[Federal Register Volume 62, Number 23 (Tuesday, February 4, 1997)]
[Notices]
[Pages 5201-5213]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2715]
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DEPARTMENT OF COMMERCE
[C-122-825]
Final Negative Countervailing Duty Determination and Final
Negative Critical Circumstances Determination: Certain Laminated
Hardwood Trailer Flooring (LHF) From Canada
AGENCY: Import Administration, International Trade Administration,
Department of Commerce
EFFECTIVE DATE: February 4, 1997.
FOR FURTHER INFORMATION CONTACT: David Boyland or Daniel Lessard, AD/
CVD Enforcement, Office I, Import Administration, U.S. Department of
Commerce, Room 3099, 14th Street and Constitution Avenue, NW.,
Washington, DC 20230; telephone (202) 482-4198 and 482-1778,
respectively.
FINAL DETERMINATION: The Department determines that countervailable
subsidies are not being provided to manufacturers, producers, or
exporters of LHF in Canada.
Case History
Since the publication of the preliminary negative determination
(Preliminary Determination) in the Federal Register (61 FR 59079,
November 20, 1996), the following events have occurred.
Verification of the responses of the Government of Canada (GOC),
the Government of Quebec (GOQ), Nilus Leclerc, Inc. and Industries
Leclerc, Inc., Erie Flooring and Wood Products (Erie), Industrial
Hardwoods Products, Ltd. (IHP), and Milner Rigsby Co., Ltd. (Milner)
was conducted between November 13 and 27, 1996.
Petitioner and respondents filed case and rebuttal briefs on
December 17, 1996, and December 23, 1996, respectively. The hearing was
held on January 7, 1997.
Scope of Investigation
The scope of this investigation consists of certain edge-glued
hardwood flooring made of oak, maple, or other hardwood lumber. Edge-
glued hardwood flooring is customized for specific dimensions and is
provided to the consumer in ``kits,'' or pre-sorted bundles of
component pieces generally ranging in size from 6'' to 14'' x 48' to
57' x 1'' to 1(1/2)'' for trailer flooring, from 6'' to 13'' x 12' to
28' x 1(1/8)'' to 1(1/2)'' for vans and truck bodies, from 9'' to 12(1/
2)'' x 8' to 10' x 1(7/8)'' to 2(1/2)'' for rail cars, and from 6'' to
14'' x 19' to 48' x 1(1/8)'' to 1(3/8)'' for containers.
The merchandise under investigation is currently classified, in
addition to various other hardwood products, under subheading
4421.90.98.40 of the Harmonized Tariff Schedule of the United States
(HTSUS). Edge-glued hardwood flooring is commonly referred to as
``laminated'' hardwood flooring by buyers and sellers of subject
[[Page 5202]]
merchandise. Edge-glued hardwood flooring, however, is not a hardwood
laminate for purposes of classification under HTSUS 4412.14. Although
the HTSUS subheading is provided for convenience and Customs purposes,
our written description of the scope of this proceeding is dispositive.
The Applicable Statute and Regulations
Unless otherwise indicated, all citations to the statute are
references to the provisions of the Tariff Act of 1930, as amended by
the Uruguay Round Agreements Act effective January 1, 1995 (the Act).
References to the Countervailing Duties: Notice of Proposed Rulemaking
and Request for Public Comments, 54 FR 23366 (May 31, 1989) (Proposed
Regulations), which have been withdrawn, are provided solely for
further explanation of the Department's countervailing duty practice.
Petitioner
The petition in this investigation was filed by the Ad Hoc
Committee on Laminated Hardwood Trailer Flooring, which is composed of
the Anderson-Tully Company, Havco Wood Products Inc., Industrial
Hardwoods Products Inc., Lewisohn Sales Company Inc., and Cloud
Corporation.
Period of Investigation (POI)
The period for which we are measuring subsidies is calendar year
1995.
Ontario Companies
We have determined that three producers of the subject merchandise
have received zero or de minimis subsidies. Erie and IHP formally
requested that they be excluded from any potential countervailing duty
order. Milner responded to our questionnaire.
IHP certified that the only subsidy it received during the POI was
consulting services pursuant to the Industrial Research Assistance
Program (IRAP). The GOC and Government of Ontario also certified and we
verified that this was the only benefit IHP received. Even assuming
this assistance constituted a countervailable subsidy, the benefit
would be de minimis.
Erie certified that it received no countervailable subsidies. The
GOC and the Government of Ontario also certified this. We verified that
Erie received no countervailable subsidies. Finally, we verified that
Milner did not receive benefits during the POI.
The remainder of this notice deals exclusively with Nilus Leclerc,
Inc. and Industries Leclerc, Inc.
Related Parties
In the present investigation, we have examined affiliated companies
(within the meaning of section 771(33) of the Act) whose relationship
may be sufficient to warrant treatment as a single company with a
single, combined countervailing duty rate. In the countervailing duty
questionnaire, consistent with our past practice, the Department
defined companies as sufficiently related where one company owns 20
percent or more of the other company, or where companies prepare
consolidated financial statements. The Department also stated that
companies may be considered sufficiently related where there are common
directors or one company performs services for the other company.
According to the questionnaire, where such companies produce the
subject merchandise or where such companies have engaged in certain
financial transactions with the company producing the subject
merchandise, the affiliated parties are required to respond to our
questionnaire.
Nilus Leclerc Inc. was identified in the petition as an exporter of
LHF from Canada. Nilus Leclerc Inc. is part of a consolidated group,
Groupe Bois Leclerc (GBL). Nilus Leclerc, Inc. and Industries Leclerc,
Inc. are the only companies in the group directly engaged in the
production of LHF. Because of the extent of common ownership, we have
found it appropriate to treat these two LHF producers as a single
company (Leclerc). As a consequence, we are calculating a single
countervailing duty rate for both companies by dividing their combined
subsidies by their combined sales.
In addition, certain separately incorporated companies in the group
received subsidies. Where those subsidies were tied to the production
of a corporation that is not directly involved in the production of
LHF, we have not included those subsidies in our calculations. Where
the subsidies benefitted the production of LHF and other merchandise,
we included those subsidies in our calculations using the sales of the
relevant products in the denominator of the ad valorem subsidy rate
calculations.
Export Subsidy Issue
Petitioner has alleged that the loans provided by the Canada-Quebec
Subsidiary Agreement on Industrial Development (Subsidiary Agreement)
and the Expansion and Modernization Program sponsored by the Societe de
Developpement Industriel du Quebec (SDI) are de facto export subsidies.
Petitioner argues that the programs should be deemed to be export
subsidies because the approval of government financing was ``in fact
contingent'' on exports to the United States. According to petitioner,
Leclerc's project and the government approval of the project were
entirely based on Leclerc's plan to export the vast majority of the
anticipated increased production to the United States. Petitioner
asserts that due to the limited growth potential of the LHF market in
Canada, the U.S. export market was the only viable market for Leclerc's
expanded capacity. Without the U.S. market, petitioner argues, there
would have been no need for expansion or financing and thus, the
government approval of Leclerc's project was, and could only have been,
``contingent'' on exports.
In rebuttal, respondents maintain that the approval of government
financing was not ``contingent'' on exports and that Leclerc's export
potential was merely one aspect of the government officials' overall
assessment of the commercial viability of the expansion project.
According to respondents, the absence of provisions in the loan
agreements which condition the receipt of the loan on exports or
consider the failure to achieve a particular level of export
performance as a default of the loan demonstrate that the programs were
not ``contingent'' upon export performance. Furthermore, respondents
invoke the second sentence of note 4 of Article 3.1(a) of the SCM which
states: ``The mere fact that a subsidy is accorded to enterprises which
export shall not for that reason alone be considered to be an export
subsidy within the meaning of (Article 3.1(a)).'' Respondents contend
that this provision makes it clear that the mere fact that Leclerc
exported to the United States or projected future exports should not
transform the government financing into an export subsidy.
While we have closely analyzed this issue, as discussed below, when
we examine the programs as domestic subsidies, the rate for these
programs is de minimis. Our analysis also shows that, even if we were
to find these programs to be export subsidies, the total countervailing
duty rate calculated for Leclerc during the POI would be de minimis.
Therefore, we have not addressed the issue of whether these two
programs are export subsidies.
Creditworthiness
In our Preliminary Determination, we treated Leclerc as
``creditworthy'' in 1993, 1994, and 1995. This decision was based on
information provided by Leclerc indicating that it had received
[[Page 5203]]
commercial financing or that commercial banks had agreed to provide it
with long-term financing in each of those years. For this final
determination, we are continuing to treat Leclerc as creditworthy in
1993 and 1994 because it received comparable loans from commercial
banks in those years. (For a further discussion of the comparability
issue, see ``Comparability'' of Commercial Loans Received section
below.) However, based on further information gathered at verification
regarding 1995, we have determined that the case-specific circumstances
surrounding the commercial financing agreed to and actually received in
that year indicate that this financing is not dispositive evidence of
Leclerc's creditworthiness. Accordingly, we have analyzed Leclerc's
financial condition and prospects in 1995 to determine whether the
company was creditworthy in that year. Based on our analysis, we have
determined that Leclerc was uncreditworthy in 1995 (see January 24,
1997 memorandum from David R. Boyland, Import Compliance Specialist,
AD/CVD Enforcement, Office 1, to Susan H. Kuhbach, Acting Deputy
Assistant Secretary, AD/CVD Enforcement, Group 1).
