[Federal Register: November 25, 1998 (Volume 63, Number 227)]
[Rules and Regulations]               
[Page 65347-65418]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25no98-23]

[[Page 65347]]

_______________________________________________________________________

Part III

Department of Commerce
_______________________________________________________________________

International Trade Administration
_______________________________________________________________________

19 CFR Part 351

Countervailing Duties; Final Rule

[[Page 65348]]

DEPARTMENT OF COMMERCE

International Trade Administration

19 CFR Part 351

[Docket No. 950306068-8205-05]
RIN 0625-AA45

 
Countervailing Duties

AGENCY: International Trade Administration, Department of Commerce.

ACTION: Final rule.

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SUMMARY: The Department of Commerce (``the Department'') hereby issues 
final countervailing duty regulations to conform to the Uruguay Round 
Agreements Act, which implemented the results of the Uruguay Round 
multilateral trade negotiations. The Department has sought to issue 
regulations that: Where appropriate and feasible, translate the 
principles of the implementing legislation into specific and 
predictable rules, thereby facilitating the administration of these 
laws and providing greater predictability for private parties affected 
by these laws; simplify and streamline the Department's administration 
of countervailing duty proceedings in a manner consistent with the 
purpose of the statute and the President's regulatory principles; and 
codify certain administrative practices determined to be appropriate 
under the new statute and under the President's Regulatory Reform 
Initiative.

DATES: The effective date of this final rule is December 28, 1998, 
except that Sec. 351.301(d) is effective on November 25, 1998. See 
Sec. 351.702 for applicability dates.

FOR FURTHER INFORMATION CONTACT: Jennifer A. Yeske at (202) 482-1032 or 
Jeffrey May at (202) 482-4412.

SUPPLEMENTARY INFORMATION:

Background

    The publication of this notice of final rules, which deals with 
countervailing duty (``CVD'') methodology, completes a significant 
portion of the process of developing regulations under the Uruguay 
Round Agreements Act (``URAA''). The process began when the Department 
took the unusual step of requesting advance public comments in order to 
ensure that, at the earliest possible stage, we could consider and take 
into account the views of the private sector entities that are affected 
by the antidumping (``AD'') and CVD laws. On February 26, 1997, the 
Department published proposed rules dealing with CVD methodology 
(``1997 Proposed Regulations''). The Department received over 200 
written public comments regarding the 1997 Proposed Regulations. On 
October 17, 1997, the Department held a public hearing, and thereafter, 
received over 50 additional post-hearing written public comments on the 
1997 Proposed Regulations.<SUP>1</SUP>
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    \1\ The prior notices published by the Department as part of its 
URAA rulemaking activity are: (1) Advance Notice of Proposed 
Rulemaking and Request for Public Comments (Antidumping Duties; 
Countervailing Duties; Article 1904 of the North American Free Trade 
Agreement), 60 FR 80 (January 3, 1995); (2) Advance Notice of 
Proposed Rulemaking; Extension of Comment Period (Antidumping 
Duties; Countervailing Duties; Article 1904 of the North American 
Free Trade Agreement), 60 FR 9802 (February 22, 1995); (3) Interim 
Regulations; Request for Comments (Antidumping and Countervailing 
Duties), 60 FR 25130 (May 11, 1995); (4) Proposed Rule; Request for 
Comments (Antidumping and Countervailing Duty Proceedings; 
Administrative Protective Order Procedures; Procedures for Imposing 
Sanctions for Violation of a Protective Order), 61 FR 4826 (February 
8, 1996); (5) Notice of Proposed Rulemaking and Request for Public 
Comments (Antidumping Duties; Countervailing Duties), 61 FR 7308 
(February 27, 1996); (6) Extension of Deadline to File Public 
Comments on Proposed Antidumping and Countervailing Duty Regulations 
and Announcement of Public Hearing (Antidumping Duties; 
Countervailing Duties), 61 FR 18122 (April 24, 1996); (7) 
Announcement of Opportunity to File Public Comments on the Public 
Hearing of Proposed Antidumping and Countervailing Duty Regulations 
(Antidumping Duties; Countervailing Duties), 61 FR 28821 (June 6, 
1996); (8) Notice of Proposed Rulemaking and Request for Public 
Comment (Countervailing Duties), 62 FR 8818 (February 26, 1997); (9) 
Final Rules (Antidumping Duties; Countervailing Duties), 62 FR 27295 
(May 19, 1997); (10) Extension of Deadline to File Public Comments 
on Proposed Countervailing Duty Regulations, (Countervailing 
Duties), 62 FR 19719 (April 23, 1997); (11) Extension of Deadline to 
File Public Comments on Proposed Countervailing Duty Regulations, 
(Countervailing Duties), 62 FR 25874 (May 12, 1997); (12) Notice of 
Public Hearing on Proposed Countervailing Duty Regulations and 
Announcement of Opportunity to File Post-Hearing Comments, 
(Countervailing Duties), 62 FR 38948 (July 21, 1997); (13) Notice of 
Public Hearing on Proposed Countervailing Duty Regulations and 
Announcement of Opportunity to File Post-Hearing Comments; 
Correction, (Countervailing Duties), 62 FR 41322 (August 1, 1997); 
(14) Notice of Postponement of Public Hearing on Proposed 
Countervailing Duty Regulations and of Opportunity to File Post-
Hearing Comments, (Countervailing Duties), 62 FR 46451 (September 3, 
1997); (15) Interim Final Rules; Request for Comments (Procedures 
for Conducting Five-Year (``Sunset'') Reviews of Antidumping and 
Countervailing Duty Orders), 63 FR 13516 (March 20, 1998); and (16) 
Final Rule; Administrative Protective Order Procedures; Procedures 
for Imposing Sanctions for Violation of a Protective Order, 
(Antidumping and Countervailing Duty Proceedings), 63 FR 24391 (May 
4, 1998).
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    In drafting these final rules, the Department has carefully 
reviewed and considered each of the comments it received. While we have 
not always adopted suggestions made by commenters, we found the 
comments to be very useful in helping us to work our way through the 
many legal and policy issues addressed in the regulation. Therefore, we 
are extremely grateful to those who took the time and trouble to 
express their views regarding how the Department should administer the 
CVD laws in the future.
    In addition, in these final rules, the Department has continued to 
be guided by the objectives described in the 1997 Proposed Regulations. 
Specifically, these objectives are: (1) Conformity with the statutory 
amendments made by the URAA; (2) the elaboration through regulation of 
certain statements contained in the Statement of Administrative Action 
(``SAA''); <SUP>2</SUP> and (3) consistency with President Clinton's 
Regulatory Reform Initiative and his directive to identify and 
eliminate obsolete and burdensome regulations.
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    \2\ See Statement of Administrative Action accompanying H.R. 
5110, H.R. Doc. No. 316, Vol. 1, 103d Cong., 2d Sess. 911-955 
(1994).
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    In the case of CVD methodology, the Department previously issued 
proposed regulations in 1989 (``1989 Proposed 
Regulations'').<SUP>3</SUP> Because the Department never issued final 
rules, the 1989 Proposed Regulations were not binding on the Department 
or private parties. Nevertheless, to some extent both the Department 
and private parties relied on the 1989 Proposed Regulations as a 
restatement of the Department's CVD methodology as it existed at the 
time. Thus, notwithstanding statutory amendments made by the URAA and 
subsequent developments in the Department's administrative practice, 
the 1989 Proposed Regulations still serve as a point of departure for 
any new regulations dealing with CVD methodology.
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    \3\ See Notice of Proposed Rulemaking and Request for Public 
Comments (Countervailing Duties), 54 FR 23366 (May 31, 1989).
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    In an earlier rulemaking (see item 9 in note 1), we consolidated 
the AD and CVD regulations into a single part 351. For the most part, 
the regulations contained in this notice constitute subpart E of part 
351.

Explanation of the Final Rules

    In drafting these Final Regulations, the Department carefully 
considered each of the comments received. In addition, we conducted our 
own independent review of those provisions of the 1997 Proposed 
Regulations that were not the subject of public comments. The following 
sections contain a summary of the comments we received and the 
Department's responses to those comments. In addition, these sections 
contain an explanation of changes the Department has made to the 1997 
Proposed Regulations either in response to

[[Page 65349]]

comments or on its own initiative. Finally, these sections contain a 
restatement of principles that remain unchanged from the 1997 Proposed 
Regulations and that were not the subject of any public comments.
    The Department is also hereby issuing interim final rules to set 
forth certain procedures for establishing the non-countervailable 
status of alleged subsidies or subsidy programs pursuant to section 
771(5B) of the Tariff Act of 1930, as amended (``the Act''). Pursuant 
to authority at 5 U.S.C. 553(b)(A), the Assistant Secretary for Import 
Administration waives the requirement to provide prior notice and an 
opportunity for public comment because this action is a rule of agency 
procedure. This interim final rule is not subject to the 30-day delay 
in its effective date under 5 U.S.C. 553(d) because it is not a 
substantive rule. The analytical requirements of the Regulatory 
Flexibility Act (5 U.S.C. 601 note) are inapplicable to this rulemaking 
because it is not one for which a Notice of Proposed Rulemaking is 
required under 5 U.S.C. 553 or any other statute.

Section 351.102

    These regulations add several definitions to Sec. 351.102. Many of 
these definitions are identical (or virtually identical) to definitions 
contained in Sec. 355.41 of the 1989 Proposed Regulations, and some are 
based on definitions contained in the Illustrative List of Export 
Subsidies (``Illustrative List'') annexed to the Agreement on Subsidies 
and Countervailing Measures (``SCM Agreement''). We have made some 
changes to the definitions contained in the 1997 Proposed Regulations.
    While we have not changed the definition of consumed in the 
production process, we are clarifying that the definition is not to be 
used as a way to expand significantly the rights of countries to apply 
border adjustments for a broad range of taxes on energy, particularly 
in the developed world. See SAA at 915.
    The definition of firm is based on Sec. 355.41(a) of the 1989 
Proposed Regulations, but an additional clause has been added to 
clarify that the purpose of this term is to serve as a shorthand 
expression for the recipient of an alleged subsidy. While other terms 
could be used, the use of the term ``firm'' in this manner has become 
an accepted part of CVD nomenclature. For clarification, we have added 
``company'' and ``joint venture'' to the entities listed in the 
definition in the 1997 Proposed Regulations.
    Similarly, the term government-provided is used as a shorthand 
adjective to distinguish the act or practice being analyzed as a 
possible countervailable subsidy from the act or practice being used as 
a benchmark. As made clear in the regulation, the use of ``government-
provided'' does not mean that a subsidy must be directly provided by a 
government. This definition is unchanged from our 1997 Proposed 
Regulations.
    As in our 1997 Proposed Regulations, loan is defined to include 
forms of debt financing other than what one normally considers to be a 
``loan,'' such as bonds or overdrafts. Again, this definition is 
intended as a shorthand expression in order to avoid repetitive use of 
more cumbersome phrases, such as ``loans or other debt instruments.''
    In this regard, the Department considered codifying its approach 
with respect to so-called ``hybrid instruments,'' financial instruments 
that do not readily fall into the basic categories of grant, loan, or 
equity. In the 1993 steel determinations (see Certain Steel Products 
from Austria (General Issues Appendix), 58 FR 37062, 37254 (July 9, 
1993) (``GIA'')), the Department developed a hierarchical approach for 
categorizing hybrid instruments, an approach that was sustained in 
Geneva Steel v. United States, 914 F. Supp. 563 (CIT 1996). However, 
notwithstanding this judicial imprimatur, the Department has relatively 
little experience with hybrid instruments. Therefore, although the 
Department has no present intention of deviating from the approach set 
forth in the GIA, the codification of this approach in the form of a 
regulation would be premature at this time.
    Many commenters proposed definitions of the phrase ``entrusts or 
directs'' as it is used in section 771(5)(B)(iii) of the Act, which 
deals with ``indirect subsidies.'' Indirect subsidies generally involve 
situations where a government provides a financial contribution through 
a private body. Under section 771(5)(B)(iii) of the Act, a subsidy 
exists when, inter alia, a government ``makes a payment to a funding 
mechanism to provide a financial contribution, or entrusts or directs a 
private entity to make a financial contribution * * *'' (emphasis 
added). In our 1997 Proposed Regulations, we did not address indirect 
subsidies in detail. Instead, we noted that the SAA directs the 
Department to proceed on a case-by-case basis (see SAA at 925-26), and 
we requested comments on the factors we should consider in making our 
case-by-case determinations.
    One commenter suggested that an indirect subsidy need only be 
linked to a government action or program to satisfy the ``entrusts or 
directs'' standard. This same commenter asked the Department to include 
an illustrative list of situations that would meet the ``entrusts or 
directs'' standard. A second commenter believed that the standard is 
met when a government takes an action that causes a private party to 
confer a benefit. This same commenter asked the Department to clarify 
that the term ``private body'' is not limited to a single entity, but 
also includes a group of entities or persons. A third commenter 
proposed that the ``entrusts or directs'' standard be considered 
satisfied whenever a government takes an action that proximately 
results in a private entity providing a financial contribution. Certain 
commenters also asked the Department to confirm that the standard is no 
narrower than the prior U.S. standard for finding an indirect subsidy.
    The issue of what ``entrusts or directs'' means was debated 
extensively at the Department's hearing on its 1997 Proposed 
Regulations. This debate prompted the submission of additional proposed 
definitions. Two commenters argued that an indirect subsidy occurs 
whenever a government action has the inevitable result of compelling a 
private party to provide a benefit. A second commenter proposed a ``but 
for'' test, i.e., if the government did not act, the subsidy would not 
exist.
    As the extensive comments on this issue indicate, the phrase 
``entrusts or directs'' could encompass a broad range of meanings. As 
such, we do not believe it is appropriate to develop a precise 
definition of the phrase for purposes of these regulations. Rather, we 
believe that we should follow the guidance provided in the SAA to 
examine indirect subsidies on a case-by-case basis. We will, however, 
enforce this provision vigorously.
    We agree with those commenters who urged the Department to confirm 
that the current standard is no narrower than the prior U.S. standard 
for finding an indirect subsidy as described in Certain Steel Products 
from Korea, 58 FR 37338 (July 9, 1993) and Certain Softwood Lumber 
Products from Canada, 57 FR 22570 (May 28, 1992). Also, we believe that 
the phrase ``entrusts or directs'' subsumes many elements of the 
definitions proposed by commenters. With respect to the suggestion that 
we include an illustrative list of situations that would fall under the 
``entrusts or directs'' standard, we do not believe this is necessary. 
The SAA at 926 lists a number of cases where the Department

