65 FR 45753, July 25, 2000 A-570-501 ARP: 02/01/98-01/31/99 Public Document G3O7: SCE MEMORANDUM TO: Troy H. Cribb Assistant Secretary for Import Administration FROM: Joseph A. Spetrini Deputy Assistant Secretary for Import Administration SUBJECT: Issues and Decision Memo for the Administrative Review of Natural Bristle Paint Brushes and Brush Heads from the People's Republic of China; February 1, 1998 through January 31, 1999 Summary We have analyzed the comments and rebuttals of interested parties in the 1998-1999 administrative review of the antidumping duty order on natural bristle paint brushes and brush heads (paintbrushes) from the People's Republic of China (PRC). As a result of our analysis, we have made changes, including corrections of certain programming and clerical errors, in the margin calculations. We recommend that you approve the positions we have developed in the Discussion of the Issues section of the memorandum. Below is the complete list of the issues in this administrative review for which we received comments and rebuttals by parties: 1. Factor Valuation and Usage Rates A. Surrogate Values of Material Inputs B. Material Input Weights C. Wooden Core D. Inflation of Surrogate Values 2. Non-Bona Fide Sale 3. Scope 4. Clerical Errors Background On March 15, 2000, the Department of Commerce (the Department) published the preliminary results of administrative review of the antidumping duty order on natural bristle paintbrushes and brush heads from the PRC. Scope Imports covered by this review are shipments of natural bristle paint brushes and brush heads from the PRC. Excluded from the review are paint brushes and brush heads with a blend of 40% natural bristles and 60% synthetic filaments. The merchandise under review is currently classifiable under item 9603.40.40.40 of the Harmonized Tariff Schedule of the United States (HTSUS). Although the HTSUS subheading is provided for convenience and customs purposes, the Department's written description of the merchandise is dispositive. Period of Review The period of review is February 1, 1998 through January 31, 1999. Discussion of the Issues 1. Factor Valuation and Usage Rates A. Surrogate Value of Material Inputs Comment 1: Disregarding NME Exports in the Indonesian Import Statistics The Paint Applicator Division of the American Brush Manufacturers Association (petitioner) argues that, while it is the Department's normal practice to exclude NME data from the valuation of factors of production, an exception must be made in the valuation of hogs' bristle because China is the primary producer of hogs' bristle worldwide. Citing an affidavit of a purchasing manager at a brush company in the United States, petitioner contends that all major U.S., European and Indonesian paintbrush producers import hogs' bristle from China. Petitioner also cites Indonesian and U.S. trade statistics, stating that 94 percent of the volume and 99 percent of the value of Indonesian imports of hogs' bristle in 1998 were from the PRC. Petitioner also notes that U.S. import statistics show that 93 percent by volume and 92 percent by value of U.S. imports of hogs' bristle in 1998 were also from the PRC. Petitioner further contends that the prices for hogs' bristle in China can be considered world market prices, since China is the primary producer of hogs' bristle. Petitioner argues that, since the value of Indonesian imports of hogs' bristle from the PRC reflect the world market price for this item, the Chinese data must be included when calculating the surrogate value for hogs' bristle. Citing Heavy Forged Hand Tools from the People's Republic of China; Final Results of Antidumping Duty Administrative Reviews, 62 FR 11813 (March 13, 1997)(Hand Tools from the PRC), respondent Hebei Founder Import and Export Corporation (Founder) states that the Department should exclude imports from non-market-economy (NME) countries to Indonesia. Founder provided the 1998 version of Indonesia Foreign Trade Statistics-Imports, published by the Badan Pusat Statistik of the Indonesian government, which provides a breakdown of the quantity and value of Indonesian imports from each country from which Indonesia imported for the year 1998. Founder argues that, despite the assertion of the petitioner in its April 4, 2000 comments regarding factor valuation, China is not the only significant supplier of hogs' bristle; to the contrary, Founder contends, the Indonesian import statistics show a total of 13,515 kilograms of hogs' bristle from Malaysia and Germany. Furthermore, Founder contends that a comparison in the import value of hogs' bristle imported by Indonesia from China, Malaysia, and Germany demonstrates that the price of hogs' bristle from China is significantly higher than the price of hogs' bristle from Malaysia and Germany. Founder concludes that the high price of the Chinese hogs' bristle proves that market forces do not determine the price for hogs' bristle from China, and that therefore the Chinese hogs' bristle prices are distorted and cannot constitute a world market price. Respondent Hunan Provincial Native Produce & Animal By-Products Import & Export Corporation (Hunan) argues that section 773(c)(1)(B) of the Tariff Act of 1930 (the Act) requires that the Department exclude imports from NME countries when valuing factors of production. Hunan contends that, even if the Chinese values for hogs' bristle can be considered "world market prices," the Department must follow its established practice of excluding such data. Hunan explains that, in Taiyuan Heavy Machinery Import and Export Corp. v. United States, Slip Op. 99-103, October 6, 1999, plaintiffs argued