``Comparability'' of Commercial Loans Received
In 1993 and 1994, Leclerc obtained commercial loans. The receipt of
such loans must be considered both in the context of the
uncreditworthiness allegation and selection of the appropriate
benchmark to use in measuring the countervailable benefit from the
government loans received. In 1995, Leclerc reached an agreement with a
commercial source to receive long-term financing. The circumstances
surrounding the 1995 financing are such that we have disregarded this
financing as dispositive evidence of creditworthiness or as a possible
benchmark. We now turn to the receipt by Leclerc of commercial loans in
1993 and 1994.
Section 355.44(b)(6)(i) of the Proposed Regulations states that the
receipt of comparable long-term financing is normally dispositive
evidence that a company is creditworthy. Section 775(5)(E)(ii) of the
Act--a new provision added by the URAA--requires that when selecting a
benchmark loan to compare to the government loan for purposes of
measuring the potential benefit, the Department must select a loan
comparable to one the company could obtain commercially. We have
determined that the commercial loans received by Leclerc are
sufficiently comparable to the government loans to constitute
dispositive evidence that the company was creditworthy in 1993 and
1994. However, we have determined that the commercial loans received
are not sufficiently comparable to measure accurately any
countervailable benefits received from the government loans.
When the Department examines whether a company is creditworthy, it
is essentially attempting to determine if the company in question could
obtain commercial financing. The analysis of whether a company is
creditworthy examines whether the company received comparable
commercial loans and, if necessary, the overall financial health and
future prospects of the company. Such an analysis is ``often highly
complex'' (see the preamble to the Proposed Regulations at 23370,
citing the Subsidies Appendix at 18019.) The fundamental question
however, is a general one; namely: was the company's financial health
such that it did not have meaningful access to long-term commercial
loans?
Given the difficult question posed by a creditworthy inquiry and
our policy of seeking guidance from the judgments of the commercial
markets, the Department has historically relied heavily upon the
receipt of comparable commercial loans as dispositive evidence that the
company at issue is creditworthy. The ``comparability'' of any
commercial loans received has essentially been determined by examining
whether long-term loans (not guaranteed by the government) were
received from commercial sources in the same year as the government
loans. (See for example, Final Affirmative Countervailing Duty
Determinations: Certain Steel Products from Italy 58 FR 37327, 37329
(July 9, 1993) and Final Affirmative Countervailing Duty
Determinations: Certain Carbon Steel Products from Austria 50 FR 33369,
33372 (August 9, 1985).) If the commercial loans received were judged
comparable on this basis, the receipt of such loans has been considered
dispositive evidence that the company was creditworthy. Based on our
traditional interpretation of ``comparable'' in the creditworthy
context, the commercial loans received by Leclerc were comparable to
the government loans it received.
We see no reason to change the policy of relying on commercial
loans or defining comparability as outlined above, because it answers
the general question posed by an uncreditworthiness allegation.
Specifically, it provides the most direct evidence that a company could
obtain loans from commercial sources. If a company is able to obtain
such financing, the marketplace has judged that the company at issue is
creditworthy. As noted above, in such instances, the Department will
normally defer to the decision of the market. The fact that the
commercial loans received may differ from the government loans with
respect to certain terms such as the level of security does not
necessarily speak directly to the question of whether the company was
creditworthy.
Because of the facts of this particular case, specifically the
presence of the private sector in the financing of Leclerc's expansion,
and the otherwise general nature of the creditworthy analysis as
outlined above, we do not believe that the differences in other terms
between Leclerc's commercial loans and its government loans are great
enough to warrant a departure from the Department's normal practice of
finding the receipt of commercial loans to be dispositive evidence that
a company is creditworthy. Therefore, we determine that Leclerc was
creditworthy in 1993 and 1994.
In contrast, we do not believe that Leclerc's commercial loans are
appropriate for use as benchmarks for purposes of the more exacting
exercise of measuring the benefit from the government loans received by
Leclerc. As noted above, the statute, as recently amended by the URAA,
requires that when selecting a benchmark interest rate to compare to
the government interest rate for purposes of measuring the potential
benefit, the Department must select a commercial loan comparable to one
the company could actually obtain on the market. The selection of the
benchmark interest rate under the new statute seeks to answer a very
specific question; namely: what is the benefit provided by the specific
government loans in question? In this context, the Department must take
into account, to the extent possible, differences in terms between the
government loans and the commercial loans offered for comparison
purposes which may substantially affect the accuracy of the benefit
calculated.
When comparing the terms of the SDI and Subsidiary Agreement loans
with Leclerc's commercial loans, differences emerge with respect to the
level of security. Because we believe that the level of security can
significantly affect the interest rate charged by a commercial lender,
selection of benchmark financing with markedly different levels of
security may distort the measurement of the countervailable benefit.
Although the specific terms of Leclerc's loans are proprietary, we
learned on verification that SDI takes on more risk than commercial
banks and
[[Page 5204]]
that there are significant differences with respect to the extent to
which commercial and SDI loan values could be recovered in the event of
Leclerc's default. Because of the differences between the commercial
loans and the SDI and Subsidiary Agreement loans, we have chosen a
benchmark interest rate which generally reflects the level of security
exhibited by the government loans.
Although we have chosen a benchmark which generally reflects the
significant terms of the government-provided loans, we have not
adjusted for minor differences in terms or any differences which cannot
be reasonably be quantified because such an analysis is not practicable
and would not have a meaningful impact on our analysis. We consider
such adjustments to be appropriate only to the extent that they reflect
significant differences in terms and the record provides a reasonable,
practicable basis for doing so.
Subsidies Valuation Information
Benchmarks for Long-term Loans and Discount Rates: We have
calculated the long-term benchmark interest and discount rate in 1993,
1994, and 1995 based on company-specific debt received by Leclerc. We
used this debt to estimate the appropriate benchmark interest rate in
1993-1995. For 1995, we added a risk premium, as described in section
355.44(b)(6)(D)(iv) of the Proposed Regulations to establish the
uncreditworthy benchmark interest and discount rate.
Allocation Period: In the past, the Department has relied upon
information from the U.S. Internal Revenue Service on the industry-
specific average useful life of assets to determine the allocation
period for nonrecurring subsidies (see General Issues Appendix (GIA)
attached to the Final Affirmative Countervailing Duty Determination:
Certain Steel Products from Austria (58 FR 37217, 37226; July 9, 1993).
However, in British Steel plc. v. United States, 879 F. Supp. 1254 (CIT
1995) (British Steel), the U.S. Court of International Trade (the
Court) ruled against this allocation methodology. In accordance with
the Court's remand order, the Department calculated a company-specific
allocation period for nonrecurring subsidies based on the average
useful life (AUL) of non-renewable physical assets. This remand
determination was affirmed by the Court on June 4, 1996. See British
Steel, 929 F. Supp. 426, 439 (CIT 1996).
The Department has decided to acquiesce to the Court's decision
and, as such, we intend to determine the allocation period for
nonrecurring subsidies using company-specific AUL data where reasonable
and practicable. In this case, the Department has determined that it is
reasonable and practicable to allocate all nonrecurring subsidies
received prior to, or during, the POI using Leclerc's AUL of 18 years.
FOB/CIF Adjustment
The Department has deducted costs associated directly with the
transportation of subject merchandise from Leclerc's U.S. sales to
determine the correct FOB value for denominator purposes (see GIA at
37236, 37237). While the majority of these costs were originally
reported by respondents, additional information obtained at
verification has been incorporated where appropriate.
Based upon the responses to our questionnaires and the results of
verification, we determine the following:
I. Analysis of Direct Subsidies
A. Programs Determined to Be Countervailable
1. Canada-Quebec Subsidiary Agreement on Industrial Development
This Subsidiary Agreement, which spans five years, was jointly
funded by the GOC and GOQ on March 27, 1992. Under this agreement, the
GOC and GOQ established a program to improve the competitiveness and
vitality of the Quebec economy by providing financial assistance,
through the initial joint funding of the agreement, to companies for
major industrial projects. The following four types of activities are
eligible for contributions: (1) capital investment projects, (2)
product or process development projects involving a major investment or
leading to a capital investment, (3) studies required to assess the
feasibility of an investment project, and (4) municipal infrastructure
required for a major capital investment project.
Leclerc received a long-term interest-free loan under the
Subsidiary Agreement. Although the Subsidiary Agreement was jointly
funded, the loan received by Leclerc was provided by the GOC from its
portion of the joint funding.
