[Federal Register Volume 59, Number 215 (Tuesday, November 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27667]


[[Page Unknown]]

[Federal Register: November 8, 1994]


                                                   VOL. 59, NO. 215

                                          Tuesday, November 8, 1994

DEPARTMENT OF COMMERCE

International Trade Administration
[A-570-827]

 

Notice of Final Determination of Sales at Less Than Fair Value: 
Certain Cased Pencils From the People's Republic of China

AGENCY: Import Administration, International Trade Administration, 
Department of Commerce.

EFFECTIVE DATE: November 8, 1994.

FOR FURTHER INFORMATION CONTACT: Kristin Heim or Thomas McGinty, Office 
of Countervailing Investigations, Import Administration, International 
Trade Administration, U.S. Department of Commerce, 14th Street and 
Constitution Avenue, N.W., Washington, D.C. 20230; telephone: (202) 
482-3798 or (202) 482-5055, respectively.

Final Determination

    The Department of Commerce (``the Department'') determines that 
certain cased pencils (pencils) from the People's Republic of China 
(PRC) are being, or are likely to be, sold in the United States at less 
than fair value (LTFV), as provided in section 735 of the Tariff Act of 
1930, as amended (the Act). The estimated margins are shown in the 
``Suspension of Liquidation'' section of this notice.

Case History

    Since the preliminary determination in this investigation on June 
8, 1994, (59 FR 30911, June 16, 1994), the following events have 
occurred.
    From July 4 through 15, 1994, Department officials conducted 
verification of the responses of the responding exporters, Shanghai 
Foreign Trade Corporation (SFTC), Shanghai Lansheng Corporation 
(Lansheng), Guangdong Provincial Stationery & Sporting Goods Import & 
Export Corp. (Guangdong), and China First Pencil Co., Ltd. (China 
First), a responding exporter and manufacturer; and the responding 
manufacturers Shanghai Three Star Stationery Industry Corporation 
(Three Star), and Anhui Stationery Company (Anhui).
    On July 22, 1994, petitioner alleged that there is a reasonable 
basis to believe or suspect that critical circumstances exist with 
respect to imports of certain cased pencils from the PRC. On August 10, 
1994, the Department published in the Federal Register a notice of 
postponement of the final determination (59 FR 40865). On August 26, 
1994, the Department published in the Federal Register a preliminary 
affirmative determination of critical circumstances (59 FR 44128).
    Petitioner and respondents submitted case and rebuttal briefs on 
September 21 and October 3, 1994, respectively. A public hearing was 
held on October 5, 1994.

Scope of Investigation

    The products covered by this investigation are certain cased 
pencils of any shape or dimension which are writing and/or drawing 
instruments that feature cores of graphite or other materials encased 
in wood and/or man-made materials, whether or not decorated and whether 
or not tipped (e.g., with erasers, etc.) in any fashion, and either 
sharpened or unsharpened. The pencils subject to this investigation are 
classified under subheading 9609.10.00 of the Harmonized Tariff 
Schedule of the United States (``HTSUS'').
    Specifically excluded from the scope of this investigation are 
mechanical pencils, cosmetic pencils, pens, non-cased crayons (wax), 
pastels, charcoals, and chalks.
    Although the HTSUS subheading is provided for convenience and 
customs purposes, our written description of the scope of this 
investigation is dispositive.

Class or Kind of Merchandise

    At the time of our initiation, the Department solicited comments 
from interested parties on whether all cased pencils constitute one 
class or kind of merchandise. Respondents first argued that raw 
pencils/pencil blanks and semi-finished pencils constitute a separate 
class or kind of merchandise apart from finished pencils.
    In addition, the Asia Pencil Association, an interested party in 
this investigation, argued that specialty pencils (e.g., carpenter and 
art pencils) constitute a separate class or kind of merchandise. 
However, the information submitted in support of its claim was 
insufficient to allow us to make a preliminary determination that 
specialty pencils are a separate class or kind of merchandise and no 
new information on specialty pencils has been submitted since the 
preliminary determination.
    Based on the information provided, the Department preliminarily 
determined that neither specialty pencils nor raw blanks constituted a 
separate class or kind of merchandise.
    In a submission dated June 2, 1994, respondents argued that the 
merchandise subject to this investigation comprises four separate 
classes or kinds of merchandise. Those arguments were filed too late to 
be considered for the preliminary determination and were to have been 
addressed fully in this determination. However, in their case brief of 
September 21, 1994, respondents argued that there are three classes or 
kinds of merchandise: Commodity, colored and designer. The Department 
will therefore address only respondents' most recent argument about the 
appropriate number of classes or kinds of merchandise under 
investigation.
    In order to establish whether cased pencils represent a single 
class or kind of merchandise, we examine below each of the criteria 
used by the Department to determine class or kind as described in 19 
CFR 353.29(i) (1) and (2) and Diversified Products Corp. v. United 
States, 6 CIT 155, 572 F.Supp. 883 (1983).

Physical Characteristics

    Respondents argue that commodity pencils are invariably hexagonal 
with a graphite core and a plain paint finish, colored pencils have a 
chemical-intensive core and designer pencils are round with a graphite 
core and ``proprietary artwork'' designs.
    Petitioner argues that, while the outward physical form of pencils 
sometimes differs, the production process is identical, except for the 
finishing. Petitioner submits that some commodity pencils are round 
while some designer pencils are hexagonal as well as triangular; that 
graphite pencils come in varying degrees of hardness due to varying 
chemical composition; and that the chemical core for colored pencils 
does not distinguish it from all other ``disposable, delible, portable 
marking instruments that require sharpening to renew the core.''
    The cased pencils described in the scope of this proceeding are 
disposable writing instruments. Two essential elements are present in 
all cased pencils. These are (1) a core which contains the material 
that, when the pencil is put to use, leaves a mark on a surface and (2) 
the casing in which the core rests. As such, we conclude that the 
physical characteristics of all pencils within the scope are similar.
    Regarding respondents' argument that the chemical-intensive cores 
of colored pencils should serve to distinguish them from other pencils 
in the scope, we note that the core composition of commodity pencils 
also varies based on the desired hardness and blackness of the pencil. 
Hence, we do not find this to be a basis for distinguishing colored 
from other pencils.
    With regard to shape, petitioner and respondents have submitted 
conflicting arguments. Based on the evidence on this record, the 
Department determines that commodity and designer pencils do not always 
have different shapes. Finally, with regard to the proprietary artwork 
on designer pencils, the difference from commodity pencils includes the 
application of foil, paint, ferrules, erasers, or some form of eye-
catching topper. While these add-ons make the pencils physically 
different from commodity pencils, they do not change the basic physical 
characteristics of the product, i.e., a core encased in wood or other 
material.

Customer Use and Expectations

    Respondents argue that commodity pencils are used in schools and 
businesses for writing; colored pencils are usually for children and 
always for coloring (not writing); and designer pencils are for 
collecting. In addition, respondents argue that marks made by most 
colored pencils are not able to be erased, while those of graphite 
pencils are. Petitioner contends that the customer use and expectation 
of all pencils is to make a mark on a surface.
    We agree that the expectations and uses of colored pencils are 
various and may differ from the expectations and uses of commodity and 
designer pencils. With respect to designer pencils, however, there is 
no evidence to support respondents' claim that these pencils are solely 
for collecting. While they are collectable, they are also used as 
writing instruments. Therefore, we have no basis to distinguish 
designer pencils from commodity pencils in terms of customer use and 
expectations.

Channels of Trade

    The channels of trade for PRC pencil sales are similar for all 
pencil types. The producer and/or exporter sells either directly to 
retail customers or distributors in the United States. The distributors 
then sell to either retailers or end-users in the United States. 
According to petitioner, U.S. produced pencils are also sold by 
manufacturers to retail customers or distributors. These distributors 
may also sell to retailers, businesses or schools. Hence, we find that 
all pencils within the scope of this proceeding are sold in the same 
channels of trade.

Manner in Which Pencils Are Advertised and Displayed

    There is conflicting evidence on the record in this investigation 
with respect to the manner in which pencils are advertised and 
displayed. Petitioner points to a China First catalog submitted in 
response to section A of our questionnaire. Petitioner argues that 
since all types of pencils are included in the China First catalog 
(some individual pages include a number of different types of pencils), 
we should conclude that the manner in which pencils are displayed is 
similar regardless of pencil type. Petitioner also submits that 
different types of pencils are often displayed together in retail 
outlets.
    Conversely, respondents submit that the manner of displaying and 
advertising pencils is particular to the type of pencil being offered 
for sale. Respondents contend that colored pencils are not offered for 
sale in office supply stores and commodity pencils cannot be found in 
toy stores and party shops. Respondents contend that even in the 
unusual event that commodity, colored, and designer pencils were 
offered for sale in the same store, they would not be displayed 
together.
    Based on our research, both petitioner and respondents are correct. 
Specialty stores such as party shops do not usually stock commodity 
pencils. On the other hand, office supply stores or pharmacies such as 
``Staples'' or ``CVS'' carry all three pencil types (commodity, colored 
and designer). In some instances they are displayed together, in other 
instances they are displayed separately.