[[Page 65350]]

has found indirect subsidies in the past, and these cases serve to 
provide examples of situations where we believe the statute would 
permit the Department to reach the same result. Similarly, regarding 
the request that we define the phrase ``private entity'' to include 
groups of entities or persons, the SAA is clear that groups are 
included (see SAA at 926). Therefore, we have not promulgated a 
regulation with this definition.
    Although the indirect subsidies that we have countervailed in the 
past have normally taken the form of a foreign government requiring an 
intermediate party to provide a benefit to the industry producing the 
subject merchandise, often to the detriment of the intermediate party, 
indirect subsidies could also take the form of a foreign government 
causing an intermediate party to provide a benefit to the industry 
producing the subject merchandise in a way that is also in the interest 
of the intermediate party. We believe the phrase ``entrusts or 
directs'' could encompass government actions that provide inducements, 
other than upstream subsidies, to a private party to provide a benefit 
to another party.
    One commenter argued that the Final Regulations should include a 
definition of consultations. Consistent with Article 13 of the SCM 
Agreement, section 702(b)(4)(A)(ii) of the Act requires the Department 
to provide the government of the exporting country named in a petition 
an opportunity for consultations with respect to the petition. This 
commenter suggested that the definition of consultations should include 
a statement of purpose as articulated in the SCM Agreement (i.e., 
clarifying the allegations in the petition and arriving at a mutually 
agreed solution). Furthermore, the commenter argued, in the Final 
Regulations the Department should commit to consult with the foreign 
government both prior to initiating and during the course of the 
investigation. Finally, the commenter proposed that the definition 
contain a requirement that all government-to-government exchanges (oral 
and written) be placed on the record of the proceeding.
    We do not believe that a regulation is required to define 
``consultations.'' We agree that, in accordance with Article 13 of the 
SCM Agreement, the purpose of consultations is to clarify the 
allegations presented in a petition and arrive at a mutually agreed 
solution. Section 351.202(h)(2)(i)(2) of Antidumping Duties; 
Countervailing Duties; Final rule, 62 FR 27295, 27384 (May 19, 1997) 
clearly states that the Department will invite the government of any 
exporting country named in a CVD petition to hold consultations with 
respect to the petition. Further, consistent with Article 13.2 of the 
SCM Agreement, the Department affords foreign governments reasonable 
opportunities to consult throughout the period of investigation. In 
regard to communications, it is the Department's longstanding practice 
that all ex parte communications with Department decisionmakers be 
placed on the record of a proceeding through memoranda to the file.

Section 351.501

    Section 351.501 restates very generally the subject matter of 
subpart E. To be more specific, the arrangement of subpart E is as 
follows. After dealing with the specificity of domestic subsidies in 
Sec. 351.502 and the concept of ``benefit'' in Sec. 351.503, 
Secs. 351.504 through 351.513 deal with the identification and 
measurement of various general types of subsidy practices. Sections 
351.514 through 351.520 focus on export subsidies, incorporating the 
appropriate standards from the Illustrative List of Export Subsidies 
contained in Annex I of the SCM Agreement. Sections 351.521 through 
351.523 deal with import substitution subsidies (currently designated 
as ``Reserved''), green light and green box subsidies, and upstream 
subsidies, respectively. Section 351.524 addresses the allocation of 
benefits to a particular time period. Section 351.525 sets forth rules 
regarding the calculation of an ad valorem subsidy rate and the 
attribution of a subsidy to the appropriate sales value of a product. 
Finally, Secs. 351.526 and 351.527 contain rules regarding program-wide 
changes and transnational subsidies, respectively. The section 
numbering in these Final Regulations reflects minor changes from the 
1997 Proposed Regulations. As discussed below, we have decided to 
codify a final rule on the concept of ``benefit.'' This rule is now 
Sec. 351.503. We have also moved the rules regarding the allocation of 
benefits, which were included in the section on grants in the 1997 
Proposed Regulations to a separate section, Sec. 351.524. Finally, we 
have moved Sec. 351.520 of the 1997 Proposed Regulations to 
Sec. 351.514(b) because general export promotion activities are more 
appropriately addressed as an exception to export subsidies.
    The last sentence of Sec. 351.501 acknowledges that subpart E does 
not address every possible type of subsidy practice. However, the same 
sentence provides that in dealing with alleged subsidies that are not 
expressly covered by these regulations, the Secretary will be guided by 
the underlying principles of the Act and subpart E.
    In this regard, the Act and the SCM Agreement serve to eliminate 
much of the confusion and controversy surrounding the necessary 
elements of a countervailable subsidy. First, under section 771(5)(B) 
of the Act and Article 1.1(a)(1) and (2) of the SCM Agreement, there 
must be a financial contribution that a government provides either 
directly or indirectly, or an income or price support in the sense of 
Article XVI of the General Agreement on Tariffs and Trade 1994 (``GATT 
1994''). Although the precise parameters will have to be determined on 
a case-by-case basis, this element provides a framework for analysis 
that previously was not directly addressed.
    Second, under section 771(5)(B) of the Act and Article 1.1(b) of 
the SCM Agreement, the financial contribution (or income or price 
support) must confer a benefit. Section 351.503 sets out the principles 
we will generally follow in determining whether a benefit has been 
conferred.
    Finally, under section 771(5)(A) of the Act and Article 1.2 of the 
SCM Agreement, a subsidy must be specific in order to be 
countervailable. The ``specificity test'' is addressed in Sec. 351.502, 
but we note here that by clarifying the purpose of the specificity test 
and the manner in which it is to be applied, the URAA, the SAA and the 
SCM Agreement should serve to reduce the controversies and volume of 
litigation concerning this issue.
    In the preamble to our 1997 Proposed Regulations we discussed our 
decision not to include two topics in our proposed changes to subpart 
E: Indirect subsidies (with the exception of upstream subsidies) and 
privatization. The numerous comments regarding our decision not to 
promulgate regulations on these two topics are addressed below.

Indirect Subsidies

    In our 1997 Proposed Regulations, we discussed only briefly the 
topic of indirect subsidies. We received several comments on this 
issue. Comments concerning the adoption of a definition of the phrase 
``entrusts or directs'' have been addressed previously (see 
Sec. 351.102). The remaining comments relating to indirect subsidies 
are addressed here.
    One commenter asked the Department to codify a rule stating that 
indirect subsidies are countervailable. In this commenter's view, this 
would eliminate any uncertainty that could become the cause of 
litigation. Another commenter requested that the Department include a

[[Page 65351]]

broad definition of indirect subsidies in our regulations.
    We have not adopted either suggestion. We believe that section 
771(5)(B)(iii) of the Act clearly states that subsidies provided by 
governments through private parties are covered by the CVD law. 
Additionally, section 771(5)(C) of the Act states that the 
determination of whether a subsidy exists shall be made ``without 
regard to whether the subsidy is provided directly or indirectly * * 
*'' (emphasis added). Therefore, no regulation is needed on this point. 
Regarding the second comment, as discussed previously, the phrase 
``entrusts or directs'' as used in section 771(5)(B)(iii) of the Act 
could encompass a broad range of meanings. As such, we do not believe 
it is appropriate to develop a precise definition of the phrase for 
purposes of these regulations.
    One commenter singled out subsidies involving the provision of 
goods and services for less than adequate remuneration and asked the 
Department to confirm that indirect subsidies can be conferred through 
the provision of goods or services by private parties. This same 
commenter also asked the Department to state in the preamble to the 
Final Regulations that the new statute will not alter the Department's 
practice of finding export restraints to be countervailable. Other 
commenters objected to this position. They argued that: (1) The 
practices constituting financial contributions under the Act are 
payments of cash or cash equivalents, while government regulatory 
measures do not entail any financial contribution; (2) export 
restraints do not direct private parties to make any type of payment; 
they simply limit the parties' ability to export; (3) regulatory 
measures that distort trade are separately covered by other World Trade 
Organization (``WTO'') Agreements (e.g., GATT 1994 Articles I-V, VII-
IX, Agreement on Sanitary and Phytosanitary Measures, Agreement on 
Technical Barriers to Trade, and Agreement on Trade-Related Investment 
Measures); and (4) expanding the definition of subsidy to include 
regulatory measures would extend that term to absurd dimensions far 
beyond the limited scope intended by the SCM Agreement and the Act. 
These same commenters urged the Department to issue a regulation which 
clarifies what they see as a conflict between the clear language in the 
statute (regulatory measures are not financial contributions within the 
meaning of the Act and, hence, cannot confer subsidies) and the 
language in the SAA at 926 (suggesting that regulatory measures can be 
countervailed as indirect subsidies).
    Regarding the issue of whether indirect subsidies can arise through 
the provision of goods and services, we believe this is clearly 
answered by the Act. Section 771(5)(D)(iii) states that financial 
contributions include the provision of goods or services. Hence, if a 
private entity is entrusted or directed to provide a good or service to 
producers of the merchandise under investigation, a financial 
contribution exists. With regard to export restraints, while they may 
be imposed to limit parties' ability to export, they can also, in 
certain circumstances, lead those parties to provide the restrained 
good to domestic purchasers for less than adequate remuneration. This 
was recognized by the Department in Certain Softwood Lumber Products 
from Canada, 57 FR 22570 (May 28, 1992) (``Lumber'') and Leather from 
Argentina, 55 FR 40212 (October 2, 1990) (``Leather''). Further, as 
indicated by the SAA (at 926), and as we confirm in these Final 
Regulations, if the Department were to investigate situations and facts 
similar to those examined in Lumber and Leather in the future, the new 
statute would permit the Department to reach the same result.
    We agree that regulatory measures that distort trade normally may 
be subject to the provisions of other WTO Agreements. We do not 
believe, however, that this negates our ability to address them through 
the application of our CVD law when such measures meet the definition 
of a countervailable subsidy. We disagree that countervailing such 
measures goes beyond the ambit of the SCM Agreement and the Act. As 
discussed above in response to an earlier comment, the SCM Agreement 
clearly permits, and the Act clearly requires, that we countervail 
subsidies provided through private parties. Also, Article VI of GATT 
1994 continues to refer to subsidies provided ``directly or 
indirectly'' by a government.

