Non-market economies




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F. Producers of Upstream Inputs
In some cases, the producer may obtain inputs from an affiliated company, which may or may not also be a producer of subject merchandise. The Department values the upstream input using the factors of production of the upstream producer only when a producer and its affiliated supplier meet the criteria for collapsing under 19 CFR 351.401(f) and, thus, are treated as a single entity. For further information, see the “Intermediate Inputs” section, below.
VI. NME Calculation Methodology
A. Overview
Section 773(c)(1) of the Act provides that the Department shall determine NV using a factors of production methodology if the merchandise is exported from an NME country and the available information does not permit the calculation of NV using home market prices, third country prices, or constructed value under section 773(a) of the Act. That is, the Department will calculate a value based on the factors of production utilized in producing the merchandise, plus an amount for general expenses and profit, plus the cost of containers, coverings, and other expenses. Factors of production include materials, labor, energy and other utilities, and representative capital cost, including depreciation. The Department will base NV on the factors of production because the NME country does not operate on market principles of cost or pricing structures, so that sales or costs of merchandise in such a country do not reflect the fair value of the merchandise.
Because NV is based on the factors of production, the NME analysis does not involve such market-economy concepts as, for example, the cost-of-production test, or level of trade analysis.
Furthermore, because the selling expense component of NV is based on a surrogate value, the Department cannot accurately calculate differences in circumstances of sale and, thus, makes no adjustment for such differences. However, the Department will make deductions to CEP for all selling expenses associated with economic activity in the United States, because such deductions are required by the plain language of section 772(c) (2) (d) of the statute.22
As in market-economy cases, NV is converted into U.S. dollars using the rate of exchange on the date of sale of the subject merchandise, in accordance with 19 CFR 351.415(a).
B. Surrogate Country Selection


  1. Overview

Section 773(c)(1)(B) of the Act states 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. Section 773(c)(4) of the Act adds that the Department shall utilize to the extent possible . . . prices . . . in one or more market economy countries that are (A) at a level of economic development comparable to that of the nonmarket economy country, and (B) a significant producer of comparable merchandise. The terms comparable level of economic development, comparable merchandise, and significant producer are not defined in the statute. The Department’s regulations at 19 CFR 351.408, however, do provide some guidance. Furthermore, pursuant to 19 CFR 351.408(c)(2), the Department normally will value all factors of production in a single surrogate country if possible.




  1. Economic Comparability




To determine which surrogate countries are at a level of economic development comparable to the NME country, the Department relies on per capita gross national income data as reported in the most current annual issue of World Development Report. See 19 CFR 351.408(b). The Department’s normal practice is to select a primary surrogate country from a list of several potential surrogate countries. The surrogate countries on the list are not ranked and are considered equivalent in terms of economic comparability.


  1. Producer of Comparable Merchandise

As noted above, comparable merchandise is not defined in the statute or the regulations, and is determined on a case-by-case basis. Nevertheless, there are some basic rules to follow. In all cases, if identical merchandise is produced, the country qualifies as a producer of comparable merchandise. In cases where none of the potential surrogate countries produces identical merchandise, the Department determines whether any of the potential surrogate countries produce comparable merchandise. The Department’s practice is to consider whether products have similar production processes, end uses, and physical characteristics. When evaluating production processes, the Department has taken into account the complexity and duration of the processes and the types of equipment used in production.23



  1. Significant Producer

The Department determines whether any of the countries which produce comparable merchandise are significant producers of that comparable merchandise. The extent to which a country is a significant producer should not be judged against the NME country’s production level or the comparative production of the countries on surrogate country list. Instead, a determination should be made consistent with the characteristics of world production of, and trade in, comparable merchandise (subject to the availability of data). Since these characteristics are specific to the merchandise in question, the standard for significant producer will vary from case to case. See Policy Bulletin 04.1 (March 1, 2004).


Sometimes, none of the countries identified as being economically comparable are significant producers of comparable merchandise, or some countries meet both criteria, but sufficient data are not available to enable the Department to use any of those countries as the primary surrogate. In such cases, the Department will consider an expanded list of potential surrogate countries and will follow the country selection procedure described above.


  1. Data Considerations




If more than one country has survived the selection process to this point, the country with the best factors data is selected as the primary surrogate country. A country that perfectly meets the requirements of economic comparability and significant production is of little use as a primary surrogate if crucial factor price data from that country are inadequate or unavailable. In assessing data and data sources, it is the Department’s practice to use period-wide price averages, prices specific to the input in question, prices that are net of taxes and import duties, prices that are contemporaneous with the period of investigation or review, and publicly available data. In addition, the source of the data must be insulated from conflicts of interest.24 Data collected or produced by an interested party, or on behalf of an interested party, should be avoided.

