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AGENCY: Import Administration, International Trade Administration, Commerce.

ACTION: Notice.

SUMMARY: We preliminarily 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 industrial belts and components and parts thereof, whether cured or uncured (industrial belts), as described in the "Scope of Investigation" section of this notice. The estimated net subsidy is 0.51 percent ad valorem for all manufacturers, producers or exporters in Korea of industrial belts, except for Hankook Belt Industry (Hankook). The estimated net subsidy for Hankook is 24.52 percent ad valorem. We have calculated a separate estimated net subsidy for Hankook because its rate differs significantly from the country-wide rate. (See "Suspension of Liquidation" section of this notice.) In addition, we preliminarily determine that critical circumstances do exist in this case. If this investigation proceeds normally, we will make a final determination on or before February 13, 1989.

EFFECTIVE DATE: December 2, 1988.

FOR FURTHER INFORMATION CONTACT: Timothy Nelson or Roy Malmrose, Office of Countervailing Investigations, Import Administration, International Trade Administration, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW., Washington, DC 20230; telephone: (202) 377-3174 and 377-5414.

SUPPLEMENTARY INFORMATION:

Based on our investigation, we preliminarily determine that certain benefits which constitute subsidies within the meaning of section 701 of the Tariff Act of 1930, as amended (the Act), are being provided to manufacturers, producers or exporters in Korea of industrial belts. For purposes of this investigation, the following programs are preliminarily found to confer subsidies.

• Short-Term Export Financing.
• Export Tax Reserves.
• Duty Drawback on Non-physically Incorporated Items and Allowances

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  for Excessive Loss and Wastage Rates.

We preliminarily determine the estimated net subsidy to be 0.51 percent ad valorem for all manufacturers, producers or exporters in Korea of industrial belts except for Hankook Belt Industry. The estimated net subsidy for Hankook is 24.52 percent ad valorem. We have calculated a separate estimated net subsidy for Hankook because its rate differs significantly from the country- wide rate.

Since the publication of the Notice of Initiation in the Federal Register (53 FR 28044, July 26, 1988), the following events have occurred. On August 1, 1988, we presented a questionnaire to the Government of Korea in Washington, DC, concerning petitioner's allegations. On August 26, 1988, petitioner filed a request that the preliminary determination be postponed for 65 days. Pursuant to section 703(c)(1)(A) of the Act, on September 7, 1988, we postponed the preliminary determination to no later than November 28, 1988 (53 FR 34570).

On September 14, 1988, we received responses from the Government of Korea (GOK) Dongil Rubber Belt Co., Ltd. (Dongil), and Taelim Moolsan Co., Ltd (Taelim Moolsan), a trading company whose exports to the United States are purchased from Dongil. The response of the GOK listed another producer of industrial belts which exports to the United States, Hankook Belt Industry (Hankook). On October 26, 1988, we sent a letter to the GOK requesting that Hankook also respond to our questionnaire. However, this company did not respond to the Department's countervailing duty questionnaire. On October 21, 1988, we delivered supplemental/deficiency questionnaires to the Government and Dongil. On November 8, 1988, we received responses from the GOK and Dongil to these questionnaires.

The United States has developed a system of tariff classification based on the international harmonized system of customs nomenclature. On January 1, 1989, the U.S. tariff schedules will be fully converted to the Harmonized Tariff Schedule (HTS) and all merchandise entered or withdrawn from warehouse for consumption on or after this date will be classified solely according to the appropriate HTS item numbers. Until that time, however, the Department will be providing both the appropriate Tariff Schedules of the United States Annotated (TSUSA) item number(s) and the appropriate HTS item number(s) with its product descriptions. As with the TSUSA, the HTS item numbers are provided for convenience and customs purposes. The written description remains dispositive as to the scope of the product coverage.

We are requesting petitioners to include the appropriate HTS item number(s) as well as the TSUSA item number(s) in all petitions filed with the Department through the end of this year. A reference copy of the HTS is available for consultation in the Central Records Unit, Room B-099, U.S. Department of Commerce, 14th Street and Constitution Avenue, NW., Washington, DC 20230. Additionally, all U.S. Customs offices have reference copies, and petitioners may contact the import specialist at their local customs office to consult the schedule.

