Opinion ID: 766349
Heading Depth: 1
Heading Rank: 3

Heading: domestic loans

Text: 12 In its Final Determination, Commerce held that the Korean government effectively controlled long-term lending practices in Korea through (1) the General Bank Act and the Korean government's Monetary Board, (2) the appointment of banking officials, (3) informal control over loan allocations, i.e., through preferential rediscounting, and (4) strict control of interest rates. 58 Fed. Reg. at 37340-41. The Korean governmental control was deemed sufficient to establish a government program. See Proposed Regulations, 54 Fed. Reg. 23366, 23379 (§ 355.2(r) defining program as any government act or practice). Although de jure preferences were terminated by 1985, Commerce found that the pattern of long-term lending to the steel industry remained largely unchanged, and that in fact lending to that industry had slightly increased. Commerce also applied a disproportionality analysis that involved the comparison of the share of long-term loans received and held by the steel industry with that industry's share of gross domestic product (GDP). Based on data supplied by the Korean government, Commerce found that while the steel industry's contribution to GDP had remained relatively constant at approximately 2.0-2.5% since the early- to mid-1980s, the volume of loans the steel industry received had consistently remained two to four times higher than its contribution to GDP in percentage terms. 58 Fed. Reg. at 37343, 37345. 13 As previously noted, the Court of International Trade held in British Steel I, that Commerce [did] not sufficiently explain . . . the connection between the government de facto program and the steel companies' alleged preferential access to specific sources of credit and remanded the case. 879 F. Supp. at 1325. In its Redetermination, following remand, Commerce concluded that the causal nexus was shown by record evidence of the Korean government's control of the Korean financial system to create a shortage of credit and to selectively exempt the steel industry from the shortage by providing it preferential access. Commerce noted that benefits received by the steel industry resulted from aggressive targeting by the Korean government of scarce long-term credit to the steel industry. Redetermination, slip op. at 15. The targeting and resulting nexus, according to Commerce, consist[ed] of (1) the de jure preferences for steel prior to 1985; (2) direct and indirect expressions of continued support for steel after 1985; (3) a major government sponsored investment project for the steel industry, i.e., the Kwangyang Bay Industrial Estate project; and (4) a volume of loans at favorable rates that exceeded the pre-1985 volume. Id. at 21-22. Finally, Commerce considered and rejected three economic factors identified as possible reasons why the distribution of benefits was not disproportionate 1) the capital intensity of the steel industry (capital needs), 2) investment cycles, and 3) the fact that the steel industry was less dependent than other industries on external financing. Id. at 46. 14 The Court of International Trade thereafter held that Commerce had identified substantial evidence to support its finding of a nexus between the Korean government's program of general control over the Korean financial system and the provision of specific benefits to the steel industry in the form of preferential long-term loans. British Steel II, 941 F. Supp. at 130. Korean producers now appeal that decision.
