, the Department should apply Korean accounting principles pertaining to unrealized exchange gains and losses which permit amortization of such gains and losses over a five year period, and should not apply U.S. principles to exchange gains and losses.

DOC Position: We did not use U.S. accounting principles to restate POSCO's financial statements which were used as a basis for the preliminary determination. An investor would consider many factors when deciding to invest in a company. One of these factors is the impact of generally accepted accounting principles on the presentation of the firm's financial results. Thus, we also examined the effects of these accounting principles on POSCO's financial statements.

When analyzing the financial results of POSCO, we used the korean principles which permit a five-year period of amortization for unrealized exchange gains and losses. U.S. accounting principles would require all exchange losses to be expensed in the year in which such losses were incurred. However, a significant number of POSCO's exchange transactions had not been amortized over a five-year period in POSCO's financial statements. An investor reviewing the financial results of POSCO would have considered the impact from these exchange transactions which had not been amortized over five years. Thus, the Department also considered the impact to profits and to other financial aspects of the company from such transactions.

Comment 10: Respondent argues that the Department departed from its prior determinations which require the use of the accounting practices of the country of the company under investigation to determine the equityworthiness of a company.

DOC Position: We did not depart from our prior determinations. We used the Korean "generally accepted accounting principles" when reviewing the financial statements of POSCO, and we considered the impact to the financial results from the application of such principles.

Comment 11: Respondent claims that POSCO is a sound investment if viewed by any standard because of its efficient production operations and its ability to service it debt. Also, the feasibility studies presented to the banks for financing POSCO's expansions presented positive economic projections.

DOC Position: We analyzed many factors for the equityworthiness

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Comment by Chaparral Steel Company, a Party to the Proceeding: In addition to endorsing the comments filed by petitioner in these proceedings, Chaparral Steel Company also filed a separate comment pertaining to the production of carbon steel structural shapes.

Comment: Chaparral Steel Company provided raw material, transportation, comparative labor cost data, and price information to suggest that, given the Koreans' cost disadvantages and lower selling prices for carbon steel structural shapes in the United States, Korean shapes producers must be subsidized.

DOC Position: Chaparral did not provide any detailed evidence or arguments that specific government programs exist which defray the Koreans' presumed cost disadvantage for steel production. At verification, we found that Inchon Iron and Steel Company, the only shapes producers in these investigations, paid all duties and shipping costs for the import of scrap iron and steel. We have also fully investigated all other programs alleged by petitioner to be subsidies. Absent specific charges that additional government subsidies exist to benefit Korean producers of shapes, we cannot determine that carbon steel structural shapes sold in the United States are subsidized to any degree greater than the de minimis level found in these determinations.

Verification

In accordance with section 776(a) of the Act, we verified the information used in making our final determinations. Commerce officials spent from September 18 to October 17 verifying the information submitted by the government of Korea and by the companies under investigation, and gathering additional information to be used in our final determinations. During this verification we followed normal verification procedures including inspection of documents and ledgers, and tracing the information in the responses to source documents, accounting ledgers, and to financial statements.

Suspension of Liquidation

In accordance with section 703(d) of the Act, on September 18, 1984 we instructed the U.S. Customs Service to suspend liquidation of all entries of cold-rolled carbon steel flat-rolled products from Korea (49 FR 36538). As of the date of publication of this notice in the Federal Register, the liquidation of all entries, or withdrawals from warehouse, for consumption of this merchandise will continue to be suspended and the Customs Service shall require a cash deposit or bond for each such entry of this merchandise in the amount of 3.60 percent ad valorem. This suspension will remain in effect until further notice. As stated above, our final determination with respect to carbon steel structural shapes is negative; therefore, we are not directing the U.S. Customs Service to suspend liquidation of entries of carbon steel structural shapes.

ITC Notification

In accordance with section 705(d) of the Act, we will notify the ITC of our determinations. In addition, we are making available to the ITC all nonprivileged and nonconfidential information relating to the investigation of cold-rolled carbon steel flat-rolled products. We will allow the ITC accesss to all privileged and confidential information in our files, provided the ITC confirms that it will not disclose such information, either publicly or under an administrative protective order, without the written consent of the Deputy Assistant Secretary for Import Administration.

The ITC will make its determination whether imports of cold-rolled carbon steel flat-rolled products materially injure, or threaten material injury to, a U.S. industry within 45 days of the publication of this notice.

If the ITC determines that material injury or the threat of material injury does not exist with respect to cold-rolled carbon steel flat-rolled products, this proceeding will be terminated and all estimated duties deposited or securities posted as a result of the suspension of liquidation will be refunded or cancelled. If, however, the ITC determines that such injury does exist, we will issue a countervailing duty order, directing the Customs Service to assess countervailing duties on all entries of cold-rolled carbon steel flat-rolled products from Korea entered, or withdrawn from warehouse, for consumption on or after the suspension of liquidation date, equal to the net subsidy amount indicated in the "Suspension of Liquidation" section of this notice.

This notice is published pursuant to section 705(d) of the Act (19 U.S.C. 1671d(d)).

William T. Archey,

Acting Assistant Secretary for Trade Administration.

November 26, 1984.