If an analyst is unable to find a significant producer of comparable merchandise in one of the countries deemed to be economically comparable to the NME country, the analyst should consult with the assigned program manager, and the Office of Policy, to consider other possible surrogate countries.


For further information, see Import Administration Policy Bulletin 04.1, March 1, 2004.
C. Calculation of NV Based on FOP


  1. Overview of Surrogate Valuation

19 CFR 351.408(c)(1) provides that the Department will normally use publicly available information to value the factors of production. The Department’s regulations further instruct the Department to normally value all factors in a single surrogate country. See 19 CFR 351.408(c)(2). Thus, the Department relies, to the extent possible, on publicly available information from the first choice, or primary, surrogate country to value all factors of production (with the exception of labor). See the Surrogate Country Selection section, above.


If there is no reliable information from the primary surrogate country for a particular factor, the Department will attempt to use publicly available data from another surrogate country. See e.g., Certain Cased Pencils from the People’s Republic of China: Final Results and Partial Rescission of Antidumping Duty Administrative Review, 67 FR 48612 (July 25, 2002), and accompanying Issues and Decision Memorandum, where the Department had to use a financial statement from a secondary surrogate country because it had no usable financial statement from the primary surrogate country.
There are two notable exceptions to the application of surrogate values to an NME producer’s factors of production. First, where the NME producer purchases a particular input from a market economy producer during the POI or period of review (“POR”), and the purchase is paid for in a market economy currency, the Department normally will use the price paid by the NME producer to value that input. See 19 CFR 351.408(c)(1) and the Market-Economy Inputs section, below. Where a portion of the input is purchased from a market economy supplier and the remainder from an NME supplier, the Department normally will value the factor using the price paid to the market economy supplier. Id. Second, the Department values the NME producer’s labor input by reference to a regression-based wage rate that effectively reflects data from a number of countries, rather than a single country. See 19 CFR 351.408(c)(3)




  1. Practice

When selecting possible surrogate values for use in an NME proceeding, the Department’s preference is to use, where possible, a publicly available value which is: (1) an average non-export value; (2) representative of a range of prices within the POI/POR or most contemporaneous with the POI/POR; (3) product-specific; and (4) duty and tax-exclusive.25 Accordingly, the Department has articulated a preference for using official import prices rather than domestic prices to value the respondent’s reported inputs because import prices, unlike domestic prices, do not include domestic taxes.26 In general, import prices also have the advantage of representing a large number of transactions, although some of them may not be of the exact same factor reported by the respondent. This potential drawback of import prices, whereby the surrogate import price encompasses a broader range of goods than the specific factor of the respondent is commonly known as the basket problem. As long as the use of the average price for the HTS category does not result in significant distortion to the calculation of NV, import prices are often more appropriate than individual company- or transaction-specific prices. Commerce explained in its final determination that it chose Indian import statistics because they were more reliable,’ as they were based on the sum of all imports into India during the POI.’27


In its calculation of the overall import price into a surrogate country, however, the Department excludes prices of imports from NME countries and from countries that provide general export subsidies, as well as prices which it deems to be aberrational. Moreover, the Department prefers, whenever possible, to use country-wide data and only to resort to company-specific information when country-wide data are not available.28
Factors of production include, but are not limited to, hours of labor required, quantities of raw materials used, amounts of energy and other utilities consumed. See section 773(c)(3) of the Act. Material inputs are measured in the number of physical units used in the production of one unit of the subject merchandise, e.g., tons, pounds, gallons. Labor is measured in terms of hours. Energy is measured in terms of quantities used, e.g., BTUs (gas), kilowatt hours (electricity), and gallons (fuel oil).
The NME questionnaire requires information on the quantity of inputs actually used to produce the subject merchandise in the NME. If the NME exporter did not produce the subject merchandise (e.g. the exporter is a trading company), the Department will normally require factors information from each of the producers supplying that trading company with exports of the subject merchandise to the United States. For each of those models or product types of the subject merchandise that were exported to the United States, the producer must supply aggregate factor data, including information on any portion of the production that was destined for other markets. Where there is more than one producer of a model or product type, the Department will calculate NV for each producer, and then calculate a weighted-average exporter-specific NV to compare with U.S. price. Where there are a large number of producers involved in the production of the merchandise, the Department may limit the questionnaire to only the largest producers.


  1. Valuation of Materials, Labor, and Energy

Interested parties have the opportunity to submit factor values in each segment of a proceeding. The Department may conduct its own research to find appropriate surrogate values. Where the Department has several surrogate values from which to choose, it makes its selection based on the quality and contemporaneity of the data.


