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

[Federal Register Volume 59, Number 215 (Tuesday, November 8, 1994)]

[Unknown Section]

[Page 0]

From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

[FR Doc No: 94-27667]

[[Page Unknown]]

[Federal Register: November 8, 1994]

VOL. 59, NO. 215

Tuesday, November 8, 1994

DEPARTMENT OF COMMERCE

International Trade Administration

[A-570-827]

Notice of Final Determination of Sales at Less Than Fair Value:

Certain Cased Pencils From the People's Republic of China

AGENCY: Import Administration, International Trade Administration,

Department of Commerce.

EFFECTIVE DATE: November 8, 1994.

FOR FURTHER INFORMATION CONTACT: Kristin Heim or Thomas McGinty, Office

of Countervailing Investigations, Import Administration, International

Trade Administration, U.S. Department of Commerce, 14th Street and

Constitution Avenue, N.W., Washington, D.C. 20230; telephone: (202)

482-3798 or (202) 482-5055, respectively.

Final Determination

The Department of Commerce (``the Department'') determines that

certain cased pencils (pencils) from the People's Republic of China

(PRC) are being, or are likely to be, sold in the United States at less

than fair value (LTFV), as provided in section 735 of the Tariff Act of

1930, as amended (the Act). The estimated margins are shown in the

``Suspension of Liquidation'' section of this notice.

Case History

Since the preliminary determination in this investigation on June

8, 1994, (59 FR 30911, June 16, 1994), the following events have

occurred.

From July 4 through 15, 1994, Department officials conducted

verification of the responses of the responding exporters, Shanghai

Foreign Trade Corporation (SFTC), Shanghai Lansheng Corporation

(Lansheng), Guangdong Provincial Stationery & Sporting Goods Import &

Export Corp. (Guangdong), and China First Pencil Co., Ltd. (China

First), a responding exporter and manufacturer; and the responding

manufacturers Shanghai Three Star Stationery Industry Corporation

(Three Star), and Anhui Stationery Company (Anhui).

On July 22, 1994, petitioner alleged that there is a reasonable

basis to believe or suspect that critical circumstances exist with

respect to imports of certain cased pencils from the PRC. On August 10,

1994, the Department published in the Federal Register a notice of

postponement of the final determination (59 FR 40865). On August 26,

1994, the Department published in the Federal Register a preliminary

affirmative determination of critical circumstances (59 FR 44128).

Petitioner and respondents submitted case and rebuttal briefs on

September 21 and October 3, 1994, respectively. A public hearing was

held on October 5, 1994.

Scope of Investigation

The products covered by this investigation are certain cased

pencils of any shape or dimension which are writing and/or drawing

instruments that feature cores of graphite or other materials encased

in wood and/or man-made materials, whether or not decorated and whether

or not tipped (e.g., with erasers, etc.) in any fashion, and either

sharpened or unsharpened. The pencils subject to this investigation are

classified under subheading 9609.10.00 of the Harmonized Tariff

Schedule of the United States (``HTSUS'').

Specifically excluded from the scope of this investigation are

mechanical pencils, cosmetic pencils, pens, non-cased crayons (wax),

pastels, charcoals, and chalks.

Although the HTSUS subheading is provided for convenience and

customs purposes, our written description of the scope of this

investigation is dispositive.

Class or Kind of Merchandise

At the time of our initiation, the Department solicited comments

from interested parties on whether all cased pencils constitute one

class or kind of merchandise. Respondents first argued that raw

pencils/pencil blanks and semi-finished pencils constitute a separate

class or kind of merchandise apart from finished pencils.

In addition, the Asia Pencil Association, an interested party in

this investigation, argued that specialty pencils (e.g., carpenter and

art pencils) constitute a separate class or kind of merchandise.

However, the information submitted in support of its claim was

insufficient to allow us to make a preliminary determination that

specialty pencils are a separate class or kind of merchandise and no

new information on specialty pencils has been submitted since the

preliminary determination.

Based on the information provided, the Department preliminarily

determined that neither specialty pencils nor raw blanks constituted a

separate class or kind of merchandise.

In a submission dated June 2, 1994, respondents argued that the

merchandise subject to this investigation comprises four separate

classes or kinds of merchandise. Those arguments were filed too late to

be considered for the preliminary determination and were to have been

addressed fully in this determination. However, in their case brief of

September 21, 1994, respondents argued that there are three classes or

kinds of merchandise: Commodity, colored and designer. The Department

will therefore address only respondents' most recent argument about the

appropriate number of classes or kinds of merchandise under

investigation.

In order to establish whether cased pencils represent a single

class or kind of merchandise, we examine below each of the criteria

used by the Department to determine class or kind as described in 19

CFR 353.29(i) (1) and (2) and Diversified Products Corp. v. United

States, 6 CIT 155, 572 F.Supp. 883 (1983).

Physical Characteristics

Respondents argue that commodity pencils are invariably hexagonal

with a graphite core and a plain paint finish, colored pencils have a

chemical-intensive core and designer pencils are round with a graphite

core and ``proprietary artwork'' designs.

Petitioner argues that, while the outward physical form of pencils

sometimes differs, the production process is identical, except for the

finishing. Petitioner submits that some commodity pencils are round

while some designer pencils are hexagonal as well as triangular; that

graphite pencils come in varying degrees of hardness due to varying

chemical composition; and that the chemical core for colored pencils

does not distinguish it from all other ``disposable, delible, portable

marking instruments that require sharpening to renew the core.''

The cased pencils described in the scope of this proceeding are

disposable writing instruments. Two essential elements are present in

all cased pencils. These are (1) a core which contains the material

that, when the pencil is put to use, leaves a mark on a surface and (2)

the casing in which the core rests. As such, we conclude that the

physical characteristics of all pencils within the scope are similar.

Regarding respondents' argument that the chemical-intensive cores

of colored pencils should serve to distinguish them from other pencils

in the scope, we note that the core composition of commodity pencils

also varies based on the desired hardness and blackness of the pencil.

Hence, we do not find this to be a basis for distinguishing colored

from other pencils.

With regard to shape, petitioner and respondents have submitted

conflicting arguments. Based on the evidence on this record, the

Department determines that commodity and designer pencils do not always

have different shapes. Finally, with regard to the proprietary artwork

on designer pencils, the difference from commodity pencils includes the

application of foil, paint, ferrules, erasers, or some form of eye-

catching topper. While these add-ons make the pencils physically

different from commodity pencils, they do not change the basic physical

characteristics of the product, i.e., a core encased in wood or other

material.

Customer Use and Expectations

Respondents argue that commodity pencils are used in schools and

businesses for writing; colored pencils are usually for children and

always for coloring (not writing); and designer pencils are for

collecting. In addition, respondents argue that marks made by most

colored pencils are not able to be erased, while those of graphite

pencils are. Petitioner contends that the customer use and expectation

of all pencils is to make a mark on a surface.

We agree that the expectations and uses of colored pencils are

various and may differ from the expectations and uses of commodity and

designer pencils. With respect to designer pencils, however, there is

no evidence to support respondents' claim that these pencils are solely

for collecting. While they are collectable, they are also used as

writing instruments. Therefore, we have no basis to distinguish

designer pencils from commodity pencils in terms of customer use and

expectations.

Channels of Trade

The channels of trade for PRC pencil sales are similar for all

pencil types. The producer and/or exporter sells either directly to

retail customers or distributors in the United States. The distributors

then sell to either retailers or end-users in the United States.

According to petitioner, U.S. produced pencils are also sold by

manufacturers to retail customers or distributors. These distributors

may also sell to retailers, businesses or schools. Hence, we find that

all pencils within the scope of this proceeding are sold in the same

channels of trade.

Manner in Which Pencils Are Advertised and Displayed

There is conflicting evidence on the record in this investigation

with respect to the manner in which pencils are advertised and

displayed. Petitioner points to a China First catalog submitted in

response to section A of our questionnaire. Petitioner argues that

since all types of pencils are included in the China First catalog

(some individual pages include a number of different types of pencils),

we should conclude that the manner in which pencils are displayed is

similar regardless of pencil type. Petitioner also submits that

different types of pencils are often displayed together in retail

outlets.

Conversely, respondents submit that the manner of displaying and

advertising pencils is particular to the type of pencil being offered

for sale. Respondents contend that colored pencils are not offered for

sale in office supply stores and commodity pencils cannot be found in

toy stores and party shops. Respondents contend that even in the

unusual event that commodity, colored, and designer pencils were

offered for sale in the same store, they would not be displayed

together.

Based on our research, both petitioner and respondents are correct.

