Antidumping Methodologies: Market Economy Inputs, Expected Non-Market Economy Wages, Duty Drawback; and Request for Comments, 61716-61724 [E6-17376]

Agencies

• DEPARTMENT OF COMMERCE
• International Trade Administration

[Federal Register Volume 71, Number 202 (Thursday, October 19, 2006)]
[Notices]
[Pages 61716-61724]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-17376]


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DEPARTMENT OF COMMERCE

International Trade Administration


Antidumping Methodologies: Market Economy Inputs, Expected Non-
Market Economy Wages, Duty Drawback; and Request for Comments

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

ACTION: Announcement of Change in Methodology, Request for Comment

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SUMMARY: This notice addresses three methodologies of the Department of 
Commerce (``the Department'') in antidumping proceedings. First, the 
Department is revising its approach concerning the use of market 
economy inputs in the calculation of normal value in antidumping 
proceedings involving non-market economy (``NME'') countries. 
Specifically, the Department is revising its approach concerning cases 
where an NME producer sources an input from both market economy 
suppliers and from within the NME. Second, the Department is revising 
its methodology for calculating expected NME wages in antidumping 
proceedings involving NME countries. Third, the Department is 
requesting comments on its approach concerning the calculation of duty 
drawback adjustments to export price in antidumping proceedings when a 
respondent producer obtains an input both from domestic and foreign 
sources. On this latter issue, the Department is seeking comments on 
the methodology that should be used when the producer receives duty 
drawback on certain exports containing the input but not on other 
exports containing the input.

FOR FURTHER INFORMATION CONTACT: Lawrence Norton with regard to market 
economy inputs, Shauna Lee-Alaia with regard to expected NME wages, and 
John Kalitka with regard to duty drawback, Office of Policy, Import 
Administration, U.S. Department of Commerce, 14\th\ Street and 
Constitution Avenue, NW, Washington DC, 20230, 202-482-1579, 202-482-
2793, or 202-482-2730, respectively.

SUPPLEMENTARY INFORMATION:

Issue One: Market Economy Inputs

Background

    In antidumping proceedings involving NME countries, the Department 
calculates normal value by valuing the NME producer's factors of 
production, to the extent possible, using prices from a market economy 
that is at a comparable level of economic development and that is also 
a significant producer of comparable merchandise. The goal of this 
surrogate factor valuation is to use the ``best available information'' 
to determine normal value. See section 773(c)(1) of the Tariff Act of 
1930, as amended (``the Act''); see also Shangdong Huraong General 
Corp. v. United States, 159 F. Supp. 2d 714, 719 (CIT 2001). When an 
NME producer purchases inputs from market economy suppliers and pays in 
a market economy currency, the Department normally uses the average 
actual price paid by the NME producer for these inputs to value the 
input in question, where possible. See 19 CFR 351.408(c)(1); see also 
Final Determination of Sales at Less Than Fair Value: Oscillating Fans 
and Ceiling Fans from the People's Republic of China, 56 FR 55271, 
55274-75 (October 25, 1991). When a portion of the input is purchased 
from a market economy supplier and the remainder from a non-market 
economy supplier, the Department will normally use the price paid for 
the input sourced from market economy suppliers to value all of the 
input,\1\ provided that the volume of the market economy input as a 
share of total purchases from all sources is ``meaningful,'' a term 
used in the Preamble to the Regulations but which is interpreted by the 
Department on a case-by-case basis. See Antidumping Duties; 
Countervailing Duties; Final Rule, 62 FR 27296, 27366 (May 19, 1997) 
(``Final Rule''); see also Shakeproof v. United States, 268 F.3d 1376, 
1382 (Fed. Cir. 2001) (``Shakeproof''). Such market economy input 
purchases must also constitute arms-length, bona fide sales. See 
Shakeproof, 268 F.3d at 1382-83.
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    \1\ See 19 CFR 351.408(c)(1).
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    Additionally, the Department disregards market economy input 
purchases when there is evidence that the prices for such inputs may be 
distorted or when the facts of a particular case otherwise demonstrate 
that market economy input purchase prices are not the best available 
information. For example, the Department disregards all input values it 
has reason to believe or suspect might be dumped or subsidized. See, 
e.g., China National Machinery Import & Export Corporation v. United 
States, 293 F. Supp. 2d 1334 (CIT 2003), as aff'd per curiam 04 Fed. 
Appx. 183 (Federal Circuit, July 9, 2004). The Department has also 
disregarded the prices of inputs that could not possibly have been used 
in the production of subject merchandise during the period of 
investigation or review. See, e.g., Final Determination of Sales at 
Less Than Fair Value: Certain Frozen and Canned Warmwater Shrimp from 
the Socialist Republic of Vietnam, 69 FR 71005, and accompanying Issues 
and Decision Memorandum, at comment 8 (December 8, 2004) (``Shrimp''). 
The Department has further rejected purchase prices from market 
economies when the input in question was produced within an NME. See 
Final Determination of Sales at Less Than Fair Value: Polyethylene 
Retail Carrier Bags from the People's Republic of China, 69 FR 34125 
and accompanying Issues and Decision Memorandum, at comment 4 (June 18, 
2004).
    The Department published on May 26, 2005, August 11, 2005, and 
March 21, 2006, three notices in the Federal Register requesting 
comment on its market economy inputs methodology in NME cases (70 FR 
30418, 70 FR 46816,

[[Page 61717]]

