On May 9, 2023, the U.S. Department of Commerce (Commerce) proposed a broad array of procedural and substantive amendments (available here) to the regulations that govern the agency’s administration of the antidumping duty (AD) and countervailing duty (CVD) laws.1 The proposed regulations reflect the Biden administration’s “new story on trade” by focusing on various issues related to fairness and sustainability.2 If these proposals are adopted, Commerce and domestic interested parties would have access to powerful new tools that could have significant effects on future AD/CVD proceedings.
This Update focuses on three of the most important new tools presented in these proposed regulations: (1) tools to address alleged government “inaction” related to property rights (including intellectual property),3 human rights, labor, and environmental protection issues; (2) tools to address potential excess capacity and oversupply of certain major inputs in the international market; and (3) tools to address transnational subsidization.4 These tools may result in new investigations, more rigorous administrative proceedings with higher burdens, and substantially increased AD/CVD rates in future proceedings. They may also be inconsistent with current U.S. law and the United States’ World Trade Organization (WTO) obligations.
Commerce invited parties to comment on the proposed regulations by July 10, 2023. Sidley attorneys are available to advise and help prepare comments on behalf of interested parties.
I. Tools to Address Issues Related to Property Rights, Human Rights, Labor, and the Environment
One key addition in the proposed regulations authorizes Commerce to consider evidence of “weak, ineffective, or nonexistent property, intellectual property, human rights, labor, and environmental protections and the impact that the lack of such protections has on the prices and costs of products” in various aspects of AD/CVD proceedings. In particular, if promulgated as drafted, Commerce will be able to use such considerations to
- countervail a new subcategory of alleged subsidies
- select benchmarks for alleged subsidies related to the provision of goods and services in CVD proceedings
- disregard information when selecting surrogate values in nonmarket economy (NME) AD proceedings
- determine that a PMS exists requiring adjustments to sales price comparisons and cost of production calculations in AD proceedings
First, the proposed regulations would add a new subcategory of countervailable subsidies titled “Certain fees, fines, and penalties.” Within this new subcategory, as explained in the preamble of the proposed regulations, Commerce may find that a government’s inaction or failure to collect fees, fines, and penalties — including those in place to enforce laws, regulations, and policies related to property rights, human rights, labor, and environmental protections — qualifies as a countervailable subsidy. Commerce provides, as one example, foregone revenue from the government’s decision to not collect penalties for noncompliance with labor laws and regulations.5
Second, Commerce would be able to rely on evidence of weak, ineffective, or nonexistent property rights, human rights, labor, and environmental protections in CVD proceedings to reject certain prices as part of its benchmarking analysis to measure adequacy of remuneration when calculating subsidy rates for government-provided goods and services. Under the proposed regulations, if a party provides Commerce with sufficient evidence demonstrating government inaction on these issues, Commerce may find prices from the respective country to be unreliable and/or unreasonable to serve as benchmarks.6
Third, similar to its ability to reject prices as part of its benchmarking analysis in CVD proceedings, Commerce would be authorized in NME AD proceedings to disregard potential sources of information that previously could have served as surrogate values for certain inputs when calculating normal value if Commerce concludes that weak, ineffective, or nonexistent property rights, human rights, labor, or environmental protections undermine the appropriateness of using a particular surrogate value in Commerce’s analysis. However, the proposed regulations limit Commerce’s ability to disregard information when selecting surrogate values for significant inputs and labor, and only in instances when the surrogate value is sourced from one country or is an average from a limited number of countries.7
Fourth, also in AD proceedings, evidence of weak, ineffective, or nonexistent property rights, human rights, labor, and environmental protections may be used to support allegations that a PMS exists requiring adjustments to Commerce’s sales price comparisons or cost-of-production calculations. As explained in a previous Sidley Update (available here), when Commerce determines that a PMS exists, Commerce may deviate from a respondent’s reported home-market/third-country sales prices or production costs as “outside the ordinary course of trade” when determining whether exports to the United States have been sold at dumped prices.8
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The message conveyed by these new tools is clear: There will be consequences if companies and countries seeking to export to the U.S. market do not maintain property rights, human rights, labor, and environmental protections consistent with the values of the United States. Indeed, these updated AD/CVD regulations are consistent with other administration priorities that have advanced these values, such as the Uyghur Forced Labor Prevention Act, the Global Arrangement on Sustainable Steel and Aluminum, and increasing sanctions designations for human rights violators.
II. Tools to Address Issues Related to Global Overcapacity and Oversupply
The proposed regulations also provide for tools to address concerns arising from alleged overcapacity or oversupply of certain key materials in the global marketplace that may distort the cost of producing merchandise subject to an AD proceeding. Specifically, Commerce would be able to address the alleged global supply concerns through a finding that a PMS exists.