that the Department should not have excluded values from NMEs because theses values represent "world market prices"; however, the court did not agree, stating that the Department's practice of excluding values from NME countries was consistent with both Congressional intent and the law. Citing Hand Tools from the PRC, Hunan contends that the Department's policy is based on the idea that the purpose of section 773(c) of the Act is to find market values for factor inputs because those prices reflect commercial reality, while prices paid for inputs from NME manufacturers may not. Hunan cites numerous determinations and court cases to support this claim. Finally, Hunan argues that to include data from NME countries when valuing factors of production, as petitioner requests, is contrary to the principles behind the Department's NME methodology because the reason the Department classifies a country as an NME is that it considers NME cost structures to be distorted by government control over the production and costing/pricing process. Therefore, Hunan argues, the price for hogs' bristle from China to Indonesia cannot be a true "world market price" as that price must encompass government control over the production process and thus does not reflect commercial reality. Department's Position: We agree with Founder and Hunan that we should disregard imports from NME countries in the Indonesian import statistics. It has been and continues to be the Department's policy to exclude NME values from import statistics of surrogate countries. See, e.g., Hand Tools from the PRC and Tapered Roller Bearings and Parts Thereof, Finished and Unfinished, from the People's Republic of China; Preliminary Results of 1997-1998 Antidumping Duty Administrative Review and Partial Rescission of Antidumping Duty Administrative Review, 64 FR 36853, 36856 (July 8, 1999) (Tapered Roller Bearings from the PRC 1997/98). The fact that China is a major producer of hogs' bristle is not relevant to our valuation, as we view its pricing and costing processes as unreliable for purposes of the antidumping margin calculation. Moreover, in the preliminary calculations, we did not have import data broken down by country, as we do now, and thus were not able to exclude Chinese values. Accordingly, since we are now able to, we excluded Chinese import values from the Indonesian import statistics for these final results. Comment 2: Disregarding Small and Aberrational Data in the Indonesian Import Statistics Citing Tapered Roller Bearings from the PRC 1997/98, Founder argues that the Department should disregard aberrational and small quantity data contained in the Indonesian import statistics. Founder recommends disregarding imports into Indonesia from all countries where the quantity was less than 100 kilograms. Department's Position: We disagree with Founder. While the Department, in prior cases, has excluded imports of small quantities from our surrogate valuation of the factors of production, we note that, in this case, Founder provided no justification for why we should exclude all imports of material inputs that were 100 kilograms or less. The 100-kilogram cutoff proposed by Founder was apparently taken from Tapered Roller Bearings from the PRC 1997/98. While the Department used a 100-kilogram cutoff in Tapered Roller Bearings from the PRC 1997/98 to separate useful from non- useful import data regarding tapered roller bearing components, Founder did not indicate why it would be a useful figure in examining import data regarding paintbrush components. On the face of the data, we find no correlation between the low quantities of imports and the values thereof. Thus, we have no reason to find that values for small quantity imports in this case are less reliable than for large quantity imports. In addition, because we use a weight-averaged calculation for the import value, any potential unreliable values from low quantity imports would thus be discounted. As for disregarding aberrational values, Founder did not suggest how to define "aberrational" in the context of this case and the particular import data on the record, nor did it offer any proof or argument for its claim. As we stated in Tapered Roller Bearings and Parts Thereof, Finished and Unfinished, from the People's Republic of China, Final Results of 1996- 1997 Antidumping Duty Administrative Review and New Shipper Review and Determination Not to Revoke Order in Part, 63 FR 63845, 63859 (Nov. 17, 1998), regarding surrogate values for packing materials: "Because we do not have specific information on the sizes of the boxes being imported, it is inappropriate to selectively exclude certain imports from the calculations." See also Certain Helical Spring Lock Washers from the People's Republic of China, 58 FR 48833 (Sept. 20, 1993) ("[R]ejecting certain Indian import values simply because those are 'too high' is potentially overly subjective, but we would add that so is rejecting certain values simply because they are 'too low.'") We therefore have not excluded any data as aberrational. Comment 3: The Department Should Only Include Pigs', Hogs', or Boars' Bristle in the Indonesian Import Statistics Petitioner argues that the Department should use data only for Indonesian imports classified under HTSUS 0502.10, the classification for "pigs', hogs', or boars' bristle and hair and waste thereof," and not also include imports classified under HTSUS 0502.90, the classification for "other" (i.e., other brush-making hair). Department's Position: Respondents Hunan and Founder indicated in their questionnaire responses that each only used pigs' bristles for the production of