Specialty stores such as party shops do not usually stock commodity

pencils. On the other hand, office supply stores or pharmacies such as

``Staples'' or ``CVS'' carry all three pencil types (commodity, colored

and designer). In some instances they are displayed together, in other

instances they are displayed separately.

Conclusion

Based on the arguments presented and our own research and analysis,

the Department is not persuaded that a determination of three separate

classes or kinds of merchandise is warranted in this investigation.

Although the products differ in certain respects, on the whole the

similarities greatly outweigh the dissimilarities. In its Notice of

Final Determination of Sales at Less Than Fair Value: Antifriction

Bearings from West Germany, 54 FR 18992 (May 3, 1989), the Department

stated that ``the real question is whether the differences are so

material as to alter the essential nature of the product, and

therefore, rise to the level of class or kind differences.'' In this

instance, the differences do not alter the essential nature of the

product. In addition, although such a finding is not dispositive to

this analysis, the ITC recently issued its report on Cased Pencils from

Thailand stating that ``all cased pencils . . . have similar physical

characteristics and uses.'' (ITC Publication 2816, at I-8). Therefore,

we conclude that commodity, colored and designer pencils are a single

class or kind of merchandise.

Period of Investigation

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

30, 1993.

Separate Rates

The four participating exporters, SFTC, Guangdong, China First, and

Lansheng have each requested a separate rate. SFTC and Guangdong are

companies owned by ``all the people.'' China First and Lansheng are

shareholding companies, both of which were previously owned by ``all

the people.'' China First issued shares in 1992 and Lansheng issued

shares in September 1993. In the preliminary determination, Guangdong,

SFTC, and Lansheng received separate rates. With respect to China

First, we preliminarily determined that, due to the lack of information

on the record regarding China First's ownership structure, we could not

grant China First a separate rate at that time.

In the Final Determination of Sales at Less Than Fair Value:

Compact Ductile Iron Works from the People's Republic of China, 58 FR

37909 (July 14, 1993) (CDIW), the Department determined that state-

owned companies, i.e., those owned by the central government, were not

eligible for separate rates. In the Final Determination of Sales at

Less Than Fair Value: Silicon Carbide from the People's Republic of

China, 59 FR 22585, (May 2, 1994) (Silicon Carbide), we found that the

PRC central government had devolved control of state-owned enterprises,

i.e., enterprises ``owned by all the people.'' As a result, we

determined that companies owned ``by all the people'' were eligible for

individual rates, if they met the criteria developed in the Final

Determination of Sales at Less Than Fair Value: Sparklers from the

People's Republic of China 56 FR 20588 (May 6, 1991) (Sparklers) and

amplified in Silicon Carbide.

In this investigation, and in the recent final determination

involving paper clips from the PRC (59 FR 51170, October 7, 1994), we

have examined companies that had been ``owned by all the people,'' but

are now shareholding companies with varying levels of government

ownership. When these companies were ``owned by all the people,'' the

central government devolved control of them. Hence, we focused our

examination on whether the change in ownership form to shareholding

companies altered that devolution of control. We found that it did not.

Significantly, we found that the government (whether the central

government or the Government of Shanghai) did not vote the shares.

(See, verification reports of Lansheng and China First.) Although the

government held its shares on behalf of the people, in one case those

shares were voted by the company's former general manager (Mr.

Lansheng), and in the other by the workers (China First).

Because we have found that the government has, in effect, severed

the voting rights from the shares it holds in trust on behalf of the

people and bestowed those rights on the enterprises themselves, we

determine that Lansheng and China First do not fall within the

prohibition set out in CDIW. Hence, the Department has applied the

criteria developed in Sparklers and amplified in Silicon Carbide to

determine whether these companies, as well as the companies ``owned by

all the people,'' should receive separate rates. Under this analysis,

the Department assigns a separate rate only when an exporter can

demonstrate the absence of both de jure1 and de facto2

governmental control over export activities.

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\1\ Evidence supporting, though not requiring, a finding of de

jure absence of central control includes: (1) absence of restrictive

stipulations associated with an individual exporter's business and

export licenses; (2) any legislative enactments decentralizing

control of companies; or (3) any other formal measures by the

government decentralizing control of companies.

\2\ The factors considered include: (1) whether the export

prices are set by or subject to the approval of a governmental

authority; (2) whether the respondent has authority to negotiate and

sign contracts and other agreements; (3) whether the respondent has

autonomy from the government in making decisions regarding the

selection of management; and (4) whether the respondent retains the

proceeds of its export sales and makes independent decisions

regarding disposition of profits or financing of losses (see Silicon

Carbide).

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De Jure Analysis

The PRC laws placed on the record of this case establish that the

responsibility for managing companies owned by ``all the people'' has

been transferred from the government to the enterprise itself. These

laws include: ``Law of the People's Republic of China on Industrial

Enterprises Owned by the Whole People,'' adopted on April 13, 1988

(1988 Law); ``Regulations for Transformation of Operational Mechanism

of State-Owned Industrial Enterprises,'' approved on August 23, 1992

(1992 Regulations); and the ``Temporary Provisions for Administration

of Export Commodities,'' approved on December 21, 1992 (Export

Provisions). The 1988 Law states that enterprises have the right to set

their own prices (see Article 26). This principle was restated in the

1992 Regulations (see Article IX).

While the PRC government has devolved control over state-owned

enterprises, the government has continued to regulate certain products

through export controls. The Export Provisions list designates those

products subject to direct government control. Pencils do not appear on

the Export Provisions list and are not, therefore, subject to the

constraints of these provisions.

Consistent with Silicon Carbide, we determined that the existence

of these laws demonstrates that Guangdong and SFTC, companies owned by

``all the people,'' are not subject to de jure control.

Since Lansheng and China First were initially companies owned by

``all the people,'' the laws cited above establish that the government

devolved control over such companies. The only additional law that is

pertinent to the de jure analysis of Lansheng and China First as share

companies is the Company Law (effective July 1, 1994). While Lansheng

and China First indicated that they were organized consistent with the

Company Law, the law did not enter into force until seven months after

the POI. In any event, this law does not alter the government's de jure

devolution of control that occurred when the companies were owned ``by

all the people.'' Therefore, we have determined that Lansheng and China

First are not subject to de jure control.

In light of reports3 indicating that laws shifting control

from the government to the enterprises themselves have not been

implemented uniformly, an analysis of de facto control is critical to

determining whether respondents are, in fact, subject to governmental

control.

---------------------------------------------------------------------------

\3\See ``PRC Government Findings on Enterprise Autonomy,'' in

Foreign Broadcast Information Service-China-93-133 (July 14, 1993)

and 1992 Central Intelligence Agency Report to the Joint Economic

Committee, Hearings on Global Economic and Technological Change:

Former Soviet Union and Eastern Europe and China, Pt.2 (102 Cong.,

2d Sess)

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De Facto Control Analysis

We analyze below the issue of de facto control based on the

criteria set forth in Silicon Carbide.

Guangdong

In the course of verification, we confirmed that Guangdong's export

prices are not set, or subject to approval, by any government

authority. This point was supported by Guangdong's sales documentation,

company correspondence, and confirmed through questioning of a Shanghai

Commission of Foreign Trade and Economic Cooperation (COFTEC)

representative. Through an examination of sales documents pertaining to

U.S. pencil sales, we also noted that Guangdong is able to negotiate

prices with its customers without government interference or influence.

We confirmed, through an examination of bank documents, that

Guangdong has the authority to borrow freely, independent of government

authority. We further found that, although required to exchange 20

percent of its foreign exchange proceeds at the official exchange rate,

Guangdong retained proceeds from its export sales and made independent

decisions regarding disposition of profits and financing of losses.

Guangdong's financial and accounting records supported this conclusion.

Finally, we have determined that Guangdong has autonomy from the

central government in making decisions regarding the selection of

management. At verification, we found that management is elected by the

Employee's Congress, which is made up of 60 percent workers and 40

percent department chiefs. First candidates are nominated by the

workers in each department. The Employee's Congress then reviews the

qualifications of potential candidates and elects them. A review of the

documentation of the election process indicated that COFTEC then

confirms Guangdong's election of management. Based on an analysis of

all these factors, we have determined that Guangdong is not subject to

de facto control by governmental authorities.

SFTC

During verification, we established that SFTC's export prices are

set by the company and do not require approval by any governmental

authority. SFTC has the authority to negotiate and sign contracts and

other agreements independent of any government authority as evidenced

by our examination of correspondence and written agreements and

contracts. We also confirmed that SFTC retained proceeds from its

export sales and made independent decisions regarding disposition of

profits by examining bank account records, financial records, and

purchase contracts.