and 71 FR 14176, respectively). In these notices, the Department 
requested comment on various proposals concerning the Department's 
approach in cases in which NME firms purchase a portion of a given 
input from a market economy and source the remainder domestically. In 
such instances, the Department must make a case-specific determination 
as to what the best available information is for valuing the input: the 
market-economy purchase price or another surrogate value. The guidance 
given in the Department's regulations, as described above, is 
``normally'' to use the prices paid for the market economy portion of 
the input to value the entire input. While the regulations do not 
elaborate as to what circumstances are ``normal,'' the Preamble states 
that the Department will disregard market economy purchases if the 
volume involved is not ``meaningful.'' In response to the Department's 
March 21, 2006 request for comment, the Department received comments in 
April 2006 from the following six interested parties: (1) the Committee 
to Support U.S. Trade Laws (``CSUSTL''); (2) the United States Steel 
Corporation (``U.S. Steel''); (3) the American Furniture Manufacturers 
Committee (``Furniture Committee''); (4) Stewart and Stewart; (5) the 
Ministry of Commerce of the People's Republic of China (``PRC 
MOFCOM''); and (6) Trade Pacific.
    The Department requested comment on its market economy inputs 
practice for two reasons. First, the undefined nature of what 
constitutes a ``meaningful'' quantity of market economy purchases 
implies that the Department must currently make case-specific decisions 
as to whether to accept market economy purchase prices to value inputs. 
This creates unpredictability as to what values would ultimately be 
used in the dumping calculation. Parties can advocate accepting or 
disregarding the use of market economy purchase prices in individual 
cases, but do not have a concrete framework for doing so. Indeed, 
parties representing NME exporters have argued that market economy 
purchase prices nearly always constitute the ``best available 
information'' to use in the Department's dumping calculations, whereas 
parties representing domestic industry have argued that market economy 
purchases should almost never be used to value the portion of an input 
that was sourced domestically within the NME. This conflicting 
understanding as to when market economy purchases should be used to 
value an entire input is also evident in the submissions the Department 
received in response to its requests for comment on its market economy 
inputs approach. Absent an announced threshold as to what quantities 
are generally considered to be ``meaningful,'' parties would continue 
to argue this issue without the benefit of any clear guidance from the 
Department.
    The Department's second reason for requesting comment on its market 
economy inputs approach was its concern that it may, in some cases, 
have used market economy input purchase prices to value an entire input 
even when these prices may not have been the ``best available 
information.'' While the Department has not had a specific threshold 
for what constitutes a ``meaningful'' quantity, the Department is 
concerned that accepting a market economy input value when the portion 
sourced from a market economy is too low may not constitute the best 
available information, particularly when no additional scrutiny is 
applied to ensure that the market economy price is representative of 
what the total price would have been had the firm purchased solely from 
market economy suppliers. This is a potential problem because the 
Department has greater confidence that the market economy purchase 
price is reflective of total purchase values of the input (and, thus, 
that it represents the ``best available information'') when the 
proportion of the total volume of the input that is sourced from market 
economies is higher. To take an extreme example, where an NME exporter 
purchases all of a given input from a market economy supplier, the 
Department can be confident that this price reflects total purchase 
value of the input. Conversely, if an NME firm purchases a tiny 
quantity of the input from market economy suppliers and sources the 
rest domestically, the Department may have little or no confidence that 
this purchase price reflects the NME firm's overall purchases of the 
input. There might be numerous factors that could easily distort a 
single, small volume market economy purchase price, for example: sample 
sales, ``bundling'' of the purchase at a low price with other purchases 
at higher prices, limited quantities available on the market at an 
unusually low price, or brief plunges in the market price for the 
input. Of course, even a single purchase of an input might also, 
depending on the facts, be representative of what an NME exporter's 
purchases would have been had it sourced all of the input in question 
from the market economy source throughout the period of investigation 
or review. As a general rule, however, the Department typically rejects 
purchases of small quantities because ``insignificant'' quantities are 
less likely to be representative of a company's cost of sourcing the 
entire input. See Final Determination of Sales at Less Than Fair Value 
and Negative Final Determination of Critical Circumstances: Certain 
Color Television Receivers from the People's Republic of China, 69 FR 
20594 and accompanying Issues and Decision Memorandum, at comment 12 
(April 16, 2004).
    This was the intended reasoning in the Preamble to the Regulations, 
which states that the Department ``would not rely on the price paid by 
an NME producer to a market economy supplier if the quantity of the 
input purchased was insignificant. Because the amounts purchased from 
the market economy supplier must be meaningful, this requirement goes 
some way in addressing the commenter's concern that the NME producer 
may not be able to fulfill all of its needs at that price.'' See Final 
Rule, 62 at 27366. By announcing a basic threshold of what constitutes 
such a ``meaningful'' quantity, and by making it high enough to reduce 
the chance of using a distorted price, without setting it too high to 
routinely prevent the use of market economy input prices, the 
Department can give greater effect to the intent of the regulations and 
improve its market economy inputs practice, to the benefit of all 
parties. This was the reasoning behind some of the proposals the 
Department put forward in its Federal Register notices soliciting 
comment on its methodology in this area. This decision, along with a 
discussion of the relevant public comments, is set forth below.

Statement of Policy

    Drawing on the many submissions the Department has received in 
response to its requests for comment, the Department is now revising 
its methodology. While the Department may still consider amending its 
regulations to remove the regulatory requirement that the Department 
``normally'' use market economy input prices to value the entire amount 
of such inputs, the Department is now establishing clearer guidance as 
to the circumstances in which it will accept market economy purchase 
prices to value an entire input. The Department is now instituting a 
rebuttable presumption that market economy input prices are the best 
available information for valuing an entire input when the total volume 
of the input purchased

[[Page 61718]]