A primary consideration is the extent to which the surrogate factor price corresponds to the NME factor of production. In many cases, an exact match is not possible, e.g., the Department must match no. 2 fuel oil to the price of no. 4 fuel oil, or the Department must use the price of a basket of goods that includes, but is not limited to, the NME factor. Another consideration is that the Department generally values factors of production using prices contemporaneous with the POI/POR, regardless of when the subject merchandise was actually produced.29 If the values are not contemporaneous with the POI/POR, the Department must adjust them using wholesale price indices from publicly available sources. Moreover, to the extent possible, the Department uses tax- and duty-exclusive factor prices.
The Department has a strong preference for using publicly available prices to value factors.30 Further, factor values should be prices that are broadly available in the surrogate economy.31 For example, if the Department has information on what a particular producer pays for an input and also has information on what producers economy-wide pay for the same input, the Department would choose the latter (all other things being equal). The Department generally does not use price quotes because they are usually not publicly available and are often not contemporaneous with the POI/POR.32 As a result, the criteria or history that led to those quotes is unknown and easily subject to manipulation. Furthermore, the market price might fluctuate significantly over time.
Where the Department cannot develop publicly available data in the surrogate country, the Department uses data from other sources, including sources in other appropriate surrogate countries.


  1. Materials

To obtain a material cost figure, the Department multiplies the surrogate value by the factor input quantity. If a by product or a co product is generated in the manufacturing process, the Department allows a credit for it in accordance with generally accepted accounting principles. See the “By-Product Offsets” section, below. When the by-product can be recycled into the production process of the subject merchandise as a factor of production, the respondent may have already reflected the recycling in the usage rate of that factor of production. The Department must ensure that the by-products credit is not counted twice.


Total materials cost is calculated on a delivered-to-producer basis. Thus, the Department’s questionnaire requests that producers report the distance and mode of transportation from the materials supplier to the producer. Moreover, when the surrogate value for the material is based on import prices, the Department uses the shorter of (a) this reported distance or (b) the distance from the nearest port to the producer to value the materials transportation in the surrogate country, and include this materials transportation value in the total materials value. Because of the litigation from which this practice arose, this materials transportation value is sometimes referred to as the Sigma freight.33


  1. Labor

The Department values labor hours using regression-based wage rates (see 19 CFR 351.408(c)(3)) that are posted on the IA web page and updated annually. The Department calculates direct labor costs by multiplying the labor hour input by the regression-based wage rate.


If indirect labor is included in the surrogate value for factory overhead (see below), it need not be valued separately. If, however, it is not included in the surrogate value for factory overhead, it should be valued as part of labor.


  1. Energy and Utilities

Most production processes use a variety of energy sources. These may include electricity, natural gas, oil or water. The Department values these inputs by determining the amount of each energy source or utility used in the production process and applying the appropriate per-unit surrogate values.


If energy is not an important production factor it may not be necessary to quantify this input separately. In this situation, energy may be included in the surrogate value for factory overhead (see below). If it is included in overhead, the analyst should be aware so as not to double count energy and utilities.
For information on particular situations regarding intermediate inputs and inputs supplied free of charge by the U.S. customer, see the Intermediate Inputs and Free-of-Charge Inputs sections, below.
4. Factory Overhead; SG&A Expenses; and Profit
Factory overhead, SG&A expenses, and profit are included in the NV. The Department uses publicly available financial statements of producers of comparable merchandise from the primary surrogate country, when available. 34 See 19 CFR 351.408(c)(4). It is important to use, to the extent possible, information from surrogate producers of the identical (or similar) merchandise. For further details, see the Financial Ratios section, below.


  1. Factory Overhead

The most important component of factory overhead is depreciation. It can also include supervisory and indirect labor,35 maintenance, and energy that is not significant enough to be valued separately. Normally, factory overhead is expressed as a percentage of materials, labor, and energy of the surrogate producer, and is applied to the materials, labor, and energy costs of the exporter.




  1. General Expenses

Included in general expenses are SG&A expenses. The Department uses actual SG&A expense amounts obtained from publicly available, published data sources (e.g., the financial statements of a company or companies located in the surrogate country). The SG&A expense ratio is applied to total of materials, labor, energy, and factory overhead.


c. Profit
The Department relies on actual profit amounts from published data in the surrogate country (e.g., the financial statements of a company or companies located in the surrogate country).


  1. Packing

Packing for shipment to the United States is valued in the surrogate country based on factor amounts for materials (including materials transportation) and labor supplied by the respondent. Packing for shipment is distinct from packaging of the product, which is included in the valuations outlined above.