Conclusion

    Based on the arguments presented and our own research and analysis, 
the Department is not persuaded that a determination of three separate 
classes or kinds of merchandise is warranted in this investigation. 
Although the products differ in certain respects, on the whole the 
similarities greatly outweigh the dissimilarities. In its Notice of 
Final Determination of Sales at Less Than Fair Value: Antifriction 
Bearings from West Germany, 54 FR 18992 (May 3, 1989), the Department 
stated that ``the real question is whether the differences are so 
material as to alter the essential nature of the product, and 
therefore, rise to the level of class or kind differences.'' In this 
instance, the differences do not alter the essential nature of the 
product. In addition, although such a finding is not dispositive to 
this analysis, the ITC recently issued its report on Cased Pencils from 
Thailand stating that ``all cased pencils . . . have similar physical 
characteristics and uses.'' (ITC Publication 2816, at I-8). Therefore, 
we conclude that commodity, colored and designer pencils are a single 
class or kind of merchandise.

Period of Investigation

    The period of investigation (POI) is June 1, 1993, through November 
30, 1993.

Separate Rates

    The four participating exporters, SFTC, Guangdong, China First, and 
Lansheng have each requested a separate rate. SFTC and Guangdong are 
companies owned by ``all the people.'' China First and Lansheng are 
shareholding companies, both of which were previously owned by ``all 
the people.'' China First issued shares in 1992 and Lansheng issued 
shares in September 1993. In the preliminary determination, Guangdong, 
SFTC, and Lansheng received separate rates. With respect to China 
First, we preliminarily determined that, due to the lack of information 
on the record regarding China First's ownership structure, we could not 
grant China First a separate rate at that time.
    In the Final Determination of Sales at Less Than Fair Value: 
Compact Ductile Iron Works from the People's Republic of China, 58 FR 
37909 (July 14, 1993) (CDIW), the Department determined that state-
owned companies, i.e., those owned by the central government, were not 
eligible for separate rates. In the Final Determination of Sales at 
Less Than Fair Value: Silicon Carbide from the People's Republic of 
China, 59 FR 22585, (May 2, 1994) (Silicon Carbide), we found that the 
PRC central government had devolved control of state-owned enterprises, 
i.e., enterprises ``owned by all the people.'' As a result, we 
determined that companies owned ``by all the people'' were eligible for 
individual rates, if they met the criteria developed in the Final 
Determination of Sales at Less Than Fair Value: Sparklers from the 
People's Republic of China 56 FR 20588 (May 6, 1991) (Sparklers) and 
amplified in Silicon Carbide.
    In this investigation, and in the recent final determination 
involving paper clips from the PRC (59 FR 51170, October 7, 1994), we 
have examined companies that had been ``owned by all the people,'' but 
are now shareholding companies with varying levels of government 
ownership. When these companies were ``owned by all the people,'' the 
central government devolved control of them. Hence, we focused our 
examination on whether the change in ownership form to shareholding 
companies altered that devolution of control. We found that it did not. 
Significantly, we found that the government (whether the central 
government or the Government of Shanghai) did not vote the shares. 
(See, verification reports of Lansheng and China First.) Although the 
government held its shares on behalf of the people, in one case those 
shares were voted by the company's former general manager (Mr. 
Lansheng), and in the other by the workers (China First).
    Because we have found that the government has, in effect, severed 
the voting rights from the shares it holds in trust on behalf of the 
people and bestowed those rights on the enterprises themselves, we 
determine that Lansheng and China First do not fall within the 
prohibition set out in CDIW. Hence, the Department has applied the 
criteria developed in Sparklers and amplified in Silicon Carbide to 
determine whether these companies, as well as the companies ``owned by 
all the people,'' should receive separate rates. Under this analysis, 
the Department assigns a separate rate only when an exporter can 
demonstrate the absence of both de jure1 and de facto2 
governmental control over export activities.
---------------------------------------------------------------------------

    \1\ Evidence supporting, though not requiring, a finding of de 
jure absence of central control includes: (1) absence of restrictive 
stipulations associated with an individual exporter's business and 
export licenses; (2) any legislative enactments decentralizing 
control of companies; or (3) any other formal measures by the 
government decentralizing control of companies.
    \2\ The factors considered include: (1) whether the export 
prices are set by or subject to the approval of a governmental 
authority; (2) whether the respondent has authority to negotiate and 
sign contracts and other agreements; (3) whether the respondent has 
autonomy from the government in making decisions regarding the 
selection of management; and (4) whether the respondent retains the 
proceeds of its export sales and makes independent decisions 
regarding disposition of profits or financing of losses (see Silicon 
Carbide).
---------------------------------------------------------------------------

De Jure Analysis

    The PRC laws placed on the record of this case establish that the 
responsibility for managing companies owned by ``all the people'' has 
been transferred from the government to the enterprise itself. These 
laws include: ``Law of the People's Republic of China on Industrial 
Enterprises Owned by the Whole People,'' adopted on April 13, 1988 
(1988 Law); ``Regulations for Transformation of Operational Mechanism 
of State-Owned Industrial Enterprises,'' approved on August 23, 1992 
(1992 Regulations); and the ``Temporary Provisions for Administration 
of Export Commodities,'' approved on December 21, 1992 (Export 
Provisions). The 1988 Law states that enterprises have the right to set 
their own prices (see Article 26). This principle was restated in the 
1992 Regulations (see Article IX).
    While the PRC government has devolved control over state-owned 
enterprises, the government has continued to regulate certain products 
through export controls. The Export Provisions list designates those 
products subject to direct government control. Pencils do not appear on 
the Export Provisions list and are not, therefore, subject to the 
constraints of these provisions.
    Consistent with Silicon Carbide, we determined that the existence 
of these laws demonstrates that Guangdong and SFTC, companies owned by 
``all the people,'' are not subject to de jure control.
    Since Lansheng and China First were initially companies owned by 
``all the people,'' the laws cited above establish that the government 
devolved control over such companies. The only additional law that is 
pertinent to the de jure analysis of Lansheng and China First as share 
companies is the Company Law (effective July 1, 1994). While Lansheng 
and China First indicated that they were organized consistent with the 
Company Law, the law did not enter into force until seven months after 
the POI. In any event, this law does not alter the government's de jure 
devolution of control that occurred when the companies were owned ``by 
all the people.'' Therefore, we have determined that Lansheng and China 
First are not subject to de jure control.
    In light of reports3 indicating that laws shifting control 
from the government to the enterprises themselves have not been 
implemented uniformly, an analysis of de facto control is critical to 
determining whether respondents are, in fact, subject to governmental 
control.
---------------------------------------------------------------------------

    \3\See ``PRC Government Findings on Enterprise Autonomy,'' in 
Foreign Broadcast Information Service-China-93-133 (July 14, 1993) 
and 1992 Central Intelligence Agency Report to the Joint Economic 
Committee, Hearings on Global Economic and Technological Change: 
Former Soviet Union and Eastern Europe and China, Pt.2 (102 Cong., 
2d Sess)
---------------------------------------------------------------------------

De Facto Control Analysis

    We analyze below the issue of de facto control based on the 
criteria set forth in Silicon Carbide.

Guangdong

    In the course of verification, we confirmed that Guangdong's export 
prices are not set, or subject to approval, by any government 
authority. This point was supported by Guangdong's sales documentation, 
company correspondence, and confirmed through questioning of a Shanghai 
Commission of Foreign Trade and Economic Cooperation (COFTEC) 
representative. Through an examination of sales documents pertaining to 
U.S. pencil sales, we also noted that Guangdong is able to negotiate 
prices with its customers without government interference or influence.
    We confirmed, through an examination of bank documents, that 
Guangdong has the authority to borrow freely, independent of government 
authority. We further found that, although required to exchange 20 
percent of its foreign exchange proceeds at the official exchange rate, 
Guangdong retained proceeds from its export sales and made independent 
decisions regarding disposition of profits and financing of losses. 
Guangdong's financial and accounting records supported this conclusion.
    Finally, we have determined that Guangdong has autonomy from the 
central government in making decisions regarding the selection of 
management. At verification, we found that management is elected by the 
Employee's Congress, which is made up of 60 percent workers and 40 
percent department chiefs. First candidates are nominated by the 
workers in each department. The Employee's Congress then reviews the 
qualifications of potential candidates and elects them. A review of the 
documentation of the election process indicated that COFTEC then 
confirms Guangdong's election of management. Based on an analysis of 
all these factors, we have determined that Guangdong is not subject to 
de facto control by governmental authorities.