from all market economy sources during the period of investigation or 
review exceeds 33 percent of the total volume of the input purchased 
from all sources during the period. In these cases, unless case-
specific facts provide adequate grounds to rebut the Department's 
presumption, the Department will use the weighted-average market 
economy purchase price to value the entire input. Alternatively, when 
the volume of an NME firm's purchases from market economy suppliers as 
a percentage of its total volume of purchases during the period of 
review is below 33 percent, but where these purchases are otherwise 
valid and meet the Department's existing conditions (described in the 
Background section above), the Department will weight-average the 
weighted-average market economy purchase price with an appropriate 
surrogate value according to their respective shares of the total 
volume of purchases, unless case-specific facts provide adequate 
grounds to rebut the presumption. In determining whether market economy 
purchases meet this 33 percent threshold, the Department will compare 
the volume that the producer purchased from market economy sources 
during the period of investigation or review with the respondent's 
total purchases during the period.\2\ When a firm has made market 
economy input purchases that may have been dumped or subsidized, are 
not bona fide, or are otherwise not acceptable for use in a dumping 
calculation, the Department will exclude them from the numerator of the 
ratio to ensure a fair determination of whether valid market economy 
purchases meet the 33 percent threshold. This addresses the comment by 
Trade Pacific that the Department explain how it intends to calculate 
whether a given quantity of purchases meets the threshold, and ensures 
a fair comparison between acceptable market economy purchases and total 
purchases of the input during the period of investigation or review. 
Morever, because this 33 percent threshold constitutes a rebutable 
presumption, parties will have an opportunity to demonstrate that case-
specific facts outweigh the presumption.
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    \2\ Notwithstanding the determination the Department reached in 
Shrimp, at comment 8, the Department will examine if and when the 
inputs were used in the production process when case-specific 
conditions demand it. Unless there are case-specific reasons to 
examine other criteria, the Department will base its decision on 
whether to accept market economy input purchases to value the entire 
input on the relative share of market economy purchases during the 
period of investigation or review to total purchases during the 
period of investigation or review.
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    The practice described above is consistent with our current 
regulations directing the Department to ``normally'' use market economy 
input prices to value an entire input. While, as discussed above, the 
term ``normally'' is not defined in the regulations, it has been 
established in both the Preamble and through the Department's long-
standing case precedent that the Department may decline to accept 
market economy purchases to value an input when the volume involved is 
insignificant. See, e.g., Preliminary Results of Administrative Review: 
Automotive Glass Windshields from China, 70 FR 24373, 24380 (May 9, 
2005) (``Windshields'') (``{w{time} here the quantity of the input 
purchased from market-economy suppliers was insignificant, the 
Department will not rely on the price paid by an NME producer to a 
market-economy supplier because it cannot have confidence that a 
company could fulfill all its needs at that price.''). Windshields is 
representative of the Department's consistent standard that it will 
rely on market economy purchases to value an entire input only when the 
share of the input sourced from market economy suppliers, relative to 
the total volume purchased, is high enough that the Department has 
confidence that the market economy purchase price is reflective of the 
firm's total purchases of the input.
    Accordingly, the Department's decision to introduce a flexible 33 
percent threshold represents an extension of its previous practice. 
This standard of 33 percent is consistent with a threshold that the 
Department has defended, and the Court has upheld, as constituting a 
``meaningful'' quantity in a prior case. See Shakeproof, 268 F.3d at 
1382-83. However, the Department is now announcing what will generally 
constitute a ``meaningful'' or ``significant'' quantity, as opposed to 
making this determination on a strictly case-specific basis and without 
general guidance. Establishing a proportional, rather than absolute, 
threshold is also consistent with the logic described in Windshields, 
because the decision of whether to accept market economy input 
purchases to value an entire input rests on whether market economy 
purchases are reflective of what the total price would have been had 
the firm purchased solely from market economy suppliers.
    Some commenters (including PRC MOFCOM) have argued that the 
Department's proposed policy statements provide solutions to what are 
only theoretical problems. These parties argue that even if 
``bundling,'' price fluctuations or other factors that could distort 
market economy purchases exist, they have not been shown to be a 
problem in past cases and so there is no need for a remedy. The 
Department disagrees with this assertion. The Department cannot be 
privy to the circumstances governing every purchase of market economy 
inputs, nor can it be expected to conduct an analysis of each input 
market to see if given sales were representative of what the total 
price would have been had the firm purchased solely from market economy 
suppliers. Instead, the Department has always relied on the quantity of 
the input sourced from market economies as a proxy to gauge its 
relative confidence that the market economy purchase price is indeed 
reflective of the total volume of the input. The only difference is 
that the Department is now announcing a threshold, rather than making 
exclusively case-specific decisions.
    On this point, PRC MOFCOM and others have argued that the 
Department should not establish a ``bright line'' threshold, that any 
threshold is arbitrary, and that the Department already has sufficient 
discretion to disregard market economy purchases that are not 
legitimate or bona fide. As described above, however, the Department is 
not introducing a rigid, ``bright line'' threshold, but rather a 
threshold that is amenable to interpretation in the light of case-
specific facts and circumstances. Moreover, this threshold is not 
arbitrary, but is carefully crafted to balance two competing concerns; 
i.e. to ensure that market economy purchases are reflective of total 
purchases without contravening the regulatory requirement to 
``normally'' accept market economy purchase prices to value an entire 
input when they are available.
    In response to the Department's proposal to weight-average the 
market economy purchase price with a surrogate value when the share of 
market economy purchases falls below the Department's flexible 
threshold, PRC MOFCOM argued that there can be only one single source 
of the ``best available information,'' and if the market economy 
purchase price constitutes the best information for valuing the portion 
of the input sourced from market economy countries, it must also 
constitute the best information for valuing the entire input. The 
Department disagrees with this assertion, and considers that the ``best 
available information'' in cases in which a respondent purchases a 
given input both domestically and from market

[[Page 61719]]

economy sources may be, depending on the circumstances, a weighted-
average of a surrogate value and a market economy purchase price. The 
fact that a given price is valid for a (relatively small) portion of 
the input in question does not necessarily mean that it is 
representative of the firm's total purchases of the input. While market 
economy input purchase prices present a valid price for the market 
economy purchases that an NME firm actually made, and the Department 
will use these data, when possible, to value the portion of the input 
purchased from market economy sources, these prices may not always be 
the best available information for valuing the portion of the input 
produced within the NME. When the Department cannot be confident that 
this price is representative, however, if the price is otherwise valid 
(as in being bona fide, not subsidized, etc.), weight-averaging an 
appropriate surrogate value with the market economy purchase price 
would be the most accurate valuation of the input.
    Other parties (including U.S. Steel, Stewart and Stewart, and 
CSUSTL) argue that except in rare cases, the Department should never 
accept market economy input purchases to value the portion of the input 
sourced domestically within the NME. Such a policy would contradict the 
applicable regulation, which clearly directs the Department to 
``normally'' use market economy input purchases to value the entire 
input, even if the market economy purchases formed only a portion of an 
NME firm's total purchases of the input. The Department may consider a 
regulatory change in the future to grant it greater discretion in this 
area. Nevertheless, the Department disagrees with the assertion that 
market economy inputs never constitute the ``best available 
information'' just as it disagrees that these purchases always do so. 
Whether the best available information to value the NME-produced 
portion of the input is the price of the firm's market economy input 
purchases or another surrogate value is a decision that should guided 
by the relative shares of the two types of purchases, as well as by 
case-specific facts. U.S. Steel argues that ``establishing a bright 
line threshold for market economy input purchases (i.e., more than 33 
percent) would encourage respondents to manipulate the results so as to 
favorably affect the calculation of their dumping margins.'' The 
Department does not agree that a change in respondents' behavior as a 
result of this policy, by itself, amounts to ``manipulation.'' 
Moreover, it is the Department's view that requiring parties, in most 
cases, to meet a 33 percent threshold actually reduces the opportunity 
for manipulation.
    The Department's flexible percentage threshold of 33 percent for 
accepting market economy purchase prices to value an entire input will 
improve the predictability and accuracy of the Department's analysis, 
while continuing to meet the Department's regulatory requirement to 
``normally'' use market economy purchases to value inputs when they are 
available. Predictability will be improved because parties will have a 
clearer idea of when the Department will accept market economy purchase 
prices to value an entire input. The Department will be able to 
calculate more accurate dumping margins, because the threshold sets a 
reasonable ratio of the market economy-sourced portion to that produced 
in the NME so that the Department can be more confident in the 
representativeness of the market economy purchase prices. However, this 
threshold is also not set so high that it would contradict the 
regulatory guidance on this issue. Finally, the fact that this 
threshold represents a rebuttable presumption means that it will be 
flexible, allowing the Department to take into account any case-
specific facts that may arise.
    The approach detailed above will take effect for all segments of 
NME proceedings that are initiated after publication of this notice in 
the Federal Register.