We have determined that the loan received by Leclerc constitutes a
countervailable subsidy within the meaning of section 771(5) of the
Act. It is a direct transfer of funds from the GOC providing a benefit
in the amount of the difference between the benchmark interest rate and
the zero interest rate paid by Leclerc.
We analyzed whether the Subsidiary Agreement is specific ``in law
or in fact,'' within the meaning of section 771(5A) of the Act. Funds
paid out by the GOC under this program are limited to companies in a
particular region of Canada (i.e., the Province of Quebec) and, hence,
regionally specific under section 771(5A)(D)(iv) of the Act.
To calculate the countervailable benefit conferred on Leclerc, we
used the 1995 uncreditworthy benchmark interest rate described above
and followed our fixed-rate, long-term loan methodology (see January
24, 1997, Memorandum from Team to Susan H. Kuhbach, Acting Deputy
Assistant Secretary, AD/CVD Enforcement, Group 1). We then divided the
benefit attributable to the POI by Leclerc's LHF sales in the POI. (See
Comment 12.) On this basis, we determine the countervailable subsidy
for this program to be 0.29 percent ad valorem for Leclerc.
2. Industrial and Regional Development Program (IRDP)
The IRDP was created by the Industrial and Regional Development Act
and Regulations in 1983 and was administered by the Canadian Department
of Regional Industrial Expansion. It was terminated on June 30, 1988.
No new applications for IRDP projects were accepted after that date.
The goals of IRDP were to achieve economic development in all
regions of Canada, promote economic development in those regions in
which opportunities for productive employment are exceptionally
inadequate, and improve the overall economy in Canada. To accomplish
these objectives, financial support in the form of grants,
contributions and loans were provided to companies for four major
purposes: (1) establishing, expanding, modernizing production; (2)
promoting the marketing of products or services; (3) developing new or
improved products or production processes, or carrying on research in
respect thereof; and (4) restructuring so as to continue on a
commercially viable basis.
Under this program, all of Canada's 260 census districts were
classified into one of four tiers on the basis of the economic
development of the region. The most economically disadvantaged regions
comprised Tier IV; the most advanced regions were classified as Tier I.
Those districts classified as Tiers III and IV were authorized to
receive the highest share of assistance under IRDP (as a percentage of
assistance per approved project); those in Tiers I and II received the
lowest. For example, a grant toward the eligible costs of
[[Page 5205]]
modernizing or significantly increasing the production of companies in
Tiers I and II could not exceed 17.5 percent of the capital costs of
the project, while in Tiers III and IV grants could cover up to 25
percent of eligible costs.
Nilus Leclerc Inc. was located in a Tier III district when it
received three grants under this program. We have determined that the
grants received by Leclerc constitute a countervailable subsidy within
the meaning of section 771(5) of the Act. The grants are direct
transfers of funds from the GOC and confer a benefit in the amount of
the portion of the grant that is in excess of the most favorable,
nonspecific level of benefits (i.e., Tiers I and II). (See section
355.44(n) of the Department's Proposed Regulations regarding programs
with varying levels of benefits.) Also, IRDP grants are regionally
specific within the meaning of section 771(5A) of the Act because the
preferential levels of benefits (i.e., contributions to Tiers III and
IV) are limited to companies in particular regions of Canada. This is
consistent with our prior determination in the Final Affirmative
Countervailing Duty Determination: Certain Fresh Atlantic Groundfish
from Canada, 51 FR 10041, 10045 (March 24, 1986).
We have treated these grants as ``non-recurring'' subsidies based
on the analysis set forth in the Allocation section of the GIA at
37226. In accordance with our past practice, we have allocated over
time those grants which exceeded 0.5 percent of the company's sales in
the year of receipt.
To calculate the countervailable subsidy, we used our standard
grant methodology. For those grants which were tied to the production
of both LHF and residential flooring, we divided the benefit
attributable to the POI by the total sales of Leclerc and Planchers
Leclerc (the company in the Leclerc group that produces residential
flooring) during the same period. Otherwise, for those grants which
benefited only the production of LHF, we divided the benefit
attributable to the POI by Leclerc's LHF sales during the same period.
On this basis, we determine the countervailable subsidy for this
program to be 0.04 percent ad valorem for Leclerc.
3. SDI: Expansion and Modernization Program
Firms in Quebec can participate in the Expansion and Modernization
Program by meeting a requirement that ``the project (for which
financing is requested) is aimed at markets outside Quebec.'' An
alternative requirement for receiving assistance is that the market in
Quebec is inadequately served by businesses in Quebec and that the
supported production is expected to replace imported goods into Quebec.
Under either requirement, the market for the products to be supported
must have an expected growth rate that is above the average for the
manufacturing sector in Canada. In addition to these requirements,
which are contained in the regulations governing Expansion and
Modernization Program, the GOQ has stated that firms receiving SDI
loans must also receive financing from commercial sources.
Loans under this program can be provided to companies involved in:
manufacturing, recycling, computer services, software or software
package design and publishing, contaminated soils remediation, the
operation of a research laboratory, and the production of technical
services for clients outside of Quebec. The regulations for this
program further indicate that businesses in other categories may be
considered ``in exceptional cases.'' The assistance may be used to
cover the following types of expenditures: (1) capital investments; (2)
the purchase and introduction of a new technology; (3) the acquisition
of information production or management equipment; (4) investments for
project-related training; and (5) other training investments related to
project start-up. Leclerc obtained loans under SDI's Expansion and
Modernization Program in 1993, 1994, and 1995. (For further information
regarding how we treated the 1995 loan, see Comment 17.) These loans
were part of a larger package of commercial and government financing
used to increase Leclerc's productive capacity.
We have determined that the 1993 and 1994 loans received by Leclerc
constitute countervailable subsidies within the meaning of section
771(5) of the Act. They are a direct transfer of funds from the GOQ
providing a benefit in the amount of the difference between the
benchmark interest rate and the interest rate paid by Leclerc.
Based on our review of the eligibility criteria, we determine that
the program is not de jure specific. However, as in our Preliminary
Determination, we have concluded that this program is in fact specific.
Although loans were given to a large number and wide variety of
users under this program, the level of financing obtained by the wood
products industries group and by Leclerc was disproportionate. In 1993
and 1994, the wood products industries group was consistently among the
largest beneficiaries under the program. Leclerc's share of financing
as a percentage of total authorized financing was also large relative
to the shares received by other users. Taken together, these facts
support a determination that the assistance received by Leclerc was
disproportionate in 1993 and 1994.
In order to calculate the benefit from long-term variable rate
loans, the Department normally calculates the difference during the POI
between the amount of interest paid on the subsidized loan and the
amount of interest that would have been paid on a comparable commercial
loan. However, in this case, the loans given under the Expansion and
Modernization Program include premia payments by Leclerc and stock
options for SDI. In addition, the SDI loans have variable repayment
schedules. Therefore, our normal methodology for long-term loans which
focuses only on differences in interest rates would not provide an
accurate measure of the benefit received by Leclerc. In order to
account for the value of the premia and the variable repayment
schedule, we have estimated a repayment schedule for the SDI loan and
compared the amount Leclerc would repay under that schedule with the
amount Leclerc would repay under a comparable commercial loan. Because
of the difficulty of assigning a value to the stock options, we have
not included them in our calculations. We note that if we were to
include the stock options, the amount of the benefit conferred by these
loans would be even less. Given that we have reached a negative
countervailing duty determination, it is not important that our subsidy
calculation reflects the lower benefit amount.
We next determined the grant equivalent of these loans, i.e., the
present value of the difference between what would be paid under the
commercial loan and the SDI loan, using the discount rates described in
the Subsidies Valuation Information section above. We used the life of
the SDI loan as the allocation period because of the variable repayment
schedule on the SDI loans. The benefit allocated to the POI was then
divided by Leclerc's total sales of subject merchandise during the POI.
Using this methodology, we determine the countervailable subsidy from
the Expansion and Modernization Program to be 0.24 percent ad valorem.
4. Export Promotion Assistance Program (APEX)
Under the APEX program, the GOQ shares certain costs incurred by a
Quebec company in the penetration of new foreign markets. Such costs
include missions to develop new markets or negotiate ``industrial
agreements,''
[[Page 5206]]
participate in trade fairs outside of Canada, adapt products to new
export markets, prepare bids with the assistance of consultants,
prepare marketing studies as well as strategies to enter foreign
markets, and hire an international marketing expert to develop the
firm's export sales (see Preliminary Countervailing Duty
Determinations: Pure and Alloy Magnesium From Canada 56 FR 63927, 63931
(December 6, 1991)).
At the Preliminary Determination, the Department considered APEX to
be a non-used program based on the questionnaire responses received.