Change in Ownership

    The SAA and the House and Senate Reports emphasize the importance 
of considering the facts of individual cases to determine whether, and 
to what extent, change-in-ownership transactions eliminate previously 
conferred countervailable subsidies. In the 1997 Proposed Regulations, 
we did not include a provision dealing with change in ownership. 
Rather, we invited comment on a broad array of factors concerning this 
topic and whether we should promulgate a final rule that integrates 
some or all of the factors identified in the preamble.
    The comments we received on this issue largely fell along two 
lines. On the one hand, several commenters argued that the Department 
should promulgate a regulation stating that change-in-ownership 
transactions, even if conducted at arm's-length and at fair market 
value, have no effect on non-recurring subsidies bestowed prior to the 
sale of a firm, and that non-recurring subsidies, in most instances, 
pass through in their entirety to the sold or privatized entity. 
Conversely, other commenters contended that a change-in-ownership 
regulation should establish a rebuttable presumption that, in general, 
the sale or change in ownership of a firm at fair market value 
eliminates the benefit conferred by prior non-recurring subsidies.
    According to the first group of commenters, under section 771(5)(F) 
of the Act, the change in ownership of a firm has no effect on the 
Department's ability to countervail fully subsidies bestowed prior to 
the change in ownership. In fact, in these commenters' view, Congress 
expected the Department to continue countervailing prior subsidies, 
unless something serves to eliminate those subsidies. The sale of a 
firm at fair market value does not serve to eliminate prior subsidies; 
thus, after such a sale, prior subsidies would continue to be 
countervailed until fully amortized. The only instance where partial 
repayment of prior subsidies can exist is where economic resources have 
been returned to the government, i.e., where the investor has paid more 
than fair market value for a productive unit. The Department should 
specify this in its regulations.
    These same commenters argued that recent court decisions support 
the conclusion that subsidies continue to be countervailable after the 
privatization of a firm at fair market value. See, e.g., Saarstahl AG 
v. United States, 78 F.3d 1539 (Fed. Cir. 1996); British Steel plc v. 
United States, 127 F.3d 1471 (Fed. Cir. 1997). In light of these 
decisions, one commenter stated that it would be ironic for the 
Department now to conclude under the URAA that subsidies are no longer 
countervailable after the sale of a firm at fair market value. This 
commenter also claimed that such a conclusion would result in anti-
subsidy practices weaker than those of the European Union (``EU''), 
because EU Guidelines on State Aid recognize that the sale of a company 
does not extinguish previously bestowed subsidies. Rather, according to 
this commenter, the EU requires subsidy recipients to repay illegal 
subsidies, including principal and interest, from the time the aid was 
disbursed, without

[[Page 65352]]

regard to whether the recipient is later sold or 
privatized.<SUP>4</SUP>
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    \ 4\ In support of this proposition, the commenter cites 
Community Guidelines on State Aid for Rescuing and Restructuring 
Firms in Difficulty, O.J. Eur. Comm. No. C283/2 at 283/4 (September 
19, 1997) (``The assessment of rescue or restructuring aid is not 
affected by changes in the ownership of the business aided. Thus, it 
will not be possible to evade control by transferring the business 
to another legal entity or owner.'')
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    These commenters opposed the Department's attempt to develop a 
``flexible'' approach toward privatization. They expressed concern that 
ascribing any significance to the broad array of factors listed in the 
1997 Proposed Regulations may lead to all or some pre-privatization 
subsidies being extinguished in a fair market privatization, which 
would involve reevaluating the amount, and possibly the existence, of 
prior subsidies based on post-bestowal events and conditions. This 
would violate the statute's prohibition against considering the effects 
of subsidies and the Department's practice of not examining subsequent 
events to determine whether the subject merchandise continues to 
benefit from subsidies. See section 771(5)(C) of the Act and GIA at 
37261. For example, one commenter stated that taking account of current 
market conditions, such as global overcapacity, in determining the 
extent to which pre-privatization subsidies pass through, is tantamount 
to considering effects. Similarly, another commenter rejected the 
suggestion that subsidies that reduce excess capacity are not 
countervailable because this too depends on an impermissible ``use'' 
analysis. Whatever the use of the subsidy, these commenters argued, the 
benefit from the subsidy continues unabated after privatization.
    Finally, this first group of commenters asserted that the 
privatization or sale of a productive unit, even at fair market value, 
does not result in any partial or full repayment of prior subsidies. To 
conclude otherwise would conflict with Congress' mandate that the 
Department's privatization methodology be ``consistent with the 
principles of the countervailing duty statute.'' S. Rep. No. 103-412, 
at 92 (1994). Those principles include prohibitions against (1) 
focusing on subsequent events, (2) analyzing alleged effects of 
subsidies, (3) granting offsets not included in the exclusive statutory 
list, and (4) valuing subsidies based on the cost-to-government 
standard. Some in this first group of commenters asserted that the 
logical reading of Congress' instruction to evaluate change-in-
ownership transactions on a case-by-case basis is to determine whether 
a privatization or sale involving a productive unit elicits some non-
commercial activity, i.e., whether under- or overpayment for the 
productive unit has occurred. In the case of underpayment, the 
Department should find that additional subsidies have been bestowed; in 
the case of overpayment, the Department should find that certain prior 
subsidies have been repaid.
    In contrast to these arguments, the second group of commenters 
asserted that the Department should issue regulations establishing a 
rebuttable presumption that the arm's-length sale of a firm, including 
a government-owned enterprise, at a price that reflects the current 
market value of its assets, in most cases extinguishes any previously 
received subsidies. This group argued that Congress' instruction to 
examine change-in-ownership transactions on a case-by-case basis 
indicates that the URAA contemplates extinguishment of prior subsidies, 
at least in certain circumstances. In these commenters' view, the 
arm's-length sale of a company at full market value is such a 
circumstance, because the market price takes into account prior 
subsidies, and the benefit is, therefore, eliminated. However, if the 
price paid for the firm does not reflect full market value, the 
question of a continuing benefit can reasonably be raised. According to 
several of these commenters, any other approach would be 
counterproductive, because it would discourage potential buyers from 
bidding on subsidized government-owned enterprises about to be 
privatized. One commenter further stressed that restructuring of, and 
foreign investment in, countries such as those in Eastern Europe, may 
be inhibited, which is a concern for U.S. investors and the United 
States' wider economic and political interests.
    One member of this group of commenters found support for the 
proposition that an arm's-length sale at fair market value must 
extinguish prior subsidies with the following statutory analysis. The 
commenter claimed that the URAA requires the Department to determine 
whether and to what extent government financial contributions confer a 
benefit on the production or sale of the investigated merchandise in 
each CVD proceeding. Such a determination is based on the nature of the 
subsidy benefit, which is the artificially reduced cost of an input 
used in the production of the merchandise. Thus, where the subsidy is 
provided for a specific use, e.g., the acquisition of capital assets, 
the continuing subsidy benefit is the reduced cost of that asset 
allocated over the useful life of the asset. Where government financial 
contributions are not tied to specific applications, as in the case of 
an equity infusion, the Department should normally view the money 
itself as the continuing subsidy benefit.
    In light of this, the commenter contended that the Department's 
privatization analysis must first examine what inputs were acquired by 
the subsidy recipient at an artificially reduced cost. Then, the 
Department must determine whether the cost for those inputs was 
artificially reduced for the privatized company as well. According to 
this commenter, where the privatization transaction occurs at arm's-
length and at fair market value, the privatized company would not 
continue to benefit from the past subsidies. Similarly, where 
government financial contributions are not tied to specific 
applications, meaning that the money itself is the continuing subsidy 
benefit, the Department's focus should be on the price and terms of the 
privatization transaction. If the privatization of the company, 
including all its physical and financial assets, was at fair market 
value, the Department would not find any benefit to have passed 
through, because the privatized company would not be operating with any 
capital for which it paid less than market value. According to this 
commenter, if the privatization of a firm were at full market value, 
the new owners of the company have paid for all of the inputs at market 
value. Therefore, the privatized firm no longer operates with inputs 
acquired at a cost that is less than what would have been paid without 
a government financial contribution.
    This commenter stressed that there are several possible exceptions 
to this rule. For example, where an asset would not have been created 
or acquired absent the government financial contribution, and where the 
creation or acquisition of the asset was not economically viable, the 
Department may conclude that the very existence of the asset is the 
continuing benefit and not the reduced costs of the asset. In such an 
instance, the benefit could be deemed to continue, even after a full 
market privatization. However, this commenter asserted that this would 
represent an exception to the general rule.
    This commenter rejected the argument that this analysis is 
tantamount to an ``effects'' test. If a subsequent event does in fact 
eliminate subsidization, limited Departmental resources should not 
prevent examination of that event. The commenter stated that, in the 
case of

[[Page 65353]]

subsidies not tied to any particular use, the only event that the 
Department would need to consider is one which would eliminate the 
artificially reduced cost of the company's inputs as a whole. The sale 
of an entire company for market value is such an event, in the 
commenter's view. Where a subsidy is tied to a particular use, the only 
event that the Department would need to consider is one that would 
affect or eliminate the benefit arising from that specific use. 
Moreover, according to the commenter, in numerous contexts the 
Department traces the use of a subsidy. These include instances where 
subsidies are provided for certain uses that may be greenlighted or 
that may benefit a company over time, i.e., non-recurring subsidies.
    Most commenters also found fault with the Department's existing 
repayment or reallocation methodology, under which pre-sale subsidies 
are partially repaid to the seller as part of the purchase price. 
Several commenters argued that the repayment/reallocation methodology 
should be abandoned, because it is not defensible, economically or 
legally. According to these commenters, the repayment/reallocation 
methodology violates the offset provision of the statute (section 
771(6) of the Act), because this provision does not include repayment 
or reallocation of subsidies in the context of a privatization at fair 
market value. Moreover, a fair-market-value privatization does not 
offset the distortion caused by government subsidies, a fact recognized 
by EU law, according to which subsidy repayment can occur only if the 
illegal aid is returned.<SUP>5</SUP> According to these commenters, the 
repayment/reallocation methodology is also inconsistent with the 
Department's and the Court's ``conceptual model of subsidies,'' which 
presumes that subsidies distort market processes and result in a 
misallocation of resources (citing Carbon Steel Wire Rod from Poland, 
49 FR 19374, 19375 (May 7, 1984), and Georgetown Steel Corp. v. United 
States, 801 F.2d 1308, 1315-16 (Fed. Cir. 1986) (``Georgetown Steel''). 
Under this model, repayment or reallocation can only occur if an 
equivalent ``distortion'' takes place, that is, a return of the 
illegally provided resources from the subsidized entity. This does not 
occur, the commenters emphasized, in a fair-market privatization. 
Further, the repayment/reallocation methodology is inconsistent with 
the benefit-to-recipient standard because it is based on the assumption 
that the government was paid more money upon privatization than it 
would have received absent the subsidy, a fact that is only relevant 
under a cost-to-government standard. These commenters stated that while 
the cost of the subsidy to the government may be diminished in a fair-
market privatization, the value of the subsidy to the recipient is 
unchanged. According to these commenters, by finding that repayment/
reallocation occurs in a fair-market-value transaction, the Department 
is encouraging subsidization. This violates the basic purpose of the 
CVD law, which is intended to deter subsidization. These commenters 
also argued that the Court of International Trade's (``CIT'') decision 
in British Steel plc vs. United States, 879 F. Supp. 1254, 1277 (CIT 
1995), aff'd in part and rev'd in part, 127 F.3d 1471 (Fed. Cir. 1997), 
casts doubt on the permissibility of finding repayment in the context 
of a privatization at fair market value. One commenter also argued that 
the repayment/reallocation methodology is inconsistent with the URAA 
and the SAA's instruction to examine carefully the facts of each case 
in determining the effects of privatization on prior subsidies, because 
it is an automatic rule that always assumes a portion of the purchase 
price represents repayment or reallocation of prior subsidies.
---------------------------------------------------------------------------

    \5\ Citing Commission notice pursuant to Article 93(2) of the EC 
Treaty to other Member States and interested parties concerning aid 
which Germany has granted to Fritz Egger Spanplattenindustrie GmbH & 
Co. KG at Brilon, O.J. Eur. Comm. No. C369/6, 369/8-369/9 (1994), 
and Agreement Respecting Normal Competitive Conditions in the 
Commercial Shipbuilding and Repair Industry, opened for signature 
December 21, 1994, art. 8, para. 5.
---------------------------------------------------------------------------

    Another commenter asserted that the repayment/reallocation 
methodology does not capture the full extent of the benefit bestowed 
upon a company because it does not capture the benefit from the 
government's assumption of risk. According to this commenter, to 
encourage investment in risky industry sectors, governments can assume 
some of the risk, for example by providing start-up capital. If the 
government privatizes the company, the trade-distorting effect of the 
government action continues, and the production of the company 
continues to enjoy the benefit of the government subsidy. This 
commenter argued that if the Department maintains the repayment/
reallocation methodology, it should also consider whether the industry 
could attract private capital at the time the subsidies were provided. 
Where an industry could not attract private capital, the Department 
should find that all subsidies passed through after privatization. 
Alternatively, if the Department finds that privatization can 
extinguish or repay a subsidy, this should only be permitted when the 
price paid for the privatized company is equal to the net worth of the 
firm without the subsidy, plus the residual value of the subsidy. For 
example, a firm receives a $1 million countervailable subsidy, which 
the Department allocates over 10 years. In year two, the residual value 
of the subsidy (for countervailing duty purposes) is $900,000. In that 
year, the firm is privatized and its pre-subsidy assets are valued at 
$18 million. If the firm is sold for $18.9 million, the subsidy would 
be repaid. If it is sold for $18 million, the subsidy would pass 
through in its entirety. According to this commenter, this approach 
recognizes that the buyer of a firm is paying for the assets as well as 
the residual value of the subsidy, while the current repayment/
reallocation approach fails to do this.
    Another modification suggested by some commenters to the repayment/
reallocation methodology is to alter the calculation of ``gamma,'' 
which measures the proportion of the purchase price that the Department 
considers to be repaid to the government in a privatization 
transaction, or reallocated to the previous owner in a private-to-
private sale. This commenter stated that the gamma ratio should be 
calculated using the total remaining value of the subsidies at the time 
of the privatization to the company's total net worth in the same year, 
rather than using the average of the historical values of the subsidies 
to the firm's net worth starting in the years the subsidies were 
received. This approach would give more weight to subsidies received 
immediately preceding privatization.
    Finally, several commenters addressed the issue of whether 
subsidies provided in anticipation, or in the process, of privatization 
should be given special consideration. On the one hand, one commenter 
argued that subsidies provided shortly before, and in preparation for, 
the sale, such as debt forgiveness, asset revaluations, tax breaks, and 
other measures to ``clean up'' balance sheets, should be considered new 
subsidies and not ``pre-privatization'' subsidies. According to this 
commenter, under no circumstance should these subsidies be eliminated 
as part of the privatization transaction. On the other hand, another 
commenter suggested that steps taken by a government just prior to 
privatization to make a company more ``saleable,'' such as closing 
inefficient operations, should not by themselves be considered

