New Commerce Regulations Signal Greater Trade Remedies Enforcement

April 03, 2024

Following notice and comment rulemaking, new regulations will soon impact antidumping and countervailing duty proceedings before the U.S. Department of Commerce (“Commerce”).

Most substantively, in issuing the new rules Commerce stated that its changes will address transnational subsidies, create a first-of-its-kind regulation to address distortions in respondent cost reporting, and introduce provisions to address weak regulatory environments that distort production costs. We discuss these changes below.

Other regulatory changes of the procedural type — to scope rulings and circumvention cases, and to Commerce’s countervailing duty practices — will be covered by a separate CLK Insights post in the days ahead.

Commerce Signals Intent to Address Potential Transnational Subsidies Through the Countervailing Duty Law

The regulations arising out of the 1994 Uruguay Round Agreements Act (“URAA”) originally included 19 C.F.R. § 351.527, a section precluding Commerce from countervailing “transnational subsidies” (i.e., subsidies from State A which benefit a company located in State B). At that time, § 351.527 was characterized as carrying forward existing law. Now Commerce is repealing the regulation, reasoning that it had been inconsistent with the statute. According to Commerce, the URAA had repealed the provision of the Trade Agreements Act of 1979 that had previously barred Commerce from countervailing transnational subsidies and so Commerce has now deemed the regulation unduly restrictive to its countervailing duty practice.

In doing so, Commerce also explained that evolutions in international subsidy practice necessitated the regulation’s removal. Commerce explicitly cited the People’s Republic of China’s One Belt, One Road initiative as evidence of this evolving global dynamic. Notably, Commerce’s regulatory change tracks the recent countervailing duty practice of the European Union (“EU”) in which the EU has attributed subsidies emanating from the PRC to the governments of Egypt and Indonesia in cases concerning fiberglass and cold-rolled stainless steel flat products.

Commerce has not, however, attempted to establish standards by which it might evaluate transnational subsidy allegations going forward, stating that “{t}he existence of a transnational subsidy would be a case-specific one.” Commerce also declined to “speculate on what evidence is needed to allege or prove the existence of a countervailable transnational subsidy without analyzing in the first instance the record evidence presented in a particular proceeding.”

In a Novel Exercise of Authority, Commerce Creates Mechanisms to Eliminate Perceived Distortions in its Antidumping and Countervailing Duty Calculations Caused by Weak or Nonexistent Regulatory Regimes

Commerce has introduced new mechanisms for addressing distortions caused by nonexistent or poorly enforced “property, intellectual property, human rights, labor, and environmental protections.” Per the new regulations, ineffective or nonexistent enforcement of property, IP, human rights, labor, and environmental laws are:

  1. A basis for excluding CVD benchmark prices (19 C.F.R. § 351.511(a)(2)(v));
  2. A basis for excluding a surrogate value for a “significant” input or labor (19 C.F.R. § 351.408(d); and
  3. An example of a cost-based particular market situation distorting the value of a “significant” input or labor (19 C.F.R. § 351.416(d)(3)(v)).

Under these provisions, Commerce’s stated concern is not whether the subject country complies with international laws, agreements, or standards, but rather whether the property, IP, human rights, labor, and environmental conditions likely distort costs. As such, Commerce rejected arguments that these provisions infringed upon the sovereign rights of other countries or ran afoul of U.S. obligations under the WTO agreements, characterizing its “refusal to use distorted values in its methodologies and calculations {a}s not a novel concept,” and emphasizing that such determinations would be made on a case-by-case basis.

To facilitate case-by-case determinations, Commerce included additional procedures such as requiring parties to submit factual information demonstrating that weak or nonexistent regulatory regimes impact the relevant benchmark values, and procedural safeguards such as comparing against countries that are economically comparable to the country of exportation. Of note, however, Commerce explicitly recognizes that there may be occasions to depart from economic comparability in selecting among values to be used in the calculations.

Commerce Clarifies its Approach to Addressing Cost and Price Distortions Through the “Particular Market Situation” Provisions of the Statute

Pursuant to authority bestowed by the 2015 Trade Preference Extension Act, Congress provided Commerce the authority to adjust or disregard reported costs of production when calculating antidumping duties in cases where “the cost of material and fabrication or other processing of any kind does not accurately reflect the cost of production in the ordinary course of trade.” The 2015 amendment complements older legislative provisions, introduced by the 1994 URAA, which permit Commerce to disregard home market sales prices distorted by a particular market situation (“PMS”) that does not admit of a “proper comparison” with U.S. price.

The final rule marks the first time Commerce has set forth procedures and standards specific to PMS allegations where previously Commerce conducted its analysis on a case-by-case basis. The case-by-case approach led to various court decisions concerning Commerce’s PMS practice. Commerce’s new regulation defines both a PMS that distort sales prices of the foreign like product, as well as a PMS that distorts production costs.

Some key features of the regulation are that it:

  • Utilizes broad definitions of “market situation” in 19 C.F.R. § 351.416(d) and “particularity” in 19 C.F.R. § 351.416(e);
  • States that “particularity” concerns the market situation as a whole, rather than each individual factor, and does not need to be “unique”;
  • Explains Commerce’s understanding that the S. Court of Appeals for the Federal Circuit (“CAFC”) did not mandate a “pass-through” or “cause-and-effect” analysis to determine whether a countervailable subsidy contributed to a cost-based PMS;
  • Explains that quantitative analysis is not necessary to find costs outside the ordinary course of trade;
  • States that Commerce is not required to precisely quantify price/cost distortions caused by a PMS in order to determine the PMS exists;
  • States that the fact a circumstance has existed for a long period of time or exists in other markets does not preclude the circumstance from constituting a PMS;
  • Provides that PMS allegations require supporting documentation that is “reasonably available” to the alleging party, although allegations devoid of evidence will not be initiated upon; and
  • Extends the implications of cost distortions to potentially affecting the sales price of the foreign like product.

Commerce made several adjustments to the regulations as originally proposed but did not alter the core structure of the rule, with one exception.

Specifically, in response to comments, Commerce introduced a three-step analysis in § 351.416(f)(3) for Commerce to determine whether it is “appropriate” to adjust its antidumping calculations in response to an identified PMS. Specifically, Commerce will now consider: (i) whether it has “sufficiently addressed” the cost distortion through another statutory provision (e.g., the transactions disregarded rule of 19 U.S.C. § 1677(f)(2)); (ii) whether it lacks a reasonable method for quantifying a PMS adjustment; and (iii) whether the record suggests that an adjustment to the Secretary’s calculations would “otherwise be unreasonable.”

Much remains to be seen over the coming months as Commerce begins to apply these new regulations in practice. For both domestic and foreign interested parties, the new regulations provide additional opportunities and process to address how Commerce should calculate antidumping and countervailing duty margins.

Trade Remedies