Commerce Proposes Modernized Regulations to Address 21st Century Trading Challenges

May 31, 2023

This month Commerce published proposed updates to its trade remedies regulations in the Federal Register. These include important modifications intended to address evolution in the unfair trading practices that injure American workers and businesses, and also recognize Commerce’s greater authority under existing law to account for foreign market distortion. Separately, Commerce has proposed modifications to its September 2021 scope, circumvention, and covered merchandise inquiry regulations which account for Commerce’s recent experience. Additional proposals, addressed at the end of this client update, are described as codifying existing Commerce practice, or otherwise consist of adjustments that are practice-oriented rather than substantive.

Comments, whether in support or in opposition, are due by July 10, 2023, via, docket number ITA-2023-0003.

Regulatory Updates that Account for 21st Century Unfair Trading Practices  

Removing the Barrier to Addressing Transnational Subsidies

One important example concerns transnational subsidization, i.e., where the government of Country A subsidizes a firm operating in Country B. At present, Commerce’s 1998 countervailing duty (“CVD”) regulations carve out such subsidies as non-countervailable, despite such treatment not being mandated by the governing statute (or the WTO Subsidies and Countervailing Measures Agreement). In proposing to eliminate this self-imposed regulatory barrier, Commerce observed that in the intervening decades, “instances in which a government provides a subsidy that benefits foreign production {have become} far more prevalent,” and that precluding Commerce from redressing the injury caused by such subsidies “is inconsistent with the very purpose of the CVD law.” As other commentators have observed, this has clear implications for major multinational industrial subsidies, such as those associated with the People’s Republic of China’s “Belt and Road Initiative.”

Addressing Weak or Nonexistent Property, Intellectual Property, Human Rights, Labor, and Environmental Protections

Commerce also proposes to evaluate the extent to which weak or nonexistent enforcement of property, intellectual property, human rights, labor, and environmental protections result in or contribute to unfair trade practices. Commerce’s proposals provide a few illustrative examples, such as non-collection of environmental fines, the use of patented technology absent any government action to enforce intellectual property rights, and forced asset transfers. The insufficiency of such protections may result from government action, or government inaction. Consistent with Commerce’s practice, Commerce’s amended regulations would include unpaid or deferred fees and penalties associated with, e.g., a respondent’s failure to satisfy environmental and labor regulations, as a type of countervailable subsidy. Commerce proposes to furthermore consider weak, ineffective, or nonexistent property, IP, human rights, labor, and environmental protections (1) as a possible basis for excluding benchmarks used to assess whether goods or services were provided for less-than-adequate remuneration; (2) as a possible basis for excluding surrogate values for non-market economy antidumping proceedings; and (3) in finding particular market situations and adjusting reported production costs to account for the same. In short, lax protections such as those described in Commerce’s proposed regulations would have the potential to materially increase subsidy rates and dumping margins.

Addressing Distorted or Non-Market Sales Prices and Production Costs

Commerce has created its first ever particular market situation (“PMS”) regulation, addressing both the longstanding “sales-based” PMS provision that addresses distorted home and third country market sales prices, as well as the “cost-based” PMS provision added by the 2015 Trade Preferences Extension Act to address distorted production costs. Commerce’s proposed regulation defines several key terms, provides examples of a cost-based PMS, and otherwise frames up the steps and thresholds in Commerce’s analysis. While this was certainly informed by Commerce’s recent practice in administering the PMS provisions, several aspects are responsive to recent judicial opinions on the subject, including the U.S. Court of Appeals for the Federal Circuit’s NEXTEEL Co., Ltd. v. United States ruling.

Commerce defines a cost-based PMS in two steps:

First, a “market situation” is a “circumstance or set of circumstances” that distorts the cost of production of subject merchandise (i.e., the circumstance(s) in question “likely contributed to the distortion in prices or costs of a significant input or the costs of production”). As an alternative to being “distorted,” costs might instead “not {be} in accordance with market-based principles.”  This is “usually a qualitative” analysis, though it could be shown quantitatively.

Second, Commerce will consider whether the market situation is “particular,” i.e., “the resulting distortions in prices or costs impact only certain products or certain parties in the subject country.”  This may be “a large number of distinct products or parties,” but should be something less than “all market activity in the {subject} country.” Commerce allows that particularity may exist even where all market activity in the country is somehow impacted, if “certain parties or products {are impacted} to a greater extent than others.” What is important in Commerce’s framework is the absence of an impact that is “uniform among the country as a whole.” Commerce also notes that particularity may be satisfied where the market situation “exists in multiple countries,” and confirms that the market situation “need not be ‘unique’ or excessively narrow in its application.”

This is a new definition of “particularity” outside the mainstream of what parties have argued in recent proceedings before Commerce. Nevertheless, it appears that it could be applied rather straightforwardly to the large majority, if not all, types of PMS’s found to date.

Commerce also provides practitioners a non-exhaustive list of PMS examples, e.g., considerable oversupply of a significant input, government control over production of a significant input, or export limitations affecting significant inputs. While described in broad terms, these examples nevertheless include limiting language (e.g., the references to “significant inputs” or “considerably more” supply). Commerce declined to expressly include transnational subsidization among these examples, but left the door open to finding a PMS on that basis, simply stating that it “require{s} analysis and consideration of the program and facts unique to that program.”