Issue Two: Expected NME Wages

Background

    With regard to its calculation of expected NME wages, the 
Department stated in its November 17, 2004 final determination in the 
antidumping duty investigation of sales at less than fair value 
regarding Wooden Bedroom Furniture from the People's Republic of China, 
that it would ``invite comments from the general public on this matter 
in a proceeding separate from the (Furniture) investigation.'' Final 
Determination of Sales at Less Than Fair Value: Wooden Bedroom 
Furniture From the People's Republic of China, 69 FR 67313 and 
accompanying Issues and Decision Memorandum, at comment 23 (November 
17, 2004). On June 30, 2005, the Department published a detailed 
description of its methodology for the calculation of expected NME 
wages and a request for comment. See Expected Non-Market Economy Wages: 
Request for Comment on Calculation Methodology, 70 FR 37761 (June 30, 
2005) (``Wage Rate FR''). The Department received comments on August 1, 
2005, from the following six interested parties: (1) CSUSTL; (2) 
Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt (``Grunfeld''); (3) 
Lacquer Craft Manufacturing Company, Ltd.; (4) Dorbest Limited; (5) PRC 
MOFCOM; and (6) the Ministry of Trade of the Socialist Republic of 
Vietnam (``VN Ministry of Trade'').
    The Department's expected NME wages are currently calculated each 
year in two steps. First, the relationship between hourly wage rates 
(obtained from the International Labor Organization's (``ILO'') 
Yearbook of Labour Statistics, relying on data that has been reported 
within the six-year period described below) and per-capita gross 
national income (``GNI'') (obtained from the World Bank) from market-
economy countries (the ``basket of countries'') is estimated using an 
ordinary least squares (``OLS'') regression analysis. Second, the GNI 
of each of the countries designated by the Department as an NME is 
applied to the regression, which yields an expected hourly wage rate 
for each NME. For further information, see Wage Rate FR.
    PRC MOFCOM and the other interested parties (excluding CSUSTL) 
(``PRC MOFCOM et al.'') argued that when the Department is valuing any 
factor of production, including labor, the Department is obliged to use 
data from economically comparable countries and that the inclusion of 
countries not considered economically comparable is in contravention of 
our statute, citing 19 U.S.C. Sec.  1677b(c)(4) and Antidumping Duties; 
Countervailing Duties, Part II, 62 FR 27296, 27367 (May 19, 1997) 
(``Final Rule''). Finally, PRC MOFCOM et al. asserted that the 
Department's original intention was to limit the regression analysis to 
economically comparable countries, citing Antidumping Duties; 
Countervailing Duties Part II, 61 FR 7308 (February 27, 1996) 
(``Proposed Rule'').
    Accordingly, these parties proposed that the Department revert to 
its former practice of valuing direct labor using a surrogate wage rate 
from a surrogate country selected in each individual proceeding, or an 
average of the wage rates for the countries designated by the 
Department as economically comparable to the NME at the outset of each 
proceeding. Alternatively, some parties proposed that the Department 
should estimate the relationship between wage rates and per-capita GNI 
only for countries that are economically comparable to the NME country 
in question, defined by either the Import Administration's Office of 
Policy or by the World Bank's national income

[[Page 61720]]

classifications. These parties asserted that the inclusion of non-
comparable countries is both distortive and contrary to the 
Department's statutory directive to use ``economically comparable'' 
surrogate values.
    Alternatively, acknowledging that the Department has a stated 
preference for more data when valuing labor, these parties proposed 
that the Department expand its basket of countries to include all 
countries for which the required data are available.
    Finally, some parties argued that the Department should use a 
generalized least squares (``GLS'') methodology for its regression 
analysis in order to account for heteroscedasticity in the data set.
    CSUSTL argued that the Department is required to value all factors 
of production for a given respondent, and must therefore capture all 
labor costs experienced by the respondent. Accordingly, CSUSTL proposed 
that the Department change its practice to rely on ``labor cost'' 
figures from Chapter 6 of the ILO's Yearbook of Labour Statistics or, 
failing that, that the Department should only use data from Chapter 5 
that captures ``employee earnings'' rather than both earnings and 
wages. CSUSTL also noted that in order to capture all factors of 
production and other costs, the Department's calculation of surrogate 
financial ratios must be adjusted according to the labor cost elements 
that are included in the Department's expected NME wage rates.

Statement of Policy

    Section 733(c) of the Act provides that the Department will value 
the factors of production in an NME using the best available 
information regarding the value of such factors in a market economy 
country or countries considered to be appropriate by the administering 
authority. The statute only requires that when valuing the factors of 
production, the Department utilize, to the extent possible, the prices 
or costs of factors of production in one or more market economy 
countries that are at a level of comparable economic development. See 
Section 733(c)(4) of the Act.
    While surrogate values for other factors of production are selected 
from a single surrogate country, the Department determined in its Final 
Rule that it would be more accurate to base estimated labor values on 
data from many countries, stating that ``more data is better than less 
data, and that averaging of multiple data points (or regression 
analysis) should lead to more accurate results in valuing any factor of 
production. However, it is only for labor that we have a relatively 
consistent and complete database covering many countries.'' See Final 
Rule at 62 FR 27367.