Prior to the start of verification, however, the GOQ stated, and we
confirmed, that Leclerc in fact used this program (see December 10,
1996 GOQ Verification Report at 12.)
Because receipt of benefits under this program is contingent upon
export performance, we determine that it is an export subsidy within
the meaning of 771(5A)(B) of the Act. We have also determined that the
grants received by Leclerc constitute a countervailable subsidy within
the meaning of section 771(5) of the Act because they are direct
transfers of funds from the GOQ and confer a benefit to Leclerc in the
amount of the face value of the grant. We have treated the grant as a
``non-recurring'' subsidy based on the analysis set forth in the
Allocation section of the GIA at 37226. We have allocated the benefit
over the AUL of Leclerc's non-renewable physical assets using the grant
allocation formula outlined in section 355.49 (b)(4)(3) of the
Department's Proposed Regulations. The benefit allocated to the POI was
then divided by Leclerc's total export sales during the POI. Using this
methodology, we determine the countervailable subsidy from the APEX
program to be 0.00 percent ad valorem.
B. Program Determined To Be Not Countervailable, But Which Was Not
Considered At The Preliminary Determination
Program for the Development of Human Resources (PDHR) of the Societe
Quebecoise de Developpement de la Main-d'Oeuvre (SQDM)
Prior to the start of verification, the GOQ reported that Leclerc
received assistance under the Program for the Development of Human
Resources (PDHR) which is administered by SQDM. PDHR was created in
1992 for the purpose of assisting businesses to develop or adapt their
human resource programs to protect and maintain existing jobs and to
support the creation of new jobs. The program is available to all
commercial enterprises, workers' unions, other groups of workers and
nonprofit organizations located in Quebec. The only eligibility
criterion is that a company is conducting business, or in the process
of establishing a business, in Quebec or is in the process of doing so.
The program focuses on assisting small and medium-size businesses: (1)
with human resources management and development needs; (2) facing a
difficult employment situation; and (3) active in priority economic
sectors at the local, regional and provincial levels.
The financial assistance generally covers 50 percent of the costs
of the company's human resource projects with a maximum cap of $200,000
per year for up to three years. In general, funds may be used for:
``hiring an expert responsible for analyzing the manpower situation at
the company; paying the wages of employees involved in human resource
activities; other expenses related to training activities for human
resource development and/or hiring a training coordinator or a human
resource manager.'' We verified that Leclerc received a grant under
this program during the POI.
We analyzed whether the program is specific ``in law or in fact,''
within the meaning of section 771(5A)(D)(i) and (iii) of the Act. Based
upon our review of the eligibility criteria for the program, we
determine that this program is not de jure specific.
We next examined whether the program is de facto specific. During
the POI, we verified that assistance under the program was distributed
over a large number and wide variety of users representing virtually
every industry and commercial sector found in Quebec. Based on this
information, we have determined that the program is not specific based
on the number of users. We also examined evidence regarding the usage
of the program and found that neither Leclerc nor the wood products
industry was a dominant user or received a disproportionate share of
benefits distributed under this program. Because the number of users is
large and there is no dominant or disproportionate use of the program
by Leclerc, we do not reach the issue of whether administrators of the
program exercised discretion in awarding benefits. Thus, we conclude
that this program is not specific and has not conferred a
countervailable subsidy on Leclerc.
C. Programs Determined To Be Not Countervailable Which Were Considered
At The Preliminary Determination
Based on verification, we continue to find these programs not
countervailable for the same reasons identified in the preliminarily
determination.
1. ``Programme d'appui a la reprise'' (PREP) program
2.Decentralized Fund for Job Creation Program of SQDM
3. Export Development Corporation (EDC)
4. Hydro-Quebec Electrotechnology Implementation Program
5. Societe de placement dans l'enterprise quebecoise (SPEQ)
D. Programs Determined to Be Not Used
Based on the information provided in the responses and the results
of verification, we determine that the following programs were not
used:
1. Capital Gains Exemptions
2. Regional Investment Tax Credits
3. Performance Security Services through the Export Development
Corporation
4. Working Capital for Growth from the Business Development Bank of
Canada (BDC)
5. St. Lawrence Environmental Technology Development Program (ETDP)
6. Program for Export Market Development
7. Canada-Quebec Subsidiary Agreement on the Economic Development of
Quebec
8. Quebec Stumpage Program
9. Programs Provided by the Industrial Development Corporation (SDI)
Article 7 Assistance
Export Assistance Program
Business Financing Program
Research and Innovation Activities Program
10. Private Forest Development Program (PFDP)
II. Analysis of Upstream Subsidies
The petitioner alleged that Leclerc receives upstream subsidies
through its purchase of lumber from suppliers which harvest stumpage
from Quebec's public forest (``allegedly subsidized'' suppliers).
Section 771A(a) of the Act, defines upstream subsidies as follows:
The term ``upstream subsidy'' means any subsidy * * * by the
government of a country that:
(1) Is paid or bestowed by that government with respect to a
product (hereinafter referred to as an ``input product'') that is
used in the manufacture or production in that country of merchandise
which is the subject of a countervailing duty proceeding;
(2) In the judgment of the administering authority bestows a
competitive benefit on the merchandise; and
[[Page 5207]]
(3) Has a significant effect on the cost of manufacturing or
producing the merchandise.
Each of the three elements listed above must be satisfied in order
for the Department to find that an upstream subsidy exists. The absence
of any one element precludes the finding of an upstream subsidy. As
discussed below, we determine that a competitive benefit is not
bestowed on Leclerc through its purchases of allegedly subsidized
lumber. Therefore, we have not addressed the first and third criteria.
Competitive Benefit
In determining whether subsidies to the upstream supplier(s) confer
a competitive benefit within the meaning of section 771A(a)(2) on the
producer of the subject merchandise, section 771A(b) directs that:
* * * a competitive benefit has been bestowed when the price for
the input product * * * is lower than the price that the
manufacturer or producer of merchandise which is the subject of a
countervailing duty proceeding would otherwise pay for the product
in obtaining it from another seller in an arms-length transaction.
The Department's Proposed Regulations offer the following hierarchy
of benchmarks for determining whether a competitive benefit exists:
* * * In evaluating whether a competitive benefit exists
pursuant to paragraph (a)(2) of this section, the Secretary will
determine whether the price for the input product is lower than:
(1) The price which the producer of the merchandise otherwise
would pay for the input product, produced in the same country, in
obtaining it from another unsubsidized seller in an arm's length
transaction; or
(2) a world market price for the input product.
In this instance, Leclerc purchases the input product, lumber, from
numerous unsubsidized (i.e., suppliers which do not harvest stumpage
from Quebec's public forest), unrelated suppliers in Canada. Therefore,
we have used the prices charged to Leclerc by these suppliers as the
benchmark.
We compared the prices paid by Leclerc to its ``allegedly
subsidized'' suppliers with the prices paid to unsubsidized suppliers
on a product-by-product and aggregate basis (see October 10, 1996,
November 6, 1996 and January 24, 1997, Memoranda from Team to Susan H.
Kuhbach, Acting Deputy Assistant Secretary, Group 1, AD/CVD
Enforcement). Based on our comparison of these prices, we found that
the price of ``allegedly subsidized'' lumber was generally equal to or
exceeded the price of unsubsidized lumber. Therefore, we have
determined that Leclerc did not receive an upstream subsidy.
Critical Circumstances
The petitioner alleged that critical circumstances exist with
respect to imports of subject merchandise. Because we have reached a
negative final determination, this issue is moot.
Interested Party Comments
Comment 1 (1995 Commercial Financing)
Petitioner disagrees with the Department's use of a 1995 financing
arrangement between Leclerc and a commercial entity as a benchmark, as
well as dispositive evidence of Leclerc's creditworthiness. Petitioner
bases its claim on the fact that Leclerc did not actually receive the
loan in 1995, nor did it meet the preconditions for receiving financing
under the arrangement. Petitioner points out that section
355.44(b)(6)(i) of the Department's Proposed Regulations requires the
receipt of a comparable long-term commercial loan for dispositive
evidence of creditworthiness.
Leclerc states that it received and accepted a loan offer from a
commercial source in 1995 and that the agreement was binding on both
parties. Leclerc notes that the Department's November 13, 1996
Creditworthy Analysis Memorandum emphasized the fact that the
Department's primary interest in considering the presence of commercial
financing in the context of a creditworthiness inquiry is whether a
company had access to such financing. According to Leclerc, the 1995
financing arrangement shows that the company had access to long-term
funds from commercial sources.
Finally, regarding use of the 1995 financing arrangement as a
benchmark, Leclerc and the GOQ state that the statute focuses on a
``comparable commercial loan that the recipient could actually obtain
on the market'' (emphasis added). Because the 1995 financing
arrangement reflects financing that Leclerc could have obtained, the
circumstances surrounding the agreement should not disqualify it as a
benchmark.