[[Page 65354]]

subsidies that pass through to the privatized company.
    Except for the comments on our current repayment/reallocation 
methodology and the comments on subsidies given in the process of 
privatization, which we address below, the commenters have presented 
two general positions with respect to the impact of changes in 
ownership on subsidies bestowed prior to the sale: (1) That the arm's-
length sale of a company at fair market value has no effect on the 
countervailability of prior subsidies; and (2) that the fair-market 
sale of a firm, in general, excuses the purchaser from any CVD 
liability for prior subsidies. While the commenters suggest possible 
exceptions to these general positions that theoretically would give 
effect to the statutory direction to consider the facts of each case, 
the exceptions are narrowly defined to fit improbable circumstances. In 
most cases, the proposals, with their narrowly defined exceptions, 
would lead to either total pass-through or total extinguishment of pre-
sale subsidies.
    Although we see merit in some of the arguments presented, we 
believe that adopting either of these extreme positions would require a 
strained interpretation of the statute. The statute, SAA, and 
legislative history plainly state that the arm's-length sale of a firm 
does not by itself require a determination that prior subsidies have 
been extinguished. See section 771(5)(F), SAA at 928, and S. Rep. No. 
103-412, at 92 (1994); see also the discussion in the 1997 Proposed 
Regulations at 8821. Moreover, we continue to disagree with the claim 
that in order to impose countervailing duties on a privatized or post-
sale firm, the Department must affirmatively demonstrate how subsidies 
continue to benefit the subject merchandise after the fair-market sale 
of a company. See GIA at 37263. Our refusal to read a continuing 
competitive benefit test (sometimes called an ``effects test'') into 
the CVD law was upheld by the Federal Circuit in Saarstahl v. United 
States, 78 F.3d 1539 (Fed. Cir. 1996) (``Saarstahl'') and British Steel 
plc v. United States, 879 F. Supp. 1254 (CIT 1995), aff'd in part and 
rev'd in part 127 F.3d 1471 (Fed. Cir. 1997) (``British Steel''). As 
the CIT explained in British Steel plc v. United States, ``Commerce has 
consistently maintained that it does not measure the effects of 
subsidies once they have been determined by Commerce. In other words, 
whether subsequent events mitigate these effects is irrelevant. This 
Court, for the purposes of this proceeding, has no quarrel with that 
practice.'' 879 F. Supp. at 1273. Further, section 771(5)(C) of the Act 
specifically states that the Department ``* * * is not required to 
consider the effect of the subsidy in determining whether a subsidy 
exists * * *'' See also Certain Hot-Rolled Lead and Bismuth Carbon 
Steel Products from the United Kingdom, 61 FR 58377, 58379 (November 
14, 1996) (1994 Administrative Review UK Lead Bar).
    In this regard, it is useful to clarify what we mean in saying that 
we would not attempt to determine whether a subsidy had any ``effect'' 
on the recipient, or whether ``subsequent events'' might have mitigated 
or eliminated any potential effects from the subsidy. The term 
``effect,'' as used in the statute and SAA, and the term ``subsequent 
events,'' as used by the Courts, refer to the question of whether a 
subsidy confers a competitive benefit upon the subsidy recipient or its 
successor. There is no requirement that the Department determine 
whether there is a competitive benefit, as is made clear in the SAA (at 
926):

* * * the new definition of subsidy does not require that Commerce 
consider or analyze the effect (including whether there is any 
effect at all) of a government action on the price or output of the 
class or kind of merchandise under investigation or review.

    In the course of the 1993 steel investigations, certain respondents 
argued that: (1) A subsidy cannot be countervailed unless it bestows a 
``competitive benefit'' on merchandise exported to the United States; 
(2) the arm's-length sale of a subsidized company eliminates any 
competitive benefit from prior subsidies (because the price paid for 
the company includes payment for any continuing value the subsidies 
might have); and (3) therefore, the arm's-length sale of a subsidized 
company frees the new owner from any countervailing duty liability for 
prior subsidies to that company. We rejected this argument (see GIA at 
37260-61), explaining that the statute did not require that a subsidy 
bestow a competitive benefit on imports to the United States as a 
condition of liability for countervailing duties. Just as we would not 
attempt to determine whether a subsidy conferred a competitive benefit 
on the original recipient in the first place (that is, whether the 
subsidy had any effect on the original recipient's subsequent 
performance (usually an effect upon its output or prices)), we would 
not attempt to determine whether any potential competitive benefit 
continued with respect to the new owner in light of a subsequent event 
such as a change in ownership. The Federal Circuit upheld this position 
in Saarstahl and British Steel. As one commenter noted, the law is 
concerned with the benefit originally received, not with what the 
recipient does with it.
    When we say we do not consider ``subsequent events'' in the 
calculation of a subsidy, we generally are referring to events that 
arguably affect the subsequent performance (normally in terms of output 
or prices) of the subsidy recipient or its successor. We have never 
implied, however, that no subsequent event could ever affect the 
allocation of a subsidy. The Department may consider whether government 
or private actions occurring after the receipt of a subsidy should 
result in the reallocation of a subsidy as long as there is no tracing 
of the uses of the subsidy or the effect of the subsidy on the output 
or price of subject merchandise. Clearly, a post-subsidy change in 
ownership is an event that occurs subsequent to the receipt of the 
subsidy, and we have reallocated subsidies based on changes in 
ownership. It is entirely appropriate and consistent with the statute 
to consider whether a change in ownership is an appropriate occasion to 
reallocate countervailing duty liability for prior subsidies to the 
company that is sold. Section 771(5)(F) of the Act implies that such an 
exercise is warranted and, as explained above, a post-subsidy change in 
ownership is not the type of subsequent event or effect that is 
envisioned in section 771(5)(C).
    The language of section 771(5)(F) of the Act purposely leaves much 
discretion to the Department with regard to the impact of a change in 
ownership on the countervailability of past subsidies. Specifically, a 
change in ownership neither requires nor prohibits a determination that 
prior subsidies are no longer countervailable. Rather, the Department 
is left with the discretion to determine, on a case-by-case basis, the 
impact of a change in ownership on the countervailability of past 
subsidies. The SAA at 928 specifically states that ``Commerce retain[s] 
the discretion to determine whether, and to what extent, the 
privatization of a government-owned firm eliminates any previously 
conferred countervailable
subsidies. . . .''
    The repayment/reallocation methodology that we currently use 
achieves this objective. See 1994 Administrative Review UK Lead Bar at 
58379-80. Depending on the amount of prior subsidies in relation to the 
company's net worth and the amount paid for the company, we might find 
that a considerable amount of prior subsidies passes through or that a

[[Page 65355]]

significant amount of subsidies has been repaid to the government or 
reallocated to the previous owner. Nonetheless, we are not codifying 
the current repayment/reallocation methodology. This methodology has 
been heavily criticized by various parties, and we recognize that it 
may not provide sufficient flexibility to deal with the ``extremely 
complex and multifaceted'' nature of changes in ownership. See SAA at 
928. We will address comments related to the calculation of gamma in 
the context of specific cases.
    While we have developed some expertise on the issue of changes in 
ownership over the past five years, and the comments submitted in 
response to the 1997 Proposed Regulations have provided us with 
additional ideas to consider, we do not think it is appropriate to 
promulgate a regulation on this issue at this time. As noted above, 
many of the ideas presented by the commenters would move us in the 
direction of adopting extreme positions. Another factor weighing 
against codification of any privatization methodology at this time is 
that the Courts may, in the course of their review of the current 
methodology, adopt an interpretation of the law that would either 
validate or overturn some of the options that we have considered, 
including those proposed by the commenters. Finally, given the rapidly 
changing economic conditions around the world, particularly with 
respect to the issue of state ownership, we believe we should continue 
to develop our policy in this area through the resolution of individual 
cases. These changing economic conditions pose additional challenges in 
developing a unified framework in which to analyze change-in-ownership 
transactions. In the 1997 Proposed Regulations, we identified many of 
these additional issues and new challenges that may warrant 
consideration in this context and raised questions about them. However, 
it is our view that the comments we received did not sufficiently 
address many of these concerns.
    An additional issue that merits further discussion concerns 
subsidies received just prior to, or in conjunction with, the 
privatization of a firm. While we have not developed guidelines on how 
to treat this category of subsidies, we note a special concern because 
this class of subsidies can, in our experience, be considerable and can 
have a significant influence on the transaction value, particularly 
when a significant amount of debt is forgiven in order to make the 
company attractive to prospective buyers. As our thinking on changes in 
ownership continues to evolve, we will give careful consideration to 
the issue of whether subsidies granted in conjunction with planned 
changes in ownership should be given special treatment.
    Our decision not to include a provision on changes in ownership in 
these Final Regulations does not preclude us from issuing such a 
regulation at a later date. We will continue to examine this issue and 
consider whether an alternative analytical framework can be developed 
that addresses the variety of change-in-ownership scenarios we have 
encountered and that, like the present methodology, satisfies 
Congressional intent that we examine changes in ownership on a case-by-
case basis. In the interim, we will continue to apply our current 
methodology for ongoing CVD cases and carefully examine the facts of 
each case. However, we will consider whether modifications to the 
methodology may be appropriate.

Section 351.502

    Section 351.502 deals with the ``specificity'' of domestic 
subsidies. Unlike its predecessor, Sec. 355.43 of the 1989 Proposed 
Regulations, Sec. 351.502 does not contain a ``general'' specificity 
test. As we noted in the preamble to the 1997 Proposed Regulations, 
section 771(5A) of the Act and the SAA provide much more detail and 
clarity regarding the application of the ``specificity test'' than did 
the prior statute and its legislative history. Thus, on the subject of 
specificity, there are far fewer interpretative gaps for the Department 
to fill than there were in 1989 and, thus, less need for regulations.
    We received numerous comments arguing that we should codify the 
policies articulated in the preamble to the 1997 Proposed Regulations, 
especially those dealing with sequential analysis, purposeful 
government action, characteristics of a ``group,'' and integral 
linkage. These commenters claimed that even where the SAA is clear on a 
particular point, it is unclear how the Courts will view the SAA. In 
their opinion, detailed specificity regulations would prevent costly 
litigation of these issues.
    We have continued to limit Sec. 351.502 to those aspects of the 
specificity test that are not addressed explicitly in the statute or 
the SAA. Section 102(d) of the URAA provides that the SAA ``shall be 
regarded as an authoritative expression by the United States concerning 
the interpretation and application of (the Agreements and the URAA) in 
any judicial proceeding in which a question arises concerning such 
interpretation or application.'' 19 U.S.C. Sec. 3512(d). Therefore, we 
see no need to repeat this principle. However, in reviewing the 
comments and the relevant provisions of the statute and the SAA, we 
have identified particular issues on which the SAA may usefully be 
clarified. In particular, we found that the statute and the SAA do not 
fully address sequential analysis and the characteristics of a group. 
Accordingly, we have included final regulations on these topics.
    Sequential analysis: Paragraph (a) is a new paragraph which 
addresses the ``sequential approach'' to specificity. We received 
several requests that we codify the sequential approach. Under this 
approach, if a subsidy is de jure specific or meets any one of the 
enumerated de facto specificity factors, in order of their appearance 
in section 771(5A)(D)(iii) of the Act, further analysis is unnecessary 
and is not undertaken. In support of their position, these commenters 
emphasized the language contained both in section 771(5A)(D)(iii) of 
the Act and the SAA that a subsidy will be considered specific ``if one 
or more'' of the factors exists. See SAA at 931. Furthermore, these 
commenters contended, the SAA and the legislative history of the URAA 
make clear that the specificity test was intended to be generally 
consistent with the Department's previous practice, a practice that 
included this sequential approach. SAA at 929-31; S. Rep. No. 103-412, 
at 93-94 (1994).
    In opposition to this view, other commenters maintained that the 
sequential approach contradicts the SAA, because the SAA states that 
the Department will ``seek and consider information relevant'' to all 
four of the de facto specificity factors. SAA at 931. Moreover, these 
commenters maintained, the language in the SCM Agreement requires that 
all of the de facto specificity factors be considered and that any 
specificity determination ``shall be clearly substantiated on the basis 
of positive evidence.'' Articles 2.1(c) and 2.4 of the SCM Agreement.
    The apparent disagreement over the interpretation of the SAA 
regarding the use of a sequential approach indicates that it is 
necessary to clarify our position in a regulation. Therefore, 
Sec. 351.502(a) provides that the de facto specificity factors will be 
examined in sequence, in order of their appearance in section 
771(5A)(D)(iii) of the Act, and that the Department may find a domestic 
subsidy to be specific based on the presence of a single de facto 
specificity factor. For example, the Department will first look to see 
if there is a limited number of users. If the number of users is 
limited, we will look