paintbrushes; therefore, in order to be as accurate as possible, we have used, for the final results of this review, Indonesian import category 0502.10, the classification for "pigs', hogs', or boars' bristle and hair and waste thereof," instead of including import category 0502.90, the category for other brush-making hair. Comment 4: The Department Should Exercise Its Discretion to Conduct Independent Surrogate Value Research For purposes of valuing SG&A, overhead, and profit, Hunan points out that the Department has, in the records of the investigations of non-natural bristle paintbrushes from the PRC and paintbrushes from Indonesia, information on factory overhead, SG&A, and profit that is more accurate and contemporaneous than the data used in the preliminary results of this review. Hunan argues that the Department has the discretion to use information gained through its own research rather than using publicly available information submitted by interested parties and should use the investigation data for the final results. According to Hunan, petitioners in those cases argued that cost of production data used to determine factory overhead, SG&A, and profit for paintbrush manufacturers were in Industry Code 39090 of the Government of Indonesia's Large and Medium Manufacturing Statistics-Volume II, rather than under Industry Code 38112, which was the code used in the preliminary results of review. Secondly, petitioners in those cases provided data from the 1997 issue of Manufacturing Statistics, which is more contemporaneous with the period of the current review than is the 1995 issue that was used for the preliminary results. Hunan contends that the Department should value factory overhead, SG&A and profit from information submitted in those petitions. Department's Position: We agree with Hunan. In the preliminary results, we used publicly available data for Industry Code 38112 for the calculation of factory overhead, SG&A, and profit. Industry Code 39090, however, used in the above mentioned investigation, includes paintbrushes, furniture, wooden brooms, and wax, among numerous other products, and is thus more appropriate than Industry Code 38112, which consists of twenty- six product categories including razors, rasps, knives, hammers, scissors, axes, etc. Furthermore, we prefer, when possible, to use data more contemporaneous with the POR than data that is less contemporaneous. Therefore, we have used the publicly available data for Industry Code 39090, used in the petition of the non-natural bristle paintbrushes and paintbrush heads investigations, in these final results of review. We placed these data on the record of this review, and allowed interested parties an opportunity to comment thereon. See Memo to the File from Michael Strollo: Transfer of Information from the Investigation of Non- natural Bristle Paintbrushes and Paintbrush Heads from the People's Republic of China and Indonesia to the Administrative Review of Natural Bristle Paint Brushes and Brush Heads from the People's Republic of China, dated July 7, 2000. B. Material Input Weights Comment 5: Founder Understated the Weights of Materials Used in the Production and Packing of the Subject Merchandise Petitioner argues that the weights of the materials (i.e., handles, bristles, ferrules, nails, bags, boxes, and cartons) determined at verification were higher than those reported by Founder. Petitioner states that the Department should use the weights determined at verification for the calculation of factor usages for Founder. Founder argues that, since the differences in the weight of the materials it reported and the weights recorded by the Department at verification are small and would not have any overall effect on the dumping margin, the Department should continue to use the material weights reported by Founder in its questionnaire response. Founder also argues that, if one adds the weights measured by the Department, they exceed the weight of the whole brush. Furthermore, the Department found that the weights of some material inputs were lower while others were higher; therefore, Founder argues, leaving the figures as reported causes less distortion than using those measured at verification. Founder also urges the Department not to use the weights of the packing materials measured at verification but to use their reported weights because the differences were very small. Department's Position: We agree with Founder. The differences between the verified weights and the weights reported by Founder are small. As our verification results demonstrate, there is little variation between the reported weights and the verified weights of brushes and their components. We note that, while some variation does exist, given the imprecise nature of testing the reported weights, we expect some variation from the reported weights to those weights recorded at verification. We also note that the differences between the reported weights and the verified weights were not strictly favorable for Founder. There were several instances in which the weights of the brush components submitted in the response were greater than the weights of the brush components recorded at verification. Therefore, since the variations between the reported weights and the verified weights were small, and were not in a uniform direction, we consider the reported weights to have been verified, and have continued to use the weights reported by Founder for these final results of review. C. Wooden Core Comment 6: Weight for Wooden Core Usage Petitioner argues that the weight used by the Department to value wooden core for Founder in the preliminary results of