Accordingly, section 351.408(c)(3) of the Department's regulations 
provides that:
For labor, the Secretary will use regression-based rates reflective 
of the observed relationship between wages and national income in 
market economy countries. The Secretary will calculate the wage rate 
to be applied in nonmarket economy proceedings each year. The 
calculation will be based on current data, and will be made 
available to the public.

19 CFR 351.408 (c)(3).
    The Department's regulations concerning the valuation of labor were 
promulgated as part of a public notice and comment process. In the 
Proposed Rule the Department explained the benefits of a wage rate 
derived from a regression analysis, which include fairness and 
predictability. The Proposed Rule states:

    Moreover, use of this average wage rate will contribute to both 
the fairness and the predictability of NME proceedings. By avoiding 
the variability in results depending on which economically 
comparable country happens to be selected as the surrogate, the 
results are much fairer to all parties. To enhance predictability, 
the average wage to be applied in any NME proceeding will be 
calculated by the Department each year, based on the most recently 
available data, and will be available to any interested party.

See Proposed Rule, at 7345.
    PRC MOFCOM et. al.'s comment that the Department should abandon its 
regression-based calculation of expected NME wage rates in favor of the 
use of a single surrogate value for wage rates would contravene the 
Department's regulations, which direct the Department to use 
regression-based labor rates. In addition, as the Department noted in 
the Proposed Rule, while there is a strong positive correlation between 
wage rates and GNI, there is also variation in the wage rates of 
comparable market economies. For example, the Department's November 
2005 regression illustrates that the observed hourly wage rates for 
market economy countries with national incomes below US$1,000 ranged 
from US$0.23 to US$0.94. See https://ia.ita.doc.gov/wages/03wages/
110805-2003-Tables/03wages-110805.html. Therefore, if the Department 
adopted this suggestion in a proceeding involving an NME country with a 
GNI under US$1,000, values for labor might range from US$0.23 to 
US$0.94, depending on which economically comparable country is selected 
as the surrogate. See Proposed Rule at 7345. The Department is able to 
avoid this variability through the regression-based methodology for 
estimating wage rates due to the availability of reliable wage rate 
data and the consistent relationship over time between wage rates and 
GNI. The Department relies upon what is, in essence, an average wage 
rate, indexed to each NME's level of economic development via its GNI. 
Under the Department's regression methodology, the value for labor will 
be the same in every proceeding involving a given NME. This enhances 
the fairness and predictability of the Department's calculations.
    Similarly, restricting the basket of countries to include only 
countries that are economically comparable to each NME is not feasible 
and would undermine the consistency and predictability of the 
Department's regression analysis. A basket of ``economically 
comparable'' countries could be extremely small. For example, there 
were five countries with GNI less than US$1,000 in the Department's 
2005 calculation. A regression based on an extremely small basket of 
countries would be highly dependent on each and every data point. The 
inclusion or exclusion of any one country could have an extreme effect 
on the regression results. As described below, the Department screens 
the available data every year to ensure that they meet a number of 
important data suitability criteria. Therefore, the number and 
composition of the countries in the basket may vary unavoidably from 
year to year. A larger basket minimizes this potential for dramatic 
year-to-year variability.
    Relative basket size would not be such a critical factor if there 
were a perfect correlation between GNI and wages. If this were the 
case, a precise regression line could be derived from suitable data 
from only two countries. However, while there is a strong world-wide 
relationship between wages and GNI (the r-square for the Department's 
2005 calculation was .92, indicating an extremely strong relationship 
between GNI and wages), there is nevertheless variability in the data. 
For example, in the Department's 2005 calculation, observed wages did 
not increase in lockstep with increases in GNI in the five countries 
with GNI less than US$1,000: Pakistan, with a GNI of US$520, had 
reported a wage of US$0.38 per hour while Sri Lanka, with a GNI of 
US$930, had reported a wage of US$0.34 per hour. As stated above, a 
larger basket minimizes the effects of any single data point and, 
thereby, better captures the global relationship between wages and GNI. 
More data is,

[[Page 61721]]