DOC Position
We disagree with respondents. As described in the December 10, 1996
Leclerc Verification Report, the circumstances surrounding the 1995
financing arrangement do not support the argument that this financing
arrangement should be considered dispositive evidence of Leclerc's
creditworthiness. These circumstances also indicate that the 1995
financing arrangement does not reflect an appropriate benchmark
interest rate. (Note: The details of the 1995 financing arrangement are
business proprietary (see January 24, 1997 memorandum from David R.
Boyland, Import Compliance Specialist, AD/CVD Enforcement, Office 1, to
Susan H. Kuhbach, Acting Deputy Assistant Secretary, Group 1, AD/CVD
Enforcement).)
Comment 2 (Creditworthiness)
In addition to arguing that the commercial and government loans are
not comparable for purposes of determining Leclerc's creditworthiness,
petitioner asserts that other evidence indicates that Leclerc was not
creditworthy when it received the government financing under
investigation. Petitioner argues that Leclerc's financial ratios during
1993, 1994, and 1995 would have been clearly unacceptable to a private
lender. Petitioner further asserts that the Department must consider
the expanded repayment obligations of the enlarged Leclerc operation,
as opposed to simply determining whether the company historically met
its financial obligations. Petitioner argues that, in addition to being
unable to meet its future financing costs with its cash flow, specific
aspects of Leclerc's financial position in 1995 indicate that the
company was not meeting its financial obligations in that year.
According to petitioner, other factors such as Leclerc's decision to
abandon several of its LHF production lines in 1995 also indicate that
the company was not in a position to cover its financial obligations.
Citing the Final Affirmative Countervailing Duty Determination:
Fresh and Chilled Atlantic Salmon from Norway, 51 FR 10041 (March 24,
1986) and section 355.44(b)(6)(i) of the Department's Proposed
Regulations, Leclerc argues that creditworthiness cannot be judged
retrospectively and that the Department can only consider
creditworthiness at the time the loans were actually made. Leclerc
cites positive information from its balance sheet and income
statements, the ITC preliminary determination in this case (Certain
Laminated Hardwood Flooring from Canada, Inv. No. 701-TA-367), and a
study of Leclerc's 1995 business plan by an outside consulting firm, to
support its position that lenders in Canada had every reason to loan it
money throughout the 1993-1995 period.
Leclerc states that the approach in the Department's October 9,
1996
[[Page 5208]]
creditworthiness memorandum (i.e., in which a company can only be
considered uncreditworthy if it did not have sufficient revenues or
resources in the past to meet its costs and fixed financial
obligations) is consistent with the preamble to the Department's
Proposed Regulations and past cases. Because it did have sufficient
resources to meet its costs and fixed financial obligations, Leclerc
asserts that no creditworthiness inquiry should be conducted.
With respect to petitioner's criticism of the company's financial
ratios, Leclerc argues that the Department must examine the individual
circumstances of the company. According to Leclerc, when the financial
ratios are considered in context, they do not reflect financial
instability nor do they indicate that the company was unable to cover
its costs and fixed financial obligations out of its revenue.
DOC Position
As noted above, we believe that the commercial loans received by
Leclerc in 1993 and 1994 are comparable to the government-provided
loans in those years. Hence, we have determined that the company was
creditworthy in those years.
We agree with petitioner that a number of aspects related to
Leclerc's financial position in 1995 would have troubled a commercial
lender and that Leclerc's financial position in 1995 reflected certain
imbalances (see January 24, 1997 memorandum from David R. Boyland,
Import Compliance Specialist, AD/CVD Enforcement, Office 1, to Susan H.
Kuhbach, Acting Deputy Assistant Secretary, Group 1, AD/CVD
Enforcement). Additionally, circumstances surrounding Leclerc's 1995
financing arrangements strongly suggest that Leclerc would not have
been able to obtain long-term commercial financing in that year (see
December 10, 1996 Leclerc Verification Report). It is on this basis
that we have determined Leclerc to be uncreditworthy in 1995.
Regarding Leclerc's argument that the Department should not have
investigated the company's creditworthiness since it had sufficient
resources in the past to cover its costs and fixed financial
obligations, we disagree. As noted in our Preliminary Determination (61
FR 59080, 59079 (November 20, 1996)), while past indicators can provide
useful information about a company's future prospects, they should not
cause the Department to disregard information contemporaneous with the
granting of the loan that is relevant to the company's ability to meet
its future financial obligations.
Comment 3 (Disproportionality--Determining Specificity Based on POI
Benefits.)
The GOQ argues that the Department incorrectly found that SDI loans
were de facto specific on the grounds that there was disproportionate
use. The GOQ maintains that the amount of benefits approved in any one
year should not be the basis upon which the Department makes a
disproportionality determination. Instead, the GOQ argues that the
Department should make its disproportionality determination for the POI
based on the SDI benefits allocated to the POI. In other words, all
benefits bestowed over the life of the SDI program should be allocated
over time, and the Department's specificity analysis should be based on
the distribution of allocated benefits in the POI. To support this
argument, the GOQ cites the Final Results of Countervailing Duty
Administrative Review; Live Swine from Canada (Live Swine from Canada)
56 FR 28531, 28534 (June 21, 1991) which states ``[i]n analyzing de
facto specificity, the Department looks at the actual number of
commodities covered during the particular period under review.''
Petitioner argues that the GOQ has offered no support in the law or
in past case precedent showing that a disproportionality finding
requires a specificity analysis based on a POI-allocated benefit
analysis. Furthermore, according to petitioner, the GOQ approach is not
feasible.
DOC Position
We disagree with the GOQ's assertion that the Department's
disproportionality analysis must focus solely on the benefits allocated
to the POI. Such an approach confuses the initial specificity
determination, which is based on the action of the granting authority
at the time of bestowal, with the allocation of the benefit over time.
Because these are two separate processes, the portions of grants
allocated to further periods of time using the Department's standard
allocation methodology is not relevant in determining the actual
distribution of assistance at the time of bestowal.
As regards Live Swine from Canada cited by Leclerc, the benefits
analyzed in that proceeding are recurring subsidies. Hence, in
performing its review period-by-review period analysis, the Department
is looking at separate and distinct disbursals each year, and not at
subsidies which have been allocated over time.
Comment 4 (Disproportionality--Aggregation)
The GOQ argues that the Department's reference to the wood products
industries is inconsistent with the law because the Department should
first consider whether the enterprise itself has received a
disproportionate share, and then whether the industry similarly
benefitted. The GOQ also argues that the Department should compare the
benefit received by the hardwood trailer flooring industry--of which
Leclerc is the sole member--to the total value of SDI loans.
Petitioner argues that requiring the Department to compare benefits
received by the hardwood trailer flooring industry to other such
industries at the same level of aggregation is impractical and is
directly contrary to section 771(5A) of the Act and section 355.43(b)
of the Proposed Regulations which allows the Department to choose from
various levels of aggregation for comparison purposes.
DOC Position
We disagree with the GOQ that the Department considered the wrong
industry level when analyzing disproportionality. In its May 20, 1996
questionnaire, the Department requested that the GOQ provide the annual
``industry distribution'' of authorized benefits under the Investment
Assistance Program for both Expansion and Modernization Program and
PREP. Our determination of disproportionality was based, in part, on an
analysis of the industry distribution maintained by the GOQ and
reported in their questionnaire response. Although other GOQ
organizations such as SQDM provided information at a more detailed
level, the Department presumed that the information provided for SDI's
Investment Assistance Program represented the most detailed information
available to the GOQ. Moreover, we did not perceive the information to
be incorrect.
In our disproportionality analysis, we determined, for both Leclerc
and the wood products industry, the percentage of total annual
authorized financing. We examined how these percentages compared to the
average transaction by industry, as well as the percentage of total
assistance accounted for by the other industry participants identified
by the GOQ. While the ``wood products industry'', as originally
reported by the GOQ in its supplemental questionnaire response, can be
broken down into more discrete units, we do not agree that we are
precluded from examining
[[Page 5209]]
disproportionality at the level of detail originally provided by the
GOQ. As the GOQ acknowledged in the hearing, ``the statute * * *
confers upon [the Department] discretion to determine what is the
appropriate level of aggregation'' (see page 70 of January 7, 1996
hearing transcript). In this case, the Department relied on information
provided by the GOQ to compare the distribution of benefits to Leclerc
and the group of wood product industries to other groups of industries
that received assistance under this program. Based on this comparison,
we determined that Leclerc received a disproportionate amount of
assistance under this program.
Comment 5 (Disproportionality--Considering Only Disbursed Financing)
The GOQ asserts that for purposes of determining disproportionality
the Department should look at loans that were actually disbursed rather
than loans that were authorized. According to the GOQ, if the
Department considers the amount actually disbursed in 1995, the share
of SDI financing accounted for by the wood products industries in that
year is less than that received by the plastics and rubber industries
and is ``on par'' with disbursements to the chemical and metal products
industries.