As for how Commerce might quantify a PMS or adjust its calculation, it has opted to leave all options on the table, rather than specifying any particular default approach. Commerce also adopted the Federal Circuit’s language from NEXTEEL to the effect that Commerce is not required to quantify the distortion precisely.

Commerce also defines a sales-based PMS as a “circumstance or set of circumstances” that prevents a proper comparison of U.S. and comparison market prices. Importantly, pushing back on some contrary CIT analysis, Commerce does not extend this “proper comparison” language to the cost-based PMS definition. Commerce notes that a cost-based PMS may “contribute to” a sales-based PMS, but declines to establish an explicit presumption that a cost-based PMS leads to a sales-based PMS.

Finally, Commerce confirmed that a PMS finding in one segment of a proceeding would not carry over to other segments, requiring new allegations and supporting record evidence in each Commerce segment.

Scope, Circumvention, and Covered Merchandise Inquiry Amendments

These modifications concern Commerce’s determinations of what merchandise is covered by or otherwise subject to duties under a given antidumping duty or countervailing duty order. The modifications are based upon Commerce’s experience administering its September 2021 scope, circumvention, and covered merchandise inquiry regulations. Substantively, Commerce intends to substantially alter its pre-inquiry operations. Currently, Commerce receives a scope or circumvention inquiry request and determines on that basis whether to initiate an investigation. Commerce proposes to instead permit other interested parties to submit information in rebuttal to such requests, followed by a brief sur-rebuttal period. Commerce also proposes to revise its current “accept-or-reject” stance toward scope and circumvention inquiry requests, to allow the agency itself to request “clarifications.” On the one hand, this would permit parties requesting such inquiries to remedy minor defects without the delay associated with an outright denial and refiling. On the other hand, by extending pre-initiation proceedings, Commerce would extend initiation timelines, and thus delay any relief that might follow Commerce’s scope or anticircumvention determination.

Relatedly, Commerce proposes to extend the deadline for preliminary circumvention determinations from 150 days up to 240 days. Although Commerce has not proposed modifying the deadline for final circumvention determinations, its proposal would nevertheless push back the application of provisional cash deposit requirements associated with affirmative preliminary determinations.

Finally, addressing a gap in its current regulation, Commerce intends to make clear that a scope inquiry may be requested prior to importation, so long as the requesting party can provide evidence that the product in question is actually produced and sold in some market. This should permit importers to obtain greater clarity on their potential antidumping/countervailing duty exposure before the importation of covered merchandise into the United States.

Additional, more technical amendments were proposed, including:

  • Clarifying the unliquidated entries to which suspension of liquidation applies upon initiation of a scope and covered merchandise inquiry.
  • Articulating additional examples of “scope clarifications,” which are essentially quasi-scope inquiries of a more technical nature (e.g., reflecting changes in industry standards referenced in scope language).

Adjusting Commerce’s administrative protective order practice to permit BPI associated with scope, circumvention, or covered merchandise inquiries to be placed on the record of antidumping and countervailing duty proceedings applicable to the same product.

Codification of Existing Practices and Other Procedural Adjustments

The codifications and clarifications which follow are, in Commerce’s view, generally intended to set forth administrative practices that would otherwise need to be discerned through the manual review of prior agency decisions.

Proposed Changes to Countervailing Duty Regulations
  • Codifying Commerce’s hierarchy for selecting among alternative subsidy rates where Commerce finds a gap in the administrative record and a respondent has not cooperated to the best of its ability.
  • Codifying Commerce’s practice of calculating subsidy benefits without regard for any compliance costs (e.g., where a law mandates renewable energy production but provides grants to purchase solar panels), an approach that the U.S. Court of International Trade has likewise upheld.
  • Codifying or establishing certain specialized countervailing duty calculation methodologies (related to, e.g., allocating forgiven debts and equity infusions, treating loan benefits as grants when not repaid, the period over which export insurers must have covered their costs, attribution of income tax benefits).
  • Codifying Commerce’s practice of assessing a firm’s equity-worthiness from the perspective of an outside private investor (as opposed to an investor that has already invested in the firm).
  • Clarifying that certain domestic and export subsidies may be allocated to multinational production.
Other Proposed Changes to Procedures

Finally, Commerce’s procedural modifications include the codification of existing practice, as well as the creation of certain deadlines and exceptions to existing practice that Commerce considers useful, including:

  • Requiring that PMS allegations include supporting evidence but limiting this to information “reasonably available” to the alleging party.
  • Codifying and clarifying the specific types of documents that Commerce does not require to be placed on the administrative record in order to be referenced in a proceeding. Notably, this includes U.S. International Trade Commission injury publications.
  • Creating an exception to Commerce’s existing regulations that would empower Commerce to place calculation memoranda on the record after the conclusion of case briefing when Commerce considers such memoranda relevant to the disposition of an argument raised in parties’ briefs. Rebuttal comments would be permitted in response, but the submission of other calculation memoranda in response would be precluded.
  • Specifying a deadline of 30 days before Commerce’s final decision by which parties must provide any notice of subsequent authority (e.g., subsequent court or agency decisions).
Trade Remedies