SFTC

    During verification, we established that SFTC's export prices are 
set by the company and do not require approval by any governmental 
authority. SFTC has the authority to negotiate and sign contracts and 
other agreements independent of any government authority as evidenced 
by our examination of correspondence and written agreements and 
contracts. We also confirmed that SFTC retained proceeds from its 
export sales and made independent decisions regarding disposition of 
profits by examining bank account records, financial records, and 
purchase contracts.
    Based on our examination of management appointment announcements 
and other correspondence, we have determined that SFTC had autonomy 
from the government in making decisions regarding the selection of 
management. Management was elected by 50 departmental staff 
representatives. These representatives were themselves elected by 
workers in each department. Documentation provided by SFTC demonstrated 
that the provincial government merely acknowledged SFTC's election of 
management. In light of the above evidence of the lack of de facto 
government control, we have concluded that SFTC is entitled to a 
separate rate.

Lansheng

    In conducting a de facto analysis of Lansheng, we have examined the 
factors set forth in Silicon Carbide, and whether the change in 
corporate structure alters our conclusion regarding those factors. 
Lansheng's sales documentation and correspondence support the 
conclusion that no government entity exercises control over Lansheng's 
export prices. Additionally, our examination of numerous contracts with 
domestic and foreign trading companies demonstrates that Lansheng has 
the authority to negotiate and sign contracts and other agreements 
without interference from any governmental entity. We confirmed during 
verification that this situation did not change after Lansheng became a 
share company.
    Before Lansheng became a share company, the general manager of its 
predecessor company, Shanghai Stationery & Sporting Goods Import and 
Export Company (Shanghai Stationery), was elected on February 27, 1993. 
The election proceeded in the following manner.
    First, for every ten employees, there was one elected 
representative. Second, the representatives then elected the general 
manager. Third, once the general manager was elected, the company sent 
a letter, announcing the election to COFTEC. COFTEC then approved the 
election process and sent a letter of congratulations to the company. 
While COFTEC technically had the authority to reject an elected 
manager, it reportedly had never done so.
    After Lansheng became a share company, the same manager continued 
to lead the company. At the first general shareholders' meeting, when 
Lansheng's Board of Directors was elected, the shares held by the State 
Asset Management Bureau (SAMB) were voted by the general manager of the 
former company, Shanghai Stationery. Subsequently, the newly elected 
Board of Directors appointed the former general manager as Chairman of 
the Board for Lansheng. The evidence on the record regarding the 
election of management indicates that no representative of the SAMB was 
present at, or participated in, the election of the Board of Directors 
or the decision to retain current management. Moreover, the chairman's 
authority to vote the shares held by the government supports the 
conclusion that the chairman and the board, rather than the government, 
have the authority to appoint the company's management.
    We also found that Lansheng retained proceeds from export sales and 
made independent decisions regarding the disposition of profits and 
financing of losses both before and after becoming a share company. 
This point was supported through examination of Lansheng's bank account 
records and bank loan applications.
    As indicated above, the record indicates that Lansheng's change to 
a share company did not have any effect on the government's devolution 
of control over Lansheng. The evidence shows that, following its 
conversion to a share company, 25.1 percent of Lansheng's shares were 
sold publicly, with the proceeds returning to the company as new 
capital investment. The remaining 74.9 percent of the shares represents 
the value of the assets in the original company, Shanghai Stationery 
(which was owned ``by all the people''). Evidence on the record 
indicates that these remaining shares are held in trust by the SAMB, 
just as its assets were held in trust when Lansheng was owned ``by all 
the people.'' The company's management, which has remained the same 
throughout its transition to a share company, votes these shares at the 
general shareholders' meetings of Lansheng. This evidence supports the 
conclusion that, under the new corporate structure, the government has 
not exerted control over Lansheng through the exercise of shareholder 
rights or otherwise; operational control remains in the hands of 
company management.

China First

    China First has been a public company since 1992. China First's 
shareholders include both the state and individual PRC and foreign 
investors. At verification, through an examination of the minutes from 
the 2nd Annual Shareholders Meeting, company records, and discussions 
with government and company officials, we found that the holder of the 
state-owned shares was the ``Office for State Assets Administration of 
the Shanghai Municipality'' (SAASM) and that SAASM's shares are voted 
by the company's employee shareholders. We also note the record shows 
that, as of verification, more than 50 percent of China First's shares 
were held by private, individual investors, both foreign and Chinese.
    In conducting a de facto analysis of China First, we have examined 
the factors set forth in Silicon Carbide. China First's sales 
documentation and correspondence supports the conclusion that no 
government entity exercises control over China First's export prices. 
Additionally, our examination of numerous contracts with domestic and 
foreign trading companies demonstrates that China First has independent 
authority to negotiate and sign contracts and other agreements, such as 
joint ventures.
    China First holds a general shareholders meeting annually. At this 
meeting the shareholders elect the Board of Directors, each of whom 
serves a three year term. Employees vote the shares held by the 
government in selecting the Board. The Board of Directors in turn 
selects the company's management. Because the state-owned shares 
represent a minority interest and because those shares are, in fact, 
voted by employee shareholders, the evidence supports the conclusion 
that the government does not control selection of the Board of 
Directors or other members of management.
    We also found that China First retained proceeds from export sales 
and made independent decisions regarding the disposition of profits and 
financing of losses both before and after becoming a share company. 
This point was supported through an examination of China First's 
financial and accounting records, and bank accounts. The evidence 
supports the conclusion that, under the corporate structure of China 
First, the government has not exerted control through the exercise of 
shareholder rights or otherwise; operational control remains in the 
hands of company management.

Conclusion

    In the case of Guangdong, SFTC, Lansheng and China First, the 
record demonstrates an absence of de jure and de facto government 
control. Accordingly, we determine that each of these exporters should 
receive a separate rate.

Nonmarket Economy

    The PRC has been treated as a nonmarket economy (NME) in past 
antidumping investigations. (See, e.g., Final Determination of Sales at 
Less than Fair Value: Certain Paper Clips from the People's Republic of 
China, 59 FR 511680 (October 7, 1994)). No information has been 
provided in this proceeding that would lead us to overturn our former 
determinations. Therefore, in accordance with 771(18)(c) of the Act, 
the Department has treated the PRC as an NME for purposes of this 
investigation.
    Where the Department is investigating imports from an NME, section 
773(c)(1) of the Act directs us to base FMV on the NME producers' 
factors of production, valued in a comparable market economy that is a 
significant producer of comparable merchandise. Section 773(c)(2) of 
the Act alternatively provides that where available information is 
inadequate for using the factors of production methodology, FMV may be 
based on the export prices for comparable merchandise from market 
economy countries at a comparable level of economic development.
    In this investigation, respondents have urged the Department to 
employ the alternative methodology provided in section 773(c)(2) of the 
Act, i.e., the export price of a pencil from a comparable market 
economy. In particular, they have argued that because the primary input 
into PRC pencils, lindenwood, cannot be valued exactly, the Department 
is compelled to employ the alternative valuation of FMV. Petitioner 
argues against using the alternative methodology for FMV. Instead, 
petitioner suggests that prices for jelutong wood be used to value 
lindenwood, as the Department did in the preliminary determination.
    We have determined that the absence of a price for lindenwood in 
the surrogate country does not preclude us from using the factors of 
production methodology. However, we have not used the jelutong prices 
relied upon in our preliminary determination. For further discussion of 
the arguments regarding the alternative methodology, see, Comment 1, 
below.

Surrogate Country

    As discussed above, section 773(c)(4) of the Act requires the 
Department to value the NME producers' factors of production, to the 
extent possible, in one or more market economy countries that are (1) 
at a level of economic development comparable to that of the nonmarket 
economy country, and (2) significant producers of comparable 
merchandise. Of the countries that have been determined to be 
economically comparable to the PRC, evidence on the record of this case 
indicates that India, Pakistan and Indonesia are significant producers 
of pencils (see, Calculation Memorandum, attachment 1, October 31, 
1994). In order to select the surrogate from among these countries that 
meet the statutory criteria, we have reviewed the data that has been 
submitted and that we have been able to develop on factor values from 
these countries.
    With respect to Pakistan, we have not located data for a 
significant number of the Chinese production factors. Among the missing 
factors are: certain packing materials, polyvinyl acetate, semi-skilled 
labor, SG&A, profit, and all transportation rates except trucking for a 
distance of 1000 km. For Indonesia, we have data for even fewer 
factors. In India, we have factor values for all inputs (other than 
wood, as discussed below, and tallow). Moreover, we have obtained 1993 
values for India, the most recent time period available for data from 
any surrogate country. Because India meets the statutory criteria for 
surrogate country selection, and because we have more complete Indian 
data, we determine that India is the preferred surrogate market in the 
instant investigation. Therefore, except for certain inputs described 
below, we have relied on Indian prices to value the Chinese factors of 
production.

Fair Value Comparisons

    To determine whether sales of pencils from the PRC to the United 
States by China First, Guangdong, SFTC, and Lansheng were made at less 
than fair value, we compared the United States price (USP) to the 
foreign market value (FMV), as specified in the ``United States Price'' 
and ``Foreign Market Value'' sections of this notice. We do not have 
verified factors of production for a portion of SFTC's U.S. sales 
discovered at verification. For these sales, we have applied best 
information available (BIA). (See ``Best Information Available'' 
section of this notice.)