The products covered by this investigation are industrial belts and components and parts thereof, whether cured or uncured, currently provided for under TSUSA item numbers 358.0210, 358.0290, 358.0610, 358.0690, 358.0800, 358.0900, 358.1100, 358.1400, 358.1600, 657.2520, 773.3510, and 773.3520 and currently classifiable under HTS item numbers 5910.00.10, 5910.00.90, 4010.10.10 and 4010.10.50.

The merchandise covered by this investigation includes certain industrial belts for power transmission. These include V-belts, synchronous belts, round belts and flat belts, in part or wholly of rubber or plastic, and containing textile fiber (including glass fiber) or steel wire, cord or strand, and whether in endless (i.e., closed loop) belts, or in belting in lengths or links. This investigation excludes conveyor belts and automotive belts as well as front engine drive belts found on equipment powered by internal combustion engines, including trucks, tractors, buses, and lift trucks.

Consistent with our practice in preliminary determinations, when a response to an allegation denies the existence of a program, receipt of benefits under a program, or eligibility of a company or industry under a program, and the Department has no persuasive evidence showing that the response is incorrect, we accept the response for purposes of the preliminary determination. All such responses, however, are subject to verification. If the response cannot be supported at verification, and a program is otherwise countervailable, the program will be considered a subsidy in the final determination.

When we do not receive a response from a company that the government has indicated is a potential respondent, we generally use in our preliminary determination the best information available. In this investigation, the response of the GOK contains information regarding the non-respondent company, Hankook. Where the government response provides complete information on both usage and the amount of benefits received by Hankook, we have used this information, as the best information available, for purposes of our preliminary determination. All such information provided by the GOK with respect to Hankook is subject to verification at the government. As described below, when the government response did not provide complete information for certain programs used by Hankook, we have also used other sources for the best information available. For these programs, we used, as the best information available, the highest rate found in previous Korean investigations, or the rate found for Dongil in this investigation, whichever was higher.

For purposes of this preliminary determination, the period for which we are measuring subsidies ("the review period") is calendar year 1987. Based upon our analysis of the petition and the responses to our questionaires, we preliminarily determine the following:

We preliminarily determine that subsidies are being provided to manufacturers, producers or exporters in Korea of industrial belts under the following programs:

The Short-term Export Financing Regulations provide the guidelines for short- term export financing. Export financing takes the form of loans on bills related to export sales transactions. Eligibility is based upon presentation of export documents or upon past export performance. Export loans based on past performance cannot exceed 90 days, while loans based on specific export documents cannot exceed 180 days and are limited to the terms of the applicable letter of credit. During our review period, the rate of interest charged on short-term export financing remained constant at ten percent, the

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The Bank of Korea also establishes rediscount ratios that set the proportion of a short-term loan which the commercial bank may rediscount through the central bank. During the period of investigation, the rediscount ratio for short-term export financing was lowered from 60 percent to 40 percent for large-sized firms, and from 90 percent ot 60 percent for small- and medium- sized firms. The rediscount ratio on domestic commercial financing remained at 60 percent for small- and medium-sized companies and 30 percent for large-sized companies. Small- and medium-sized firms are defined as companies with fewer than 300 employees. According to the response of the GOK, both Dongil and Hankook are large companies.

Because only exporters are eligible to use the short-term export financing, we preliminarily find these loans to be countervailable to the extent that they are provided on preferential terms. Moreover, we preliminarily determine that the different rediscount ratios applied to financing for the large firms (currently 40 percent for export transactions, 30 percent for domestic transactions) results in the provision of export financing on preferential terms for large firms. This is because in lending to large firms, commercial banks have an incentive to channel more funds to finance those firms' export transactions and fewer funds to finance their domestic transactions.

To determine if these loans are at preferential rates, we used information provided by the GOK to construct a weighted-average interest rate to represent what large firms pay to finance domestic transactions. Becasue commercial banks have an incentive to direct their loans for large firms to financing export transactions rather than domestic transactions, large firms must seek alternative sources for financing domestic sales.

The weighted-average interest rate we have computed is a best estimate measure of the preference created by the different rediscount ratios. It includes the interest rates on commercial bank loans for domestic transactions; the issuance of commercial paper; and financing from investment and finance companies, mutual credit cooperatives, and mutual savings and finance companies. If, at verification, we discover other sources of short-term financing for large companies, we will take these into account in our final determination.

