IMPORT ADMINISTRATION POLICY BULLETIN Number: 92/4 Date of Issue December 15, 1992 Topic: The Use of Constructed Value in COP Cases. Author: Mark Lunn Approved (Signed) Alan M. Dunn Assistant Secretary for Import Administration Issue Whether after finding inadequate sales of a given model above cost in the home market, to use the next most similar model, or constructed value, to determine foreign market value. Analysis Section 773(a) of the Tariff Act of 1930 ("the Act") requires the Department to base foreign market value (FMV) on the price: (A) at which such or similar merchandise is sold, or in the absence of sales, offered for sale in the principal markets of the country from which exported, in the usual commercial quantities and in the ordinary course of trade for home consumption, or (B) if not sold or offered for sale for home consumption, or if the administering authority determines that the quantity sold for home consumption is so small in relationship to the quantity sold for exportation to countries other than the United States as to form an inadequate basis for comparison, then the price at which so sold or offered for sale for exportation to countries other than the United States.... 19 U.S.C.  1677b(a)(1) (1988). 773(a) goes on to say: (2) Use of Constructed Value - If the administering authority determines that the foreign market value of imported merchandise cannot be determined under paragraph (1)(A), then notwithstanding paragraph (1)(B), the foreign market value of the merchandise may be the constructed value of that merchandise, as determined under subsection (e). 19 U.S.C.  1677b(2) (1988). Therefore, in general, the Act specifies a preference for determining FMV on the basis of the price for such or similar merchandise in the home country, but if it cannot be determined on this basis, allows for the use of the price of such or similar merchandise in a third country, or for the use of constructed value. Prior to 1974, the only reason for basing FMV on CV was that there was no viable home or third country market. In 1974, Congress added section 773(b) to the Act to provide in certain situations for the disregard of home market or third country sales if such sales are made at prices which represent less than the cost of production of the merchandise in question. Section 773(b) requires that: Whenever sales are disregarded by virtue of having been made at less than the cost of production and the remaining sales, made at not less than the cost of production, are determined to be inadequate as a basis for the determination of foreign market value under subsection (a) of this section, the administering authority shall employ the constructed value of the merchandise to determine its foreign market value. 19 U.S.C.  1677b(b) (1988) (emphasis added). Under the Department's current practice, when more than 90 percent of a given model (the such or similar merchandise as defined in section 771(16)) is found to be sold in the home market at less than the cost of production, the Department will disregard the sales of that model. The issue is, when the sales of a given model cannot be used, whether the Department should use the next most similar model, in order to follow the price preference specified in 773(a), or go directly to constructed value as indicated in 773(b). Prior to determining FMV under section 773(a), the Department must first select the most similar merchandise. Section 771(16) of the Act defines such or similar merchandise and provides a hierarchy of preferences for determining which merchandise sold in the foreign market is most similar to the merchandise sold in the United States. Section 771(16) also expresses a preference for the use of identical over similar merchandise, stating categorically that such or similar merchandise is the merchandise that falls into the first hierarchical category in which comparisons can be made. The cost test is not conducted until after the most similar model match is found under section 771(16). Section 771(16) requires us to descend through successive levels of the hierarchy until sales of such or similar merchandise are found. However, it does not condition the determination of such or similar on any basis other than similarity of the merchandise. In particular, section 771(16) directs us only to "the first of the following categories..." and not to the next category when the first match is below cost. If this were not the case, the cost test would inappropriately become part of the basis for determining what constitutes such or similar merchandise, which is clearly not the purpose of the cost test. Therefore, because section 771(16) specifies the determination of such or similar merchandise on the similarity of the merchandise only and not on whether the most similar model is sold above cost, section 771(16) appears to direct us to the use of constructed value when the most similar model is sold below cost. The statute, therefore, directs us to the use of constructed value when the most similar model is sold below cost. Moreover, the use of constructed value would lessen the burden on the Department of calculating the dumping margin. If the next most similar match is used, it would require the Department, after rejecting the below cost model, to conduct successive searches of home market sales for the next most similar model until all similar models have been exhausted. This process would have to be followed in all cases in which less than 90 percent of the home market sales were sold below cost. Statement of Policy In determining FMV, if the Department finds that sales of a given model, otherwise suitable for comparison, are sold below the cost of production, and the remaining sales of that model are inadequate to determine FMV, the Department will use constructed value to determine FMV. Implementation The above practice should be followed in all investigations and administrative reviews for which a preliminary determination has not been reached by the issue date of this bulletin, and in all final determinations in which the issue has been raised in comments from interested parties. If this method is challenged in comments after a preliminary determination, you should use the reasoning expressed in the bulletin, as well as citing to any appropriate cases. In responding to the comment, the bulletin itself, standing alone, cannot be cited as authority for an action, as it is not a regulation.