United States Price

    We based USP on purchase price, in accordance with section 772(b) 
of the Act, because the subject merchandise was sold directly by the 
Chinese exporters to unrelated parties in the United States prior to 
importation into the United States.
    For those exporters that responded to the Department's 
questionnaire, we calculated purchase price based on packed, FOB 
foreign-port prices to unrelated purchasers in the United States. We 
made deductions for containerization, loading, port handling expenses 
and foreign inland freight valued in a surrogate country. In two 
instances, sales were made on a C&F basis. For these sales, we adjusted 
for freight expenses.

Foreign Market Value

    As discussed above, we calculated FMV, based on the factors of 
production reported by the factories which produced the subject 
merchandise for the three exporters. The factors used to produce 
pencils include materials, labor, and energy. We made adjustments to 
materials usages to account for the resale of scrap materials, where 
applicable.
    In determining the appropriate surrogate value to assign to each 
factor of production, we used publicly available published information 
(PAPI), where possible. The PAPI used was: (1) an average non-export 
value; (2) most current; (3) product-specific; and (4) tax-exclusive.
    The following materials were not valued in India:

Wood

    The wood used by the Chinese producers in pencil production 
(Chinese lindenwood) has been the subject of much debate in this 
investigation. Wood is the most significant input into a finished 
pencil. (For the domestic industry, it accounts for approximately 50 
percent of the cost.)
    Prior to the preliminary determination, we consulted industry 
experts who told us that jelutong was ``quite similar'' to lindenwood 
and that ``in price, property and uses, American basswood is nearly 
indistinguishable from lindenwood.'' Although we had this information 
at the time of the preliminary determination, we did not have a 
surrogate value for basswood. Instead, we used a basket category of 
woods imported into India to assign a value to lindenwood. This 
category did not include lindenwood or basswood, but did include 
jelutong, which the record indicated was used to produce pencils in 
Indonesia.
    Since the preliminary determination, both respondents and 
petitioner have provided information on the price and quality of 
basswood, the most similar wood to lindenwood. The prices are those 
charged by U.S. producers to U.S. customers. Despite extensive 
research, no surrogate market or world prices for basswood have been 
found.
    Having determined that basswood is most similar to lindenwood, we 
have used U.S. basswood prices to value the wood input. Although 
section 773(c)(4) directs the Department to value the NME factors of 
production in a comparable surrogate country that is a significant 
producer of comparable merchandise, this is required only to the extent 
possible. In this case, where wood is such a significant input and 
where the only alternative to the basswood price, a price for jelutong, 
is so much higher than the most comparable wood, we have determined 
that it is appropriate to use the most comparable wood even though we 
can only find prices for this input in the United States.

Erasers, Ferrules and Paint

    Respondents provided information which led us to question the 
quality of the Indian PAPI for erasers, ferrules, paint, animal glue 
and foil. Based on a comparison of the Indian values to the Pakistani 
values and the values provided in the petition for these inputs (the 
only other sources of prices for these inputs), we determine that the 
Indian values for ferrules, erasers and paint were aberrational. 
Therefore, we valued these factors using Pakistani import statistics 
(see, Calculation Memorandum, October 31, 1994).

Tallow

    Tallow is not imported or, to the best of our knowledge, sold in 
India or Pakistan. Therefore, we have valued this input in Indonesia. 
As discussed above, Indonesia has been found to be economically 
comparable to the PRC and to be a significant producer of pencils.

Non-material Inputs

    We used Indian transportation rates to value inland freight between 
the source of the production factor and the pencil factories, and 
between factories, where appropriate. In those cases where a respondent 
failed to provide any information on transportation distances and 
modes, we applied, as BIA, the most expensive distance/modes 
combination (i.e., the longest truck rates) that was available in 
India. We were unable to obtain values for two modes of transportation 
(man-drawn carts, inland water transport). Therefore, we assumed that 
these forms were competitive with trucking rates over similar 
distances.
    To value electricity, we used PAPI from the Asian Development Bank 
on Indian rates. To value coal and natural gas, we used Indian Import 
Statistics for 1993, the Monthly Statistics of Mineral Production, and 
the Indian Bureau of Mines dated November 1992, respectively. To value 
water, we used the Indian industrial schedule from the Water Utilities 
Data Book.
    For all material and energy values that were for a period prior to 
the POI, we adjusted the factor values to account for inflation between 
the applicable time period and the POI using wholesale price indices 
published in International Financial Statistics (IFS) by the 
International Monetary Fund.
    To value labor amounts, we used the International Labor Office's 
1993 Yearbook of Labor Statistics. To determine the number of hours in 
an Indian workday, we used the Country Reports: Human Rights Practices 
for 1990. We adjusted the factor values to account for inflation 
between the applicable time period and the POI using the consumer price 
indices published in IFS.
    To value factory overhead, we calculated percentages based on 
elements of industry group income statements from The Reserve Bank of 
India Bulletin (RBI), December 1993. We based our overhead percentage 
calculations on the RBI data, adjusted to reflect an energy-exclusive 
overhead percentage. For selling, general and administrative (SG&A) 
expenses, we calculated percentages based on the RBI data. We used the 
calculated SG&A percentages because they were greater than the ten 
percent statutory minimum. However, we used the statutory minimum of 
eight percent for profit because the profit percentage derived from the 
RBI data was less than the statutory minimum of eight percent of 
materials, labor, factory overhead, and SG&A expenses.
    We made no adjustments for selling expenses. Packing materials were 
valued using Indian PAPI. These prices were adjusted to include the 
freight costs for the delivery of packing materials to the factories 
producing pencils.

Best Information Available

    Because information has not been presented to the Department to 
prove otherwise, only SFTC, Guangdong, China First and Lansheng are 
entitled to separate dumping margins. Other exporters identified by the 
PRC Ministry of Foreign Trade and Economic Cooperation (MOFTEC) have 
failed to respond to our questionnaire. Lacking responses from these 
companies, we are basing the PRC country-wide rate on BIA in accordance 
with section 776(c) of the Act.
    In determining what to use as BIA, the Department follows a two-
tiered methodology whereby the Department normally assigns lower 
margins to those respondents that cooperated in an investigation and 
more adverse margins for those respondents which did not cooperate in 
an investigation. As outlined in the Final Determination of Sales at 
Less Than Fair Value: Certain Cold-Rolled Carbon Steel Flat Products 
From Argentina (Argentina Steel), 58 FR 7066, 7069-70 (February 4, 
1993), when a company refuses to provide the information requested in 
the form required, or otherwise significantly impedes the Department's 
investigation, it is appropriate for the Department to assign to that 
company the higher of (a) the highest margin alleged in the petition, 
or (b) the highest calculated rate of any respondent in the 
investigation.
    Here, the non-responding companies failed to cooperate. Therefore, 
we are assigning to them the highest margin in the petition, as 
recalculated by the Department for the initiation and on the basis of 
petitioner's updated information submitted in May 1994. Also, in 
recalculating the petition rate, we substituted the U.S. basswood price 
discussed above for the wood value used by petitioner. In making this 
change we relied on PRC wood usage factors because of the possibility 
that the amount of wood used to produce a pencil will vary depending on 
wood type.
    We are also applying BIA to a portion of SFTC's sales. SFTC was 
cooperative in this investigation. However, we are lacking the 
necessary data for FMV calculations for three sets of pencil sales. We 
do not find these deficiencies sufficient to call into question the 
overall reliability of SFTC's data. Therefore, we are applying partial 
BIA to these sales. As partial BIA, we applied the higher of (a) the 
highest margin alleged in the petition, or (b) the highest calculated 
rate of any respondent in the investigation.

Verification

    As provided in section 776(b) of the Act, we verified information 
provided by respondents using standard verification procedures, 
including the examination of relevant sales and financial records, and 
original source documentation.