Although the response of the GOK states that the highest interest rate offered by commercial banks for short-term non-export financing is 11.5 percent, a source of information available to the Department indicates that for such financing companies have been charged interest rates above that rate. Information submitted by the GOK also indicates that local commercial banks charge interest rates higher than national commercial banks. Therefore, as our interest rate for commercial bank financing, we have taken the average of the highest rates offered by national and local commercial banks, 12.0 percent.

The weights assigned to each of the sources of short-term domestic credit were based on the Monthly Bulletin of the Bank of Korea. From this source, we determined the amount of, and interest rates charged on, short-term financing from each of the financial entities.

Using the data from these sources, we calculated a weighted-average interest rate of 12.70 percent. We compared this rate to the 10 percent interest rate on export loans received by Dongil and Hankook. (According to the response of Taelim Moolsan, it did not receive any export loans during the period of review.) To determine the benefit of the preferential interest rate, we subtracted the interest paid on the export loans at 10 percent from the interest the companies would have paid if the loans had been contracted at the benchmark.

According to the responses of Dongil and the government, it was not possible to segregate the loans received as to product or destination. Therefore, we divided the benefit by both companies' total exports during the review period. We did not receive information regarding Hankook's total exports, but we were able to determine Hankook's exports of the subject merchandise to the United States from information in the GOK response. We are, therefore, using as best information available, the amount of Hankook's total exports of the subject merchandise to the United States to represent its total exports of all goods to all markets. On this basis, we calculated an estimated net subsidy of 0.24 percent ad valorem for Dongil and 24.05 percent ad valorem for Hankook.

Under Article 22, a corporation may establish a reserve amounting to the lesser of one percent of foreign exchange earnings, or 50 percent of the foreign exchange earnings component of net income. If certain export losses occur, they may be offset from the reserve fund. Following the tax year to which the reserve amount applies there is a one-year grace period. After the grace period, amounts remaining in the reserve that have not been offset by actual losses are returned to the taxable income account in three equal annual installments.

Article 23, which governs overseas market development funds, allows a corporation to establish a reserve fund amounting to one percent of its foreign exchange earnings in the respective tax year. Expenses incurred in developing overseas markets may be offset from the reserve fund. Funds remaining in the reserve after the tax year are treated as under Article 22.

A price fluctuation reserve fund may be established under Article 24. 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 resulting from the fluctuation of prices for export goods 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 year.

The balance in all three reserve funds is not subject to corporate tax, although all moneys in the reserve fund 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 deferment, contingent upon exports, of direct taxes.

To measure the benefit conferred by the deferments for Dongil, we followed the same methodology previously used in Certain Stainless Steel Cooking Ware from the Republic of Korea: Final Affirmative Countervailing Duty Determination (51 FR 42687, November 26, 1986) (Cooking Ware) and calculated an amount of tax savings by multiplying the amount maintained in the reserves by Dongil's effective tax rate. We treated the tax savings on these funds as short-term interest-free loans. Accordingly, to determine the benefit, the amount of Dongil's tax savings was multiplied by the average of the highest short-term national and local

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According to the response of Taelim Moolsan, it did not claim any reserves during the period of investigation. For Hankook, although the GOK provided us with information regarding the amount of reserves claimed by Hankook under this program, we were unable to use this information to derive a benefit because we lacked Hankook's effective tax rate. Therefore, as best information available, we applied to Hankook the same subsidy rate as that found for Dongil. Using this information, we calculated an estimated net subsidy of 0.27 percent ad valorem for Dongil and for Hankook.

According to the response of the GOK, input usage rates are determined every four years for producers of exported products. The survey upon which the GOK based its input usage rates was based on a survey solely of Dongil's production process. Tables of these rates are used by Korean Customs for duty drawback purposes. The response of the GOK states that recoverable scrap is factored into the usage rates and that, therefore, the loss and waste rates built into the input usage tables are not excessive.

In its response, Dongil claims that it has not received any duty drawback on non-physically incorporated items. Furthermore, it claims that it does not have recoverable scrap from its production process. In its response, Taelim Moolsan claims that it does not receive duty drawback.