Petitioner disagrees with the GOQ's argument that the Department
should base its disproportionality analysis on loans actually
disbursed, as opposed to loans authorized. According to petitioner, the
level of authorized financing reflects the GOQ's intent during a
particular period and is, therefore, an appropriate measure for
determining disproportionality. Petitioner also notes that the only
record evidence in this case regarding industry-by-industry assistance
under the Expansion and Modernization Program is based on SDI
authorized loans.
DOC Position
We disagree with the GOQ that authorized SDI financing cannot be
used in the Department's disproportionality analysis. The only data we
have on shares received by industries/enterprises other than Leclerc is
derived from authorized amounts. To use the amount disbursed for
Leclerc and the amounts authorized for other industries/enterprises to
calculate their relative shares would be inappropriate given the
inconsistency inherent in comparing such data. (See also Comment 17.)
Comment 6 (Disproportionality--Magnitude)
The GOQ argues that the Department has never found
disproportionality in a case with facts resembling the facts here. In
the Final Affirmative Countervailing Duty Determinations: Certain Steel
Products from Brazil 58 FR 37295 (July 9, 1993)), the steel producers
received more than 50 percent of the ``benefits'' under the examined
program, two-and-a-half times more than the second largest recipient
industry. The GOQ also cites Final Affirmative Countervailing Duty
Determination: Grain-Oriented Electrical Steel from Italy 59 FR 18357
(April 18, 1994) and Final Results of Countervailing Duty
Administrative Review: Live Swine from Canada 59 FR 12243 (March 16,
1994) as examples in which the Department found disproportionality
based on large industry usage of a program. While the Department
determined 16.9 percent to be disproportionate in Final Affirmative
Countervailing Duty Determinations: Certain Steel Products From Belgium
(Certain Steel Products From Belgium) 58 FR 37273 (July 9, 1993)), the
GOQ alleges that the Department was examining a single industry (the
steel industry), as opposed to a group of industries. The GOQ also
cites Final Results of Countervailing Duty Administrative Reviews:
Antifriction Bearings (Other Than Tapered Roller Bearing) (AFBs) from
Singapore 60 FR 52377 (October 6, 1995) in which the group of
industries in which AFBs belongs received a large percentage of
assistance, while AFBs themselves received a small percentage.
Petitioner states that the Department analyzed specificity at both
an industry and company-specific level and reasonably found that there
was disproportionate use. Although petitioner agrees that the cases
cited by the GOQ indicate that greater levels of usage have been the
basis for a finding of disproportionality in some instances, petitioner
asserts that this does not mean the Department's disproportionality
analysis in the instant case is unreasonable or faulty.
DOC Position
We agree with petitioners. Disproportionality is fact-specific and
determined on a case-by-case basis. The shares found to be
disproportionate in previous cases do not represent a floor below which
the Department cannot determine disproportionality to exist. Our
determination in this case was based both on usage by the group of
industries to which Leclerc belongs and usage by Leclerc. As discussed
above, the wood products industries were among the top of users of the
Expansion and Modernization Program and Leclerc, as an individual
enterprise within this group, also received a relatively large
percentage of financing under this program. On this basis, we
determined that Leclerc received disproportionate amounts under this
program.
Comment 7 (Disproportionality--Addressing GDP)
The GOQ argues that the CIT has determined that the Department
cannot rely on a mechanical, per se test for disproportionality and
that it has a further obligation to address the reasons that may
explain why an industry has received a relatively large share (see
British Steel at 1326). In addition to comparing the industry's share
of government benefits over time to the industry's share of gross
domestic product (GDP), the GOQ also argues that the CIT has stated
that the receipt of large benefits may also be explained by the fact
that the industry was expanding, or that there was an increased demand
for capital investment. According to the GOQ, when the Department
considers GDP, it must request and consider other evidence which the
Department did not do in this case.
The GOQ states that information provided to the Department at
verification demonstrated that the share of loans received by the wood
products industries is virtually identical to their share of total
shipments of manufactured goods in Quebec. Additionally, the GOQ notes
that during the 1993-1995 period, North America was emerging from a
recession. In this economic environment, the laminated hardwood trailer
flooring industry, along with other wood products industries, was
experiencing sustained growth and, thus, was in need of capital.
Petitioner disagrees that the Department should use a GDP analysis
in this case because the GDP figures relied upon by the GOQ are based
on manufacturing GDP. Therefore, they do not represent Canada's GDP and
they do not match the scope of SDI's lending authority which goes
beyond the manufacturing sector. Petitioner also rejects the GOQ's
argument that the CIT decision in British Steel stands for the
proposition that the Department must perform a GDP analysis and examine
factors explaining why an industry received a relatively large share of
assistance under a particular program. According to petitioner, British
Steel requires the Department to examine the above-referenced
information only when it relies on indirect factors to determine
disproportionality. Since the indicators used in the instant case were
directly related, as opposed to indirectly
[[Page 5210]]
related, petitioner argues that the CIT's finding in British Steel is
irrelevant.
DOC Position
We disagree with the GOQ that a finding of disproportionality
requires the Department to examine reasons that may explain why the
industry at issue received a disproportionate share of the benefits.
The statute does not require the Department to determine the cause of
any de facto specificity that occurs as a result of the government
action. To the contrary, the statute provides that the Department may
impose a countervailing duty if it determines that a benefit provided
by a government action is conferred upon a specific industry. No intent
or purposeful government action is required to show that a specific
industry is receiving the benefit, as acknowledged by the Court in
British Steel. See also, Final Affirmative Countervailing Duty
Determination: Certain Softwood Lumber Products from Canada, 57 FR
22570, 22580-81 (1992).
In response to the Court's remand instructions in British Steel,
the Department stated that it is not required to analyze the causal
relationship between the benefit conferred and the specificity of the
benefit. Furthermore, ``imposing the requirement of an affirmative
showing that de facto specificity is the result of particular
government actions is contrary to the statute, the intent of Congress,
and past judicial precedent.'' See Final Results of Redetermination
Pursuant to Remand British Steel Plc. v. United States (February 9,
1995) at 12. The Department's redetermination was upheld by the Court
(see British Steel PLC v. United States 941 F. Supp. 119, 128, (CIT
1996)).
The same point is made in the Uruguay Round Trade Agreements
Statement of Administrative Action (SAA) at 262. The SAA states that
evidence of government intent to target or otherwise limit benefits is
irrelevant in de facto specificity analysis.
Comment 8 (Disproportionality--Considering SDI as Only One Program)
The GOQ argues that the Department incorrectly limited its
examination of funds received by Leclerc and the wood products
industries to the Expansion and Modernization Program, as opposed to
total loans received under all SDI programs. The GOQ states that the
latter approach is correct because all SDI loans come from the same
pool of monies, they are disbursed under different ``programs'' only
for administrative purposes, and that program distinctions make no
difference in the loan criteria, terms, essential eligibility, or
participation. Also, they are administered by the same loan officers
and the customized terms for all SDI loans and loan guarantees are
essentially the same. This information indicates that the hardwood
trailer flooring industry received only a fraction of all SDI loans
between 1993 and 1995.
DOC Position
We do not agree that all SDI programs should, in effect, be
considered integrally linked and, therefore, a single program for
purposes of determining specificity. Section 355.43(b)(6) of the
Department's Proposed Regulations states that in determining whether
two or more programs are integrally linked ``the Secretary will
examine, among other factors, the administration of the programs,
evidence of a government policy to treat industries equally, the
purposes of the programs as stated in their enabling legislation, and
the manner of funding the programs.'' In the Final Affirmative
Countervailing Duty Determination: Pure Magnesium and Alloy Magnesium
From Canada 57 FR 30946 (July 13, 1992) (Magnesium from Canada), the
Department applied this standard when it found that SDI Article 7
assistance was not integrally linked to ``general SDI programs.'' In
making this determination, the Department noted that ``[t]he * * *
programs offer different types of assistance and have been established
for different purposes.'
Each SDI program under investigation in this case (e.g., Expansion
and Modernization Program and PREP) operates under separate regulations
and directives. Each program is also different with respect to
objective and level of benefit. For example, PREP was a temporary
program established to alleviate cash flow problems experienced by
Quebec companies during the recession of the early 1990s. Under PREP,
SDI guaranteed a percentage of loans that could range between
CD$100,000 and CD$1,000,000. The Expansion and Modernization Program,
on the other hand, was a long-term program which provided businesses
with loans for the establishment or expansion of facilities. Although
the floor for assistance under Expansion and Modernization Program is
also CD$100,000, there is no stated cap.
While we acknowledge the overlap that the GOQ refers to with
respect to the administration of its programs, these programs are not
integrally linked because they are separated for legal purposes by
different regulations. They also have different objectives and benefit
levels. For these reasons, we have continued to examine these programs
individually for the final determination.
Comment 9 (Subsidiary Agreement: Including Amount not Disbursed in POI
to Determine Benefit)
Petitioner claims that the Department's preliminary ad valorem
calculation regarding the Subsidiary Agreement was understated because
the Department failed to include funds disbursed to Leclerc after the
POI.