Continuation of Suspension of Liquidation

    For China First and Guangdong we calculated a zero margin. 
Therefore, in accordance with 19 CFR 353.21 and consistent with Jia 
Farn Manufacturing Co., Ltd. v. United States, Slip Op. 93-42 (March 
26, 1993), we will exclude from the application of any order issued 
imports of subject merchandise that are sold by either China First or 
Guangdong and manufactured by the producers whose factors formed the 
basis for the zero margin. Under the NME methodology, the zero rate for 
each exporter is based on a comparison of the exporter's U.S. price and 
FMV based on the factors of production of a specific producer (which 
may be a different party). The exclusion, therefore, applies only to 
subject merchandise sold by the exporter and manufactured by that 
specific producer. Merchandise that is sold by the exporter but 
manufactured by other producers will be subject to the order, if one is 
issued. This is consistent with Jia Farn which held that exclusion of 
merchandise manufactured and sold by respondent did not cover 
merchandise sold but not manufactured by respondent. Therefore, 
merchandise that is sold by China First or Guangdong but produced by 
another producer is subject to suspension of liquidation at the ``all 
others'' cash deposit rate.
    In accordance with sections 733(d)(1) and 735(c)(4) (A) and (B) of 
the Act, we are directing the U.S. Customs Service to continue to 
suspend liquidation of all entries of pencils from the PRC that are 
entered, or withdrawn from warehouse, for consumption on or after March 
18, 1994, (i.e., 90 days prior to the date of publication of our 
preliminary determination in the Federal Register), except entries of 
the excluded merchandise described above. The U.S. Customs Service 
shall require a cash deposit or posting of a bond equal to the 
estimated amount by which the FMV exceeds the USP as shown below. These 
suspension of liquidation instructions will remain in effect until 
further notice.
    The weighted-average dumping margins are as follows:

------------------------------------------------------------------------
                                                             Weighted-  
             Manufacturer/Producer/Exporter               average margin
                                                            percentage  
------------------------------------------------------------------------
China First/Company A...................................            0.00
China First/Any other manufacturer......................           44.66
Guangdong/Company B.....................................            0.00
Guangdong/Any other manufacturer........................           44.66
SFTC....................................................            8.31
Shanghai Lansheng.......................................           17.45
All Others..............................................           44.66
------------------------------------------------------------------------

Critical Circumstances

    On August 22, 1994, the Department issued its preliminary 
determination that critical circumstances exist in this investigation 
with respect to pencils exported by SFTC, China First, Lansheng, and 
``all others.''
    Section 733(e)(1) of the Act provides that the Department will 
determine that there is a reasonable basis to believe or suspect that 
critical circumstances exist if:
    (A) (1) there is a history of dumping in the United States or 
elsewhere of the class or kind of merchandise which is the subject of 
this investigation, or
    (2) the person by whom, or for whose account, the merchandise was 
imported knew or should have known that the exporter was selling the 
merchandise which is subject of the investigation at less than its fair 
value, and
    (B) there have been massive imports of the class or kind of 
merchandise which is the subject of the investigation over a relatively 
short period.
    Because we have determined that Guangdong and China First in 
connection with their responding suppliers have not sold cased pencils 
to the U.S. at less than fair value during the POI, we determine that 
critical circumstances do not exist with respect to these companies. 
Therefore, we have limited our analysis of critical circumstances to 
SFTC and Lansheng.

History of Dumping

    As stated in our preliminary determination of critical 
circumstances, in April 1994, the Government of Mexico published an 
antidumping duty order on certain cased pencils produced and exported 
from the PRC. On this basis, we determine that there is a history of 
dumping elsewhere of the class or kind of merchandise under 
investigation.

Massive Imports

    In accordance with 19 CFR 353.16(f) and 353.16(g), to determine 
whether imports have been massive over a relatively short period of 
time, we consider: 1) the volume and value of the imports; 2) seasonal 
trends (if applicable); and 3) the share of domestic consumption 
accounted for by the imports.
    When examining volume and value data, the Department typically 
compares the export volume for equal periods immediately preceding and 
following the filing of the petition. Under 19 CFR 353(f)(2), unless 
the imports in the comparison period have increased by at least 15 
percent over the imports during the base period, we will not consider 
the imports to have been ``massive.''
    The U.S. volume and value information submitted by the respondents 
in this investigation and used by the Department in its preliminary 
determination of critical circumstances is unchanged. Based on this 
information, we find that imports of pencils from the PRC have been 
massive over a relatively short period of time for both SFTC and 
Lansheng. Also, for the non-responding exporters, we have assumed as 
BIA that imports have been massive.
    Therefore, the statutory criteria for finding critical 
circumstances have been met for SFTC and Lansheng and all non-
responding PRC exporters of pencils.