Based on our examination of management appointment announcements

and other correspondence, we have determined that SFTC had autonomy

from the government in making decisions regarding the selection of

management. Management was elected by 50 departmental staff

representatives. These representatives were themselves elected by

workers in each department. Documentation provided by SFTC demonstrated

that the provincial government merely acknowledged SFTC's election of

management. In light of the above evidence of the lack of de facto

government control, we have concluded that SFTC is entitled to a

separate rate.

Lansheng

In conducting a de facto analysis of Lansheng, we have examined the

factors set forth in Silicon Carbide, and whether the change in

corporate structure alters our conclusion regarding those factors.

Lansheng's sales documentation and correspondence support the

conclusion that no government entity exercises control over Lansheng's

export prices. Additionally, our examination of numerous contracts with

domestic and foreign trading companies demonstrates that Lansheng has

the authority to negotiate and sign contracts and other agreements

without interference from any governmental entity. We confirmed during

verification that this situation did not change after Lansheng became a

share company.

Before Lansheng became a share company, the general manager of its

predecessor company, Shanghai Stationery & Sporting Goods Import and

Export Company (Shanghai Stationery), was elected on February 27, 1993.

The election proceeded in the following manner.

First, for every ten employees, there was one elected

representative. Second, the representatives then elected the general

manager. Third, once the general manager was elected, the company sent

a letter, announcing the election to COFTEC. COFTEC then approved the

election process and sent a letter of congratulations to the company.

While COFTEC technically had the authority to reject an elected

manager, it reportedly had never done so.

After Lansheng became a share company, the same manager continued

to lead the company. At the first general shareholders' meeting, when

Lansheng's Board of Directors was elected, the shares held by the State

Asset Management Bureau (SAMB) were voted by the general manager of the

former company, Shanghai Stationery. Subsequently, the newly elected

Board of Directors appointed the former general manager as Chairman of

the Board for Lansheng. The evidence on the record regarding the

election of management indicates that no representative of the SAMB was

present at, or participated in, the election of the Board of Directors

or the decision to retain current management. Moreover, the chairman's

authority to vote the shares held by the government supports the

conclusion that the chairman and the board, rather than the government,

have the authority to appoint the company's management.

We also found that Lansheng retained proceeds from export sales and

made independent decisions regarding the disposition of profits and

financing of losses both before and after becoming a share company.

This point was supported through examination of Lansheng's bank account

records and bank loan applications.

As indicated above, the record indicates that Lansheng's change to

a share company did not have any effect on the government's devolution

of control over Lansheng. The evidence shows that, following its

conversion to a share company, 25.1 percent of Lansheng's shares were

sold publicly, with the proceeds returning to the company as new

capital investment. The remaining 74.9 percent of the shares represents

the value of the assets in the original company, Shanghai Stationery

(which was owned ``by all the people''). Evidence on the record

indicates that these remaining shares are held in trust by the SAMB,

just as its assets were held in trust when Lansheng was owned ``by all

the people.'' The company's management, which has remained the same

throughout its transition to a share company, votes these shares at the

general shareholders' meetings of Lansheng. This evidence supports the

conclusion that, under the new corporate structure, the government has

not exerted control over Lansheng through the exercise of shareholder

rights or otherwise; operational control remains in the hands of

company management.

China First

China First has been a public company since 1992. China First's

shareholders include both the state and individual PRC and foreign

investors. At verification, through an examination of the minutes from

the 2nd Annual Shareholders Meeting, company records, and discussions

with government and company officials, we found that the holder of the

state-owned shares was the ``Office for State Assets Administration of

the Shanghai Municipality'' (SAASM) and that SAASM's shares are voted

by the company's employee shareholders. We also note the record shows

that, as of verification, more than 50 percent of China First's shares

were held by private, individual investors, both foreign and Chinese.

In conducting a de facto analysis of China First, we have examined

the factors set forth in Silicon Carbide. China First's sales

documentation and correspondence supports the conclusion that no

government entity exercises control over China First's export prices.

Additionally, our examination of numerous contracts with domestic and

foreign trading companies demonstrates that China First has independent

authority to negotiate and sign contracts and other agreements, such as

joint ventures.

China First holds a general shareholders meeting annually. At this

meeting the shareholders elect the Board of Directors, each of whom

serves a three year term. Employees vote the shares held by the

government in selecting the Board. The Board of Directors in turn

selects the company's management. Because the state-owned shares

represent a minority interest and because those shares are, in fact,

voted by employee shareholders, the evidence supports the conclusion

that the government does not control selection of the Board of

Directors or other members of management.

We also found that China First retained proceeds from export sales

and made independent decisions regarding the disposition of profits and

financing of losses both before and after becoming a share company.

This point was supported through an examination of China First's

financial and accounting records, and bank accounts. The evidence

supports the conclusion that, under the corporate structure of China

First, the government has not exerted control through the exercise of

shareholder rights or otherwise; operational control remains in the

hands of company management.

Conclusion

In the case of Guangdong, SFTC, Lansheng and China First, the

record demonstrates an absence of de jure and de facto government

control. Accordingly, we determine that each of these exporters should

receive a separate rate.

Nonmarket Economy

The PRC has been treated as a nonmarket economy (NME) in past

antidumping investigations. (See, e.g., Final Determination of Sales at

Less than Fair Value: Certain Paper Clips from the People's Republic of

China, 59 FR 511680 (October 7, 1994)). No information has been

provided in this proceeding that would lead us to overturn our former

determinations. Therefore, in accordance with 771(18)(c) of the Act,

the Department has treated the PRC as an NME for purposes of this

investigation.

Where the Department is investigating imports from an NME, section

773(c)(1) of the Act directs us to base FMV on the NME producers'

factors of production, valued in a comparable market economy that is a

significant producer of comparable merchandise. Section 773(c)(2) of

the Act alternatively provides that where available information is

inadequate for using the factors of production methodology, FMV may be

based on the export prices for comparable merchandise from market

economy countries at a comparable level of economic development.

In this investigation, respondents have urged the Department to

employ the alternative methodology provided in section 773(c)(2) of the

Act, i.e., the export price of a pencil from a comparable market

economy. In particular, they have argued that because the primary input

into PRC pencils, lindenwood, cannot be valued exactly, the Department

is compelled to employ the alternative valuation of FMV. Petitioner

argues against using the alternative methodology for FMV. Instead,

petitioner suggests that prices for jelutong wood be used to value

lindenwood, as the Department did in the preliminary determination.

We have determined that the absence of a price for lindenwood in

the surrogate country does not preclude us from using the factors of

production methodology. However, we have not used the jelutong prices

relied upon in our preliminary determination. For further discussion of

the arguments regarding the alternative methodology, see, Comment 1,

below.

Surrogate Country

As discussed above, section 773(c)(4) of the Act requires the

Department to value the NME producers' factors of production, to the

extent possible, in one or more market economy countries that are (1)

at a level of economic development comparable to that of the nonmarket

economy country, and (2) significant producers of comparable

merchandise. Of the countries that have been determined to be

economically comparable to the PRC, evidence on the record of this case

indicates that India, Pakistan and Indonesia are significant producers

of pencils (see, Calculation Memorandum, attachment 1, October 31,

1994). In order to select the surrogate from among these countries that

meet the statutory criteria, we have reviewed the data that has been

submitted and that we have been able to develop on factor values from

these countries.

With respect to Pakistan, we have not located data for a

significant number of the Chinese production factors. Among the missing

factors are: certain packing materials, polyvinyl acetate, semi-skilled

labor, SG&A, profit, and all transportation rates except trucking for a

distance of 1000 km. For Indonesia, we have data for even fewer

factors. In India, we have factor values for all inputs (other than

wood, as discussed below, and tallow). Moreover, we have obtained 1993

values for India, the most recent time period available for data from

any surrogate country. Because India meets the statutory criteria for

surrogate country selection, and because we have more complete Indian

data, we determine that India is the preferred surrogate market in the

instant investigation. Therefore, except for certain inputs described

below, we have relied on Indian prices to value the Chinese factors of

production.

Fair Value Comparisons

To determine whether sales of pencils from the PRC to the United

States by China First, Guangdong, SFTC, and Lansheng were made at less

than fair value, we compared the United States price (USP) to the

foreign market value (FMV), as specified in the ``United States Price''

and ``Foreign Market Value'' sections of this notice. We do not have

verified factors of production for a portion of SFTC's U.S. sales

discovered at verification. For these sales, we have applied best

information available (BIA). (See ``Best Information Available''

section of this notice.)