[[Page 65356]]

no further. In accordance with the SAA, the Department will continue 
its practice of collecting information regarding each of the four de 
facto specificity factors; however, our analysis of the issue will stop 
if we determine that a single factor justifies a finding of 
specificity. As for the SCM Agreement, none of the provisions cited 
precludes a finding of specificity based on the presence of a single 
factor. Moreover, a finding that a certain industry receives 
disproportionate amounts under a particular government program, for 
example, constitutes positive evidence of specificity even if there are 
numerous users of the program and there is little discretion in 
awarding benefits.
    Discretion: In endorsing the use of a sequential approach in the 
preamble to the 1997 Proposed Regulations, we stated, ``with the 
exception of the government discretion factor, the Department may find 
a domestic subsidy to be specific based on the presence of a single de 
facto specificity factor.'' (1997 Proposed Regulations at 8824.) 
Certain commenters objected to the exception of the discretion factor, 
arguing that the statute accords the exercise of government discretion 
equal status with the other de facto specificity factors. They asked 
the Department to clarify that the Department may find a subsidy to be 
specific solely based on the degree of discretion exercised in the 
administration of a subsidy program.
    There appears to be a great deal of confusion and controversy over 
the role of the fourth factor, discretion, in the finding of de facto 
specificity. Based on the comments received and a review of the statute 
and SAA, we are elaborating on the statements we made in the preamble 
to the 1997 Proposed Regulations. As stated in the 1997 Proposed 
Regulations, we do not believe that a finding of specificity may be 
based solely on the fact that some measure of discretion may have been 
exercised in the administration of a subsidy program. This position is 
consistent with the SAA, which states that if a subsidy program is 
broadly available and widely used and there is no evidence of dominant 
or disproportionate use, the mere fact that government officials may 
have exercised discretion in administering the program is insufficient 
to justify a finding of specificity. SAA at 931.
    Based on our experience in administering the CVD law, some measure 
of administrative discretion exists in the operation of almost every 
alleged subsidy program. At the most basic level, an administrator of a 
program typically must exercise judgment or discretion in evaluating 
the facts and merits of an application for a subsidy to determine 
whether the applicant qualifies for the subsidy. If we were to find 
specificity based simply on the exercise of this type of discretion, 
the other de facto factors would be rendered meaningless, because 
virtually every subsidy program in the world could be declared specific 
on the basis of the discretion factor alone. This is clearly an absurd 
result and could not have been the intent of Congress.
    Instead, section 771(5A)(D)(iii)(IV) of the Act provides that a 
subsidy is specific if:

    The manner in which the authority providing the subsidy has 
exercised discretion in the decision to grant the subsidy indicates 
that an enterprise or industry is favored over others. (Emphasis 
added.)

This language does not focus on discretion alone. Rather, it states 
that discretion is relevant only to the extent that it is exercised in 
a manner that favors one enterprise or industry over others. This 
distinction is important because it supports the statements made in the 
SAA and the position we are taking in these regulations. Haphazard, 
random, or purposeless discretion cannot by itself indicate 
specificity. Only discretion that shows favoritism toward some 
enterprises or industries over others can inform the question of 
specificity. In the Department's experience, favoritism generally will 
manifest itself as one of the first three de facto factors: A limited 
number of users, dominant users, or one or a few users receiving a 
disproportionate amount of the subsidy. For example, administrators of 
a program could exercise discretion in selecting some industries 
instead of others as beneficiaries. If the selected industries 
constituted a limited number of industries, there would be specificity. 
Similarly, if benefits were distributed such that there was a 
predominant user or such that certain users received disproportionate 
benefits, there would be specificity. However, if the selected 
industries constituted more than a limited number of industries, if 
there were no dominant users or disproportionate benefits to certain 
users, or if there were no other indication that one or a group of 
enterprises or industries was favored over others, the program would 
not be specific.
    As indicated in the SAA at 931, the discretion factor is generally 
more valuable as an analytical tool that enhances the analysis of the 
other de facto specificity factors and criteria. The example given in 
the SAA is the case of a new subsidy program for which there have been 
few applicants and few recipients. In accordance with section 
771(5A)(D)(iii) of the Act, in evaluating the four de facto factors, 
the Department must take into account ``* * * the length of time during 
which the subsidy program has been in operation.'' In the case of a new 
program, the first three factors--limited number of users, dominant 
user, or disproportionately large user--may provide little or 
misleading indication regarding whether the program is de facto 
specific. Therefore, the manner in which authorities have exercised 
their discretion in the early days of a new program (e.g., by excluding 
certain applicants and limiting the benefit to a particular industry) 
might be more useful for the Department in making a specificity 
determination. See SAA at 931.
    Discretion can also come into play where evidence relating to the 
first three factors is inconclusive. As an example, where the number of 
users is borderline, discretion may help to inform whether there is 
specificity. In this situation, the factors we might consider in 
analyzing the relevance of discretion include the number of applicants 
that are turned down, the reasons they are turned down, and the reasons 
successful applicants are chosen.
    Characteristics of a ``group'': New paragraph (b) clarifies the 
Department's position regarding whether the Department must examine the 
``actual make-up'' of a group of beneficiaries when performing a 
specificity analysis. Citing PPG Industries, Inc. v. United States, 978 
F.2d 1232, 1240-41 (Fed. Cir. 1992) (``PPG II''), one group of 
commenters argued that, to be consistent with judicial precedent, the 
Department must undertake such an analysis. According to these 
commenters, if a group of recipients does not share similar 
characteristics but, instead, consists of companies in a variety of 
industries, the Department cannot conclude that the subsidy in question 
is limited to a ``group of industries.'' Moreover, they argued, nothing 
in the Act or the SAA requires the Department to ignore the 
characteristics of the group receiving the benefits from an alleged 
subsidy program.
    Other commenters argued that the Department can identify a 
``group'' of subsidy recipients without regard to any shared 
characteristics of the individual group members. According to these 
commenters, a proper understanding of what may constitute a specific 
``group of industries'' flows directly from the

[[Page 65357]]

purpose of the specificity test as articulated in Carlisle Tire & 
Rubber Co. v. United States, 564 F. Supp. 834 (CIT 1983) 
(``Carlisle''); namely, that subsidy recipients should be considered a 
specific group unless the recipient industries are numerous and 
distributed very broadly throughout the economy. Moreover, these 
commenters maintained that the Department has on several occasions 
found subsidy programs specific even when the ``group'' of recipients 
has not shared common characteristics. See, e.g., Steel Wheels from 
Brazil, 54 FR 15523, 15526 (April 18, 1989) and Cold-Rolled Carbon 
Steel Flat-Rolled Products from Korea, 49 FR 47284, 47287 (December 3, 
1984).
    As noted in the preamble to the 1997 Proposed Regulations, we 
disagree with the first set of comments. Section 771(5A)(D) of the Act 
provides that a subsidy may be found to be specific if it is limited to 
a ``group'' of enterprises or industries. There is no requirement that 
the members of a group share similar characteristics. The purpose of 
the specificity test is simply to ensure that subsidies that are 
distributed very widely throughout an economy are not countervailed. 
There is no basis for adding the further requirement that subsidies 
that are not widely distributed are also confined to a group of 
enterprises or industries that share similar characteristics. See, 
e.g., Certain Refrigeration Compressors from the Republic of Singapore, 
61 FR 10315 (March 13, 1996).
    Assuming, arguendo, that PPG II is relevant under the new law, this 
decision upheld the Department's determination that the program in 
question was not specific. To put PPG II in its proper context, it is 
necessary to understand the facts presented in the underlying CVD case. 
In that case, there were numerous enterprises that used the program 
under investigation. Therefore, when looked at in terms of the number 
of enterprises, the actual recipient enterprises did not appear to be 
limited. However, this conclusion says nothing about whether the number 
of industries that received benefits under the program was limited. To 
answer this question, the Department (and the Court) correctly focused 
on the makeup of the users. If the numerous enterprises that received 
benefits had comprised a limited number of industries, then the program 
would have been specific. However, because the users represented 
numerous and diverse industries, the program was found not to be 
specific. There is no basis in PPG II or in the language of section 
771(5A)(D) of the Act for concluding that there is a requirement that 
the limited users also share similar characteristics. Moreover, such a 
requirement would undermine the purpose of the specificity test as 
articulated in the SAA.
    Several commenters have urged the Department to codify our position 
with respect to this issue. Because this issue is not addressed in the 
statute or the SAA, we have adopted this suggestion. Accordingly, 
Sec. 351.502(b) provides that the Secretary is not required to 
determine whether there are shared characteristics among enterprises or 
industries that are eligible for, or actually receive, a subsidy in 
determining whether that subsidy is specific.
    Integral linkage: Paragraph (c) is a new paragraph which sets out 
our revised test for considering two or more subsidy programs to be 
``integrally linked.'' Section 355.43(b)(6) of the 1989 Proposed 
Regulations provided that, for purposes of applying the specificity 
test, the Department would consider two or more subsidy programs as a 
single program if the Secretary determined that the programs were 
``integrally linked.'' Section 355.43(b)(6) also set forth factors to 
be considered in making this determination.
    In the 1997 Proposed Regulations, we opted not to incorporate 
Sec. 355.43(b)(6) into these regulations. We noted that claims of 
integral linkage were relatively rare, and that when they did arise, we 
did not find the factors set forth in Sec. 355.43(b)(6) particularly 
helpful. We did not, however, rule out the possibility of considering 
two or more ostensibly separate subsidy programs as constituting a 
single program for specificity purposes, and we outlined circumstances 
that might lead us to do so.
    We received a number of comments requesting that we promulgate a 
regulation which allows for integral linkage. Two commenters argued 
that, in addition to the factors discussed in the preamble, the 
regulation should re-codify certain of the factors found in the 1989 
Proposed Regulations. These commenters also suggested that programs 
should not be considered to be integrally linked unless they were 
linked ``at their inception.'' These commenters asked the Department to 
clarify that it will view claims of integral linkage narrowly and that 
respondents will be required to establish that the programs are linked 
by clear and convincing evidence. Other commenters argued that the 
factors enumerated in both the 1989 Proposed Regulations and in the 
preamble to the 1997 Proposed Regulations are too restrictive and that 
any integral linkage test should not be applied narrowly.
    We have given further consideration to our earlier decision not to 
codify an integral linkage test. In light of the interest in this 
issue, and the fact that we have had experience with a regulation on 
this topic, we have concluded that it would be beneficial to parties to 
promulgate a rule describing when two or more separate programs may be 
integrally linked and treated as one program for specificity purposes. 
We have not codified the 1989 rule because, as we stated in the 
preamble to our 1997 Proposed Regulations, we did not find the factors 
enumerated in that provision to be particularly useful. Instead, 
Sec. 351.502(c) provides that integral linkage is possible in 
situations where the subsidy programs have the same purpose (e.g., to 
promote technological innovation), bestow the same type of benefit 
(e.g., long-term loans or tax credits), confer similar levels of 
benefits on similarly situated firms, and were linked at their 
inception.
    We believe these factors are more useful for finding integral 
linkage than those contained in the 1989 Proposed Regulations because 
they require evidence of similarities in the purposes and 
administration of the programs which are more than coincidental. For 
example, where a government claims that a program is integrally linked 
with another program, Sec. 351.502(c)(4), which calls for the programs 
to be linked at inception, requires evidence that, in establishing the 
most recent program, the government's clear and express purpose was to 
complement the other program.
    As stated in the preamble to the 1997 Proposed Regulations, when an 
interested party believes that two or more programs should be 
considered in combination for purposes of the Department's specificity 
analysis, that party will have the burden of identifying the relevant 
programs and supporting its contention that the programs are integrally 
linked by providing information and documentation regarding the 
purpose, type and levels of benefit associated with the programs.
    Agricultural subsidies: Paragraph (d) is based on Sec. 355.43(b)(8) 
of the 1989 Proposed Regulations and is the same as Sec. 351.502(a) of 
the 1997 Proposed Regulations. It provides that the Secretary will not 
consider a domestic subsidy to be specific solely because it is limited 
to the agricultural sector. Instead, as under prior practice, the 
Secretary will find an agricultural subsidy to be countervailable only 
if it is specific within the agricultural sector, e.g., a subsidy is 
limited to livestock, or

