As has been widely publicized, the U.S. Department of Commerce recently issued proposed amendments to its antidumping (AD) and countervailing duty (CVD) regulations. [1] These proposed amendments come in the wake of Commerce’s revisions to the regulations governing scope and anti-circumvention proceedings, as discussed in my note posted in October 2021. The new proposals cover a broad range of topics, both technical and substantive, several of which are novel and significant. In this note, I focus on one of the more far-reaching proposed revisions – namely, the expansion of the types of issues that the trade remedy laws are intended to address.
Traditionally, the AD and CVD laws have been understood as limited to specific types of economic conduct – predatory pricing (or price discrimination) in the case of AD, and government financial contributions that confer a benefit on foreign producers/exporters in the case of CVD. The proposed regulations will significantly expand that scope by authorizing proceedings to address the fundamental economic concept of externalities, as well as benefits to foreign production that are difficult to quantify, such as lax enforcement of labor, environmental, human rights, and intellectual property (IP) rules. The proposed expansion of the U.S. trade remedies regulations is consistent with the current Administration’s efforts to include non-traditional elements in trade agreements and in the standards by which international trade is to be judged.
Several aspects of this proposed expansion of the trade remedies regulations deserve attention.
First, the Proposed Rule would address not just actions taken (or financing provided) by foreign governments to support their producers and exporters, but also foreign government “inaction” in enforcing their laws in the fields of property rights (including IP), labor protections, human rights, and environment protection, where that inaction “evinces the existence of a financial contribution” to a foreign producer. [2] The Proposed Rule explains,
“We recognize that every country retains discretion to pursue its own priorities, whether through directed efforts to assist in the economic success of its domestic industries, such as subsidies and government assistance, or by implementing and enforcing certain laws, policies and standards for the public welfare. However, we also recognize that when governments take little or no action to implement or enforce such laws, policies, and standards, benefits may accrue to a company in a way that provides the company with a financial advantage over its competitors.” [3]
What is intriguing is not just the expansive reach of the Proposed Rule, but also that Commerce’s explanation uses language broader than that traditionally used to describe and justify the trade remedy laws. That is, Commerce’s explanation uses the economic terminology found in studies of externalities to describe the failure of markets to set prices that capture the social costs of production. Commerce explains that producers do not typically consider externalities (i.e., “the indirect societal costs of their production decisions”) when setting prices and calculating profits, and as a result, government regulation is necessary to ensure that those externalities are captured and the full “cost of compliance” is considered by producers. Classic sources in the economic literature, such as Coase and Samuelson, are cited in support of this principle. [4] The logical outcome of this analysis, according to Commerce, is that the failure of a foreign government to enforce its regulations confers a benefit on producers who are not required to fully internalize the social costs incurred through their productive activity.
Second, Commerce justifies the proposed rule in part by comparing the economic impact of government inaction across, rather than within, countries. The Proposed Rule states:
“These examples of foreign government inaction could result in costs and prices that are unreasonably suppressed and create an unlevel playing field between producers and suppliers in countries in which governments provide weak, ineffective, or nonexistent property (including intellectual property), human rights, labor, and environmental protections, and producers and suppliers in countries in which the governments provide and enforce such protections.” [5]
This reasoning seems to conflate the situation in countries where necessary rules don’t exist with countries where rules exist but are inadequately enforced. Put differently, the term “provide,” in the quoted text, is different from “enforce.” It would be difficult, if not impossible, to compare the “costs of compliance” [6] across countries when different countries impose different compliance obligations in the first place.