United States Price

We based USP on purchase price, in accordance with section 772(b)

of the Act, because the subject merchandise was sold directly by the

Chinese exporters to unrelated parties in the United States prior to

importation into the United States.

For those exporters that responded to the Department's

questionnaire, we calculated purchase price based on packed, FOB

foreign-port prices to unrelated purchasers in the United States. We

made deductions for containerization, loading, port handling expenses

and foreign inland freight valued in a surrogate country. In two

instances, sales were made on a C&F basis. For these sales, we adjusted

for freight expenses.

Foreign Market Value

As discussed above, we calculated FMV, based on the factors of

production reported by the factories which produced the subject

merchandise for the three exporters. The factors used to produce

pencils include materials, labor, and energy. We made adjustments to

materials usages to account for the resale of scrap materials, where

applicable.

In determining the appropriate surrogate value to assign to each

factor of production, we used publicly available published information

(PAPI), where possible. The PAPI used was: (1) an average non-export

value; (2) most current; (3) product-specific; and (4) tax-exclusive.

The following materials were not valued in India:

Wood

The wood used by the Chinese producers in pencil production

(Chinese lindenwood) has been the subject of much debate in this

investigation. Wood is the most significant input into a finished

pencil. (For the domestic industry, it accounts for approximately 50

percent of the cost.)

Prior to the preliminary determination, we consulted industry

experts who told us that jelutong was ``quite similar'' to lindenwood

and that ``in price, property and uses, American basswood is nearly

indistinguishable from lindenwood.'' Although we had this information

at the time of the preliminary determination, we did not have a

surrogate value for basswood. Instead, we used a basket category of

woods imported into India to assign a value to lindenwood. This

category did not include lindenwood or basswood, but did include

jelutong, which the record indicated was used to produce pencils in

Indonesia.

Since the preliminary determination, both respondents and

petitioner have provided information on the price and quality of

basswood, the most similar wood to lindenwood. The prices are those

charged by U.S. producers to U.S. customers. Despite extensive

research, no surrogate market or world prices for basswood have been

found.

Having determined that basswood is most similar to lindenwood, we

have used U.S. basswood prices to value the wood input. Although

section 773(c)(4) directs the Department to value the NME factors of

production in a comparable surrogate country that is a significant

producer of comparable merchandise, this is required only to the extent

possible. In this case, where wood is such a significant input and

where the only alternative to the basswood price, a price for jelutong,

is so much higher than the most comparable wood, we have determined

that it is appropriate to use the most comparable wood even though we

can only find prices for this input in the United States.

Erasers, Ferrules and Paint

Respondents provided information which led us to question the

quality of the Indian PAPI for erasers, ferrules, paint, animal glue

and foil. Based on a comparison of the Indian values to the Pakistani

values and the values provided in the petition for these inputs (the

only other sources of prices for these inputs), we determine that the

Indian values for ferrules, erasers and paint were aberrational.

Therefore, we valued these factors using Pakistani import statistics

(see, Calculation Memorandum, October 31, 1994).

Tallow

Tallow is not imported or, to the best of our knowledge, sold in

India or Pakistan. Therefore, we have valued this input in Indonesia.

As discussed above, Indonesia has been found to be economically

comparable to the PRC and to be a significant producer of pencils.

Non-material Inputs

We used Indian transportation rates to value inland freight between

the source of the production factor and the pencil factories, and

between factories, where appropriate. In those cases where a respondent

failed to provide any information on transportation distances and

modes, we applied, as BIA, the most expensive distance/modes

combination (i.e., the longest truck rates) that was available in

India. We were unable to obtain values for two modes of transportation

(man-drawn carts, inland water transport). Therefore, we assumed that

these forms were competitive with trucking rates over similar

distances.

To value electricity, we used PAPI from the Asian Development Bank

on Indian rates. To value coal and natural gas, we used Indian Import

Statistics for 1993, the Monthly Statistics of Mineral Production, and

the Indian Bureau of Mines dated November 1992, respectively. To value

water, we used the Indian industrial schedule from the Water Utilities

Data Book.

For all material and energy values that were for a period prior to

the POI, we adjusted the factor values to account for inflation between

the applicable time period and the POI using wholesale price indices

published in International Financial Statistics (IFS) by the

International Monetary Fund.

To value labor amounts, we used the International Labor Office's

1993 Yearbook of Labor Statistics. To determine the number of hours in

an Indian workday, we used the Country Reports: Human Rights Practices

for 1990. We adjusted the factor values to account for inflation

between the applicable time period and the POI using the consumer price

indices published in IFS.

To value factory overhead, we calculated percentages based on

elements of industry group income statements from The Reserve Bank of

India Bulletin (RBI), December 1993. We based our overhead percentage

calculations on the RBI data, adjusted to reflect an energy-exclusive

overhead percentage. For selling, general and administrative (SG&A)

expenses, we calculated percentages based on the RBI data. We used the

calculated SG&A percentages because they were greater than the ten

percent statutory minimum. However, we used the statutory minimum of

eight percent for profit because the profit percentage derived from the

RBI data was less than the statutory minimum of eight percent of

materials, labor, factory overhead, and SG&A expenses.

We made no adjustments for selling expenses. Packing materials were

valued using Indian PAPI. These prices were adjusted to include the

freight costs for the delivery of packing materials to the factories

producing pencils.

Best Information Available

Because information has not been presented to the Department to

prove otherwise, only SFTC, Guangdong, China First and Lansheng are

entitled to separate dumping margins. Other exporters identified by the

PRC Ministry of Foreign Trade and Economic Cooperation (MOFTEC) have

failed to respond to our questionnaire. Lacking responses from these

companies, we are basing the PRC country-wide rate on BIA in accordance

with section 776(c) of the Act.

In determining what to use as BIA, the Department follows a two-

tiered methodology whereby the Department normally assigns lower

margins to those respondents that cooperated in an investigation and

more adverse margins for those respondents which did not cooperate in

an investigation. As outlined in the Final Determination of Sales at

Less Than Fair Value: Certain Cold-Rolled Carbon Steel Flat Products

From Argentina (Argentina Steel), 58 FR 7066, 7069-70 (February 4,

1993), when a company refuses to provide the information requested in

the form required, or otherwise significantly impedes the Department's

investigation, it is appropriate for the Department to assign to that

company the higher of (a) the highest margin alleged in the petition,

or (b) the highest calculated rate of any respondent in the

investigation.

Here, the non-responding companies failed to cooperate. Therefore,

we are assigning to them the highest margin in the petition, as

recalculated by the Department for the initiation and on the basis of

petitioner's updated information submitted in May 1994. Also, in

recalculating the petition rate, we substituted the U.S. basswood price

discussed above for the wood value used by petitioner. In making this

change we relied on PRC wood usage factors because of the possibility

that the amount of wood used to produce a pencil will vary depending on

wood type.

We are also applying BIA to a portion of SFTC's sales. SFTC was

cooperative in this investigation. However, we are lacking the

necessary data for FMV calculations for three sets of pencil sales. We

do not find these deficiencies sufficient to call into question the

overall reliability of SFTC's data. Therefore, we are applying partial

BIA to these sales. As partial BIA, we applied the higher of (a) the

highest margin alleged in the petition, or (b) the highest calculated

rate of any respondent in the investigation.

Verification

As provided in section 776(b) of the Act, we verified information

provided by respondents using standard verification procedures,

including the examination of relevant sales and financial records, and

original source documentation.

Continuation of Suspension of Liquidation

For China First and Guangdong we calculated a zero margin.

Therefore, in accordance with 19 CFR 353.21 and consistent with Jia

Farn Manufacturing Co., Ltd. v. United States, Slip Op. 93-42 (March

26, 1993), we will exclude from the application of any order issued

imports of subject merchandise that are sold by either China First or

Guangdong and manufactured by the producers whose factors formed the

basis for the zero margin. Under the NME methodology, the zero rate for

each exporter is based on a comparison of the exporter's U.S. price and

FMV based on the factors of production of a specific producer (which

may be a different party). The exclusion, therefore, applies only to

subject merchandise sold by the exporter and manufactured by that

specific producer. Merchandise that is sold by the exporter but

manufactured by other producers will be subject to the order, if one is

issued. This is consistent with Jia Farn which held that exclusion of

merchandise manufactured and sold by respondent did not cover

merchandise sold but not manufactured by respondent. Therefore,

merchandise that is sold by China First or Guangdong but produced by

another producer is subject to suspension of liquidation at the ``all

others'' cash deposit rate.