therefore, better than less data for the purposes of the Department's 
regression analysis, provided it is suitable and reliable data.
    For this reason, consistent with the regulation and the statute, 
the Department's methodology relies on a significantly larger basket of 
countries. This maximizes the accuracy of the regression results, 
minimizes the effects of the potential year-to-year variability in the 
basket, and provides predictability and fairness. Importantly, the 
Department notes that economic comparability is established in the 
regression calculation through the GNI of the NME in question, which 
ensures that the result represents a wage rate for a country 
economically comparable to the NME.
    With regard to the use of an alternative regression methodology, 
the Department notes that in its Proposed Rule, the Department 
explicitly stated that it would utilize an OLS regression analysis. See 
Proposed Rule, at 7345. OLS regression analysis is a commonly used 
analytical tool that is a basic component of any statistical analysis 
package. Like all statistical tools, the OLS analysis has certain 
limitations and cannot account for all characteristics of any given 
dataset, including heteroscedasticity. One of the assumptions of the 
OLS regression analysis is that the variance of the error terms is 
constant across observations. If the variance of the error terms is not 
constant, the error terms are considered heteroscedastic.
    The data set upon which the Department bases its regression 
analysis changes on an annual basis. The Department does not consider 
it prudent, especially in light of its stated intention to use an OLS 
analysis, to decide on a year-by-year basis whether or not the level of 
heteroscedasticity in a given year's data would weigh in favor of using 
a GLS regression analysis. Instead, the OLS regression analysis allows 
the Department to rely on a simple, easily-duplicated methodology that 
enhances the fairness, predictability and transparency of the 
Department's antidumping duty calculations, while also ensuring their 
accuracy.
    With regard to the CSUSTL comment that the Department should rely 
on ``labor cost'' figures from Chapter 6 of the ILO's Yearbook of 
Labour Statistics, the Department notes that the ILO defines data under 
``Chapter 5b: Wages in Manufacturing'' as wages and bonuses, i.e., pre-
tax monetary remuneration received by the employee. This is the data 
set that the Department relies upon in its calculations of expected NME 
wage rates.
    The Department also notes that the ILO defines ``earnings'' under 
Chapter 5 of its Yearbook of Labour Statistics as being inclusive of 
``wages,'' and as including both bonuses and gratuities. The Department 
agrees with CSUSTL that, in order to ensure that its calculation of 
expected NME wage rates accurately reflects the remuneration received 
by workers, it should rely on ``earnings,'' not ``wages.''
    Chapter 6 data, on the other hand, includes all costs to the 
producer related to labor including wages, benefits, housing, training, 
etc. As described below, the Department is already capturing as much of 
such labor costs as possible in its financial ratio calculations. The 
Department notes further that significantly fewer countries report 
Chapter 6 labor data than report Chapter 5b labor data. As of August 
2006, 15 market economy countries had reported 2004 Chapter 6 data, 
while 65 market economy countries had reported 2004 Chapter 5b data. 
Chapter 6 therefore results in a significantly smaller basket of 
countries for which reliable data is available and may not accurately 
capture the global average of costs associated with labor.
    The Department agrees with CSUSTL, however, that in order to ensure 
that labor costs not included in the ILO defined ``earnings'' are 
accounted for in its calculation of normal value, it is best to adjust, 
where possible, the surrogate financial ratios employed by the 
Department to value overhead expenses, selling, general and 
administrative (``SG&A'') expenses, and profit. Accordingly, it is the 
Department's practice to categorize all individually identifiable labor 
costs not included in the ILO's definition of ``earnings'' under 
Chapter 5 of the Yearbook of Labour Statistics as overhead expenses. 
See Folding Metal Tables and Chairs from the People's Republic of 
China: Final Results of Antidumping Duty Administrative Review, 71 FR 
2905 (January 18, 2006) and accompanying Issues and Decision 
Memorandum, at comment 1. Such adjustments are fact-specific in nature 
and subject to available information on the record. Specifically, where 
warranted, individually identifiable labor costs in the surrogate 
financial statements which are not included in ``earnings'' are 
categorized as overhead or SG&A expenses for purposes of the 
Department's calculation of surrogate financial ratios.
    Finally, the Department agrees that the basket of countries upon 
which the regression is based should be expanded to include all 
countries for which data are available in order to ensure accuracy and 
fairness. All such data must meet the Department's suitability 
requirements described below, which include contemporaneity and that 
the data cover both men and women and all reporting industries in the 
country.
    Under its practice heretofore, the Department includes data from 
Chapter 5 of the ILO Yearbook of Labour Statistics that has been 
reported within five years of the Base Year, thereby considering a 
total of six years of data. (As described below in Attachment 1, the 
``Base Year'' is the year upon which the regression data are based and 
is two years prior to the year in which the Department conducts its 
regression analysis.) In the course of reviewing its methodology, the 
Department has concluded that the inflation of data up to five years 
potentially reduces the accuracy of the calculation. Wage data that are 
potentially six years old may not represent the wage dynamics in labor 
markets today. The Department believes that, given the significant 
availability of more contemporaneous data, inflating old data is no 
longer necessary in order to achieve an acceptably large basket of 
countries. For example, over 50 countries reported suitable data within 
one year of 2003. The Department expects that the number of countries 
that meet the Department's suitability requirements will increase over 
time, as a greater number of countries report wage data to ILO in a 
reliable manner.
    Therefore, in its revised methodology, the Department will only 
rely on ILO wage data that have been reported within one year prior to 
the Base Year, thereby considering a total of two years of data.

Revision of Methodology

    Pursuant to the comments received and the Department's analysis 
thereof, effective for the 2006 calculation of expected NME wage rates, 
the Department will make the following revisions to its methodology:
    1. The Department will only use earnings data reported in Chapter 
5b of the ILO statistics.
    2. The basket of countries upon which the wage regression is based 
will include data from all market economy countries that meet the 
criteria described below and that have been reported within 1 year 
prior to the Base Year.
    3. Each year, the Department's annual calculation of expected NME 
wage rates will be subject to public notice prior to the adoption of 
the resulting expected NME wage rates for use in antidumping 
proceedings. Comment will be requested only

[[Page 61722]]

with regard to potential clerical errors in the Department's 
calculation in light of its stated revised methodology.
    Accordingly, the Department intends to publish its 2006 expected 
NME wage rates on its website in the autumn of 2006, together with a 
notice in the Federal Register requesting comment with regard to 
potential clerical errors in light of the revised methodology described 
below. The Department intends to finalize its calculations within one 
month thereafter.
    The Department's methodology is described in full in below.

The Expected NME Wage Rate Methodology

    The Department's regulations generally describe the methodology by 
which the Department calculates expected NME wages:

    For labor, the Secretary will use regression-based wage rates 
reflective of the observed relationship between wages and national 
income in market economy countries. The Secretary will calculate the 
wage rate to be applied in non-market economy proceedings each year. 
The calculation will be based on current data, and will be made 
available to the public.

    19 CFR 351.408 (c)(3).
    In accordance with Section 351.408(c)(3), the Department annually 
calculates expected NME wages in two steps. First, the Department uses 
an ordinary least squares regression analysis to estimate a linear 
relationship between per-capita GNI and hourly wages in market economy 
(``ME'') countries. Second, the Department uses the results of the 
regression and NME GNI data to estimate hourly wage rates for NME 
countries.
    There is usually a two-year interval between the current year and 
the most recent reporting year of the data required for this 
methodology due to the practices of the respective data sources. The 
Department bases its regression analysis on this most recent reporting 
year, which the Department refers to as the ``Base Year.'' For example, 
the Department relied upon data from 2001 to calculate expected NME 
wages in 2003, i.e., the ``Base Year'' for the 2003 calculation was 
2001. In practice, the ``Base Year,'' i.e., the year upon which the 
regression data are based, is two years prior to the year in which the 
Department conducts its regression analysis.

1. Regression Analysis

    The Department's regression analysis, which describes generally the 
relationship between wages and GNI, relies upon four distinct data 
series: (A) country-specific wage rate (earnings) data from Chapter 5B 
of the International Labor Organization's (``ILO'') Yearbook of Labour 
Statistics; (B) country-specific consumer price index (``CPI'') data 
from the International Financial Statistics of the International 
Monetary Fund (``IMF''); (C) exchange rate data from the IMF's 
International Financial Statistics; and (D) country-specific GNI data 
from the World Development Indicators of the World Bank (``WB'').
    The wage rate data described above are converted to hourly wage 
rates and adjusted using CPI data to be representative of the current 
Base Year. The data are then converted to U.S. dollars using the 
appropriate exchange rate data. A regression analysis is ultimately run 
on these adjusted wage rate data and GNI. The following sections 
describe each data series and how it is used.