Interested Party Comments

    Comment 1: Respondents argue that section 773(c)(1) of the Act 
requires the Department to value the specific input used by the PRC 
producer based on the best available information regarding values in 
the surrogate country or countries. Absent an acceptable surrogate 
value for each factor, the Department must consider the use of the 
exception provided for in the statute at section 773(c)(2) of the Act. 
This is especially so where, as here, the Department lacks a surrogate 
value for the single most significant input, lindenwood.
    Respondents submit that the Conference Report to what became the 
Trade and Competitiveness Act of 1988 shows Congress' recognition that 
in some cases the Department will be unable to develop adequate and 
usable sources of surrogate factor values (which, in turn, will deprive 
nonmarket economy producers and exporters of any notion of fairness), 
requiring resort to the alternative provided in the statute, i.e., 
export prices of comparable merchandise from an economically comparable 
country. See, Omnibus Trade & Competitiveness Act of 1988--Conference 
Report, Rep. No. 100-576, 100th Cong., 2d Sess. at 592 (1988). 
Respondents assert that this Conference Report reflects Congress' 
desire to provide nonmarket economy countries with some semblance of 
realism and reasonableness in the determination of their foreign market 
values.
    Petitioner argues that the statute provides a clear preference for 
the factors of production methodology over the alternative, export 
prices of comparable merchandise from an economically comparable 
country. Petitioner asserts that the Department can only use the export 
price alternative if the Department finds that the available 
information is inadequate for purposes of determining the FMV of the 
subject merchandise. In this case, the price of jelutong is acceptable 
for valuing the Chinese wood price.
    Petitioner claims further that the Indian export data regarding 
pencils provided by respondents covers too few pencils and provides no 
information with respect to the quality of those pencils. Therefore, 
petitioner contends, the Indian export data provide an inadequate basis 
for determining FMV. The Department should not reject the adequate and 
detailed surrogate value data in favor of deficient export data.
    DOC Position: The statute states that the Department shall 
``determine the foreign market value of the merchandise on the basis of 
the value of the factors of production utilized in producing the 
merchandise,'' and furthermore that, ``the valuation of the factors of 
production shall be based on the best available information regarding 
the values of such factors in a market economy country or countries 
considered to be appropriate by the administering authority.'' See 
section 773(c)(1) of the Act. The Act further provides that, if the 
Department finds the available information inadequate for purposes of 
determining foreign market value based on the factors of production, 
the Department shall base FMV on the price at which comparable 
merchandise is produced and exported in one or more market economy 
countries at a comparable level of economic development to that of the 
nonmarket economy. See, section 773(c)(2).
    In this investigation, we have determined that we have sufficient 
information on factor values to rely on the factors of production 
methodology. Although we do not have a value for the specific wood used 
by PRC producers, the Department may exercise its discretion in 
selecting a comparable input by which to value this factor.
    In Ceiling Fans From the People's Republic of China: Notice of 
Court Decision; Exclusion From the Application of the Antidumping Duty 
Order, in Part; Termination of Administrative Reviews; and Amended 
Final Determination and Order (59 FR 9956, March 2, 1994), the 
Department stated that ``. . . section 773(c)(1) of the Act provides 
for valuation of factors of production on the best available 
information from an appropriate surrogate country, not on the basis of 
perfectly conforming information.'' In this instance, we have evidence 
that basswood is virtually indistinguishable from lindenwood. 
Therefore, as explained in FMV section of this notice, we have used 
basswood as a surrogate value for lindenwood.
    Moreover, we are not persuaded that the use of the statutory 
exception in this investigation would increase the accuracy of our 
calculations. The comparison of an average Indian export price with 
each of the several different pencil types exported to the U.S. by the 
PRC respondents could lead to significant distortions and inherent 
unfairness. Because the Indian export price may reflect a wide variety 
of pencil types, PRC exporters selling lower value-added pencils, e.g., 
raw or semi-finished, could be severely penalized by such an approach. 
Similarly, PRC exporters of higher value-added pencils, e.g., colored, 
foil, or designer, could profit.
    Absent some workable method for adjusting the average Indian export 
price to reflect the differences in merchandise exported by the 
respondents, we cannot agree that the export price methodology yields a 
better measure of FMV in this case.
    Comment 2: Respondents argue that, if the Department does not use 
the export price of Indian pencils as FMV, then it must reject the use 
of jelutong as a surrogate for lindenwood.
    Wood is the single most significant input used in the production of 
wooden cased pencils, as petitioner's own figures demonstrate. All 
respondents use lindenwood exclusively in the production of pencils. 
Respondents submit that lindenwood is a very low-quality wood with 
little alternative commercial use. The basket of woods chosen by the 
Department in its preliminary determination as a surrogate value for 
lindenwood is a group of tropical timbers, whereas lindenwood is a 
temperate hardwood. Respondents submit that, at the very least, the 
basket of woods should include lindenwood. Therefore, respondents argue 
that the basket category is unacceptable for use as a surrogate for 
lindenwood.
    Petitioner argues that the Department properly relied upon the 
price of jelutong for valuing the wood input. Based on the evidence 
developed by the Department, jelutong is ``quite similar'' to 
lindenwood. Also, petitioner asserts that jelutong is used to produce 
pencils.
    Petitioner submits that the Department has previously found it 
appropriate to rely on available information for the price of a similar 
input material when surrogate information for the identical material is 
not available. See, Final Determination of Sales at Less Than Fair 
Value: Sebacic Acid from the People's Republic of China, 59 FR 28053, 
28058 (May 31, 1994). Thus, according to petitioner, because the record 
demonstrates that jelutong and lindenwood are similar types of wood, 
jelutong is an adequate surrogate and meets the statutory requirement.
    DOC Position: All parties agree that wood is the single most 
significant input used in the production of wooden cased pencils. Thus, 
the Department has taken great care in its determination of the 
appropriate surrogate value for PRC lindenwood. In light of information 
submitted by both petitioner and respondents and the Department's own 
research after the preliminary determination, we determine that the 
value of jelutong and/or the Indian basket category of tropical woods 
used in the preliminary determination is not an adequate surrogate for 
lindenwood. We find the jelutong value inappropriate because our 
research indicates that, although jelutong is used in pencil 
production, it is an entirely different genus of wood. Jelutong is a 
tropical soft timber and lindenwood is a temperate hardwood. Simply 
because both woods are used to produce pencils does not, in our 
estimation, indicate that they are comparable in quality or value. 
Indeed, when the price of jelutong is compared to the price of 
basswood, the wood identified as most comparable to lindenwood, it 
reveals that the value of jelutong is not comparable.
    Moreover, we note that the Indian import value used for logs in the 
preliminary determination was based on a basket category. The basket 
category is made up of seven types of wood; three of these are similar 
in properties and use to lindenwood, four are not as similar. 
Therefore, even if we were to agree with petitioner that jelutong is an 
acceptable surrogate for lindenwood, it is questionable whether this 
basket price even reflects a value for jelutong.
    The price used in the preliminary determination for sawn jelutong, 
in contrast to the price for logs, is a world market price. Therefore, 
the problem of jelutong is twofold: it is less similar to lindenwood 
than is basswood and it is reported in a basket category for one of the 
two forms in which PRC producers purchased lindenwood.
    Comment 3: Petitioner argues that, should the Department decide to 
use a U.S. price for basswood, it should not use the price provided by 
respondents. Petitioner argues that the type of basswood described in 
respondents' submission is not suitable for pencil production. 
Specifically, the information submitted by respondents is for grade 4/4 
FAS+ (FAS+ indicates highest quality) basswood, whereas pencil 
production requires at least grade 12/4. In support of this, petitioner 
points to a study which it submitted which shows that U.S. producers 
would use 12/4 and 16/4 basswood.
    DOC Position: One PRC producer who supplies pencils to a PRC 
exporter purchases wooden slats, rather than logs or sawn timber, to 
produce pencils. Slats are thin pieces of wood that are further 
processed than logs. The U.S. prices we have for basswood which has 
been processed beyond the log stage (i.e., sawn lumber) are for grade 
4/4 (submitted by respondents) and for grades 12/4 and 16/4 (obtained 
by the Department). None of these grades corresponds to the actual 
input purchased by the PRC company in question (e.g. slats).
    Lacking information on the specific input used by the PRC producer, 
we have relied on petitioner's study as indicative of the grades of 
sawn lumber that would be used to produce pencils. Moreover, we also 
note that the prices submitted by respondents were for September 1994, 
after the POI.
    Petitioner's submission also indicated that U.S. producers would 
use FAS+ and 1C (number 1 common) quality wood. Therefore, we averaged 
the prices during the POI of 12/4 and 16/4 basswood at FAS+ and 1C 
quality levels.
    The other PRC producers in this investigation purchase logs of 
lindenwood for their pencil production. We obtained basswood log price 
listings during the POI from another publication (see, Calculation 
Memorandum, October 31, 1994) and we used POI prices for log basswood 
for these producers.
    Comment 4: Respondents argue that the Department should review its 
determination of India as the most appropriate surrogate, and in light 
of new information, determine that Pakistan is the most appropriate 
surrogate. Specifically, a comparison of revised 1994 World Bank 
statistics in the World Development Report shows that Pakistan's 
economy is more comparable to that of the PRC than India's, based on 
per capita GNP and growth rates. Moreover, the Pakistani factor value 
data is more timely, i.e., closer to the POI, and reflects larger, 
``commercially viable'' import quantities.
    Petitioner claims that India should remain the preferred surrogate 
because the Department has consistently determined it to be the 
appropriate surrogate for the PRC, based on the criteria set forth in 
section 773(c)(4) of the Act. Furthermore, according to petitioner, the 
statute does not require that the Department choose the most comparable 
surrogate, but rather only that the Department base its surrogate 
determination on a country: (1) whose economy is comparable to that of 
the PRC, and (2) which is a significant producer of comparable 
merchandise. In petitioner's view, Pakistan does not meet the second 
criterion. Finally, petitioner argues that the Pakistani factor values 
placed on the record by respondents do not cover all the inputs.
    DOC Position: Based on World Bank data, the Department has 
identified a number of countries that are at a level of economic 
development comparable to the PRC. Among these comparable countries are 
Pakistan, India, and Indonesia. We have also determined that Pakistan, 
India, and Indonesia are significant producers of pencils (see, 
Concurrence Memorandum, October 31, 1994). Therefore, all three 
countries meet the statutory criteria for being selected as the 
surrogate in this investigation.
    In this case, India is the country where, in comparison to other 
potential surrogates, we have been able to obtain values for the 
overwhelming majority of factors. (Pakistani values were available for 
approximately half the factors, Indonesia less than that.) Therefore, 
we have chosen India as our primary surrogate and we are valuing most 
of the factors there. This is consistent with our practice of 