15 The general rule is that a countervailing duty (in addition to any other duty) shall be imposed if 16 (1) the administering authority [Commerce] determines that - 17 (A) a country under the Agreement, or 18 (B) a person who is a citizen or national of such a country, or a corporation, association, or other organization organized in such a country, 19 is providing, directly or indirectly, a subsidy with respect to the manufacture, production, or exportation of a class or kind of merchandise imported, or sold (or likely to be sold) for importation, into the United States, and 20 (2) the Commission [International Trade Commission] determines that-- 21 (A) an industry in the United States-- 22 (i) is materially injured or 23 (ii) is threatened with material injury, or 24 (B) the establishment of an industry in the United States is materially retarded, 25 by reason of imports of that merchandise or by reason of sales (or the likelihood of sales) of that merchandise for importation, 26 then there shall be imposed upon such merchandise a countervailing duty, in addition to any other duty imposed, equal to the amount of the net subsidy. For purposes of this subsection and section 1671d(b)(1) of this title, a reference to the sale of merchandise includes the entering into of any leasing arrangement regarding the merchandise that is equivalent to the sale of the merchandise. 27 19 U.S.C. § 1671(a) (1988). The statute further provides that in order to countervail a governmental subsidy, Commerce must determine 28 whether the bounty, grant, or subsidy in law or in fact is provided to a specific enterprise or industry, or group of enterprises or industries. Nominal general availability, under the terms of the law, regulation program, or rule establishing a bounty, grant, or subsidy, of the benefits thereunder is not a basis for determining that the bounty, grant, or subsidy is not, or has not been, in fact provided to a specific enterprise or industry, or group thereof. 29 19 U.S.C. § 1677(5)(B) (1988). Thus, Commerce must determine whether a governmental program provided a benefit to a specific industry. Moreover, in the case of an indirect subsidy, evidence of a causal nexus between the program and the benefit is also required. See British Steel I, 879 F. Supp. at 1328. 30 In this case, Commerce determined that governmental control of lending institutions in Korea constituted a program, that the provision of preferential access to loans constituted a countervailable benefit, that a causal nexus in the form of aggressive targeting of loans existed between the program and the benefit to the Korean steel industry, and that access to the loans was provided specifically to the steel industry. 31 1. The basic premise of the aggressive targeting theory is that the Korean government exercised its influence over Korean commercial banks to direct credit preferentially to the steel industry. In reviewing the administrative record, however, Commerce was unable to identify a single piece of direct evidence in support of its theory. In verification interviews, governmental and banking officials uniformly asserted that the government did not direct credit to the steel industry during the pertinent period. In the course of its investigation, Commerce also conducted interviews with several executives of large Korean banks, selected by the United States embassy in Korea for their experience and familiarity with the Korean financial system. None of those bankers suggested that the Korean government had sought to allocate loans preferentially to the steel industry during the period under investigation. To the contrary, the bankers stated that the government had attempted through a variety of formal and informal means to direct credit to small and medium-sized businesses, while encouraging banks to reduce their lending to large companies such as POSCO. 32 Third-party source materials that were introduced into the administrative record supported the bankers' assertions that the government favored lending to small businesses during the investigation period. For example, a World Bank report on Korean economic development noted a government policy to increase the bank lending to small/medium firms. Similarly, a 1991 article in the Financial Times examined the government policy of encouraging banks to lend to small companies, while expressing doubts as to its effectiveness. 33 The absence of direct evidence to support the aggressive targeting theory is striking, given that successful implementation of such a program would seemingly require the knowledge and cooperation of the government and banking officials who were interviewed by Commerce. In addition, it is troubling that Commerce apparently did not seek to obtain documentary corroboration for its targeting theory. Instead, Commerce took the position that no company or government documentation exist[s] for a program such as direction of credit. As a result, Commerce's verification process consisted of information gathering rather than checking the accuracy of previously supplied information. 34 Commerce's position with respect to the unavailability of documentation is difficult to accept, because Commerce encountered no difficulty in finding documentation for the Korean government's direction of credit in other instances. The administrative record is replete with examples of preferential allocation of credit in favor of steel and other heavy industries in the late 1970s, before the period under investigation. And, as noted, there was ample evidence that the government shifted its policy and began to attempt to direct credit to smaller industries in the mid-1980s. In light of that evidence, the absence of corresponding documentation for a program of aggressive targeting to the steel industry suggests that the existence of such a program should be viewed with skepticism. 