(A) Wage Data

    For every country for which data is available and suitable (as 
described below), the Department chooses a single wage rate that 
represents a broad measure of wages for that country. The Department 
will choose data that is either contemporaneous with the Base Year or 
one year prior. Thus, the Department limits its selection of data to a 
two year period.
    The ILO Chapter 5B database categorizes data under a number of 
parameters.\3\ The Department prioritizes these parameters in order to 
arrive at a single wage rate for each country representing the broadest 
possible measure of wages. As such, there are three criteria that all 
data must meet in order to be considered suitable for the Department's 
regression analysis.
---------------------------------------------------------------------------

    \3\ For example, ``Type of Data,'' i.e., whether the data 
reported is ``earnings'' or ``wages,''' ``Sex,'' i.e., male/female 
coverage; ``Sub-Classification,'' i.e. , coverage of different types 
of industry; ``Worker Coverage,'' i.e. , coverage of different types 
of workers, such as wage earners or salaried employees; ``Type of 
Data,'' i.e., the unit of time for which the wage is reported, such 
as per hour or per month; and, ``Source ID,'' i.e., a code for the 
source of the data; ``Source,'' i.e., the original survey source of 
the data and ``Classification,'' i.e., the industrial 
classification.
---------------------------------------------------------------------------

    First, under the category ``Type of Data,'' the Department will 
only use data that is reported in ``earnings.''
    Second, under the category ``Sex,'' the Department will only use 
data that cover both men and women.\4\
---------------------------------------------------------------------------

    \4\ The Department does not consider values of ``Indices, Men 
and Women'' for this parameter.
---------------------------------------------------------------------------

    Third, under the category ``Sub-Classification,'' the Department 
will only use data that represent all reported industries. This is 
indicated in the database by a value of ``Total'' for the ``Sub-
Classification'' parameter.
    If there is more than one record in the ILO database that meet 
these three requirements, the Department will choose the data point 
from the Base Year over data from the prior year. At times, there is 
more than one data record in the ILO database that is both (1) reported 
in the same, most contemporaneous year and (2) meet the three required 
criteria above. In such cases, the Department chooses a single data 
point by prioritizing the following three parameters, described in 
greater detail below: (1) ``Worker Coverage,'' i.e., coverage of 
different types of workers; (2) ``Type of Data,'' i.e., the unit of 
time for which the wage is reported; and, (3) ``Source ID,'' i.e., a 
code for the source of the data.
    For example, for the parameter ``Worker Coverage,'' the Department 
considers ``wage earners'' to be the best measurement for calculating 
expected NME wages and prioritizes such data over ``employees,'' 
``salaried employees'' and ``total employment,'' in that order.
    When the values for all parameters listed above are equal, the 
Department prioritizes data reported on an hourly basis over that 
reported on a daily, weekly and monthly basis, in that order, for the 
parameter ``Type of Data.'' Through this choice, the Department 
minimizes potential error due to converting daily, weekly or monthly 
wages to hourly wages.
    When the values for all parameters listed above are equal, the 
Department prioritizes data classified under the International Standard 
Industrial Classification (ISIC) Revision 3 (ISIC Rev.3-D) over ISIC 
Revision 2 (ISIC Rev. 2-3). ISIC Rev. 3-D was revised in 1989 and is a 
more recent classification standard than the 1968 ISIC Rev. 2-3. See 
https://unstats.un.org/unsd/cr/family2.asp?Cl=2 and https://
laborsta.ilo.org/applv8/data/isic2e.html.
    Finally, when the values for all parameters listed above are equal, 
the Department prioritizes data with a ``Source ID'' value of ``no 
value'' over ``1,'' ``2'' and ``3,'' in that order.
    The ILO data that are not reported on an hourly basis are converted 
to an hourly basis based on the premise that there are 8 working hours 
per day, 5.5 working days a week and 24 working days per month.

(B) CPI Data

    Once hourly figures have been calculated based on the wage rate 
data discussed above, the wages are adjusted to the Base Year on the 
basis of the

[[Page 61723]]

Consumer Price Index for each country, as reported by the IMF's 
International Financial Statistics. This adjustment is made for any 
wage rate data not reported for the Base Year.

(C) Exchange Rate Data

    These inflation-adjusted wage data, which are denominated in each 
country's national currency, are then converted to U.S. dollars using 
Base Year period-average exchange rates reported by the IMF's 
International Financial Statistics.
    Thus, using (A) wage data, (B) CPI data and (C) exchange rate data, 
discussed above, the Department arrives at hourly wages, denominated in 
U.S. dollars and adjusted for inflation for each country for which all 
the above data are available.
    Finally, once the data have been converted to U.S. dollars per hour 
and adjusted for inflation, it is the Department's practice to 
eliminate values that could not possibly be reflective of actual wage 
levels or values that vary in either direction in the extreme from year 
to year (and which probably reflect errors in the original source 
data). For example, if a country is found to have average wage levels 
of US$0.01 per hour, the Department would eliminate that value as 
erroneous.

(D) GNI Data

    The Department uses Base Year GNI data for each of the countries in 
the Department's analysis, as reported by the WB. GNI data are 
denominated in U.S. dollars current for the Base Year. The WB defines 
GNI per capita as equivalent to gross national product (``GNP'') per 
capita, which is ``the dollar value of a country's final output of 
goods and services in a year divided by its population.''
    The Department conducts its linear, ordinary least squares 
regression analysis using the Base Year wages per hour in U.S. dollars 
discussed above and Base Year GNI per capita in U.S. dollars to arrive 
at the following equation: Wage[lsqb]i[rsqb] = Y-intercept + X-
coefficient [ast] GNI. The X-coefficient describes the slope of the 
line estimated by the regression analysis, while the Y-intercept is the 
point on the Y-axis where the regression line intercepts the Y-axis. 
The results of this regression analysis describe generally the 
relationship between hourly wages and GNI.

2. Application of Regression Results to NME GNI Data

    The Department applies the NME Base Year GNI to the equation 
presented above to arrive at an estimated wage rate for the NME. This 
is done for each NME.