Since Dongil claims that it has no recoverable scrap and that it has not received any duty drawback on non-physically incorporated items, we preliminarily determine that Dongil receives no subsidy under this program. According to the response of the GOK, all inputs into the manufacture of industrial belts are physically incorporated. Thus, with respect to this issue, we find no subsidy for Hankook. However, with respect to the issue of recoverable scrap, since the GOK's claim that there is no excessive remission of customs duties because recoverable scrap is included in the loss and wastage rates is based on information solely from Dongil, we preliminarily determine that this does not apply to Hankook. Therefore, as best information available, we applied to Hankook the rate found for this program in Cooking Ware. Using this information, we calculated an estimated net subsidy of 0.20 percent ad valorem for Hankook.

II. Programs Preliminarily Determined Not to be Used

We preliminarily determine that the following programs were not used by manufacturers, producers or exporters in Korea of industrial belts during the review period:

B. Unlimited Deduction of Overseas Entertainment Expenses
Petitioner alleges that producers and exporters of the subject merchandise receive tax benefits in the form of entertainment expense deductions.

Under Article 18-2 of the Corporation Tax Act and supporting legislation, domestic and overseas entertainment expenses are eligible to be deducted from taxable income. The amount which can be deducted for domestic entertainment expenses is subject to a ceiling according to an established formula. This ceiling is lowered if overseas entertainment expenses are claimed. There is no cap on overseas entertainment expenses. If a company's overseas entertainment expense deductions exceed its domestic ceiling, the amount by which the domestic ceiling is exceeded constitutes a countervailable tax benefit. According to Dongil's response, in the tax return filed in the review period, Dongil's overseas entertainment expenses did not exceed its domestic ceiling. According to the response of the GOK, Hankook did not claim a deduction on the tax return filed during the review period for overseas entertainment expenses.

C. Loans to Promising Small- and Medium-sized Enterprises
Petitioner alleges that manufacturers, producers, and exporters of industrial belts in Korea benefit from a program under which the Bank of Korea directs commercial banks to provide long-term loans to select "promising" small- and medium-sized companies. According to the response of the GOK, the Bank of Korea does not direct commercial banks to provide loans under this program. The response states that commercial banks which provide more than 35 percent of new loans to small- and medium-sized companies obtain from the Bank of Korea a 50 percent rediscount ratio on loans to such enterprises in excess of the 35 percent level. The response further states that none of the companies under investigation qualifies as a small- or medium-sized enterprise because Dongil and Hankook have more than 300 regular employees and Taelim Moolsan is not an industrial company.

D. Exemption from the Acquisition Tax
Petitioner alleges that producers of industrial belts in Korea benefit under the Law for the Promotion of Income Sources in Rural Areas. Under this law companies which establish factories in rural areas may be exempted from paying the two percent acquisition tax on purchases of land, buildings, and capital equipment. According to the response of the GOK, neither producers nor exporters of industrial belts received exemption from the Acquisition Tax during the review period.

E. Tax Incentives for Businesses Moving to a Provincial Area
Petitioner alleges that manufacturers, producers, and exporters of industrial belts in Korea benefit from a program whereby companies moving out of metropolitan areas into rural areas received income and corporate tax deductions based on the cost of the move. According to the response of the GOK, neither producers nor exporters of industrial belts received this tax benefit during the review period.

F. Free Export Zone Program
Petitioner alleges that manufacturers, producers, and exporters of industrial

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G. Tariff Reductions on Plant and Equipment under Article 28 of the Customs Law
Petitioner alleges that manufacturers, producers, and exporters of industrial belts in Korea benefit under Article 28 of the Customs Law which allow for import duty reductions on certain items for certain industries. According to the response of the GOK, neither producers nor exporters of industrial belts are eligible for this program.

H. Export Credit Financing from the Export-Import Bank of Korea (KXMB)
Petitioner alleges that manufacturers, producers, and exporters of industrial belts in Korea may receive preferential export financing through the KXMB. According to the response of the GOK, this program is not available to producers or exporters of industrial belts.

I. Export Guarantees from the KXMB
Petitioner alleges that manufacturers, producers, and exporters of industrial belts in Korea may receive export guarantees on exports of Korea goods. According to the response of the GOK, this program is not available to producers or exporters of industrial belts.