35 2. Because of the lack of direct evidence to support the aggressive targeting theory, Commerce had to look to circumstantial evidence to support its nexus finding. Commerce urges us to affirm based on what it terms a series of interrelated determinations that, taken as a whole, demonstrate[ ] that a de facto program to provide steel 'preferential access' exist[s]. The problem with Commerce's argument, however, is that key elements of the circumstantial case for aggressive targeting are not supported by the record. 36 The starting point for Commerce's analysis is the Korean government's long history of support for the steel industry, including the history of preferential direction of credit. Redetermination, slip op. at 23-29. That history is well documented. During the Heavy and Chemical Industries drive in the 1970s, the Korean government encouraged banks to lend to the steel industry and directly invested large sums of capital to help develop the industry. The Iron and Steel Promotion Act of 1970 gave further encouragement to the steel industry, promising government support in building infrastructure and securing foreign loans. Finally, the charter of the Korea Development Bank gave explicit preference to the steel industry in obtaining long-term credit. As Commerce noted, however, the entire legal framework of preferences for the steel industry was repealed by 1984. The pre-1985 system is pertinent only insofar as it provides a background against which to assess the Korean government's subsequent conduct. 37 Commerce relied on what it termed continued expressions of support for the steel industry after the removal of legal preferences. Redetermination, slip op. at 32-33. In particular, Commerce focused on two specific references. The first was a 1988 prospectus filed by POSCO with the Securities and Exchange Commission in conjunction with a corporate bond issue. In that filing, POSCO noted that it had previously been designated as a public company by the Korean government and asserted that the designation indicated its strategic importance. The prospectus, however, cautioned investors that the public company designation carried no implication of financial support or performance. The prospectus does not seem helpful to Commerce's argument, particularly given that the principal characteristic of a public company in Korea appears to be that certain restrictions are placed on foreign stock ownership. 38 The second reference is a reported statement by a Korean banker that even after the Korea Development Bank charter was changed to allow industries other than steel to have nominally equal access to long-term loans, the steel industry was still in a better position to receive loans. The probative value of that statement, however, is negated by the next sentence of the same report, which states that by 1985 any remaining preferences had ceased. As a result, the expressions of support identified by Commerce are not persuasive evidence of aggressive targeting. 39 The centerpiece of Commerce's aggressive targeting theory is the observation that in the years after the removal of legal preferences in favor of the steel industry, lending to the steel industry actually increased slightly. Redetermination, slip op. at 30-31. According to Commerce, that trend indicates that the government's policy of favoring the steel industry did not change but merely became more circumspect. ld. at 22. POSCO counters that the increase in lending from 1985 to 1991 is attributable to increased credit requirements associated with POSCO's large steel mill project at Kwangyang Bay. Commerce rejected that argument, claiming that the Kwangyang Bay mill was in reality a project of the Korean government, not POSCO. According to Commerce, the increased borrowing associated with Kwangyang Bay was an example of how the Korean government manipulated both POSCO's credit needs and the financial system to ensure that the steel industry would receive a large share of limited long-term credit. ld. at 34-37, 49-52. 40 The importance of Commerce's characterization of the Kwangyang Bay project to its final conclusion of aggressive targeting cannot be overstated. If Commerce is correct in describing Kwangyang Bay as essentially a government project, Commerce can plausibly contend that a de jure preference program was replaced with a de facto system under which industry credit requirements and supplies were both managed by the government. If that premise is incorrect, however, the aggressive targeting theory is clearly unsupported. Commerce itself recognized the centrality of its characterization of Kwangyang Bay, stating in the Redetermination that [i]f we were convinced that POSCO, on its own, made an independent, unfettered decision, based entirely on commercial considerations, to build the Kwangyang Bay steel mill, we would not have concluded that the [government of Korea] continued to target the steel industry for preferential access to scarce long-term credit at favorable rates. Redetermination, slip op. at 49-50. 