In accordance with sections 733(d)(1) and 735(c)(4) (A) and (B) of

the Act, we are directing the U.S. Customs Service to continue to

suspend liquidation of all entries of pencils from the PRC that are

entered, or withdrawn from warehouse, for consumption on or after March

18, 1994, (i.e., 90 days prior to the date of publication of our

preliminary determination in the Federal Register), except entries of

the excluded merchandise described above. The U.S. Customs Service

shall require a cash deposit or posting of a bond equal to the

estimated amount by which the FMV exceeds the USP as shown below. These

suspension of liquidation instructions will remain in effect until

further notice.

The weighted-average dumping margins are as follows:

------------------------------------------------------------------------

Weighted-

Manufacturer/Producer/Exporter average margin

percentage

------------------------------------------------------------------------

China First/Company A................................... 0.00

China First/Any other manufacturer...................... 44.66

Guangdong/Company B..................................... 0.00

Guangdong/Any other manufacturer........................ 44.66

SFTC.................................................... 8.31

Shanghai Lansheng....................................... 17.45

All Others.............................................. 44.66

------------------------------------------------------------------------

Critical Circumstances

On August 22, 1994, the Department issued its preliminary

determination that critical circumstances exist in this investigation

with respect to pencils exported by SFTC, China First, Lansheng, and

``all others.''

Section 733(e)(1) of the Act provides that the Department will

determine that there is a reasonable basis to believe or suspect that

critical circumstances exist if:

(A) (1) there is a history of dumping in the United States or

elsewhere of the class or kind of merchandise which is the subject of

this investigation, or

(2) the person by whom, or for whose account, the merchandise was

imported knew or should have known that the exporter was selling the

merchandise which is subject of the investigation at less than its fair

value, and

(B) there have been massive imports of the class or kind of

merchandise which is the subject of the investigation over a relatively

short period.

Because we have determined that Guangdong and China First in

connection with their responding suppliers have not sold cased pencils

to the U.S. at less than fair value during the POI, we determine that

critical circumstances do not exist with respect to these companies.

Therefore, we have limited our analysis of critical circumstances to

SFTC and Lansheng.

History of Dumping

As stated in our preliminary determination of critical

circumstances, in April 1994, the Government of Mexico published an

antidumping duty order on certain cased pencils produced and exported

from the PRC. On this basis, we determine that there is a history of

dumping elsewhere of the class or kind of merchandise under

investigation.

Massive Imports

In accordance with 19 CFR 353.16(f) and 353.16(g), to determine

whether imports have been massive over a relatively short period of

time, we consider: 1) the volume and value of the imports; 2) seasonal

trends (if applicable); and 3) the share of domestic consumption

accounted for by the imports.

When examining volume and value data, the Department typically

compares the export volume for equal periods immediately preceding and

following the filing of the petition. Under 19 CFR 353(f)(2), unless

the imports in the comparison period have increased by at least 15

percent over the imports during the base period, we will not consider

the imports to have been ``massive.''

The U.S. volume and value information submitted by the respondents

in this investigation and used by the Department in its preliminary

determination of critical circumstances is unchanged. Based on this

information, we find that imports of pencils from the PRC have been

massive over a relatively short period of time for both SFTC and

Lansheng. Also, for the non-responding exporters, we have assumed as

BIA that imports have been massive.

Therefore, the statutory criteria for finding critical

circumstances have been met for SFTC and Lansheng and all non-

responding PRC exporters of pencils.

Interested Party Comments

Comment 1: Respondents argue that section 773(c)(1) of the Act

requires the Department to value the specific input used by the PRC

producer based on the best available information regarding values in

the surrogate country or countries. Absent an acceptable surrogate

value for each factor, the Department must consider the use of the

exception provided for in the statute at section 773(c)(2) of the Act.

This is especially so where, as here, the Department lacks a surrogate

value for the single most significant input, lindenwood.

Respondents submit that the Conference Report to what became the

Trade and Competitiveness Act of 1988 shows Congress' recognition that

in some cases the Department will be unable to develop adequate and

usable sources of surrogate factor values (which, in turn, will deprive

nonmarket economy producers and exporters of any notion of fairness),

requiring resort to the alternative provided in the statute, i.e.,

export prices of comparable merchandise from an economically comparable

country. See, Omnibus Trade & Competitiveness Act of 1988--Conference

Report, Rep. No. 100-576, 100th Cong., 2d Sess. at 592 (1988).

Respondents assert that this Conference Report reflects Congress'

desire to provide nonmarket economy countries with some semblance of

realism and reasonableness in the determination of their foreign market

values.

Petitioner argues that the statute provides a clear preference for

the factors of production methodology over the alternative, export

prices of comparable merchandise from an economically comparable

country. Petitioner asserts that the Department can only use the export

price alternative if the Department finds that the available

information is inadequate for purposes of determining the FMV of the

subject merchandise. In this case, the price of jelutong is acceptable

for valuing the Chinese wood price.

Petitioner claims further that the Indian export data regarding

pencils provided by respondents covers too few pencils and provides no

information with respect to the quality of those pencils. Therefore,

petitioner contends, the Indian export data provide an inadequate basis

for determining FMV. The Department should not reject the adequate and

detailed surrogate value data in favor of deficient export data.

DOC Position: The statute states that the Department shall

``determine the foreign market value of the merchandise on the basis of

the value of the factors of production utilized in producing the

merchandise,'' and furthermore that, ``the valuation of the factors of

production shall be based on the best available information regarding

the values of such factors in a market economy country or countries

considered to be appropriate by the administering authority.'' See

section 773(c)(1) of the Act. The Act further provides that, if the

Department finds the available information inadequate for purposes of

determining foreign market value based on the factors of production,

the Department shall base FMV on the price at which comparable

merchandise is produced and exported in one or more market economy

countries at a comparable level of economic development to that of the

nonmarket economy. See, section 773(c)(2).

In this investigation, we have determined that we have sufficient

information on factor values to rely on the factors of production

methodology. Although we do not have a value for the specific wood used

by PRC producers, the Department may exercise its discretion in

selecting a comparable input by which to value this factor.

In Ceiling Fans From the People's Republic of China: Notice of

Court Decision; Exclusion From the Application of the Antidumping Duty

Order, in Part; Termination of Administrative Reviews; and Amended

Final Determination and Order (59 FR 9956, March 2, 1994), the

Department stated that ``. . . section 773(c)(1) of the Act provides

for valuation of factors of production on the best available

information from an appropriate surrogate country, not on the basis of

perfectly conforming information.'' In this instance, we have evidence

that basswood is virtually indistinguishable from lindenwood.

Therefore, as explained in FMV section of this notice, we have used

basswood as a surrogate value for lindenwood.

Moreover, we are not persuaded that the use of the statutory

exception in this investigation would increase the accuracy of our

calculations. The comparison of an average Indian export price with

each of the several different pencil types exported to the U.S. by the

PRC respondents could lead to significant distortions and inherent

unfairness. Because the Indian export price may reflect a wide variety

of pencil types, PRC exporters selling lower value-added pencils, e.g.,

raw or semi-finished, could be severely penalized by such an approach.

Similarly, PRC exporters of higher value-added pencils, e.g., colored,

foil, or designer, could profit.

Absent some workable method for adjusting the average Indian export

price to reflect the differences in merchandise exported by the

respondents, we cannot agree that the export price methodology yields a

better measure of FMV in this case.

Comment 2: Respondents argue that, if the Department does not use

the export price of Indian pencils as FMV, then it must reject the use

of jelutong as a surrogate for lindenwood.

Wood is the single most significant input used in the production of

wooden cased pencils, as petitioner's own figures demonstrate. All

respondents use lindenwood exclusively in the production of pencils.

Respondents submit that lindenwood is a very low-quality wood with

little alternative commercial use. The basket of woods chosen by the

Department in its preliminary determination as a surrogate value for

lindenwood is a group of tropical timbers, whereas lindenwood is a

temperate hardwood. Respondents submit that, at the very least, the

basket of woods should include lindenwood. Therefore, respondents argue

that the basket category is unacceptable for use as a surrogate for

lindenwood.

Petitioner argues that the Department properly relied upon the

price of jelutong for valuing the wood input. Based on the evidence

developed by the Department, jelutong is ``quite similar'' to

lindenwood. Also, petitioner asserts that jelutong is used to produce

pencils.

Petitioner submits that the Department has previously found it

appropriate to rely on available information for the price of a similar

input material when surrogate information for the identical material is

not available. See, Final Determination of Sales at Less Than Fair

Value: Sebacic Acid from the People's Republic of China, 59 FR 28053,

28058 (May 31, 1994). Thus, according to petitioner, because the record

demonstrates that jelutong and lindenwood are similar types of wood,

jelutong is an adequate surrogate and meets the statutory requirement.

