IMPORT ADMINISTRATION POLICY BULLETIN

Number 91/2           

Date of Issue: July 18, 1991

Topic:  Constructed Value, Source of Cost of Manufacture

Author: Mueller


Approved:(Signed)
         Eric I. Garfinkel
         Assistant Secretary
           for Import Administration


Statement of Issue

Should constructed value be based on the cost of manufacture (COM) of 
the merchandise exported to the U.S. or of the merchandise sold in the 
domestic market of the exporting country (or to third countries when 
there is no viable home market)?

Analysis

The statute does not explicitly call for the use of the COM of either 
home market or exported products in determining CV.

A review of the legislative history provides no indication that 
constructed value was intended to be based on home market COM, or CV 
considered as a surrogate for home market sales with unusable prices.  
It does indicate that CV was intended to be used when no home market 
or third country price existed.  In such a situation, only the COM 
of the exported product would be available.

Although the 1974 amendments created situations where CV would be 
used when there was a home market price Congress did not make any 
corresponding changes to make CV a substitute for disregarded home 
market prices.

The practice of both Treasury and Commerce for at least 60 years was 
to use the COM of the exported product.

Using the COM of home market merchandise, which may be physically 
different than exported merchandise, introduces a double distortion.  
First, the difference in merchandise adjustment would only adjust for 
the differences in variable manufacturing costs, which would only 
partly offset the cost differential built into the home market COM.  
Second, even the variable manufacturing cost differences, which would 
be accounted for by the difference in merchandise adjustment, would 
be inflated by the minimum 8% profit standard.  Both these distortions 
would be eliminated by starting with the COM of the exported item.

In a 1940 decision in United States v. European Trading Co., 27 CCPA 
289, the U.S. Court of Customs and Patent Appeals determined that the 
cost of materials actually used in the exported articles should be 
used to determine CV.  Though the precise issue was the treatment of 
a rebate on materials used in exported merchandise, the court noted 
that foreign market value and constructed value (then called "cost of 
production") were independent of one another.  Though the 1979 statute 
brought CV under foreign market value, this was stated in the Senate 
report to be not a substantive change and was intended solely to 
simplify the law.

Statement of Policy

In calculating constructed value under Section 773(e) of the Tariff 
Act of 1930, the term "the cost of materials....and of fabrication or 
other processing of any kind in producing such of similar merchandise" 
relates to the costs incurred in producing such or similar merchandise 
destined for export to the United States.

Since any inquiry into the cost of production of goods sold in the 
home or third markets under section 773 (b) may result in the use of 
constructed value for foreign market value, any request for cost of 
production information should also include a request for the cost of 
manufacture of the merchandise exported to the United States.  This 
will avoid delays in obtaining information necessary to conclude an 
investigation or administrative review within the time allowed by
statute and regulation.

Implementation

This policy will be implemented on all future cases and those outstanding 
administrative reviews where the information necessary to calculate 
constructed value on the basis of the costs of the exported merchandise 
exists and the change can be made without delaying the reviews beyond 
their due dates.