Issue Three: Duty Drawback

Background

    With respect to the duty drawback adjustment, the Department is 
directed by section 772(c)(1)(B) of the Act, which states that 
``{t{time} he price used to establish export price and constructed 
export price shall be -- (1) increased by [hellip] (B) the amount of 
any import duties imposed by the country of exportation which have been 
rebated, or which have not been collected, by reason of the exportation 
of the subject merchandise to the United States.''
    Based upon this statutory language, the Department applies a two-
prong test to determine entitlement to a duty drawback adjustment. That 
is, the party claiming such adjustment must establish that: (1) the 
import duty paid and the rebate payment are directly linked to, and 
dependent upon, one another (or the exemption from import duties is 
linked to exportation); and (2) there were sufficient imports of the 
imported raw material to account for the drawback received upon the 
exports of the manufactured product. See, e.g., Notice of Final Results 
of the Eleventh Administrative Review of the Antidumping Duty Order on 
Certain Corrosion-Resistant Carbon Steel Flat Products from the 
Republic of Korea, 71 FR 7513 (February 13, 2006) and accompanying 
Issues and Decision Memorandum, at comment 2 (``CORE from Korea''). 
Moreover, the courts have sustained the Department's traditional two-
prong test. See, e.g., Wheatland Tube Company v. United States, 414 F. 
Supp. 2d 1271, 1287 (CIT 2006); Allied Tube & Conduit Corp. v. United 
States, 374 F. Supp. 2d 1257, 1261 (CIT 2005); Allied Tube & Conduit 
Corp. v. United States, 132 F. Supp. 2d 1087, 1093 (CIT 2001); Far East 
Machinery Co., Ltd. v. United States, 699 F. Supp. 309, 311 (CIT 1988); 
Carlisle Tire & Rubber Co. v. United States, 657 F. Supp. 1287, 1289-90 
(CIT 1987).
    The Department previously requested and received comments regarding 
its practice with respect to duty drawback adjustments to export price 
in antidumping proceedings. See Duty Drawback Practice in Antidumping 
Proceedings, 70 FR 37764 (June 30, 2005) and Duty Drawback Practice in 
Antidumping Proceedings, 70 FR 44563 (August 3, 2005). Among other 
things, the Department requested comments on the appropriate 
methodology to apply when duty drawback is claimed for some, but not 
all, exports incorporating the input in question. In past cases, 
certain parties have argued that the Department should allocate the 
total amount of relevant drawback received to total exports, regardless 
of destination, to ensure that the adjustment claimed on U.S. sales is 
not overstated. See, e.g., CORE from Korea, Issues and Decision 
Memorandum at comment 2.
    Some parties argued, for example, for application of a 
``reasonableness'' standard in this regard. They claim that, while an 
adjustment in the full amount of the duty drawback received should be 
made when the foreign producer can directly trace particular imported 
duty-paid inputs through the subsequent production process and into 
particular finished goods that are exported to the United States, this 
is an unlikely situation. Because it is more likely that exported goods 
may or may not actually have incorporated the imported input, a 
reasonable approach would involve allocating the drawback received to 
all exports that may have incorporated the duty-paid input in question. 
By doing so, these commenters claim, the Department would reasonably 
avoid excessive claims for drawback adjustments in antidumping 
calculations. These commenters further suggest that parties claiming 
favorable adjustments such as claims based upon duty drawback carry the 
burden of proof in this regard. See Statement of Administrative Action, 
H. Doc. 103-316, 103d Cong. 2d Sess., 829 (1994) (``{A{time} s with all 
adjustments which benefit a responding firm, the respondent must 
demonstrate the appropriateness of such adjustment.'').
    The Department agrees with these commenters and proposes to modify 
its approach by limiting the duty drawback adjustment in certain 
circumstances. The Department generally agrees that it should allocate 
the total amount of duty drawback received across all exports that may 
have incorporated the duty-paid input in question, regardless of 
destination, to ensure that the adjustment claimed on U.S. sales is not 
overstated. Absent such a limitation, the Department is concerned that 
its current practice of permitting an adjustment to export price and 
constructed export price for all duty drawback received, whether or not 
it is related to U.S. sales, is an inappropriate application of its 
statutory authority to account for the effects of foreign drawback 
programs on price differentials between normal value and U.S. price. 
Furthermore, the Department is concerned that the adjustment could be 
manipulated by certain parties for purposes of obtaining a more 
favorable dumping margin. However, the Department will continue

[[Page 61724]]

to permit a full adjustment for duty drawback received should the 
foreign producer claiming such adjustment demonstrate that it can 
directly trace the particular imported duty-paid inputs through the 
subsequent production process and into particular finished goods that 
are exported to the United States. The Department welcomes comment on 
this proposed methodology.
DEADLINE FOR SUBMISSION OF COMMENTS (on duty drawback): November 17, 
2006.

Comments (Duty Drawback Issue Only)

    Persons wishing to comment should file a signed original and six 
copies of each set of comments by the date specified above. The 
Department will consider all comments received before the close of the 
comment period. Comments received after the end of the comment period 
will be considered, if possible, but their consideration cannot be 
assured. The Department will not accept comments accompanied by a 
request that a part or all of the material be treated confidentially 
because of its business proprietary nature or for any other reason. The 
Department will return such comments and materials to the persons 
submitting the comments and will not consider them in development of 
any changes to its methodology. All comments responding to this notice 
will be a matter of public record and will be available for public 
inspection and copying at Import Administration's Central Records Unit, 
Room B-099, between the hours of 8:30 a.m. and 5 p.m. on business days. 
The Department requires that comments be submitted in written form. The 
Department recommends submission of comments in electronic form to 
accompany the required paper copies. Comments filed in electronic form 
should be submitted either by e-mail to the webmaster below, or on CD-
ROM, as comments submitted on diskettes are likely to be damaged by 
postal radiation treatment.
    Comments received in electronic form will be made available to the 
public in Portable Document Format (PDF) on the Internet at the Import 
Administration Web site at the following address: https://
ia.ita.doc.gov/.
    Any questions concerning file formatting, document conversion, 
access on the Internet, or other electronic filing issues should be 
addressed to Andrew Lee Beller, Import Administration Webmaster, at 
(202) 482-0866, e-mail address: webmaster-support@ita.doc.gov.

    Dated: October 11, 2006.
David M. Spooner,
Assistant Secretary for Import Administration.
[FR Doc. E6-17376 Filed 10-18-06; 8:45 am]
BILLING CODE 3510-DS-S