attempting to use a single country, where possible, for valuing 
factors. See, e.g., Final Determination of Sales at Less Than Fair 
Value: Sulfanilic Acid from the People's Republic of China, 57 FR 29705 
(July 6, 1992).
    We also note that we have been able to obtain Indian data that is 
contemporaneous with the Pakistani data submitted by respondents. 
Therefore, while we agree that ``timeliness'' of the data may be a 
reason to select one potential surrogate over another, that issue does 
not arise in this case. (Respondents' comment regarding ``commercially 
viable'' amounts is addressed in the context of the Department's 
decisions with respect to specific factors.)
    Comment 5: If the Department continues to use India as the 
surrogate country, respondents argue that certain Indian factors data 
are skewed. Therefore the Department should reject these Indian factors 
in favor of more reasonable, commercially justifiable and current data 
submitted by respondents. Specifically, they contend that Pakistani 
factor values for erasers, ferrules, plastic foil, animal glue and 
paint represent more reasonable surrogate values than the information 
used by the Department in its preliminary determination. They state 
that the time period covered by the Pakistani data is broader and more 
recent, the Pakistani values are based on more commercially viable 
import volumes, and for erasers, ferrules and animal glue, the 
Pakistani values are more aligned with the U.S. industry cost data 
submitted by petitioner.
    Petitioner argues that Pakistani data represent a larger volume of 
merchandise simply because Pakistani tariff categories are broader than 
Indian tariff categories, which are based on the HTS. Petitioner 
further asserts that it is the Department's practice to use data from a 
single country where possible in valuing factors of production. 
Finally, petitioner claims that it is meaningless that some of the 
Pakistani data are closer to the costs of the U.S. pencil industry. The 
United States is not a surrogate country, therefore, U.S. prices are 
irrelevant to the calculation of FMV.
    DOC Position: Although we have selected India as the appropriate 
surrogate country in this investigation, this does not mean that we are 
required to use those Indian factor values that we find to be 
aberrational. We have analyzed the Indian factor values for erasers, 
ferrules, paint, animal glue, and plastic foil. We compared these 
factor values with Pakistani and U.S. values based on U.S. costs taken 
from the petition and found the Indian factor values for erasers, 
ferrules and paint to be aberrational. (See, Calculation Memorandum, 
October 31, 1994.) Therefore, we have used import statistics from 
Pakistan, another country which is economically comparable to the PRC 
and which is a significant producer of comparable merchandise, in order 
to value these three factors as accurately as possible.
    We agree with petitioner that, when possible, the Department's 
preference is to use a single surrogate market to value the factors of 
production. However, as stated above, when the facts of a case indicate 
that this will not permit accurate valuation of the input, we are not 
required to do so. Where necessary, we have used factor values from 
multiple countries in a number of recent NME investigations. See, Final 
Determination of Sales at Less Than Fair Value: Paper Clips from the 
People's Republic of China 59 FR 51168 (October 7, 1994); Final 
Determination of Sales at Less Than Fair Value: Headwear from the 
People's Republic of China 54 FR 11983 (March 23, 1989); and Final 
Determination of Sales at Less Than Fair Value: Shop Towels from the 
People's Republic of China 55 FR 34307 (August 22, 1990).
    We disagree with petitioner's claim that U.S. prices are 
irrelevant. Where, as here, questions have been raised about PAPI with 
respect to particular material inputs in the chosen surrogate, it is 
the Department's responsibility to examine that PAPI. To make this 
examination, we relied on the data on the record--Pakistani and U.S. 
values. For these inputs, U.S. values served to corroborate the claim 
that certain Indian PAPI for these factors was unreliable.
    Comment 6: Petitioner argues that the Department should use 
nitrocellulose-based lacquer classified under HTS item number 
3208.90.09 to derive a value for the lacquer used by respondents in 
pencil production. Petitioner submits that given the properties of the 
two HTS categories of lacquer that have been considered by the 
Department to value the PRC producer's lacquer, nitrocellulose-based 
lacquer is the most appropriate.
    DOC Position: As stated above, we have found the Indian price for 
paint (lacquer) to be aberrational and have, therefore, used Pakistani 
data to value paint. Pakistani import statistics are reported in the 
Standard International Trade Classification (SITC) format which is a 
United Nations sanctioned nomenclature. Due to the nature of the SITC 
system, there are fewer product categories, which means that a greater 
variety of items is included in each category. Pakistani data on 
specific subcategories of lacquers are unavailable. The SITC subheading 
we used was 5334202 which encompasses both the HTS subheading proposed 
by petitioner and the one used by the Department in the preliminary 
determination. The description of SITC subheading 5334202 is 
``lacquers.''
    Comment 7: Petitioner argues that the Department should rely on the 
actual expense and profit percentages for the Indian pencil industry, 
rather than the amounts in the petition, for the calculation of the 
``all others'' rate. The actual data concerning expense and profit 
percentages is the best available information and, therefore, would 
provide an ``all others'' FMV that better reflects the actual surrogate 
values for these items.
    Petitioner further states that the Department should adjust the 
``all others'' rate to reflect transportation costs reported by the 
Chinese respondents. Petitioner suggests that the Department apply the 
highest transportation cost, port handling and loading charge, and 
containerization fee reported by respondents. Petitioners submit that 
non-responding PRC exporters should not be rewarded for their non-
cooperation by receiving the benefit of a margin that does not reflect 
all costs.
    DOC Position: We disagree with petitioner. We do not believe it is 
appropriate to adjust petition data only where the values would 
increase. Although an adverse inference is drawn when exporters do not 
cooperate, this does not mean that the BIA rate should be as high as 
possible.
    In this case we have made one adjustment to the petition data based 
on surrogate values developed in the course of this investigation. This 
adjustment was to revalue the wood input using basswood prices. We made 
this adjustment because, based on what we have learned, the most 
similar wood to lindenwood is basswood. Having rejected jelutong as a 
surrogate for lindenwood, it would not be appropriate to use jelutong 
even in a BIA situation.
    Comment 8: Petitioner argues that the Indian import data do not 
convey the full value of the materials in India because they exclude 
Indian customs tariffs applicable to these materials. In valuing the 
imported materials, the Department should apply the ad valorem tariff 
rate imposed by the Indian government.
    Respondents argue that both India and Pakistan have drawback 
schemes whereby exporters are reimbursed for or exempted from the 
payment of import duties collected on inputs. Thus, the added cost of 
import duties is not one which would be incurred, and it should not be 
added to the already inflated values represented in surrogate values 
derived from Indian import statistics.
    DOC Position: We disagree with petitioner. The purpose of the 
factors methodology is to construct the FMV of NME-produced goods using 
values in the surrogate country. Theoretically two costs could be 
calculated--the cost for a domestically sold pencil and the cost of an 
exported pencil--if the country permits duty free importation of inputs 
for exports. We are constructing the value of the exported merchandise, 
therefore, it is appropriate to use the costs the surrogate producer 
would face in producing exported merchandise. Consistent with our 
standard practice in this regard, we are not adding the Indian import 
duties to the values reported in the published Indian import statistics 
as those duties would have been rebated upon export of the finished 
products. See, Final Determination of Sales at Less than Fair Value: 
Certain Helical Spring Lock Washers from the People's Republic of 
China, 58 FR 48833, 48841-42 (September 20, 1993).
    Comment 9: Petitioner claims that respondents belatedly submitted 
Pakistani import data covering certain of the raw materials used in 
pencil production on September 13, 1994. Petitioner argues that this 
information should be rejected by the Department because (1) the time 
for submitting surrogate value information had long since passed, and 
(2) under the Department's regulation, factual information submitted 
after the commencement of verification is untimely and should be 
rejected. See 19 CFR Secs. 353.31(a)(1)(i),(b)(3). Petitioner contends 
that the information was not submitted in response to a current request 
by the Department, and respondents did not request or receive an 
extension of the long-expired previous requests for surrogate 
information. Thus, this information does not fall into one of the 
narrow exceptions for late submissions included in 19 CFR 
Secs. 353.31(b)(2), (b)(3), of the Department's regulation.
    DOC Position: Contrary to petitioner's contention, respondents 
requested and received an extension by telephone (See, Memorandum to 
File from Team dated September 28, 1994), for the submission of PAPI. 
Petitioner, in fact, was also granted an extension for the submission 
of PAPI once an extension was requested.
    Comment 10: At verification, it was discovered that a U.S. producer 
provided one manufacturer with a material input free of charge. 
Petitioner argues that the Department should assign a value to this 
input, regardless of whether it was provided free of charge. The 
Department is required by the statute to include all inputs in the 
construction of FMV for comparison to U.S. sales.
    Respondents contend that the situation in the instant investigation 
is analogous to a situation where a U.S. customer has a tolling 
arrangement with a foreign producer. Respondents argue that in such 
situations the Department has consistently compared the price charged 
to the U.S. customer--exclusive of materials supplied by the customer 
to the price charged for similar arrangements in the home market. See, 
Final Determination of Sales at Less Than Fair Value: Brass Sheet and 
Strip from France 52 FR 812 (January 9, 1987). Respondents point out 
that in Final Determination of Sales of Less Than Fair Value: Brass 
Sheet and Strip from Korea 51 FR 40834 (November 10, 1986), the 
Department stated that ``[i]f we were to compare the prices of tolled 
to non-tolled sales, extensive adjustments would have to be made. For 
example, if the U.S. transaction is a non-tolled sale, we would have to 
adjust home market prices for non-tolled sales so that they would 
reflect in addition the cost of the customer supplied inputs. In the 
opposite situation, home market prices for non-tolled sales would 
somehow have to be adjusted downward.'' Respondents conclude that in 
this case the Department is constructing a value and not adjusting a 
price; therefore, any materials supplied by a U.S. customer should not 
be included in the constructed FMV.
    DOC Position: We agree with respondents. The factors of production 
methodology constructs the value of the subject merchandise as 
exported. We verified that a certain input in one of the pencils sold 
to a certain customer was provided free of charge to the producer/
exporter. If we were comparing a constructed FMV inclusive of this free 
input to a U.S. sale to a different customer who had not provided the 
input, it is possible that an adjustment to FMV would have been 
warranted. However, this is not the case. We compared the constructed 
factor value for this pencil type with U.S. sales of this type of 
pencil to only the customer that provided the input. Therefore, 
contrary to petitioner's argument, we have correctly valued the NME 
producers factors of production for this merchandise.
    Comment 11: Petitioner argues that the verification report shows 
numerous substantive material errors in SFTC's questionnaire response. 
These serious deficiencies warrant the application of comprehensive BIA 
for SFTC.
    Respondents argue that the Department should not resort to total 
BIA for SFTC as it did in the preliminary determination in this 
investigation. Respondents argue that SFTC has cooperated fully 
throughout this investigation and, therefore, the Department should 
calculate a margin based on the data supplied by the company and 