The GOQ contends that petitioner's argument ignores the legal
requirement that the Department determine whether countervailable
benefits were provided during the POI. According to the GOQ, events
occurring after the POI can have no relevance to the Department's
determination of whether benefits were received during the POI.
Leclerc notes that the Department correctly treated the Subsidiary
Agreement assistance as a variable rate, long-term loan. Thus, in
accordance with section 355.49(d)(1) of the Proposed Regulations,
Leclerc argues that the Department must determine the amount of the
benefit attributable to a particular year under a variable rate, long-
term loan by calculating the difference between what the firm paid
during the year under the government loan and what the firm would have
paid during the year under the benchmark loan.
DOC Position
We disagree with petitioner. In accordance with section 355.48 of
the Proposed Regulations, a countervailable benefit is deemed to have
been received at the time that there is a cash flow effect on the firm
receiving the benefit. In the case of a loan, the cash flow effect is
normally deemed to have occurred at the time a firm is due to make a
payment on the benchmark loan. Therefore, because Leclerc would not
have been required to make a payment during the POI on the benchmark
loan for the disbursement in question, that disbursement could not have
conferred a benefit on the firm during the POI.
Comment 10 (Benchmark Interest Rate Based on Adverse Facts Available)
Petitioner argues that the benchmark interest rate for the loan
under the Subsidiary Agreement should be 20 percent, based on adverse
facts available. Petitioner contends that the use of adverse facts
available is warranted because the GOC did not provide the verification
team with certain documents.
[[Page 5211]]
The GOC argues that the requested analysis/approval documents were
provided to the verification team (see GOC Verification Report at page
2). Accordingly, no grounds exist for the Department to consider the
punitive measures petitioner proposes.
DOC Position
We agree with the GOC that application of adverse facts available
is not warranted with respect to the Subsidiary Agreement loan. As
noted in the GOC verification report, while the GOC initially could not
provide the analysis/approval documents because of concerns regarding
the proprietary nature of the documents, the GOC made available certain
approval documents to the verification team on November 28, 1996. Thus,
no grounds exist for the Department to consider the use of adverse
facts available.
Comment 11 (Upstream Subsidy)
Petitioner states that the Department's verification of Leclerc's
lumber purchasing records incidentally confirmed that Leclerc paid
widely varying prices for the same species and grade purchased at the
same time, that it paid higher prices for lower quality lumber
purchased at the same time, and that it was able to buy lumber, a
commodity product, at prices below what other buyers were willing to
pay. Thus, petitioner contends that because the Department failed to
address the issues regarding the credibility of Leclerc's lumber
purchasing records, the Department must disregard Leclerc's prices.
Both the GOQ and Leclerc note that the factual record in this case
fully supports the Department's Preliminary Determination that no
competitive benefit was bestowed on Leclerc through its purchases of
allegedly subsidized lumber. Respondents note that the Department twice
verified the actual prices paid by Leclerc for purchases of lumber and
the sources of Leclerc's lumber. Moreover, respondents state that the
Department's verification reports confirm that Leclerc and the GOQ
accurately reported all the relevant competitive benefit data.
Respondents add that the Department analyzed the verified data and
correctly concluded that no competitive benefit was bestowed upon
Leclerc.
DOC Position
We agree with respondents. We thoroughly examined and verified
Leclerc's lumber purchasing records for the POI, as well as GOQ records
which confirmed the sources from which Leclerc's suppliers obtained
timber (see August 26, 1996 Verification Reports of Leclerc and the GOQ
and December 10, 1996 Verification Reports of Leclerc and the GOQ).
Moreover, many concerns raised by petitioner prior to verification were
addressed at verification. This verified record information was then
analyzed using several approaches. Based on our analysis, we have
determined that the company did not receive a competitive benefit
through its lumber purchases from allegedly subsidized suppliers.
Comment 12 (Denominator Issue: Subsidiary Agreement and SDI)
Leclerc contends that the financing received under the Subsidiary
Agreement and SDI benefited the company's total production and,
therefore, the denominator used to calculate the ad valorem subsidy
rate should be total sales. Leclerc adds that the Department's
verification reports of Leclerc and the GOC further confirm that the
assistance benefited total sales, not just subject merchandise.
Petitioner contends that Leclerc's argument is misplaced because
the GOC and GOQ provided the assistance solely to support the
production of LHF. Petitioner notes that the financing received through
SDI and the Subsidiary Agreement was received by the two companies in
the Leclerc group of companies which produce LHF, and that other
members of the group which produce other items did not receive this
financing. Finally, petitioner claims that Leclerc has failed to
produce documentation showing that the governments intended their
financing to go beyond LHF production at the time it was granted.
DOC Position
We agree with petitioner that the assistance provided to Leclerc
under these programs was ``tied'' to the production of subject
merchandise. Consistent with the Department's traditional tying
analysis, we have determined that our inquiry should focus on the
subsidy givers'' (i.e., the GOC and GOQ) intended use for the subsidies
prior to or at the point of bestowal. Namely, a subsidy is considered
to be tied to a particular product when the intended use is
acknowledged prior to or concurrent with the bestowal of the subsidy
(see GIA at 37232). With respect to the financing in question, all
available documentary record evidence generated by the GOC, GOQ and
Leclerc prior to the point of bestowal (e.g., applications, analysis
reports, recommendation documents, and contracts) demonstrate that the
governments only considered the expansion and/or creation of LHF
facilities as the project for which the assistance was provided.
Additionally, as noted by petitioner, the Department verified that
the financing in question was provided to Nilus Leclerc, Inc. and
Industries Leclerc, Inc., the LHF producers in the Leclerc group of
companies. Members of the Leclerc group of companies which produce non-
subject merchandise were not considered in the above-referenced
government documents as beneficiaries of the financing in question.
Therefore, we have determined that the financing received under the
Subsidiary Agreement and SDI solely benefited the production of LHF.
Comment 13 (SDI: Calculation Errors)
The GOQ and Leclerc contend that the Department erred in
calculating the net present value of the 1995 and 1994 SDI loans by
incorrectly calculating the present value of some cash flows. The GOQ
and Leclerc assert that when these errors are corrected, there is no
benefit from the SDI loans during the POI.
DOC Position
We agree with the GOQ and Leclerc that errors were made in
calculating the present value interest factor for the SDI loans. These
errors have been corrected.
Comment 14 (The Department Must First Find a Benefit)
According to the GOQ, the statute requires the Department to find
first that a payment is a subsidy, and only subsequently can it analyze
whether the subsidy is countervailable. The GOQ and Leclerc assert that
if the Department had not erred when it determined that the SDI loans
conferred a benefit, it would never have analyzed the specificity of
the SDI loans.
DOC Position
We disagree with the assertion that the Department first must find
a benefit from a particular program that is used in order to analyze
the specificity of such program. Programs can be found to be specific
on different grounds, which in turn dictate the method for calculating
the benefit. For example, if a program is found to be an export
subsidy, rather than a specific domestic subsidy, the denominator used
to calculate the benefit is export sales rather than total sales, which
can affect the finding of a benefit. Additionally, because the
Department cumulates the benefit from all countervailable programs in
order to determine if the aggregate benefit is greater than de minimis,
the Department must assess the countervailability of any program
[[Page 5212]]
where the benefit may be greater than zero.
Comment 15 (Using 1996 Information to Calculate the Benefit)
According to the GOQ, were we to consider events subsequent to the
POI, there would be no benefit to Leclerc from any of the loans.
However, both the GOQ and Leclerc also argue that information
concerning events subsequent to the POI cannot be used retrospectively
to determine a countervailable benefit.
Petitioner claims that the Department did not verify important
elements of these events and, therefore, cannot rely on them to
calculate a benefit. In rebuttal, Leclerc argues that the events are on
the record and verified.
DOC Position
We disagree with respondents that our calculation of the benefit
conferred by a long-term loan during the POI cannot reflect events
subsequent to the POI. For example, if we learn during verification
that scheduled payments on the loan were missed during the year
following the POI, it is appropriate to reflect those missed payments
in our calculation. This is because when we are calculating the grant
equivalent of a long-term loan we necessarily include information about
expected payments under the loan. Where actual payments differ from
expected payments, we reflect the actual payments to increase the
accuracy of our calculation.
Our examination of the post-POI information was sufficient to
determine that the information provided is generally consistent with
information submitted in Leclerc's questionnaire, as well as other
information provided by the GOQ, which was fully verified. Therefore,
as facts available, we have decided to use the post-POI information to
achieve accurate calculations of the benefits conferred by these loans.
Comment 16 (The Department Should Use its Long-term, Variable-rate
Methodology for SDI Loans)
Leclerc maintains that the Department's approach to calculating the
benefit under the SDI and Subsidiary Agreement programs is internally
inconsistent, and that the variable rate methodology could be used for
the SDI loans. While Leclerc notes that we changed our methodology in
order to account for the premia, they state that the underlying loans
are actually variable rate loans. Furthermore, Leclerc notes that the
first option in the Department's long-term, variable-rate benchmark
hierarchy is to use the interest rate on a variable-rate, long-term
benchmark loan.
