In a Proposed Rule issued last year, the U.S. Commerce Department said it would take into account "nonexistent, weak, or ineffective property (including intellectual property), human rights, labor, and environmental protections" in various ways as part of its anti-dumping/countervailing duty calculations (surrogate value selection, § 351.408; particular market situation, § 351.416; adequacy of remuneration for provision of goods or services, § 351.511). Commerce explained its thinking as follows:
Government inaction and failure to enforce property (including intellectual property), human rights, labor, and environmental protections lowers the cost of production for firms in their jurisdiction. This is because such firms are not paying a ‘‘cost of compliance’’ for which firms operating in other jurisdictions are responsible to meet regulatory standards. The economics literature explains this in terms of externalities and public goods, identifying the fact that firms base their decisions almost exclusively on direct cost and profitability considerations, largely ignoring the indirect societal costs of their production decisions.
For example, foreign government environmental laws, policies, and standards might be weak, ineffective, or even nonexistent, allowing producers to dump toxic waste into the local water supply, or spew corrosive smog into nearby neighborhoods, which may enable producers to produce merchandise at costs lower than would be possible if the environmental laws were in place and effectively enforced. In other words, if a government does not require companies to mitigate the environmental impact of production, either through investing resources to avoid or minimize the environmental impacts, or by paying compensation for such impacts, their costs of production will be lower. Of course, with lower costs, the foreign producers would also be able to take those cost savings and ‘‘race to the bottom’’—charging their purchasers lower prices for their merchandise than their foreign competitors would be able to charge, all else being equal.
In another example, failure by foreign governments to implement or enforce labor and human rights protection laws would allow for unsafe and unhealthy working conditions, slave or forced labor, child labor, and even human trafficking. This would allow companies to avoid paying costs associated with preventing or mitigating such adverse labor and human rights impacts and thereby reduce their costs of production.
Similarly, if a producer incorporates certain technology into its production of merchandise which is subject to patent protections in the foreign country or abroad, but the foreign government does not act to enforce the intellectual property rights of the patent owner, absent the need to pay usage or licensing fees, the producer might enjoy a windfall not available to international competitors who, by law, are required to honor the rights of the patent owner and pay such fees. Put another way, companies would be able to use the knowledge others create without the high fixed costs of creating that knowledge themselves, or without paying the creator of the knowledge for its use, allowing the foreign producers to enjoy lower costs of production than they would if the intellectual property rights were properly enforced. Again, with lower and distorted production costs, the foreign producer in that scenario would be able to charge its customers less, all else being equal, than producers from countries in which intellectual property rights are respected and enforced.
Likewise, an unrelated entity might forcefully take over a company’s factory or inventory in violation of the producer’s property and real property rights, while the national government takes no action to prevent such usurpation. The result of such a forced transfer of managerial control could result in the price of the producer’s merchandise being lowered to unprofitable levels.
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. When such standards are not enforced, the lack of enforcement does more than merely lower firms’ production costs. Lower production costs can enable firms to lower prices for their products, which enable these firms to gain market share to the disadvantage of foreign competitors, including U.S. businesses, who pay such costs of compliance. For this reason, we propose to make certain modifications to the AD/CVD regulations to address this concern.
(footnotes omitted)
The Final Rule was published today. The discussion of the WTO consistency of these proposed rule changes is interesting. Commerce noted that:
Some commenters expressed concerns that Commerce’s consideration of the impact of foreign government inaction on costs or prices incorporates concepts not embodied in the relevant WTO agreements and allows Commerce to manipulate its trade remedy laws in an effort to force property (including intellectual property), human rights, labor, and environmental standards on other WTO members. They commented that the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade (AD Agreement) does not permit such considerations, pointing to a dispute Panel decision in European Union-Antidumping Measures on Biodiesel from Argentina, in which the dispute Panel concluded that a dumping analysis is not intended to cover certain distortions arising out of government actions or circumstances.74 They also suggested that other international and WTO agreements cover such matters satisfactorily.
74 See Report of the Panel, European Union – Anti-Dumping Measures on Biodiesel from Argentina, WT/DS473/R, (May 23, 2016) (European Union-Antidumping Measures on Biodiesel from Argentina), at para. 7.240.
Commerce's response to these comments was:
Commerce’s AD statute and regulations are in full compliance with the United States’ WTO obligations. Commerce is permitted under U.S. law and the AD Agreement to consider factors that may objectively distort costs of production. There is no obligation for WTO members enshrined in any of the WTO Agreements to ignore price or cost distortions caused by another government’s decision to ignore or permit a company to pollute, use slave labor, or discriminate in violation of a country’s own laws, or in absence of laws altogether, and therefore, benefit from cheaper production costs. As we indicated above, Commerce is codifying its consideration of the appropriate surrogate values, benchmark prices, or input cost in an PMS analysis. These considerations are not intended to impose any standards on any country.
Indeed, in the context of a surrogate value (which involves using values from other countries for a non-market economy analysis) and less than adequate remuneration analysis (which involves using prices from other countries to determine an appropriate benchmark value), the rejection of certain surrogates or benchmarks will have no bearing on the countries from which those prices or costs originate in any way. Thus, it is hard to see how such an analysis could ‘‘punish’’ the source countries, as stated by some in their comments. Further, for both a surrogate value and PMS analysis, Commerce’s analysis under §§ 351.408 and 351.416 will normally be limited only to ‘‘significant’’ inputs, reflecting that Commerce’s analysis will be a targeted analysis focused only on certain alleged ‘‘weak, ineffective, or nonexistent’’ protections and their impact on certain costs of production, and no more.
Finally, we disagree that other WTO Agreements address Commerce’s concerns in this regard in any way. These modifications to the trade remedy regulations address distortions in costs or prices caused by weak, ineffective, or nonexistent protections, and other WTO Agreements do not address such cost or price distortions.
These issues could show up in a future WTO complaint, and that will certainly be something to look out for. But in the short term I am more interested in how this will play out in U.S. agency decisions and domestic court appeals. Evaluating property, IP, human rights, labor, and environmental protections in this way seems like a challenge, and U.S. courts (and perhaps USMCA binational panels too) could be asked to scrutinize whatever Commerce does here as it considers these issues in specific investigations and reviews. Also worth noting is that the petitioners' bar has an opportunity to get creative with all this, and Commerce will be reacting to what is put before it by the domestic industry lawyers.