[[Page 65358]]

livestock receive disproportionately large amounts of the subsidy. See, 
e.g., Lamb Meat from New Zealand, 50 FR 37708, 37711 (September 17, 
1985).
    One commenter suggested that the Department should abandon the 
special specificity rule for agricultural subsidies, citing the fact 
that under section 771(5B)(F) of the Act and Article 13(a) of the WTO 
Agreement on Agriculture, so-called ``green box'' agricultural 
subsidies are non-countervailable. With respect to this comment, we 
note that the Department's application of the specificity test to 
agricultural subsidies was upheld in Roses, Inc. v. United States, 774 
F. Supp. 1376 (CIT 1991) (``Roses''). Given the absence of any 
indication that Congress intended the ``green box'' rules to change the 
Department's practice or to overturn Roses, we are retaining the 
special specificity rule for agricultural subsidies.
    Subsidies to small- and medium-sized businesses: Paragraph (e) is 
based on Sec. 355.43(b)(7) of the 1989 Proposed Regulations, and 
continues to provide that the Secretary will not consider a subsidy to 
be specific merely because it is limited to small or small- and medium-
sized firms. Instead, as under prior practice, the Secretary will find 
such a subsidy to be countervailable if, either on a de jure or a de 
facto basis, the subsidy is limited to certain small or small- and 
medium-sized firms. As in the case of the special specificity rule for 
agricultural subsidies, there is no indication that Congress intended 
to alter this aspect of the Department's specificity practice. We 
received no comments regarding this rule.
    Disaster relief: Paragraph (f) provides that the Secretary will not 
regard disaster relief as a specific subsidy if the relief constitutes 
general assistance available to anyone in the affected area. Although 
paragraph (f) has no counterpart in the 1989 Proposed Regulations, the 
rule contained in paragraph (f) has been part of the Department's 
specificity practice since Certain Steel Products from Italy, 47 FR 
39356, 39360 (September 7, 1982), in which the Department stated that 
``[d]isaster relief is not selective in the same manner as other 
regional programs since there is no predetermination of eligible areas 
and no part of the country, and no industry, is excluded from 
eligibility in principle.'' However, before declaring a subsidy to be 
non-specific under paragraph (f), the Department would have to be 
satisfied that the subsidy in question was, in fact, bona fide disaster 
relief. See Certain Steel Products from Italy, 58 FR 37327, 37332 (July 
9, 1993). We received no comments regarding this rule.
    Purpose of the specificity test: Some commenters requested that the 
Department restate in the regulations the policy rationale behind the 
specificity test. According to these commenters, the underlying purpose 
of the specificity test is to identify those domestic subsidies that 
confer a competitive advantage and thereby distort international trade. 
Other commenters pointed out that the new statute expressly states that 
the Department is not required to examine the effects of a subsidy or 
establish that the subsidy has any effect at all. These commenters, 
citing the reference to the Carlisle decision in the SAA, maintain that 
the sole purpose of the specificity test is to ``winnow out only those 
foreign subsidies which truly are broadly available and widely used 
throughout an economy.'' SAA at 929-30.
    In our view, the language from the SAA cited above makes the 
purpose of the specificity test abundantly clear. Given the clarity of 
the SAA on this point, the authoritative nature of the SAA (see 19 
U.S.C. 3512(d)), and our general reluctance to issue regulations that 
merely repeat the statute or the SAA, we do not consider it appropriate 
to issue a regulation that restates the purpose of the specificity 
test.
    Use of presumptions: Some commenters suggested that in applying the 
specificity test, the Department should employ certain presumptions. 
These commenters maintained that, when investigating a domestic subsidy 
program (and when considering whether to initiate an investigation of 
such a program), the Department should presume that the foreign 
government in question exercises discretion in the administration of 
the program, and that the program is specific. These commenters 
maintained that, because information regarding applications and 
approvals generally is not available to petitioners prior to the filing 
of a petition, the burden should be on respondent interested parties to 
provide such information and to rebut the presumption of specificity. 
One commenter also suggested that the Final Regulations should state 
that a previous finding that a subsidy was de facto non-specific should 
have no relevance when the same subsidy program is alleged in a new 
investigation involving different merchandise and different facts.
    Other commenters argued that there is no legal basis for making 
presumptions regarding specificity. With respect to de facto 
specificity, the SAA states that the Department is obligated to ``seek 
and consider'' information relevant to each of the four factors listed 
in section 771(5A)(D)(iii) of the Act. SAA at 931. One of these 
commenters also asserted that a petitioner alleging that a subsidy is 
specific should be required to provide a reasonable amount of 
information supporting the allegation.
    As was true under the law prior to the URAA, we note that a 
petition to initiate an investigation of alleged domestic subsidies 
must provide reasonably available information supporting the allegation 
that the subsidy is specific. See section 702(b) of the Act. On the 
other hand, we recognize that because detailed information regarding 
the distribution of program benefits usually either is not published or 
is not widely available, information supporting specificity often is 
not reasonably available to a petitioner at the time a petition is 
filed. Therefore, in deciding whether to include alleged domestic 
subsidies in our investigation, we carefully consider the information 
the petitioner has put forward, the reasons that more information may 
not be available, and any arguments the petitioner makes regarding the 
specificity of the program. Because the types of allegations and 
information available will vary from case to case, it is not possible 
to state a general rule for accepting or rejecting specificity 
allegations. However, we believe that the threshold we have used in the 
past for including alleged subsidies in CVD investigations has been 
sufficient to ensure that all potentially countervailable subsidies are 
investigated. We intend to continue employing this initiation 
threshold.
    In this regard, we note that when a subsidy program has been 
previously investigated and found to be non-specific, it would be a 
waste of administrative resources to re-investigate that program 
without a reasonable basis to believe that the facts supporting the 
previous finding have changed. In situations where a previous finding 
may be pertinent to one industry, e.g., that the paper clip industry 
did not receive dominant or disproportionate benefits under a 
particular program, petitioners seeking investigation of benefits under 
that program to the staple industry should allege that the program has 
changed or that the situation of the staple industry differs, and they 
should support their allegation with reasonably available information.
    Where domestic subsidy programs are included in an investigation, 
we will not presume such programs are specific. Instead, we will seek 
in our questionnaire all of the information

[[Page 65359]]

necessary to apply the specificity test according to section 771(5A)(D) 
of the Act. Based on our analysis of the information provided in the 
questionnaire responses, verification, and other information that may 
be collected, we will make the necessary specificity determination. If 
a respondent refuses to provide the information requested by the 
Department to conduct its specificity analysis, we may draw adverse 
inferences in the application of ``facts available.'' See section 
776(b) of the Act. However, the use of an adverse inference in these 
situations is not the same thing as relying on a rebuttable presumption 
of specificity.
    Purposeful government action: In our 1997 Proposed Regulations, we 
noted that certain commenters, citing such cases as Saudi Iron and 
Steel Co. (Hadeed) v. United States, 675 F. Supp. 1362, 1367 (CIT 
1987), maintained that a finding of specificity does not require a 
finding of targeting or some other sort of purposeful government action 
that limits the number of subsidy program beneficiaries. They cited the 
statute and its legislative history for the proposition that the 
Department should deem irrelevant the fact that program usage may be 
limited by the ``inherent characteristics'' of the thing being provided 
by the government. SAA at 932; S. Rep. No. 103-412 at 94 (1994).
    In the preamble to the 1997 Proposed Regulations, we agreed with 
these commenters, stating:

[e]xcept in the special circumstances described in section 771(5A), 
i.e., where respondents request the Department to take into account 
the extent of economic diversification in the jurisdiction of the 
granting authority or the length of time during which the program 
has been in operation, the Department is not required to explain why 
the users of a subsidy may be limited in number.

    Several of the same commenters objected to this statement, arguing 
that it could be misinterpreted to mean that evidence of purposeful 
action is required in some instances. These commenters requested that 
the Department clarify, in a regulation, that purposeful government 
action is never required.
    As we stated in the 1997 Proposed Regulations, the SAA and other 
legislative history are clear on this point. The SAA clearly indicates 
that the Department does not need to find ``targeting'' or ``purposeful 
government action'' to conclude that a domestic subsidy is specific. 
See SAA at 932 (``(E)vidence of government intent to target or 
otherwise limit benefits would be irrelevant in de facto specificity 
analysis''). Thus, for example, the fact that users may be limited due 
to the inherent characteristics of what is being offered would not be a 
basis for finding the subsidy non-specific. SAA at 932; S. Rep. No. 
103-412 at 94 (1994). Regarding situations where the Department is 
asked to consider the economic diversification in the jurisdiction or 
the length of time during which the program has been in operation, 
neither purposeful government action nor targeting is required to find 
specificity. However, evidence indicating that the government has taken 
or will take actions to limit benefits to certain industries would be 
sufficient to find specificity.
    Universe: One commenter argued that, in determining whether 
subsidies are specific, the Department generally should focus on the 
level of benefits provided to recipients, rather than the number of 
recipients to whom subsidies are provided. This commenter also argued 
that, in analyzing the level of benefits provided, the Department's 
point of reference should be the economy as a whole, as it was for the 
preferential loan programs used by the Korean steel industry in Certain 
Steel Products from Korea, 58 FR 37338 (July 9, 1993) (``Korean 
Steel''), rather than those enterprises or industries that were 
eligible to receive the subsidy.
    For the most part, we disagree. The starting point of the 
Department's analysis of specificity will always be the number of 
users. We normally will not analyze the level of benefits provided 
(that is, whether the recipients were dominant or disproportionate 
users of the program) unless the subsidy in question was provided to 
numerous and diverse industries. Even in that situation, it may be 
impracticable or impossible to determine the relative level of 
benefits.
    Once we have decided to analyze the level of benefits provided, our 
point of reference normally will be the enterprises or industries that 
received benefits under the program. In other words, we will attempt to 
determine whether one or a limited number of the recipient enterprises 
or industries were, in fact, dominant or disproportionate users. In 
certain limited circumstances, however, it may be appropriate to 
determine whether the benefits received by a particular enterprise or 
industry or group thereof were disproportionate in relation to the 
economy as a whole. The Department employed this approach in Korean 
Steel, because the type of subsidy under investigation--governmental 
use of the economy-wide banking system to direct credit to steel 
producers--required the broader analysis. We consider the Korean 
situation to be unusual compared with the majority of cases in which we 
have analyzed specificity. In addition, we agree that the analysis of 
whether an enterprise or industry or group thereof is a dominant user 
of, or has received disproportionate benefits under, a subsidy program 
should normally focus on the level of benefits provided rather than on 
the number of subsidies given to different industries.

Section 351.503

    Section 351.503 deals with the concept of benefit. Under section 
771(5)(B) of the Act and Article 1.1(b) of the SCM Agreement, a 
government action must confer a benefit in order to be considered a 
countervailable subsidy. Hence, the notion of benefit is central to the 
administration of the CVD law. In the preamble to the 1997 Proposed 
Regulations, we included a lengthy discussion of this topic. We 
described a benefit as being conferred when a firm pays less for an 
input than it otherwise would pay or receives more revenue than it 
otherwise would earn. Given the crucial role that benefit plays in our 
analysis of whether a government action confers a countervailable 
subsidy, we have decided to codify a final rule regarding benefit that 
reflects the principles outlined in the 1997 Proposed Regulations.
    Paragraph (a) states that, where a specific rule for the 
measurement of a benefit is contained in these regulations, we will 
determine the benefit as provided in that rule. Where a government 
program is covered by a specific rule contained in these regulations, 
such as a program providing grants, loans, equity, direct tax 
exemptions, or worker-related subsidies, we will not seek to establish, 
nor entertain arguments related to, whether or how that program 
comports with the definition of benefit contained in this section.
    Paragraph (b) outlines the principles we will follow when dealing 
with alleged subsidies for which these regulations do not establish a 
specific rule. In such instances, we will normally consider a benefit 
to be conferred where a firm pays less for its inputs (e.g., money, a 
good, or a service) than it otherwise would pay in the absence of the 
government program, or receives more revenues than it otherwise would 
earn.
    We have adopted this definition because it captures an underlying 
theme behind the definition of benefit contained in section 771(5)(E) 
of the Act and, in our estimation, reflects the fundamental principles 
that we have