DOC Position: All parties agree that wood is the single most

significant input used in the production of wooden cased pencils. Thus,

the Department has taken great care in its determination of the

appropriate surrogate value for PRC lindenwood. In light of information

submitted by both petitioner and respondents and the Department's own

research after the preliminary determination, we determine that the

value of jelutong and/or the Indian basket category of tropical woods

used in the preliminary determination is not an adequate surrogate for

lindenwood. We find the jelutong value inappropriate because our

research indicates that, although jelutong is used in pencil

production, it is an entirely different genus of wood. Jelutong is a

tropical soft timber and lindenwood is a temperate hardwood. Simply

because both woods are used to produce pencils does not, in our

estimation, indicate that they are comparable in quality or value.

Indeed, when the price of jelutong is compared to the price of

basswood, the wood identified as most comparable to lindenwood, it

reveals that the value of jelutong is not comparable.

Moreover, we note that the Indian import value used for logs in the

preliminary determination was based on a basket category. The basket

category is made up of seven types of wood; three of these are similar

in properties and use to lindenwood, four are not as similar.

Therefore, even if we were to agree with petitioner that jelutong is an

acceptable surrogate for lindenwood, it is questionable whether this

basket price even reflects a value for jelutong.

The price used in the preliminary determination for sawn jelutong,

in contrast to the price for logs, is a world market price. Therefore,

the problem of jelutong is twofold: it is less similar to lindenwood

than is basswood and it is reported in a basket category for one of the

two forms in which PRC producers purchased lindenwood.

Comment 3: Petitioner argues that, should the Department decide to

use a U.S. price for basswood, it should not use the price provided by

respondents. Petitioner argues that the type of basswood described in

respondents' submission is not suitable for pencil production.

Specifically, the information submitted by respondents is for grade 4/4

FAS+ (FAS+ indicates highest quality) basswood, whereas pencil

production requires at least grade 12/4. In support of this, petitioner

points to a study which it submitted which shows that U.S. producers

would use 12/4 and 16/4 basswood.

DOC Position: One PRC producer who supplies pencils to a PRC

exporter purchases wooden slats, rather than logs or sawn timber, to

produce pencils. Slats are thin pieces of wood that are further

processed than logs. The U.S. prices we have for basswood which has

been processed beyond the log stage (i.e., sawn lumber) are for grade

4/4 (submitted by respondents) and for grades 12/4 and 16/4 (obtained

by the Department). None of these grades corresponds to the actual

input purchased by the PRC company in question (e.g. slats).

Lacking information on the specific input used by the PRC producer,

we have relied on petitioner's study as indicative of the grades of

sawn lumber that would be used to produce pencils. Moreover, we also

note that the prices submitted by respondents were for September 1994,

after the POI.

Petitioner's submission also indicated that U.S. producers would

use FAS+ and 1C (number 1 common) quality wood. Therefore, we averaged

the prices during the POI of 12/4 and 16/4 basswood at FAS+ and 1C

quality levels.

The other PRC producers in this investigation purchase logs of

lindenwood for their pencil production. We obtained basswood log price

listings during the POI from another publication (see, Calculation

Memorandum, October 31, 1994) and we used POI prices for log basswood

for these producers.

Comment 4: Respondents argue that the Department should review its

determination of India as the most appropriate surrogate, and in light

of new information, determine that Pakistan is the most appropriate

surrogate. Specifically, a comparison of revised 1994 World Bank

statistics in the World Development Report shows that Pakistan's

economy is more comparable to that of the PRC than India's, based on

per capita GNP and growth rates. Moreover, the Pakistani factor value

data is more timely, i.e., closer to the POI, and reflects larger,

``commercially viable'' import quantities.

Petitioner claims that India should remain the preferred surrogate

because the Department has consistently determined it to be the

appropriate surrogate for the PRC, based on the criteria set forth in

section 773(c)(4) of the Act. Furthermore, according to petitioner, the

statute does not require that the Department choose the most comparable

surrogate, but rather only that the Department base its surrogate

determination on a country: (1) whose economy is comparable to that of

the PRC, and (2) which is a significant producer of comparable

merchandise. In petitioner's view, Pakistan does not meet the second

criterion. Finally, petitioner argues that the Pakistani factor values

placed on the record by respondents do not cover all the inputs.

DOC Position: Based on World Bank data, the Department has

identified a number of countries that are at a level of economic

development comparable to the PRC. Among these comparable countries are

Pakistan, India, and Indonesia. We have also determined that Pakistan,

India, and Indonesia are significant producers of pencils (see,

Concurrence Memorandum, October 31, 1994). Therefore, all three

countries meet the statutory criteria for being selected as the

surrogate in this investigation.

In this case, India is the country where, in comparison to other

potential surrogates, we have been able to obtain values for the

overwhelming majority of factors. (Pakistani values were available for

approximately half the factors, Indonesia less than that.) Therefore,

we have chosen India as our primary surrogate and we are valuing most

of the factors there. This is consistent with our practice of

attempting to use a single country, where possible, for valuing

factors. See, e.g., Final Determination of Sales at Less Than Fair

Value: Sulfanilic Acid from the People's Republic of China, 57 FR 29705

(July 6, 1992).

We also note that we have been able to obtain Indian data that is

contemporaneous with the Pakistani data submitted by respondents.

Therefore, while we agree that ``timeliness'' of the data may be a

reason to select one potential surrogate over another, that issue does

not arise in this case. (Respondents' comment regarding ``commercially

viable'' amounts is addressed in the context of the Department's

decisions with respect to specific factors.)

Comment 5: If the Department continues to use India as the

surrogate country, respondents argue that certain Indian factors data

are skewed. Therefore the Department should reject these Indian factors

in favor of more reasonable, commercially justifiable and current data

submitted by respondents. Specifically, they contend that Pakistani

factor values for erasers, ferrules, plastic foil, animal glue and

paint represent more reasonable surrogate values than the information

used by the Department in its preliminary determination. They state

that the time period covered by the Pakistani data is broader and more

recent, the Pakistani values are based on more commercially viable

import volumes, and for erasers, ferrules and animal glue, the

Pakistani values are more aligned with the U.S. industry cost data

submitted by petitioner.

Petitioner argues that Pakistani data represent a larger volume of

merchandise simply because Pakistani tariff categories are broader than

Indian tariff categories, which are based on the HTS. Petitioner

further asserts that it is the Department's practice to use data from a

single country where possible in valuing factors of production.

Finally, petitioner claims that it is meaningless that some of the

Pakistani data are closer to the costs of the U.S. pencil industry. The

United States is not a surrogate country, therefore, U.S. prices are

irrelevant to the calculation of FMV.

DOC Position: Although we have selected India as the appropriate

surrogate country in this investigation, this does not mean that we are

required to use those Indian factor values that we find to be

aberrational. We have analyzed the Indian factor values for erasers,

ferrules, paint, animal glue, and plastic foil. We compared these

factor values with Pakistani and U.S. values based on U.S. costs taken

from the petition and found the Indian factor values for erasers,

ferrules and paint to be aberrational. (See, Calculation Memorandum,

October 31, 1994.) Therefore, we have used import statistics from

Pakistan, another country which is economically comparable to the PRC

and which is a significant producer of comparable merchandise, in order

to value these three factors as accurately as possible.

We agree with petitioner that, when possible, the Department's

preference is to use a single surrogate market to value the factors of

production. However, as stated above, when the facts of a case indicate

that this will not permit accurate valuation of the input, we are not

required to do so. Where necessary, we have used factor values from

multiple countries in a number of recent NME investigations. See, Final

Determination of Sales at Less Than Fair Value: Paper Clips from the

People's Republic of China 59 FR 51168 (October 7, 1994); Final

Determination of Sales at Less Than Fair Value: Headwear from the

People's Republic of China 54 FR 11983 (March 23, 1989); and Final

Determination of Sales at Less Than Fair Value: Shop Towels from the

People's Republic of China 55 FR 34307 (August 22, 1990).

We disagree with petitioner's claim that U.S. prices are

irrelevant. Where, as here, questions have been raised about PAPI with

respect to particular material inputs in the chosen surrogate, it is

the Department's responsibility to examine that PAPI. To make this

examination, we relied on the data on the record--Pakistani and U.S.

values. For these inputs, U.S. values served to corroborate the claim

that certain Indian PAPI for these factors was unreliable.

Comment 6: Petitioner argues that the Department should use

nitrocellulose-based lacquer classified under HTS item number

3208.90.09 to derive a value for the lacquer used by respondents in

pencil production. Petitioner submits that given the properties of the

two HTS categories of lacquer that have been considered by the

Department to value the PRC producer's lacquer, nitrocellulose-based

lacquer is the most appropriate.