D. Sample Calculation
Surrogate Factor Valuation
Factor Amount Used in Source Value in Surrogate ME Purchase Value

Production of One

Ton of Subject

Merchandise
steel 1.07 tons NME 12,000 Rs./ton N/A
plastic 2 lbs. ME N/A $2.00/lb.
labor 150 hours NME $0.97/hr. N/A
electricity 130 kwh. NME 4.13 Rs./kwh. N/A
factory 20% of materials +

overhead labor + energy (MLE)


SG&A 8% of MLE +

factory overhead


profit 5% of MLE +

factory overhead +

SG&A
steel scrap 0.05 tons NME 1,000 Rs./ton N/A

by-product36 (per ton of

subject merchandise

produced)


packing 15 kg. NME 100 Rs./kg. N/A

materials


packing 10 hrs. NME $0.97/hr. N/A

labor
Materials Transportation Valuation37


Factor DistanceB DistanceB Transportation Surrogate Freight

Supplier to Nearest Port to Method Value

Production Production

Facility Facility
steel 40 km. 25 km. truck 1.02 Rs./ton/km.
packing 5 km. 25 km. truck 1.02 Rs./ton/km.
Normal Value Calculation
Factor Calculation of Value Value Exchange Value in

Rate US $38
steel 1.07 tons x 12,000Rs./ton 12,840 Rs. 0.027 $346.68
transportation 1.07 tons x 25 km. x 1.02 Rs./ 27.285 Rs. 0.027 $ 0.74

for steel ton/km.


plastic 2 lbs. x $2.00/lb. $4.00 1.000 $ 4.00
labor 150 hrs. x $0.97/hr. $144.50 1.000 $144.50
electricity 130 kwh. x 4.13 Rs./kwh. 536.9 Rs. 0.027 $ 14.50
factory 20% x ($346.68 + 0.74 + 4.00 + 144.50 + 14.5) $102.08

overhead = 20% x $510.42


SG&A 8% x ($510.42 + 102.08) $ 49.00

= 8% x $612.5


profit 5% x ($612.50 + 49.00) $ 33.07

= 5% x $661.50


steel scrap 0.05 tons x 1,000 Rs./ton 50 Rs. 0.027 $ 1.35

by-product39


packing 15 kg. x 100 Rs./kg. 1,500 Rs. 0.027 $ 40.50

materials


transportation 15 kg. x 5 km. x .00102 Rs./ 0.0765 0.027 $ 0.003

for packing kg./km.

materials
packing labor 10 hrs. x $0.97/hr. $9.70 1.00 $ 9.70
Normal Value: $346.68 + $0.74 + $4.00 + $144.50 + 14.50 + $102.08 + $49.00 + $33.07 -

$1.35 + $40.50 + $0.003 + $9.70 = $743.423


E. Market-Economy Inputs
1. Overview
19 CFR 351.408(c)(1) provides that where a factor is purchased from a market economy supplier and paid for in a market economy currency, the Department normally will use the price paid to the market economy supplier. Furthermore, where a portion of the factor is purchased from a market economy supplier and the remainder from a nonmarket economy supplier, the Department normally will value the factor using the price paid to the market economy supplier.40 The Department has established a threshold for using market economy purchases to form the basis for valuation of a respondent’s input.41 If a respondent purchases at least 33 percent of an input from market economy suppliers, the Department will use the weighted average purchase price to value the entire input used by the respondent
Alternatively, when the volume of an NME respondent’s purchases from market economy suppliers as a percentage of its total volume of purchases during the POI/POR is below 33 percent, but where these purchases are otherwise valid and meet the Department’s existing conditions, 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. The Department also established that the validity of any market economy purchases can be refuted by parties and if the Department determines that the prices are not valid, they will not be used to value the input.

2. Practice
Where a respondent purchases a factor from market-economy suppliers and pays for the factor in a market-economy currency, the Department normally will use the weighted-average price paid by the respondent to all such suppliers to value the factor. However, the Department does not rely on data that it considers aberrational or otherwise unreliable. The Department has established a three-pronged test to assess the reliability of market-economy input prices. The Department looks at: (1) the value and volume of the imports; (2) the type and quality of the imported product; and (3) consumption of the imported product by the NME producer.42
Accordingly, the market-economy purchases must have been contemporaneous with the POI/POR. In cases where the factor was purchased outside the POI/POR, the Department has declined to value the factor using the market-economy purchases.43 This is because the value of any particular factor might change greatly from one period to the next.
In addition, the factor purchased from a market-economy supplier must have been used in production during the POI/POR. For example, in the case of shrimp from the PRC, the Department noted that it will not use the price from the market-economy supplier in factor valuation where record evidence indicates that the factor purchased from a market-economy supplier could not have been used during the period in question.44
Finally, the Department can disregard inputs it has reason to believe or suspect might be dumped or subsidized. It should be noted that the Department does not need specific evidence of dumping or subsidization from the country of origin of the input, but where the Department has reason to believe or suspect dumping or subsidization, it will exclude these prices from valuing the factor input.45 This holds true even where the factor was purchased from a third-country supplier (e.g., a Hong Kong trading company). For example, in the case of helical spring lock washers from the PRC, the Department stated: It is the Department’s longstanding practice to consider that goods determined to be dumped or subsidized remain so whether or not they are sold through third-country trading companies.46
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