Under the proposed regulations, Commerce would be able to determine that a PMS exists if Commerce is provided evidence that supply of a significant input used to produce the merchandise subject to the proceeding is greater than demand in international markets, and, as such, the price or cost of the significant input is distorted. The PMS finding would allow Commerce to adjust its cost-of-production calculations when conducting its AD analysis.9 For example, if a downstream steel product (e.g., cold-rolled steel) is subject to an AD proceeding, and Commerce receives evidence that there is global oversupply of upstream steel products (e.g., hot-rolled steel) that are a significant input used to produce the downstream steel product, Commerce may find that a PMS exists and may adjust the cost of production calculations to address any alleged distortions arising from the oversupply.
III. Potential Tools to Address Transnational Subsidies
The proposed regulations contemplate a third major area of concern: transnational subsidies. Specifically, Commerce announced its intention to remove the regulation that precludes it from countervailing transnational subsidies (i.e., 19 C.F.R. § 351.527).10 The removal of the transnational subsidy regulation provides Commerce the opportunity to address alleged unfair practices related to foreign direct investment initiatives, with the main target appearing to be China’s Belt and Road Initiative, and opens the door to subsidy allegations in CVD investigations that previously would not have been possible.
Under the existing regulations, Commerce cannot countervail any alleged subsidies provided by the government of a country other than that of the country in which the recipient firm is located. For instance, if the government of China provides a grant to a producer/exporter located in Vietnam, Commerce cannot determine this grant to be a countervailable subsidy.
The proposed removal of 19 C.F.R. § 351.527 paves the way for Commerce to countervail such programs. Indeed, if a producer/exporter in Vietnam were receiving subsidies only from the Chinese government, there would be no mechanism prior to the removal of this language to impose a countervailable duty to offset such subsidies. The only exception to this would be if the producer/exporter in Vietnam were found to be circumventing an existing CVD order against China. Now, with the proposed removal of 19 C.F.R. § 351.527, Commerce may not be precluded from finding subsidies provided by China to a producer/exporter in Vietnam to be countervailable in a CVD proceeding against Vietnam.
Whether Commerce has authority under the existing statute or under WTO law to countervail transnational subsidies, however, is questionable. Two years ago, Congress proposed amending the statute to include language expressly authorizing Commerce to countervail transnational subsidies. A previous Sidley Update (available here) provided more information about this proposal. Commerce now appears to take the position that the existing statute already authorizes it to countervail transnational subsidies. If the removal of 19 C.F.R. § 351.527 is included in Commerce’s final regulations and Commerce does eventually countervail transnational subsidies, the issue of Commerce’s authority to do so may be ripe for litigation in the U.S. courts as well as at the WTO.
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If one or more of the new tools discussed above are promulgated in the final regulations, we expect a significant number of new allegations and arguments in AD/CVD proceedings, which will require vigorous support or defense from domestic industries and foreign respondents. Parties should be prepared to address these issues in future AD/CVD proceedings.
We also expect that these new tools, as currently drafted, would face legal challenges, both in U.S. courts and before the WTO. Substantial questions arise as to the legality of these proposed regulations under Commerce’s statutory authority and its obligations under international law.
1 See Regulations Improving and Strengthening the Enforcement of Trade Remedies Through the Administration of the Antidumping and Countervailing Duty Laws, 88 Fed. Reg. 29850 (Dep’t of Commerce May 9, 2023) (Proposed AD/CVD Regulations).
2 See U.S. Trade Representative Katherine Tai’s Testimony Before the Senate Finance Committee Hearing on the President’s 2023 Trade Policy Agenda, available here.
3 Throughout this Update, references to property rights include both real and intellectual property.
4 Other aspects of the proposed regulations relate to various procedural deadlines, definitions, and methodologies. The deadlines relate to (1) scope and circumvention inquiry initiations and determinations; (2) comments and factual information; and (3) supplemental authorities and administrative decisions in other proceedings. The new or revised definitions and calculation methodologies include (1) the definition of factual information; (2) the definition and methodologies to determine whether a particular market situation (PMS) exists in AD proceedings and how to account for it; and (3) the definition and benefit calculations of various types of subsidies, including loans, equity infusions, debt forgiveness, direct taxes, provisions of goods and services, and export insurance. This Update does not specifically address these items. Should you have questions related to these issues, please contact your Sidley attorney for advice.
5 Proposed AD/CVD Regulations, 88 Fed. Reg. at 29858.
6 Proposed AD/CVD Regulations, 88 Fed. Reg. at 29859-60.
7 Proposed AD/CVD Regulations, 88 Fed. Reg. at 29860-61.
8 Proposed AD/CVD Regulations, 88 Fed. Reg. at 29861-62.
9 Proposed AD/CVD Regulations, 88 Fed. Reg. at 29864.
10 Proposed AD/CVD Regulations, 88 Fed. Reg. at 29870.
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