DOC Position: As stated above, we have found the Indian price for

paint (lacquer) to be aberrational and have, therefore, used Pakistani

data to value paint. Pakistani import statistics are reported in the

Standard International Trade Classification (SITC) format which is a

United Nations sanctioned nomenclature. Due to the nature of the SITC

system, there are fewer product categories, which means that a greater

variety of items is included in each category. Pakistani data on

specific subcategories of lacquers are unavailable. The SITC subheading

we used was 5334202 which encompasses both the HTS subheading proposed

by petitioner and the one used by the Department in the preliminary

determination. The description of SITC subheading 5334202 is

``lacquers.''

Comment 7: Petitioner argues that the Department should rely on the

actual expense and profit percentages for the Indian pencil industry,

rather than the amounts in the petition, for the calculation of the

``all others'' rate. The actual data concerning expense and profit

percentages is the best available information and, therefore, would

provide an ``all others'' FMV that better reflects the actual surrogate

values for these items.

Petitioner further states that the Department should adjust the

``all others'' rate to reflect transportation costs reported by the

Chinese respondents. Petitioner suggests that the Department apply the

highest transportation cost, port handling and loading charge, and

containerization fee reported by respondents. Petitioners submit that

non-responding PRC exporters should not be rewarded for their non-

cooperation by receiving the benefit of a margin that does not reflect

all costs.

DOC Position: We disagree with petitioner. We do not believe it is

appropriate to adjust petition data only where the values would

increase. Although an adverse inference is drawn when exporters do not

cooperate, this does not mean that the BIA rate should be as high as

possible.

In this case we have made one adjustment to the petition data based

on surrogate values developed in the course of this investigation. This

adjustment was to revalue the wood input using basswood prices. We made

this adjustment because, based on what we have learned, the most

similar wood to lindenwood is basswood. Having rejected jelutong as a

surrogate for lindenwood, it would not be appropriate to use jelutong

even in a BIA situation.

Comment 8: Petitioner argues that the Indian import data do not

convey the full value of the materials in India because they exclude

Indian customs tariffs applicable to these materials. In valuing the

imported materials, the Department should apply the ad valorem tariff

rate imposed by the Indian government.

Respondents argue that both India and Pakistan have drawback

schemes whereby exporters are reimbursed for or exempted from the

payment of import duties collected on inputs. Thus, the added cost of

import duties is not one which would be incurred, and it should not be

added to the already inflated values represented in surrogate values

derived from Indian import statistics.

DOC Position: We disagree with petitioner. The purpose of the

factors methodology is to construct the FMV of NME-produced goods using

values in the surrogate country. Theoretically two costs could be

calculated--the cost for a domestically sold pencil and the cost of an

exported pencil--if the country permits duty free importation of inputs

for exports. We are constructing the value of the exported merchandise,

therefore, it is appropriate to use the costs the surrogate producer

would face in producing exported merchandise. Consistent with our

standard practice in this regard, we are not adding the Indian import

duties to the values reported in the published Indian import statistics

as those duties would have been rebated upon export of the finished

products. See, Final Determination of Sales at Less than Fair Value:

Certain Helical Spring Lock Washers from the People's Republic of

China, 58 FR 48833, 48841-42 (September 20, 1993).

Comment 9: Petitioner claims that respondents belatedly submitted

Pakistani import data covering certain of the raw materials used in

pencil production on September 13, 1994. Petitioner argues that this

information should be rejected by the Department because (1) the time

for submitting surrogate value information had long since passed, and

(2) under the Department's regulation, factual information submitted

after the commencement of verification is untimely and should be

rejected. See 19 CFR Secs. 353.31(a)(1)(i),(b)(3). Petitioner contends

that the information was not submitted in response to a current request

by the Department, and respondents did not request or receive an

extension of the long-expired previous requests for surrogate

information. Thus, this information does not fall into one of the

narrow exceptions for late submissions included in 19 CFR

Secs. 353.31(b)(2), (b)(3), of the Department's regulation.

DOC Position: Contrary to petitioner's contention, respondents

requested and received an extension by telephone (See, Memorandum to

File from Team dated September 28, 1994), for the submission of PAPI.

Petitioner, in fact, was also granted an extension for the submission

of PAPI once an extension was requested.

Comment 10: At verification, it was discovered that a U.S. producer

provided one manufacturer with a material input free of charge.

Petitioner argues that the Department should assign a value to this

input, regardless of whether it was provided free of charge. The

Department is required by the statute to include all inputs in the

construction of FMV for comparison to U.S. sales.

Respondents contend that the situation in the instant investigation

is analogous to a situation where a U.S. customer has a tolling

arrangement with a foreign producer. Respondents argue that in such

situations the Department has consistently compared the price charged

to the U.S. customer--exclusive of materials supplied by the customer

to the price charged for similar arrangements in the home market. See,

Final Determination of Sales at Less Than Fair Value: Brass Sheet and

Strip from France 52 FR 812 (January 9, 1987). Respondents point out

that in Final Determination of Sales of Less Than Fair Value: Brass

Sheet and Strip from Korea 51 FR 40834 (November 10, 1986), the

Department stated that ``[i]f we were to compare the prices of tolled

to non-tolled sales, extensive adjustments would have to be made. For

example, if the U.S. transaction is a non-tolled sale, we would have to

adjust home market prices for non-tolled sales so that they would

reflect in addition the cost of the customer supplied inputs. In the

opposite situation, home market prices for non-tolled sales would

somehow have to be adjusted downward.'' Respondents conclude that in

this case the Department is constructing a value and not adjusting a

price; therefore, any materials supplied by a U.S. customer should not

be included in the constructed FMV.

DOC Position: We agree with respondents. The factors of production

methodology constructs the value of the subject merchandise as

exported. We verified that a certain input in one of the pencils sold

to a certain customer was provided free of charge to the producer/

exporter. If we were comparing a constructed FMV inclusive of this free

input to a U.S. sale to a different customer who had not provided the

input, it is possible that an adjustment to FMV would have been

warranted. However, this is not the case. We compared the constructed

factor value for this pencil type with U.S. sales of this type of

pencil to only the customer that provided the input. Therefore,

contrary to petitioner's argument, we have correctly valued the NME

producers factors of production for this merchandise.

Comment 11: Petitioner argues that the verification report shows

numerous substantive material errors in SFTC's questionnaire response.

These serious deficiencies warrant the application of comprehensive BIA

for SFTC.

Respondents argue that the Department should not resort to total

BIA for SFTC as it did in the preliminary determination in this

investigation. Respondents argue that SFTC has cooperated fully

throughout this investigation and, therefore, the Department should

calculate a margin based on the data supplied by the company and

verified by the Department.

Respondents argue that where information is either missing or

unavailable, the Department should not seek unnecessarily to punish

SFTC given the company's cooperative approach in this investigation.

The following paragraphs outline the specific data problems and

respondents' suggested treatment of these problems.

Prior to verification, the company discovered that it had

misreported the pencil producers for a number of transactions.

Respondents point out that, upon the commencement of verification, the

verifier was informed of this issue. Since, as a result of this

misreported information, SFTC was unable to provide factors data for

the actual producers for certain transactions, respondents contend that

BIA, if applied, should be the highest calculated margin for any of

SFTC's pencil sales of similar merchandise, if available. Respondents

contend that in the case where similar merchandise is not available,

BIA, if applied, should be the highest calculated margin for any SFTC

sale.

In addition, at verification the Department found that SFTC

incorrectly reported two different suppliers for one transaction.

Respondents argue that this discrepancy is minor because SFTC reported

and the Department verified data from both suppliers. Therefore, the

Department should simply use the verified factors data for the correct

supplier, rather than resorting to BIA.

Respondents argue that the discovery at verification that two of

SFTC's shipments to the U.S. were shipped C&F, and not FOB, is an

oversight of little significance. The data were collected at

verification and can now be used to calculate the correct freight for

these sales. Similarly, it was discovered that two invoice numbers were

incorrect, as reported. Respondents submit that these were

typographical errors of no significance.

Finally, at verification it was discovered that SFTC inadvertently

excluded a sale of yellow pencils it thought was produced and supplied

by a producer whose pencils it was previously permitted to exclude from

the sales listing (See Memorandum from Elizabeth Graham to Barbara

Stafford, dated April 7, 1994). Respondents argue that the Department

should use the actual producer's factors data to calculate the margin

for this sale. Respondents submit that the Department has paint usage

for this supplier, that whether the paint is white or yellow is of no

consequence, and that the Department has the appropriate usage rates

for ferrules and erasers.