III. Programs Preliminarily Determined To Have Been Terminated

We preliminarily determine that the following programs have been terminated:

A. Special Depreciation under Article 11 of the Act Concerning the Regulation of Tax Reduction and Exemption
According to the response of the GOK, special depreciation was abolished effective December 26, 1986.

B. Tax Credit for Investment for Key Industries
According to the response of the GOK, this program was abolished effective December 26, 1986.

IV. Program Preliminarily Determined Not To Exist

We preliminarily determine that the following program does not exist:

Loans for Expansion or Construction of Maufacturing Facilities
According to the response of the GOK, this program does not exist.

Critical Circumstances

Petitioner alleges that "critical circumstances" exist within the meaning of section 703(e)(1) of the Act with respect to imports of industrial belts from Korea. In determining whether critical circumstances exist, we must examine whether there is a reasonable basis to believe or suspect that: (1) The alleged subsidy is inconsistent with the Agreement, and (2) there have been massive imports of the subject merchandise over a relatively short period.

Section 355.29(a) of the Commerce Regulations or critical circumstances provides, inter alia, that we will determine "whether the alleged subsidy is an export subsidy inconsistent with the Agreement." We have preliminarily determined that the Export Tax Reserves and the Duty Drawback on Non-physically Incorporated Items and Allowances for Excessive Loss and Wastage Rates programs constitute export subsidies which are inconsistent with the Agreement.

In determining whether imports have been massive over a relatively short period of time, we consider the following factors: (1) The volume and value of the imports; (2) seasonal trends; and (3) the share of domestic consumption accounted for by the imports. A review of this information indicates that imports from Korea have been massive over a relatively short period of time.

For the reasons described above, we determine that there is a reasonable basis to believe or suspect that "critical circumstances" exist with respect to imports of industrial belts from Korea.

Verification

In accordance with section 776(b) of the Act, we will verify the information used in making our final determination.

Suspension of Liquidation

In accordance with section 703(e) of the Act, we are directing the U.S. Customs Service to suspend liquidation of all unliquidated entries of industrial belts from Korea entered, or withdrawn from warehouse, for consumption, on or after the date which is 90 days before the date of publication of this notice in the Federal Register, and to require a cash deposit or bond for each such entry of this merchandise, except for entries from Hankook Belt Industry, equal to 0.51 percent ad valorem. Entries of this merchandise from Hankook Belt Industry require a cash deposit or bond equal to 24.52 percent ad valorem. This suspension will remain in effect until further notice.

ITC Notification

In accordance with section 703(f) of the Act, we will notify the ITC of our determination. In addition, we are making available to the ITC all nonprivileged and nonproprietary information relating to this investigation. We will allow the ITC access to all privileged and business proprietary information in our files, provided the ITC confirms that it will not disclose such information, either publicly or under an administrative protective order, without the written consent of the Assistant Secretary for Import Administration.

If our final determination is affirmative, the ITC will make its final determination within 120 days after this preliminary affirmative determination, or 45 days after the Department makes its final determination, whichever is later.

Public Comment

In accordance with 19 CFR 355.35, we will hold a public hearing, if requested, to afford interested parties an opportunity to comment on this preliminary determination. Individuals who wish to request or to participate in the hearing must submit a request within ten days of the publication of this notice in the Federal Register to the Assistant Secretary for Import Administration, U.S. Department of Commerce, Room B-099, 14th Street and Constitution Avenue NW., Washington, DC 20230.

Requests should contain: (1) The party's name, address, and telephone number; (2) the number of participants; (3) the reason for attending; and (4) a list of the issues to be discussed. In addition, ten copies of the business properietary version and seven copies of the nonproprietary version of the pre-hearing briefs must be submitted to the Assistant Secretary at least seven days prior to the scheduled date of the public hearing. Oral presentations will be limited to issues raised in the briefs. Written views should be submitted in accordance with 19 CFR 355.33(d) and 355.34, and will be considered if received not less than 30 days before the final determination is due or, if a hearing is held, within seven days after the hearing transcript is available.

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November 28, 1988.

Jan W. Mares,

Assistant Secretary for Import Administration.