[[Page 65360]]

articulated over the years with respect to programs and practices that 
we have determined confer either direct or indirect countervailable 
subsidies. One common element the four illustrative examples set forth 
in the statute share is that, in the overwhelming majority of cases, 
the recipient of a government financial contribution, income or price 
support, or indirect subsidy, enjoys a reduction in input costs or 
revenue enhancement that it would not otherwise have enjoyed absent the 
government action. As explained below, we are using the terms ``input'' 
and ``cost'' broadly.
    While we believe that this definition will provide useful guidance, 
we recognize that there may be programs or practices not fitting the 
input cost reduction or revenue enhancement definition in some economic 
or accounting senses that may still give rise to a benefit in the sense 
that the program or practice is similar to the illustrative examples 
listed in section 771(5)(E) of the Act. For example, without attempting 
to create a hypothetical program or practice not yet encountered in our 
experience, we would argue that a program that is similar to a 
countervailable equity infusion constitutes a reduction in a firm's 
cost of capital, or that a program that is similar to a countervailable 
provision of a freight forwarding service constitutes a reduction in a 
firm's input costs. Since both practices constitute a reduction in the 
cost of an input, there would be a benefit. We recognize that some 
might take issue with whether equity or a freight forwarding service is 
in fact an input into subject merchandise, or whether equity or freight 
forwarding constitutes a cost of producing subject merchandise. 
Nonetheless, in these and other instances in which a program or 
practice contains elements similar to those in the illustrative 
examples in the statute, a benefit would still exist. As explained 
further below, when we talk about input costs in the context of the 
definition of benefit, we are not referring to cost of production in a 
strict accounting sense. Nor are we referring exclusively to inputs 
into subject merchandise. Instead, we intend the term ``input'' to 
extend broadly to any input into a firm that produces subject 
merchandise.
    When we talk about a firm paying less for its inputs than it 
otherwise would pay (or receiving more revenues than it otherwise would 
earn), we are referring to the lower price it pays to acquire the thing 
provided by the government (e.g., money, a good, or a service), or the 
increased revenue it receives as a result of a government action. We 
believe that the definition of benefit outlined here is consistent with 
the various standards (or ``benchmarks'') used to identify and measure 
the benefit from different subsidy programs that are contained in 
section 771(5)(E) of the Act and Article 14 of the SCM Agreement. For 
example, when the amount that a firm pays on a government-provided loan 
is less than what the firm ``would pay on a comparable commercial loan 
that the (firm) could actually obtain on the market,'' the firm's cost 
of borrowing money is reduced. See section 771(5)(E)(ii) of the Act. 
Similarly, when a firm sells its goods to the government and ``such 
goods are purchased for more than adequate remuneration,'' the firm's 
revenues are increased beyond what it would otherwise earn. See section 
771(5)(E)(iv) of the Act. In neither instance need the Department do 
more than apply the test enumerated by the statute in order to find 
that a benefit has been conferred.
    Paragraph (b)(2) cautions that the definition of benefit as an 
input cost reduction or revenue enhancement does not limit our ability 
to impose countervailing duties when the facts of a particular case 
indicate that a financial contribution has conferred a benefit, even if 
that benefit does not take the form of a reduction in input costs or an 
enhancement of revenues. We will examine the concept of benefit in this 
broader sense by looking to see whether the alleged program or practice 
contains elements similar to the examples listed in sections 
771(5)(E)(i) through (iv) of the Act. We cannot possibly foresee all 
the types of government actions we will encounter in administering the 
CVD law and, hence, cannot write a definition of benefit that would be 
sufficiently broad to capture all possible countervailable subsidies.
    In this regard, it is important to note here our practice of not 
applying the CVD law to non-market economies. The CAFC upheld this 
practice in Georgetown Steel Corp. v. United States, 801 F.2d 1308 
(Fed. Cir. 1986). See also GIA at 37261. We intend to continue to 
follow this practice. Where the Department determines that a change in 
status from non-market to market is warranted, subsidies bestowed by 
that country after the change in status would become subject to the CVD 
law.
    We received several comments regarding the proposed definition of 
benefit. Two commenters expressed the opinion that the definition is 
too restrictive. These parties identified examples of benefits which 
they believed would not be captured under the proposed definition. The 
first example is where a domestic purchaser is the only customer for an 
input provided by a government entity or where non-domestic purchasers 
are not allowed to purchase an input. In these situations, the 
commenter maintains that there could be a benefit even though the price 
paid is not less than any other domestic price. The second example is 
where a transaction is structured so that the firm pays market value 
for the input but receives other perquisites, such as a higher-quality 
input or additional services or goods as part of a package.
    We disagree that our definition of a benefit is not comprehensive 
enough to include these types of scenarios. The definition of a benefit 
(in the absence of a specific rule for the measurement of the benefit) 
does not call for comparisons only to other domestic prices. Rather, it 
calls for a determination of whether the input costs were reduced 
relative to what they would be in the absence of the financial 
contribution. In the first example, a benefit exists to the extent that 
the domestic purchaser would have paid more for the input absent the 
government provision or absent the restrictions placed on foreign 
purchasers. Likewise, in the second example, if the firm would have had 
to pay more in order to receive the additional perquisites without the 
government assistance, a benefit exists. Section 351.511, governing the 
provision of goods and services, contains more detailed guidance on how 
such subsidies would be valued.
    Another commenter supported the proposed definition, but urged the 
Department to leave itself enough flexibility so that we could find a 
benefit when government action enables a firm to sell a product that 
would not have been created but for the government assistance. For 
example, if the government assists in the development of a new product, 
this commenter asserted that the benefit is not the reduced development 
cost of the new product, but the continuing existence of the product.
    We believe that in situations such as that described by the 
commenter, the existence of a benefit is directly dependent upon the 
nature of the financial contribution. If a financial contribution has 
been provided, either directly or indirectly, in a form which is 
specifically identified in the statute or regulations (e.g., a loan, a 
grant, an equity infusion, etc.), we will identify and measure the 
resulting benefit in accordance with the rules contained in the statute 
and regulations. If the financial contribution takes a form

[[Page 65361]]

which has not been specifically dealt with in these regulations, we 
will identify and measure the benefit in accordance with the definition 
of benefit contained in paragraph (b). Moreover, as noted above, 
paragraph (b) provides sufficient flexibility to accommodate 
circumstances in which the facts of a particular case indicate that a 
financial contribution has conferred a benefit, even if the benefit 
does not take the form of a reduction in input costs or an enhancement 
of revenues.
    Finally, one commenter objected to the following statement which 
was included in the preamble to the 1997 Proposed Regulations: ``By the 
same token, where a firm does not pay less for an input than it 
otherwise would pay (or its revenues are not increased) as a result of 
a financial contribution, it would be very difficult to contend that a 
benefit exists.'' This commenter argued that we should not define the 
types of practices which do not confer benefits as this would invite 
the creation and exploitation of loopholes.
    We agree that we need only provide a definition of what constitutes 
a benefit. We believe we have given ourselves the flexibility to apply 
the concept of benefit in such a way that we will be able to find a 
benefit in situations in which the regulations do not contain specific 
rules for identifying and measuring the benefit from a particular 
government program or practice.
    We received several comments regarding the extent to which the 
Department should consider the overall ``effect'' a government program 
has on a firm's behavior in determining whether a benefit exists. One 
group of commenters requested an affirmative statement preserving the 
Department's discretion to consider ``effects'' in appropriate 
circumstances. Another group of commenters urged us to renounce any use 
of our discretion and to state that the effects of government actions 
are irrelevant to the existence of a countervailable subsidy.
    As we explained in the preamble to the 1997 Proposed Regulations, 
the determination of whether a benefit is conferred is completely 
separate and distinct from an examination of the ``effect'' of a 
subsidy. In other words, a determination of whether a firm's costs have 
been reduced or revenues have been enhanced bears no relation to the 
effect of those cost reductions or revenue enhancements on the firm's 
subsequent performance, such as its prices or output. In analyzing 
whether a benefit exists, we are concerned with what goes into a 
company, such as enhanced revenues and reduced-cost inputs in the broad 
sense that we have used the term, not with what the company does with 
the subsidy. Our emphasis on reduced-cost inputs and enhanced revenues 
is derived from elements contained in the examples of benefits in 
section 771(5)(E) of the Act and in Article 14 of the SCM Agreement. In 
contrast, the effect of government actions on a firm's subsequent 
performance, such as its prices or output, cannot be derived from any 
elements common to the examples in section 771(5)(E) of the Act or 
Article 14 of the SCM Agreement.
    For example, assume that a government puts in place new 
environmental restrictions that require a firm to purchase new 
equipment to adapt its facilities. Assume also that the government 
provides the firm with subsidies to purchase that new equipment, but 
the subsidies do not fully offset the total increase in the firm's 
costs--that is, the net effect of the new environmental requirements 
and the subsidies leaves the firm with costs that are higher than they 
previously were.
    In this situation, section 771(5B)(D) of the Act, which deals with 
one form of non-countervailable subsidy, makes clear that a subsidy 
exists. Section 771(5B)(D) of the Act treats the imposition of new 
environmental requirements and the subsidization of compliance with 
those requirements as two separate actions. A subsidy that reduces a 
firm's cost of compliance remains a subsidy (subject, of course, to the 
statute's remaining tests for countervailability), even though the 
overall effect of the two government actions, taken together, may leave 
the firm with higher costs. As another example, if a government 
promulgated safety regulations requiring auto makers to install seat 
belts in back seats, and then gave the auto makers a subsidy to install 
the seat belts, we would draw the same conclusion. In the two examples, 
the government action that constitutes the benefit is the subsidy to 
install the equipment, because this action represents an input cost 
reduction. The government action represented by the requirement to 
install the equipment cannot be construed as an offset to the subsidy 
provided to reduce the costs of installing the equipment.
    Thus, if there is a financial contribution and a firm pays less for 
an input than it otherwise would pay in the absence of that financial 
contribution (or receives revenues beyond the amount it otherwise would 
earn), that is the end of the inquiry insofar as the benefit element is 
concerned. The Department need not consider how a firm's behavior is 
altered when it receives a financial contribution that lowers its input 
costs or increases its revenues.
    If there were any doubt on this score, section 771(5)(C) of the Act 
eliminates it by clarifying that the ``benefit'' and the ``effect'' of 
a subsidy are two different things. While, as stated above, there must 
be a benefit in order for a subsidy to exist, section 771(5)(C) of the 
Act expressly provides that the Department ``is not required to 
consider the effect of the subsidy in determining whether a subsidy 
exists.'' This message is reinforced by the SAA at 926, which states 
that ``the new definition of subsidy does not require that Commerce 
consider or analyze the effect (including whether there is any effect 
at all) of a government action on the price or output of the class or 
kind of merchandise under investigation or review.''
    Paragraph (c) of the new regulation further reinforces this 
principle by stating affirmatively that, in determining whether a 
benefit is conferred, the Department is not required to consider the 
effect of the government action on the firm's performance, including 
its prices or output, or how the firm's behavior otherwise is altered.
    When we examine indirect subsidies, we are inquiring into whether a 
government is entrusting or directing a private entity to provide a 
reduced-cost input or enhanced revenue to a firm that produces the 
subject merchandise. For example, we have investigated whether below-
market loans or reduced-cost goods have been provided by means of 
indirect subsidies. This analysis in no way implies that we are 
examining whether the indirect subsidy has an effect on the price or 
output of the subject merchandise. It merely means that we are 
investigating, in fulfillment of other statutory requirements, whether 
loans were provided on non-commercial terms or whether goods were 
provided for less than adequate remuneration.
    In addition to those comments relating specifically to our proposed 
definition of a benefit, we received comments on other topics which we 
believe are appropriately addressed in the context of a discussion on 
benefits. First, one commenter objected to the absence of a regulation 
regarding so-called ``tiered'' programs. Tiered programs are those 
programs which provide varying levels of government assistance based 
upon differing eligibility criteria. Our longstanding practice 
regarding such programs has been to countervail only the difference 
between the assistance provided at a

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non-specific level (within the meaning of section 771(5A) of the Act) 
and the assistance provided to a specific enterprise or industry (or 
group thereof). This practice was reflected in Sec. 355.44(n) of the 
1989 Proposed Regulations.
    Our omission of a similar rule in this round of regulations was an 
oversight. To correct for this, we have added paragraph (d), which 
provides that where varying levels of financial contributions are 
provided, a benefit will be conferred to the extent that a specific 
enterprise or industry or group thereof receives a greater level of 
financial contribution than that provided at the non-specific level. 
The varying financial contribution levels must be set forth in a 
statute, decree, regulation, or other official act, and they must be 
clearly delineated and identifiable (e.g., the investment tax credit 
program in Certain Fresh Atlantic Groundfish from Canada, 51 FR 10041 
(March 24, 1986)). We note, however, that this exception cannot apply 
where the statute specifies a commercial test for determining the 
benefit, such as with respect to loans and loan guarantees.
    Another related topic involves the treatment of taxes on subsidies. 
Typically, we have referred to this issue as the ``secondary tax 
consequences'' of subsidies. Section 351.527 of the 1997 Proposed 
Regulations stated that we would not take account of secondary tax 
consequences. For example, if receipt of a grant increases the amount 
of income tax paid by a firm, we do not reduce the amount of the 
benefit from the grant to reflect the higher taxes paid. In these Final 
Regulations, we have retained this rule and have relocated it to 
Sec. 351.503(e).
    We received two comments expressing support for the 1997 Proposed 
Regulations. One of these commenters requested that we include in the 
regulation the following corollary, which flows from the same basic 
principle: where a subsidy is exempt from income tax, we will treat the 
tax exemption as a separate benefit in addition to the benefit from the 
original subsidy. An additional commenter requested that the regulation 
be expanded to clarify that we will not consider any secondary 
consequences or effects of the granting of the subsidy outside the 
exclusive list of subsidy offsets designated by the statute. To this 
end, this commenter advocated including the list of allowable offsets 
in the regulations and stating that we will not consider secondary 
consequences of the benefit. We have not added the requested language 
because the statute is clear regarding what is considered to be an 
allowable offset. Nor have we broadened the regulation as requested by 
either commenter. We believe that the impact of the benefit under one 
subsidy program should not be considered in calculating the benefit 
under a separate program. However, in our experience, this question has 
only arisen with respect to the impact of tax programs on other 
programs. Therefore, a broader regulation is not necessary.