In its supplemental questionnaire response dated May 17, 1994, SFTC

notified the Department that portions of reported raw pencil sales had

been supplied by a factory previously thought to have supplied only

yellow pencils. Respondents submit that, as BIA, the Department should

use the highest margin calculated for other sales of raw pencils.

A small number of sample shipments not reported in SFTC's sales

response were noted in the sales verification report (See SFTC

Verification Report, at 5 and Exhibit 11). These shipments were never

sold. Therefore, in respondents' view, these invoices should be

considered properly excluded from SFTC's sales listing.

DOC Position: Although we found at verification that SFTC had a

number of misreported pieces of information, SFTC has made every effort

to cooperate in this investigation. In addition, as noted above, we do

not find that these deficiencies are sufficient to call into question

the overall reliability of SFTC's data. Therefore, contrary to

petitioner's assertion, we determine that SFTC's response does not

warrant the application of total BIA and we applied partial BIA as

described in the BIA section of this notice. However, the partial BIA

methodology suggested by respondents would result in assigning a zero

margin for sales for which we are missing the necessary factors data.

Because such BIA would not be adverse, we find it inappropriate. We

are, therefore, applying as partial BIA the petition rate.

With respect to our finding at verification that two U.S. sales

were made on C&F terms rather than FOB as reported, we simply adjusted

SFTC's freight expenses accordingly.

At both the SFTC verification and the verification of its U.S.

sales office, we noted sample shipments of raw pencils. It is the

Department's practice to exclude sample sales from its calculations, if

evidence exists that the sample sales were not made in substantial

quantities. See, e.g., Final Determination of Sales at Less Than Fair

Value: Professional Electric Cutting Tools and Professional Electric

Sanding/Grinding Tools from Japan, 58 FR 30144 (May 26, 1993), and

Final Determination of Sales at Less Than Fair Value: Sulphur Dyes,

Including Sulphur Vat Dyes from the United Kingdom 58 FR 3253, (January

8, 1993). In this case, we found no evidence that SFTC routinely offers

samples to its U.S. customer. Rather, at verification, we established

that only a small quantity of raw pencils were provided to the U.S.

customer for quality testing. Therefore, we have not treated these

sample shipments as U.S. sales.

Comment 12: Respondents argue that the Department was incorrect in

its preliminary determination of critical circumstances with respect to

imports of pencils into the U.S. from China First, SFTC, and Lansheng.

Respondents argue that critical circumstances are not present.

Respondents assert that, on their face, the Mexican dumping

findings relied on by the Department are incredible (451 percent) and

should be disregarded with respect to the requirement that a history of

dumping be found. Furthermore, the Mexican finding was based on BIA,

and the only Chinese producer identified was Guangdong. According to

the ITC record, none of the other PRC respondents in the instant

investigation was named or participated in the Mexican case or exported

significant quantities of pencils to Mexico. Accordingly, China First,

SFTC or Lansheng have no history of dumping.

Absent history of dumping, importer knowledge of dumping is

required in order for the Department to find critical circumstances.

Respondents assert that the final determination in this investigation

will reflect dumping margins much lower than those established in the

preliminary determination, thus eliminating any suggestion that

importers had the required knowledge of dumping.

Finally, respondents contend that the statutory phrase ``relatively

short period of time'' was meant to denote a period of time in the

post-filing period which was shorter than the pre-filing period used

for comparison. By comparing equivalent periods of time prior to and

after the filing of the petition, the Department has exceeded its

statutory authority. Therefore, the Department should modify its

methodology for the final determination.

Petitioner argues that respondents have not explained why Mexican

antidumping proceedings are inherently suspect. The size of the margins

found in the Mexican proceeding is not relevant; what is relevant is

that Mexico, a signatory to the General Agreement on Tariffs and Trade

(GATT) Antidumping Code, issued an affirmative finding of dumping. This

meets the statutory standard for history of dumping. It is immaterial

whether a particular foreign exporter is named in a third country

antidumping finding, or does not export to that third country.

Petitioner takes issue with respondents' claim that the

``relatively short period of time'' phrase ``was meant to denote a

period of time in the post-filing period which was shorter than the

pre-filing period used for comparison.'' Congress identified the

statutory ``relatively short period'' as that between the commencement

of an investigation and the preliminary determination. H.R. Rep. No.

96-317, 96th Cong., 1st Sess. 63 (1979). The Department's regulation

comports with the legislative purpose. See, 19 CFR 353.16(g).

Respondents have failed to demonstrate that the regulation is neither

reasonable nor a proper exercise of the Secretary of Commerce's

discretion. See Smith-Corona Group v. United States, 713 F.2d 1568

(Fed. Cir. 1983). Petitioner argues that in order to make its

determination, Commerce must compare the post-filing period with a

similar ``normal'' period before the case began.

Finally, petitioner submits that the statute directs the Department

to determine whether ``there have been massive imports of the

merchandise which is the subject of investigation over a relatively

short period.'' See section 735(a)(3) of the Act. Petitioner argues

that the Department is directed to analyze the subject merchandise as a

whole, and that there is no provision for the exception of individual

exporters when the massive imports criterion is met. Thus an

affirmative final critical circumstances determination is warranted for

all exporters, including Guangdong in this investigation.

DOC Position: We disagree with respondents' assertion that the

Mexican antidumping determination with respect to pencils from the PRC

should be disregarded by the Department. On the contrary, the Mexican

determination meets exactly the statutory requirement under section

733(e)(1) of the Act with respect to a history of dumping of the class

or kind of merchandise under investigation in the United States or

elsewhere. Moreover, with respect to respondents' assertion that the

Mexican finding identified only one respondent, we note that the order

exists as to pencils from the PRC and not as to one particular

respondent. Therefore, we do not believe that we should single out only

those producers specifically mentioned in the Mexican finding.

We disagree with respondents' contention that the Department

exceeded its statutory authority in selecting an equal period of time

before and after the filing of the petition in this investigation. The

Department acted in accordance with the requirements of the statute and

past practice by examining equal time periods to determine whether or

not imports of pencils from the PRC have been massive over a relatively

short period of time. See, e.g., Preliminary Determination of Sales at

Less Than Fair Value: Coumarin from the People's Republic of China, 59

FR 39727 (August 4, 1994) and Final Determination of Sales at Less Than

Fair Value: Industrial Belts from Italy, 54 FR 15483 (April 18, 1989).

Finally, we disagree with petitioner's assertion that the

Department is statutorily required to determine the existence of

critical circumstances on an aggregate basis. When company-specific

information is available, we conduct our analysis on a company-specific

basis. In the event that such information is not available, we use the

most specific information available in making our critical

circumstances determination. In this investigation, we have reached our

critical circumstances determination on a company-specific basis

because respondents provided the information which permitted us to do

so.

Comment 13: Petitioner argues that the Department should explicitly

provide in its final determination that Chinese pencils transshipped

through Hong Kong are within the scope of this investigation.

DOC Position: The scope of the order, if one is issued, will cover

certain cased pencils produced in the PRC. The fact that the PRC

pencils are transshipped through a third country en route to the U.S.

would not alter the fact that they are PRC-produced pencils subject to

the order. Therefore, Chinese produced pencils that are transshipped

through Hong Kong (or any other country) are within the scope of this

investigation and are subject to any antidumping duties imposed as a

result of this proceeding.

ITC Notification

In accordance with section 735(d) of the Act, we have notified the

International Trade Commission (ITC) of our determination. As our

determination is affirmative, the ITC will determine whether these

imports are materially injuring, or threatening material injury to, the

U.S. industry within 45 days. If the ITC determines that material

injury, or threat of material injury does not exist, the proceeding

will be terminated and all securities posted will be refunded or

cancelled. If the ITC determines that such injury does exist, the

Department will issue an antidumping order directing U.S. Customs

officials to assess antidumping duties on all imports of the subject

merchandise entered, or withdrawn from warehouse, for consumption on or

after the date of suspension of liquidation.

Notification to Interested Parties

This notice serves as the only reminder to parties subject to

administrative protective order (APO) of their responsibility

concerning the return or destruction of proprietary information

disclosed under APO in accordance with 19 CFR 353.34(d). Failure to

comply is a violation of the APO.

This determination is published pursuant to section 735(d) of the

Act and 19 CFR 353.20(a)(4).

Dated: October 31, 1994.

Susan G. Esserman,

Assistant Secretary for Import Administration.

[FR Doc. 94-27667 Filed 11-7-94; 8:45 am]

BILLING CODE 3510-DS-P