verified by the Department.
    Respondents argue that where information is either missing or 
unavailable, the Department should not seek unnecessarily to punish 
SFTC given the company's cooperative approach in this investigation. 
The following paragraphs outline the specific data problems and 
respondents' suggested treatment of these problems.
    Prior to verification, the company discovered that it had 
misreported the pencil producers for a number of transactions. 
Respondents point out that, upon the commencement of verification, the 
verifier was informed of this issue. Since, as a result of this 
misreported information, SFTC was unable to provide factors data for 
the actual producers for certain transactions, respondents contend that 
BIA, if applied, should be the highest calculated margin for any of 
SFTC's pencil sales of similar merchandise, if available. Respondents 
contend that in the case where similar merchandise is not available, 
BIA, if applied, should be the highest calculated margin for any SFTC 
sale.
    In addition, at verification the Department found that SFTC 
incorrectly reported two different suppliers for one transaction. 
Respondents argue that this discrepancy is minor because SFTC reported 
and the Department verified data from both suppliers. Therefore, the 
Department should simply use the verified factors data for the correct 
supplier, rather than resorting to BIA.
    Respondents argue that the discovery at verification that two of 
SFTC's shipments to the U.S. were shipped C&F, and not FOB, is an 
oversight of little significance. The data were collected at 
verification and can now be used to calculate the correct freight for 
these sales. Similarly, it was discovered that two invoice numbers were 
incorrect, as reported. Respondents submit that these were 
typographical errors of no significance.
    Finally, at verification it was discovered that SFTC inadvertently 
excluded a sale of yellow pencils it thought was produced and supplied 
by a producer whose pencils it was previously permitted to exclude from 
the sales listing (See Memorandum from Elizabeth Graham to Barbara 
Stafford, dated April 7, 1994). Respondents argue that the Department 
should use the actual producer's factors data to calculate the margin 
for this sale. Respondents submit that the Department has paint usage 
for this supplier, that whether the paint is white or yellow is of no 
consequence, and that the Department has the appropriate usage rates 
for ferrules and erasers.
    In its supplemental questionnaire response dated May 17, 1994, SFTC 
notified the Department that portions of reported raw pencil sales had 
been supplied by a factory previously thought to have supplied only 
yellow pencils. Respondents submit that, as BIA, the Department should 
use the highest margin calculated for other sales of raw pencils.
    A small number of sample shipments not reported in SFTC's sales 
response were noted in the sales verification report (See SFTC 
Verification Report, at 5 and Exhibit 11). These shipments were never 
sold. Therefore, in respondents' view, these invoices should be 
considered properly excluded from SFTC's sales listing.
    DOC Position: Although we found at verification that SFTC had a 
number of misreported pieces of information, SFTC has made every effort 
to cooperate in this investigation. In addition, as noted above, we do 
not find that these deficiencies are sufficient to call into question 
the overall reliability of SFTC's data. Therefore, contrary to 
petitioner's assertion, we determine that SFTC's response does not 
warrant the application of total BIA and we applied partial BIA as 
described in the BIA section of this notice. However, the partial BIA 
methodology suggested by respondents would result in assigning a zero 
margin for sales for which we are missing the necessary factors data. 
Because such BIA would not be adverse, we find it inappropriate. We 
are, therefore, applying as partial BIA the petition rate.
    With respect to our finding at verification that two U.S. sales 
were made on C&F terms rather than FOB as reported, we simply adjusted 
SFTC's freight expenses accordingly.
    At both the SFTC verification and the verification of its U.S. 
sales office, we noted sample shipments of raw pencils. It is the 
Department's practice to exclude sample sales from its calculations, if 
evidence exists that the sample sales were not made in substantial 
quantities. See, e.g., Final Determination of Sales at Less Than Fair 
Value: Professional Electric Cutting Tools and Professional Electric 
Sanding/Grinding Tools from Japan, 58 FR 30144 (May 26, 1993), and 
Final Determination of Sales at Less Than Fair Value: Sulphur Dyes, 
Including Sulphur Vat Dyes from the United Kingdom 58 FR 3253, (January 
8, 1993). In this case, we found no evidence that SFTC routinely offers 
samples to its U.S. customer. Rather, at verification, we established 
that only a small quantity of raw pencils were provided to the U.S. 
customer for quality testing. Therefore, we have not treated these 
sample shipments as U.S. sales.
    Comment 12: Respondents argue that the Department was incorrect in 
its preliminary determination of critical circumstances with respect to 
imports of pencils into the U.S. from China First, SFTC, and Lansheng. 
Respondents argue that critical circumstances are not present.
    Respondents assert that, on their face, the Mexican dumping 
findings relied on by the Department are incredible (451 percent) and 
should be disregarded with respect to the requirement that a history of 
dumping be found. Furthermore, the Mexican finding was based on BIA, 
and the only Chinese producer identified was Guangdong. According to 
the ITC record, none of the other PRC respondents in the instant 
investigation was named or participated in the Mexican case or exported 
significant quantities of pencils to Mexico. Accordingly, China First, 
SFTC or Lansheng have no history of dumping.
    Absent history of dumping, importer knowledge of dumping is 
required in order for the Department to find critical circumstances. 
Respondents assert that the final determination in this investigation 
will reflect dumping margins much lower than those established in the 
preliminary determination, thus eliminating any suggestion that 
importers had the required knowledge of dumping.
    Finally, respondents contend that the statutory phrase ``relatively 
short period of time'' was meant to denote a period of time in the 
post-filing period which was shorter than the pre-filing period used 
for comparison. By comparing equivalent periods of time prior to and 
after the filing of the petition, the Department has exceeded its 
statutory authority. Therefore, the Department should modify its 
methodology for the final determination.
    Petitioner argues that respondents have not explained why Mexican 
antidumping proceedings are inherently suspect. The size of the margins 
found in the Mexican proceeding is not relevant; what is relevant is 
that Mexico, a signatory to the General Agreement on Tariffs and Trade 
(GATT) Antidumping Code, issued an affirmative finding of dumping. This 
meets the statutory standard for history of dumping. It is immaterial 
whether a particular foreign exporter is named in a third country 
antidumping finding, or does not export to that third country.
    Petitioner takes issue with respondents' claim that the 
``relatively short period of time'' phrase ``was meant to denote a 
period of time in the post-filing period which was shorter than the 
pre-filing period used for comparison.'' Congress identified the 
statutory ``relatively short period'' as that between the commencement 
of an investigation and the preliminary determination. H.R. Rep. No. 
96-317, 96th Cong., 1st Sess. 63 (1979). The Department's regulation 
comports with the legislative purpose. See, 19 CFR 353.16(g). 
Respondents have failed to demonstrate that the regulation is neither 
reasonable nor a proper exercise of the Secretary of Commerce's 
discretion. See Smith-Corona Group v. United States, 713 F.2d 1568 
(Fed. Cir. 1983). Petitioner argues that in order to make its 
determination, Commerce must compare the post-filing period with a 
similar ``normal'' period before the case began.
    Finally, petitioner submits that the statute directs the Department 
to determine whether ``there have been massive imports of the 
merchandise which is the subject of investigation over a relatively 
short period.'' See section 735(a)(3) of the Act. Petitioner argues 
that the Department is directed to analyze the subject merchandise as a 
whole, and that there is no provision for the exception of individual 
exporters when the massive imports criterion is met. Thus an 
affirmative final critical circumstances determination is warranted for 
all exporters, including Guangdong in this investigation.
    DOC Position: We disagree with respondents' assertion that the 
Mexican antidumping determination with respect to pencils from the PRC 
should be disregarded by the Department. On the contrary, the Mexican 
determination meets exactly the statutory requirement under section 
733(e)(1) of the Act with respect to a history of dumping of the class 
or kind of merchandise under investigation in the United States or 
elsewhere. Moreover, with respect to respondents' assertion that the 
Mexican finding identified only one respondent, we note that the order 
exists as to pencils from the PRC and not as to one particular 
respondent. Therefore, we do not believe that we should single out only 
those producers specifically mentioned in the Mexican finding.
    We disagree with respondents' contention that the Department 
exceeded its statutory authority in selecting an equal period of time 
before and after the filing of the petition in this investigation. The 
Department acted in accordance with the requirements of the statute and 
past practice by examining equal time periods to determine whether or 
not imports of pencils from the PRC have been massive over a relatively 
short period of time. See, e.g., Preliminary Determination of Sales at 
Less Than Fair Value: Coumarin from the People's Republic of China, 59 
FR 39727 (August 4, 1994) and Final Determination of Sales at Less Than 
Fair Value: Industrial Belts from Italy, 54 FR 15483 (April 18, 1989).
    Finally, we disagree with petitioner's assertion that the 
Department is statutorily required to determine the existence of 
critical circumstances on an aggregate basis. When company-specific 
information is available, we conduct our analysis on a company-specific 
basis. In the event that such information is not available, we use the 
most specific information available in making our critical 
circumstances determination. In this investigation, we have reached our 
critical circumstances determination on a company-specific basis 
because respondents provided the information which permitted us to do 
so.
    Comment 13: Petitioner argues that the Department should explicitly 
provide in its final determination that Chinese pencils transshipped 
through Hong Kong are within the scope of this investigation.
    DOC Position: The scope of the order, if one is issued, will cover 
certain cased pencils produced in the PRC. The fact that the PRC 
pencils are transshipped through a third country en route to the U.S. 
would not alter the fact that they are PRC-produced pencils subject to 
the order. Therefore, Chinese produced pencils that are transshipped 
through Hong Kong (or any other country) are within the scope of this 
investigation and are subject to any antidumping duties imposed as a 
result of this proceeding.

ITC Notification

    In accordance with section 735(d) of the Act, we have notified the 
International Trade Commission (ITC) of our determination. As our 
determination is affirmative, the ITC will determine whether these 
imports are materially injuring, or threatening material injury to, the 
U.S. industry within 45 days. If the ITC determines that material 
injury, or threat of material injury does not exist, the proceeding 
will be terminated and all securities posted will be refunded or 
cancelled. If the ITC determines that such injury does exist, the 
Department will issue an antidumping order directing U.S. Customs 
officials to assess antidumping duties on all imports of the subject 
merchandise entered, or withdrawn from warehouse, for consumption on or 
after the date of suspension of liquidation.

Notification to Interested Parties

    This notice serves as the only reminder to parties subject to 
administrative protective order (APO) of their responsibility 
concerning the return or destruction of proprietary information 
disclosed under APO in accordance with 19 CFR 353.34(d). Failure to 
comply is a violation of the APO.
    This determination is published pursuant to section 735(d) of the 
Act and 19 CFR 353.20(a)(4).

    Dated: October 31, 1994.
Susan G. Esserman,
Assistant Secretary for Import Administration.
[FR Doc. 94-27667 Filed 11-7-94; 8:45 am]
BILLING CODE 3510-DS-P