review, which was public for 2" brushes, should not be used for the 4" brush. Petitioner contends that the Department should double the weight used for wooden core for 2" brushes to obtain the weight of wooden core in a 4" brush. Founder argues that accepting petitioner's approach to doubling the weight for the core would lead to absurd results, distorting the weight of the component parts in relation to the weights of the whole brushes. Founder argues that, by adding the wooden core factor, the sum of the weights of the component parts would exceed the weights of the finished brushes by approximately the weight of the wooden core added. Founder contends that any adjustment the Department makes to the weights of the component parts should be done in relation to the total weight of the brush. Founder suggests that the Department estimate the weight of the wooden core by deducting the reported weight of the bristles from the verified weight of the bristles and the wooden core. Department's Position: Founder provided a weight for bristles, but failed to provide the weight of the wooden core. We were unable to verify the weight of the bristles separately; we only verified the weight of the bristles and wooden core as combined into a single unit. Therefore, the question before us is how, as facts available, to value the bristles and wooden core, whether separately, or as one unit. With respect to Founder's suggestion that we subtract the reported weight of bristle from the verified weight of bristle and wooden core combined to obtain the weight of wooden core, we cannot rely on the accuracy of such a calculation because we were unable to separately verify the weight of the bristles. Given the foregoing, we have concluded that we are unable to separately value the bristles. In addition, we note that the per kilogram value of wooden core is less than the per kilogram value of bristles. Therefore, as facts available for these final results, we are using the value of bristles to value the bristle/wooden core combination. We agree with petitioner that we should not, as we did in the preliminary results, apply the weight of a two-inch wooden core to a four-inch paintbrush. However, we note that there was a clerical error in our application of the public data from Hunan's response in the preliminary review results. Specifically, we applied the kilogram per dozen amount reported by Hunan as though it were a kilogram per brush amount, thus overstating the weight of both 2" and 4" brushes. However, this issues is moot, since we are not separately valuing the wooden core for these final results. D. Inflation of Surrogate Values Comment 7: The Department Should Not Inflate In-POR Data Founder argues that the Department should not use an inflator to adjust surrogate values for data within the period of review (POR). Founder argues, citing Heavy Forged Hand Tools, Finished or Unfinished, With or Without Handles, from the People's Republic of China; Preliminary Results and Partial Rescission of Antidumping Duty Administrative Reviews, 65 FR 12202 (March 8, 2000), Tapered Roller Bearings and Parts Thereof- 1997/1998, and Notice of Preliminary Determination of Sales at Less Than Fair Value: Certain Non-Frozen Apple Juice Concentrate from the PRC, 64 FR 65675 (November 23, 1999), that the Department's normal practice is to inflate only data that is outside the POR. Department's Position: We agree with Founder, and we have made no adjustment for inflation in the final results of review. 2. Non-Bona Fide Sale Comment 8: Founder's Single U.S. Sale Is Not Commercially Reasonable Petitioner argues that Founder's single sale during the POR is not bona fide. Citing Certain Cut-to-Length Carbon Steel Plate from Romania (Romanian Plate), 63 FR 47232 (September 4, 1998), petitioner argues that the facts in the instant review of paintbrushes are similar to those in Romanian Plate and, in Romanian Plate, the Department rejected the single reported sale. Petitioner argues that Founder admits that its single sale was made to reduce its antidumping duty rate and that, therefore, Founder must be able to prove that its sale is commercially reasonable. Petitioner argues that Founder's one sale is not commercially reasonable because the timing, volume, terms of sale, and manner in which the sale was negotiated all are inconsistent with standard commercial considerations. Petitioner further argues that, as evidenced by domestic and third-country sales invoices shown to the Department at verification, the volume of most of Founder's sales were higher than the volume sold to the U.S. customer. Founder argues that the statute has no requirements regarding the number of sales, or the minimum quantity of these sales, in order for a company to have its sales reviewed. Founder argues that, in Romanian Plate, the Department noted that it has conducted reviews of one sale and recognizes that an exporter may make only a single sale in order to establish its own antidumping duty rate. Founder also states that, in PQ Corp. v. United States, 652 F. Supp. 724 (CIT 1987), the Court of International Trade maintained that neither the Act nor the Department's regulations reflect any Congressional intent to disregard a company that made only one sale of subject merchandise during the POR. Founder further notes that, in Chang Tieh Industry Co. v. United States, 849 F. Supp. 141 (CIT 1993), the Court noted that, if the Department found evidence that the sale being reviewed was part of an "orchestrated export scheme involving artificially set prices," then the sale might be not bona fide, but concluded that, in that case, there was no evidence on the