Section 351.504

    Section 351.504 deals with the benefit attributable to the most 
basic type of subsidy, a grant. In the 1997 Proposed Regulations, 
paragraph (c) of this section (which was then numbered Sec. 351.503) 
included our methodology for allocating over time the benefit from a 
grant, or the benefit from a subsidy that the Department treated as a 
grant. In these Final Regulations, we have broken out the allocation 
issues from the grant section and created a separate section 
(Sec. 351.524) which deals with the allocation of benefits to a 
particular time period. Therefore, Sec. 351.504 now pertains only to 
grants.
    As in our 1997 Proposed Regulations, paragraph (a) provides that in 
the case of a grant, a benefit exists in the amount of the grant. 
Paragraph (b) sets forth the rule for determining when a firm is 
considered to have received a subsidy provided in the form of a grant. 
This paragraph provides that the Secretary will normally consider the 
benefit as having been received on the date on which the firm received 
the grant. In these Final Regulations, we have added the word 
``normally'' for reasons explained in the preamble discussion of 
Sec. 351.524. Finally, paragraph (c) provides that the benefit from a 
grant will be allocated to a particular time period pursuant to the 
methodology set forth in Sec. 351.524.
    All the comments that we received regarding grants dealt with the 
allocation of benefits. These comments are, therefore, discussed in the 
preamble to Sec. 351.524.

Section 351.505

    Section 351.505 deals with loans and other forms of debt financing. 
Paragraph (a) deals with the identification and measurement of the 
benefit attributable to a loan. Paragraph (a)(1) tracks the general 
standard set forth in section 771(5)(E)(ii) of the Act, which directs 
the Department to use a ``comparable commercial loan that the recipient 
could actually obtain on the market'' as the benchmark in determining 
whether a government-provided loan confers a benefit.
    Use of Effective Interest Rates: Paragraph (a)(1) restates the 
Department's current practice of normally seeking to compare effective 
interest rates rather than nominal rates in making this comparison. 
``Effective interest rates'' are intended to take account of the actual 
cost of the loan, including the amount of any fees, commissions, 
compensating balances, government charges (such as stamp taxes) or 
penalties paid in addition to the ``nominal'' interest. However, where 
effective rates are not available, we will compare nominal rates or, as 
a last resort, nominal to effective rates, as under current practice. 
If the ``loan'' is a bond (see definition of ``loan'' in Sec. 351.102), 
we normally will treat the yield on the bond as the effective interest 
rate.
    One commenter asked that the regulations clarify that only payments 
legitimately made on a loan will be used when calculating the effective 
interest rate. The commenter urged the Department to exclude other, 
unrelated payments to the government which the borrower might make 
along with the loan payments.
    We agree with this commenter that payments unrelated to the loan 
should not be included when we calculate the effective interest rate, 
but we do not believe that the regulation needs to be modified to 
address this concern. The preamble clearly describes the types of 
payments that would be included in calculating an effective interest 
rate. However, we will examine whether there are requirements placed on 
either the government loan or the benchmark loan affecting the cost of 
borrowing that should be factored into the calculation of the benefit 
amount.

Selection of Benchmark Loans and Interest Rates

    Paragraphs (a)(2) and (a)(3) elaborate on the criteria for 
selecting the benchmark. The criteria contained in these two paragraphs 
are much more general (and, thus, much more flexible) than the detailed 
hierarchies contained in Sec. 355.44(b) of the 1989 Proposed 
Regulations. The Department seldom used these hierarchies because, in 
practice, the information required in the 1989 Proposed Regulations was 
seldom available.
    ``Comparable commercial loan'' defined: Paragraph (a)(2) sets forth 
the criteria the Department normally will consider in selecting a 
comparable commercial loan. First, paragraph (a)(2)(i) defines the term 
``comparable.'' In the preamble to the 1997 Proposed Regulations, we 
stated that in order to be used as a benchmark, a comparable

[[Page 65363]]

commercial loan should represent a financial instrument that is similar 
to the government-provided loan and that was taken out (or could have 
been taken out) at the same time. To identify a loan that is comparable 
to the government-provided loan, the 1997 Proposed Regulations called 
for primary emphasis to be placed on the structure of the loans (e.g., 
fixed interest rate v. variable interest rate), the maturities of the 
loans (e.g., short-term v. long-term), and the currencies in which the 
loans are denominated.
    Several commenters maintained that it is not enough to look at the 
structure, maturity, and currency denomination to identify a benchmark 
loan that is comparable to the government-provided loan. These 
commenters argued that the Department should also consider the level of 
risk associated with the loans by comparing the security or collateral 
that the borrower is required to provide for each loan. One of the 
commenters observed that this approach would be consistent with the 
Department's practice in Laminated Hardwood Trailer Flooring from 
Canada, 62 FR 5201 (February 4, 1997). This commenter also noted that, 
while the risk element was discussed in the preamble of the 1997 
Proposed Regulations, it did not appear in the regulation.
    In opposition, another commenter argued that a commercial loan 
should be considered sufficiently comparable to a government loan when 
the structures and maturities of the two loans are identical or similar 
and the loans are provided in the same currency. This commenter argued 
that in the interest of predictability and uniformity, no further 
analysis, particularly with regard to the level of security of a loan, 
should be necessary. This commenter asserted that, where these three 
criteria are met, the loans would generally require the same level of 
security. Comparing the value of different assets securing different 
loans would create an unworkable test, according to the commenter, who 
suggested that the Department at least make it a rebuttable presumption 
that a commercial and a government-provided loan are comparable if the 
three criteria listed above match.
    We have not adopted the proposals put forward by either set of 
commenters. As in the 1997 Proposed Regulations, Sec. 351.505(a)(2)(i) 
states that we intend to place primary emphasis on three basic 
characteristics in determining whether particular loans are comparable 
to a government-provided loan: The structure, maturity, and currency 
denomination of the loans. This does not mean, however, that a loan in 
the same currency with a similar structure and maturity will always be 
found comparable to the government-provided loan. Nor should our 
decision to place primary emphasis on these three characteristics be 
seen as a rebuttable presumption.
    Instead, we recognize that many characteristics could factor into a 
decision of whether a loan should be considered comparable to the 
government-provided loan. Certainly, as the first set of commenters has 
pointed out, the levels of security or collateral on the two loans 
could be relevant in determining comparability. Similarly, the amounts 
of principal might differ so greatly that the two loans should not be 
compared. However, rather than identifying numerous characteristics for 
finding loans to be comparable, and thereby limiting our ability to 
find benchmarks, we have continued to place primary emphasis on what we 
believe to be the three most important characteristics. Regarding other 
characteristics that might render particular loans not comparable to 
the government-provided loan, such as collateral and size, we will 
consider arguments made by the parties based on the facts presented in 
their cases.
    Paragraph (a)(2)(ii) provides a definition of the term 
``commercial.'' The 1997 Proposed Regulations stated that we would 
normally treat a loan as ``commercial'' if it were taken out from a 
commercial lending institution or if it were a bond issued by the firm 
in commercial markets. We also stated that a loan provided under a 
government program, even if the program is not specific to an 
enterprise or industry, would not be considered a ``commercial'' loan 
for benchmark purposes. Finally, the 1997 Proposed Regulations stated 
that the Department would treat a loan from a government-owned bank as 
a commercial loan, unless there was evidence that the loan was provided 
at the direction of the government or with government funds.
    We received several comments on this issue, all of which urged us 
not to use loans from government-owned banks for benchmark purposes. 
One commenter asserted that a loan from a government-owned bank is the 
same as a loan from the government, regardless of whether the loan is 
provided under a government program, because the actions of a 
government-owned bank are presumably consistent with the policies of 
its owner, the government. A second commenter maintained that the 
distinction between ``a government program'' and ``government control'' 
is blurred and pointed to the Department's determination in Certain 
Steel Products from Korea, 58 FR 37338 (July 9, 1993), where the 
Department found that a countervailable benefit was conferred by 
government-directed, preferential access to specific sources of credit 
offered at favorable terms. Because of the availability of ``directed 
credit'' such as that found in the Korean case, this commenter argued 
that the Department should not use rates from loans provided by 
government-owned banks as benchmark rates. A third commenter argued 
that the Department should not use loans from government-owned banks 
for benchmark purposes unless the respondent can demonstrate the 
commercial nature of such loans. This and other commenters objected to 
the burden that the 1997 Proposed Regulations allegedly placed upon a 
petitioner to show that a loan from a government-owned bank is provided 
at the direction of the government or with government funds. Noting 
that the 1989 Proposed Regulations directed the Department to use 
financing provided or directed by the government as a benchmark only 
under certain exceptional circumstances, several commenters urged the 
Department to continue to apply this narrow standard.
    We have traditionally recognized that government-owned banks may 
operate as commercial banks in some countries. It is not appropriate to 
maintain that loans from government-owned banks per se are not 
commercial. Therefore, we continue to take the positions that: (1) We 
will not consider loans provided under government programs to be 
commercial loans, and (2) we will not automatically disqualify loans 
from government-owned commercial banks as benchmarks. However, we will 
not use loans from government-owned special purpose banks, such as 
development banks, as benchmarks because such loans are similar to 
loans provided under a government program or at the direction of the 
government. Regarding loans from government-owned commercial banks, we 
will treat such loans as being commercial and use them as benchmarks 
unless they are made on non-commercial terms or are provided at the 
direction of the government. We do not believe that this standard 
imposes an unreasonable burden on petitioners because this is the type 
of information they would routinely provide when alleging that 
government-provided loans are countervailable.
    Further, regarding the definition of ``commercial,'' where a firm 
receives a financing package including loans from both commercial banks 
and from the government, we intend to examine the package closely to 
determine whether

[[Page 65364]]

the commercial bank loans should in fact be viewed as ``commercial'' 
for benchmark purposes. In particular, we will look to whether there 
are any special features of the package that would lead the commercial 
lender to offer lower, more favorable terms than would be offered 
absent the government/commercial bank package.
    Paragraphs (a)(2)(iii) and (iv) specify the time period from which 
the Department will select comparable financing. Paragraph (a)(2)(iii) 
addresses long-term loans and is unchanged from the 1997 Proposed 
Regulations. This regulation directs us to use a loan whose terms were 
established during or immediately before the year in which the terms of 
the government-provided loan were established. Paragraph (a)(2)(iv) 
addresses short-term loans. In the 1997 Proposed Regulations, we stated 
that we would use as the benchmark rate an annual average of the 
interest rates on comparable commercial loans taken out during the 
period of investigation or review. However, in cases with significantly 
fluctuating interest rates, the 1997 Proposed Regulations allowed us to 
use ``the most appropriate'' interest rate as the benchmark rate.
    We received two comments regarding the benchmark interest rate for 
short-term loans. Both commenters argued against using a simple average 
of the interest rates on comparable commercial short-term loans 
obtained by the respondent. Instead, they asked the Department to 
weight the rates by the associated principal amount of each loan in 
order to prevent small, one-time loans from distorting the benchmark 
calculation. According to the commenters, this change would also 
address the Department's concern about significantly fluctuating 
interest rates.
    We have adopted the commenters' proposal in part and have amended 
paragraph (a)(2)(iv) to provide that we will calculate a weighted 
rather than a simple average benchmark interest rate for short-term 
loans. However, we do not share the commenters' view that this change 
addresses situations where the interest rate fluctuates significantly 
over the year, e.g., in economies with a high inflation rate. We are, 
therefore, retaining the provision that allows us to use benchmarks 
other than annual weighted averages in these situations.
    We also wish to clarify that we intend to follow our practice of 
calculating short-term benchmarks on a calendar year basis. In most 
instances, the period of investigation or review is a calendar year, so 
the short-term benchmark will be calculated using commercial loans that 
were obtained (or could have been obtained) during the period of 
investigation or review. In situations where the loans under 
investigation span two calendar years, we will calculate two annual 
benchmarks corresponding to the two years.
    Finally, we received one comment on the selection of benchmark 
interest rates to be used in administrative reviews of suspension 
agreements. In the preamble to the 1997 Proposed Regulations, we stated 
that in administering a suspended investigation, we would monitor 
developments in commercial benchmarks outside of the normal 
administrative review process and that this monitoring activity should 
serve to ensure that the commercial benchmarks used were timely. Th