41 Commerce's evidentiary support for that central tenet of its aggressive targeting theory is extremely thin. The principal record support that Commerce relied on in its Redetermination is a single speech made in 1981 by Korean president Chun Doo Hwan. In that speech, President Chun stated that the government would give special emphasis to the nation's steel industry, and promised to carry on the work of constructing the second integrated iron and steel mill. The relevance of those excerpts from President Chun's 1981 speech is questionable. The speech took place before any construction began at Kwangyang Bay. At the time of the speech, the Korean government was in the midst of an elaborate campaign to promote the development of heavy industry. By the time of Commerce's investigation, however, that entire framework had been dismantled and government attention had shifted to emphasize aid to smaller industries. Tellingly, Commerce was unable to identify any other statements by government officials or documentary evidence indicating an active role for the government in the decision to build the steel mill at Kwangyang Bay. 42 The other pieces of evidence used by Commerce to support its conclusions regarding Kwangyang Bay are even weaker. For example, in the Redetermination Commerce pointed to an Industry Basic Placement Plan published by the Korean government that described the Kwangyang Bay industrial estate as centered around the iron and steel industry. See Redetermination, slip op. at 36-37. That document does not discuss how the decision to build Kwangyang Bay was made. More importantly, the document cited by Commerce dates from 1990, after the steel mill was completed. The only other evidence that Commerce cited is a single newspaper article regarding the completion of the Kwangyang Bay steel mill, which describes the mill as implemented by the Fifth Republic. That statement could be plausibly interpreted as referring either to Kwangyang Bay's relative position in the National Industrial Estate system implemented by the Korean government to disperse economic development, or to more direct involvement by the government in the specific project. In any case, it is hardly a sufficient base from which to draw a conclusion that the Korean government directed POSCO to build the plant. 43 Conversely, there was considerable evidence in the record that indicated that POSCO had every reason to decide on its own to build the steel mill at Kwangyang Bay. During the construction of the Kwangyang Bay facility, the demand for steel in Korea almost doubled. Completion of the plant moved POSCO into a position as one of the world's largest steel manufacturers, and the plant has proved to be a profitable investment. Finally, the record shows that POSCO internally financed a high percentage of the development costs. Although not conclusive, each of those facts suggests that the Kwangyang Bay development was what it appears to be: a rational decision by a private actor to expand facilities to service a growing market. 44 Apart from the materials relating specifically to Kwangyang Bay, Commerce relied on a number of third-party materials allegedly showing the continued direction of credit by the Korean government to the steel industry. A review of each of those documents demonstrates that, singly or collectively, they do not provide support for Commerce's aggressive targeting theory. 45 First, Commerce points to statements made by certain Korean bankers that the government influenced lending to favor manufacturing sectors of the economy over service sectors. Inferentially, the steel industry could be expected to benefit from that intervention. The same bankers, however, also made clear that lending to small businesses was favored over large ones, that the government had instructed the bankers to reduce lending to the largest corporations in Korea, of which POSCO was one, and that there were no specific preferences in favor of the steel industry. 46 Several sources referred to the ability of the Korean government to allocate credit in commercial banking. A report of the Organisation for Economic Co-operation and Development, for example, stated that supervision by the Korean Ministry of Finance goes beyond the mere monitoring and supervisory functions usually exercised by official bodies and has included allocation of financial resources. Similarly, articles in the Far Eastern Economic Review and the Economist made general references to official intervention in credit allocation. None of those sources, however, suggested that government officials intervened in lending decisions on behalf of the Korean steel industry during the investigation period. 47 The only sources identified by Commerce in support of credit allocation in favor of steel related to the period in which the Korean government was overtly favoring heavy industry. For example, a World Bank report assessed the distortive effect of preferences to steel and other favored industries before noting that in the mid-1980s government policy changed to favor smaller industries. An academic paper presented at the Korea Development Institute in 1989 also described credit policies undertaken by the government to favor steel, but did not suggest that those policies continued after the 1970s. 48 In sum, Commerce's conclusion that there is a causal nexus between the Korean government's control of the financial system and the domestic loans received by the steel industry from private sources is unsupported by substantial evidence. While it is clear that the Korean government exercised control to benefit the steel industry at one time, Commerce has not pointed to evidence from which it is reasonable to infer that the government's control continued into the period of investigation. The portion of the Court of International Trade's judgment sustaining the imposition of countervailing duties based on domestic credit provided to the Korean steel industry by private Korean lenders therefore must be reversed.