record indicating that the sale was not bona fide, the price of its sale was "artificially set," or its sale was part of an "orchestrated export scheme." Founder also takes issue with petitioner's reliance on the Romanian Plate case to argue Founder's sale was not valid because the circumstances of its situation are, it claims, easily distinguished from those in Romanian Plate. Founder notes that, in the instant review, the exporter and U.S. importer are not affiliated, unlike in Romanian Plate. Founder argues that U.S. import statistics demonstrate that a substantial number of U.S. imports of paintbrushes in HTS category 9603.40.40.40 were transported by air, and therefore one cannot argue that the transportation method was unreasonable. Secondly, Founder contends that the Department does not have a policy against reviewing one sale, and that it must sell in small shipments due to its high cash deposit rate. In addition, Founder asserts that there is no evidence on the record which would indicate that the paintbrushes were resold at a loss, as was the case in Romanian Plate, and all evidence on the record indicates that the transaction was at arms- length. Furthermore, Founder argues that U.S. import statistics show that the average unit value of natural bristle brushes imported into the United States from China in 1998 was $0.175 per piece, which is consistent with the price of Founder's sale. Finally, Founder argues that the Department's verifiers found no evidence at verification that the transaction was not at arms-length or that the sale was in any way not bona fide. Department's Position: We disagree with petitioner. We note that neither the size of a sale nor the number of sales is sufficient to determine that a sale is not bona fide and that we must consider the totality of the circumstances. The totality of the circumstances in this case do not support petitioner's claim that this sale is not bona fide. While Founder did indeed make only one sale, and while the quantity of Founder's sale to the U.S. during the POR may not be the same as the quantity of Founder's sales to third countries during the same period, these two factors alone do not compel a conclusion that Founder's U.S. sale was not bona fide. There is no evidence in Founder's questionnaire responses, as verified by the Department, indicating that the U.S. sale was not an arms-length transaction. At verification the Department found no evidence that Founder and its U.S. customer were affiliated, and there is no evidence that the freight and expenses involved were greater than the total value of the sale. There is also no evidence on the record indicating, as in Romanian Plate, that the U.S. customer sold the merchandise at a loss. Therefore, we conclude that there is insufficient evidence on the record to support petitioner's claim that Founder's sale was not bona fide. 3. Scope Comment 9: The Scope of the Order Should Be Changed to Include Only the Hogs' Bristle Category Founder argues that, since petitioner seems only concerned with paintbrushes made with hogs' bristle, as indicated in petitioner's April 4, 2000 factor values submission, then the Department should amend the scope of the order to include only HTSUS category 0502.10.00.00 for pigs', hogs', and boars' bristle brushes. Petitioner states that it was not suggesting that the scope of the order be clarified and that the Department should only consider altering the scope if it receives a proper scope inquiry. Department's Position: We disagree with Founder. We will consider altering the scope of the order if an appropriate scope inquiry is received concerning this issue. 4. Clerical Errors Comment 10: The Department Made a Clerical Error in Calculating Cost of Production (COP) Petitioner argues that the Department incorrectly subtracted the amount of SG&A expenses from Hunan's cost of manufacturing (COM), rather than adding the SG&A expenses to the COM, in calculating COP. Hunan agrees that the Department should add SG&A expenses to COM for the final results. Department's Position: We agree with petitioner in part. We did not subtract the amount of SG&A expenses from Hunan's COM. However, we failed to properly add SG&A expenses to COM in calculating COP. We made this correction for the final results of review. Comment 11: The Department Made a Typographical Error With Respect to the Amount Reported by Hunan for the Consumption of Bristles for a Particular Product. Hunan states that the Department made a typographical error with respect to the amount reported by Hunan for the per unit consumption factor of bristle for a particular product. Department's Position: We agree with Hunan and we have corrected this for the final results. **There were changes from the preliminary results for both Hunan and Founder which were not the subject of comments by any interested party. For Hunan, in the preliminary results we failed to multiply the freight surrogate and exchange rate by the distance the subject merchandise was shipped from the factory to the port. For the final results, we revised the calculation of foreign inland freight to use the exchange rate on the date of sale and to properly calculate the freight factor: (distance)*(freight surrogate value)*(exchange rate on the date of sale). For Founder, we revised the calculation of foreign inland freight to properly use the exchange rate on the date of sale and to reflect the fact that no conversion was needed from kilograms to pounds. AGREE_________ DISAGREE_________ ________________________________ Troy H. Cribb Acting Assistant Secretary for Import Administration ________________________________ (Date)