The GOQ notes that the Department prudently deviated from its
traditional methodology to account for the full costs to the borrower.
However, the GOQ notes that the Department might choose to revert to
its traditional methodology.
Petitioner contends that the SDI loans cannot be treated as
variable rate loans because of events subsequent to the POI that
preclude the use of the Department's long-term, variable-rate
methodology.
DOC Position
We disagree with Leclerc that the Department should revert to using
its long-term, variable-rate methodology. As we explained in our
Preliminary Determination, there are several features of these loans
that lead us to conclude that our variable-rate loan methodology is not
capable of measuring the benefits conferred by these loans. Therefore,
we have continued to apply our long-term, fixed-rate loan methodology.
Comment 17 (Extent to Which the 1995 SDI Loan Provided a 1995 Benefit
to Leclerc)
The GOQ and Leclerc argue that the authorized portion of the 1995
SDI loan disbursed during the POI should not have been countervailed
because no payments were due or would have been due under comparable
financing during the POI. The GOQ and Leclerc state that the
Department's Proposed Regulations and prior practice dictate that it
countervail a benefit ``at the time a firm is due to make a payment on
the loan.'' (See Proposed Regulations, 355.48(a), (b)(3)). Leclerc
cites, among others, Final Results of Countervailing Duty
Administrative Review: Certain Iron-Metal Casings From India, 61 FR
64687 (December 6, 1996) in which the Department calculated the benefit
as having been received when the first interest payment was made,
despite the fact that interest had accrued in the prior year.
If the Department continues to assign a benefit to 1995 from the
1995 SDI loan, the GOQ and Leclerc argue that the Department should not
include amounts that were authorized, but not disbursed during 1995.
Including the amounts that were not disbursed would violate Article 19
of the Uruguay Round Agreement on Subsidies and Countervailing Measures
because, Leclerc argues, it could not have benefited during the POI
from funds that were not disbursed.
Petitioner claims that the Department was consistent with its
regulations in finding a benefit from the 1995 SDI loan because it
calculated the loan's grant equivalent. Petitioner notes that section
355.48(b) of the Department's Proposed Regulations state that ``{the
benefit} occur{s} in the case of a grant * * * at the time a firm
receives the grant or equity infusion.'' Thus the benefit on the 1995
loan occurred at the time of receipt (i.e., during the POI). Petitioner
further argues that the cases cited by the GOQ and Leclerc do not apply
to the loan in question because in all the cited cases the loans in
question are short-term loans, in which the Department does not
calculate a grant equivalent. Moreover, Petitioner contends that the
methodology proposed by the GOQ and Leclerc is not consistent with
economic logic because it would preclude the Department from finding a
benefit on a loan with lengthy payment deferrals if the recipient could
show that it obtained a similar loan from commercial lenders.
DOC Position
We agree with respondents. While we have calculated a grant
equivalent for the SDI loans, the underlying instrument continues to be
a loan. If there is no effect on the recipient's cash flow during the
POI (i.e., no payment would have been made on the benchmark loan during
the POI), there is no benefit attributable to the POI. (See Final
Affirmative Countervailing Duty Determinations: Certain Steel Products
from France, 58 FR 37304 (July 9, 1993) and Final Affirmative
Countervailing Duty Determination: Brass Sheet and Strip from France,
52 FR 1218, 1221 (January 12, 1987).)
Furthermore, based on the Department's practice of calculating a
benefit at the time a payment is due on the benchmark loan, we have
found, in this instance, that the benefit conferred by the SDI loans
should be attributed to the year subsequent to disbursement because no
payments were due on the benchmark loans until that time.
Because we have decided that a benefit should not be calculated for
the 1995 SDI loan, we do not reach the countervailability of the
undisbursed amount.
Comment 18 (SDI Loans Should be Treated as Grants or the Methodology
Should be Revised)
As adverse facts available, petitioner asserts that the SDI loans
should be treated as grants offset only by verified payments. If the
Department does not treat the SDI loans as grants, it should: (1) use
only verified payments in the repayment stream; (2) consider principal
outstanding at the end of the
[[Page 5213]]
loan term to be forgiven; (3) use a benchmark interest rate of 20
percent; (4) assume there will be no extension of due dates; (5) assume
any shares of Leclerc that SDI might acquire will have no value; and
(6) treat the SDI loans as export subsidies.
Such measures are justified, according to petitioner, because
Leclerc failed to provide the Department with pertinent information
about the SDI loans prior to verification. This omission constitutes a
serious material misrepresentation, in petitioner's view. Despite being
requested by the Department in the questionnaire to provide such
information, Leclerc failed to do so. Petitioner asserts that it is
Department practice to use facts available when a party ``withholds
information that has been requested'' (see 776(a) of the Act).
Additionally, because the SDI regulations state that it can enter into
agreements with distressed borrowers, any SDI loan terms are suspect
and, thus, cannot be used for benefit calculations.
Leclerc argues that petitioner's insistence on the use of adverse
facts available is without merit because Leclerc has cooperated fully
with the Department. The Department has conducted two successful
verifications with the GOQ, the GOC and Leclerc. Leclerc claims that
its voluntary submission of minor additional information discovered
during the course of preparing for verification substantiates its
cooperation. Specifically, Leclerc states that the Department's
standard questionnaire simply asks that parties report differences
between what the loan agreement requires and what a party actually
paid.
Additionally, Leclerc claims that there is no legal precedent or
argument that would justify treating the SDI loans as grants, and that
there is no evidence on the record that the loans are grants. Thus, the
Department should continue to analyze the SDI financing as loans.
Leclerc and the GOQ argue that Leclerc continues to have a legal
obligation to repay its SDI loans, thus no forgiveness has occurred.
Moreover, section 355.44(k) of the Proposed Regulations requires the
Department to recognize loan forgiveness as a grant ``at the time of
the assumption or forgiveness.'' Leclerc asserts that petitioner's
other methodological suggestions are groundless. The events subsequent
to the POI affecting the SDI loans are indeed on the record and
verified, but these events are irrelevant because they occurred after
the POI.
DOC Position
In this instance, we do not believe that Leclerc's late submission
of information concerning events subsequent to the POI requires that
the Department use adverse facts available. While we have included the
post-POI information in our calculations to make them more accurate,
our investigation has clearly focussed on information from years prior
to and including the POI.
Further, we agree with Leclerc and the GOQ that the Proposed
Regulations state that a benefit from loan forgiveness usually occurs
when the loan is forgiven. We disagree with petitioner that the loans
should be treated as grants simply because SDI can renegotiate loan
terms with its clients. Commercial lenders also typically have the
freedom to change the terms when dealing with a distressed borrower.
Regarding treating the SDI financing as a grant, the Department's
GIA at 37255 sets out the standard for determining whether an
instrument should be considered a grant:
We have distinguished grants from both debt and equity by
defining grants as funds provided without expectation of a: (1)
Repayment of the grant amount, (2) payment of any kind stemming
directly from the receipt of the grant, or (3) claim on any funds in
case of company liquidation. (parenthesis omitted)
Based on the above, the SDI loans should not be considered grants
because the SDI financing does not meet any of the three criteria.
Moreover, in distinguishing between equity and loans, the GIA at 37255
states:
Loans typically have a specified date on which the last
remaining payments will be made and the obligation of the company to
the creditor is fulfilled. Even if the instrument has no pre-set
repayment date, but a repayment obligation exists when the
instrument is provided, the instrument has characteristics more in
line with loans than equity.
While certain aspects of repayment under the SDI loans are more
flexible than that of a standard commercial bank loan, as reflected in
its financial statements, Leclerc had a repayment obligation to SDI
during the POI. Thus, we find no basis on which to consider the SDI
loans to be a grant.
Summary
Based on the four countervailable programs described above, the
aggregate ad valorem rate is 0.57 percent. This rate is de minimis,
pursuant to 703(b)(4) of the Act. Therefore, we determine that no
benefits which constitute bounties or grants within the meaning of the
countervailing duty law are being provided to manufacturers, producers
or exporters of LHF in Canada.
Verification
In accordance with section 782(i) of the Act, we verified the
information used in making our final determination. We followed
standard verification procedures, including meeting with government and
company officials, and examination of relevant accounting records and
original source documents. Our verification results are outlined in
detail in the public versions of the verification reports, which are on
file in the Central Records Unit (Room B-099 of the Main Commerce
Building).
Return or Destruction of Proprietary Information
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 355.34(d). Failure to
comply is a violation of the APO.
This determination is published pursuant to section 705(d) of the
Act.
Dated: January 27, 1997.
Robert S. LaRussa,
Acting Assistant Secretary for Import Administration.
[FR Doc. 97-2715 Filed 2-3-97; 8:45 am]
BILLING CODE 3510-DS-P