As noted above, Commerce concedes that different countries will have different enforcement priorities. And it appears to recognize the obvious point that the trade remedy laws of a single country – such as the United States – are not a suitable engine to ensure that the entire global economy accedes to a given level of labor, environmental and IP standards. However desirable such global standards may be, they must be established through multilateral (or at least bilateral) agreement, as seen in the United States’ negotiation of agreements that include such standards. But if that is true, then it would be difficult for CVD rules to be applied through a comparison of general policies regarding cost internalization in one country against another, despite what Commerce seems to be saying at several points in the Proposed Rule. [7]
Third, the Proposed Rule would apply the “inaction” principle in several ways. A finding that a foreign government failed to enforce its rules would impact CVD determinations in two ways, and one in AD. The first CVD impact is direct, if limited. A proposed new regulation, 19 C.F.R. 351.529, would provide that a failure by a foreign government to impose or collect “fees, fines, and penalties” from a producer/exporter would be treated as a countervailable subsidy. This would be limited, presumably, to situations in which the other criteria for countervailability – most importantly, specificity – were also found to exist. The countervailable benefit would be measured as the amount of the fee that was not collected, or the amount of interest foregone in the case of deferred payment of a fee. [8]
The second CVD impact is less direct, but it raises more fundamental issues. The Proposed Rule would amend section 351.511(a)(2) of Commerce’s regulations, concerning the benchmark used to determine whether a foreign government is providing goods or services at “less than adequate remuneration.” The proposed amendment would authorize Commerce to consider whether “certain prices are derived from countries with weak, ineffective, or nonexistent property (including intellectual property), human rights, labor, or environmental protections.” If so, those prices could be excluded from the benchmark against which the provision of goods or services by the government under investigation to its producers/exporters would be measured. As the quoted language makes clear, the exclusion of the third country’s prices from the benchmark would be based on broad social and economic findings – far broader than the “fees, fines, and penalties foregone” principle. Importantly, however, the financial impact of those broad findings – i.e., the “weak, ineffective or nonexistent” legal protections – would not have to be quantified, thus avoiding what would entail a very complex exercise.
In the AD space, the proposed impact of the “inaction” principle focuses on the calculation of dumping margins for non-market economy (“NME”) countries – primarily China and Vietnam. In calculating the dumping margin for an NME producer, Commerce does not determine the “normal value” (“NV”) of the merchandise exported to the United States on the basis of the prices charged by that producer in its home country. Rather, it bases NV on the value of the inputs (“factors of production” or “FOPs”) used to produce the subject merchandise in a “surrogate” market economy country at a level of economic development comparable to the NME. [9] The Proposed Rule would authorize Commerce to disregard a proposed market economy surrogate value if, inter alia, that value is “derived” from an industry, region or country with “weak, ineffective, or nonexistent property (including intellectual property), human rights, labor, or environmental protections.” [10] Thus, for example, if the environmental protections or IP enforcement in proposed surrogate countries for China, such as Romania or Malaysia, are found to be inadequate, and if they “undermine the appropriateness” of the value of a significant FOP, then Commerce could disqualify that surrogate country’s data to value the FOP.
Finally, on a procedural matter, Commerce has invited comments on the Proposed Rule, which are due by July 10, 2023. The Proposed Rule will certainly be subject to careful review by Commerce before it is finally promulgated, and the provisions discussed in this note may undergo substantial revision. In addition, however it is finally formulated, the Proposed Rule will almost certainly be subject to challenge, either in domestic litigation – as exceeding the scope of the AD/CVD laws and Commerce’s authority as granted by Congress – or the WTO – as exceeding the scope of the AD/SCM Agreements to which the United States acceded – or both.
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Through his 39 years of experience in the international trade regulatory field, Neil Ellis has worked extensively with his clients in evaluating and commenting on proposed amendments to U.S. statutes and regulations. If you have questions regarding the Proposed Rule – either the specific topics discussed in this note, or otherwise – please feel free to contact us at neil@neilellislaw.com.
[1] U.S. Dep’t Commerce, “Regulations Improving and Strengthening the Enforcement of Trade Remedies Through the Administration of the Antidumping and Countervailing Duty Laws,” 89 Fed. Reg. 29850 (May 9, 2023) (“Proposed Rule”).
[2] Id., 89 Fed. Reg. at 29858.
[3] Id.
[4] Id., 89 Fed. Reg. at 29859 n.29 (citing, among others, the classic article by Ronald Coase, “The Problem of Social Cost,” 3 J. L. & Econ. 1 (1960)).
[5] Id., 89 Fed. Reg. at 29859.
[6] Id.
[7] And indeed, challenges of general economic and welfare policies enacted by foreign countries may necessarily be limited by the “specificity” concept that underpins the CVD law. See 19 U.S.C. 1677(5A); WTO Agreement on Subsidies and Countervailing Measures, Arts. 1.2 & 2.
[8] The proposed regulation, 19 C.F.R. 351.529(b), explains that the deferral of the payment of a fee, fine, or penalty would be treated as a government-provided loan in the amount of the payment deferred.
[9] See 19 U.S.C. 1677b(c); 19 C.F.R. 351.408.
[10] Proposed Rule, 89 Fed. Reg. at 29875 (proposing new subsection 351.408(d)).