Final U.S. AD/CVD Rules Allow Targeting of Inaction on Property, IP, Labor, Environment, Human Rights

Under a final rule published today, the U.S. Commerce Department will 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. Chinese products are likely to be targeted here, although these goods are already subject to a range of methodologies that lead to high anti-dumping/countervailing duties, so the ultimate impact on duties on China might not be that significant.

As CTM reported in August 2023, the U.S. Department of Commerce (DOC) was considering proposed rule changes that would take into account "inaction" by foreign governments in a number of policy areas as part of the calculation of anti-dumping and countervailing duties.

In its proposed regulations, the DOC highlighted government inaction and failure to enforce "property (including intellectual property), human rights, labor, and environmental protections," which "lowers the cost of production for firms in their jurisdiction." In this regard, the DOC explained that the lower costs arise because "such firms are not paying a 'cost of compliance' for which firms operating in other jurisdictions are responsible to meet regulatory standards."

The DOC proposed "certain modifications to the AD/CVD regulations to address this concern," as follows:

• A modification to § 351.511(a), which applies to a CVD analysis covering the provision of goods or services. Because "the lower and distorted prices that may result from the above-mentioned types of government inaction may, in some circumstances, not allow for appropriate comparisons," the DOC "may determine that those prices are unusable and should be excluded from consideration as a benchmark." In this regard, "[f]or purposes of determining a benchmark under § 351.511(a)(2), in light of the fact that government inaction in certain matters can result in distorted prices," the DOC "therefore propose[d] to add a provision to § 351.511(a)(2) which states that when parties have demonstrated, with sufficient information, that there is a likely impact on prices of that input as a result of weak, ineffective, or nonexistent property (including intellectual property), human rights, labor, or environmental protections, we may exclude such prices from our benchmark analysis."
• Turning from CVD law to AD law, "in selecting a surrogate value in determining normal value for non-market economy AD investigations and administrative reviews," the DOC proposed "a change to § 351.408 to provide that Commerce may consider weak, ineffective, or nonexistent property (including intellectual property), human rights, labor, or environmental protections in its analysis, should interested parties raise the issue and submit information on the record in support of their claims." Specifically, it proposed adding paragraphs (d)(1) and (2) to § 351.408, which states that the DOC "may disregard a particular surrogate value if it concludes that weak, ineffective, or nonexistent environmental, property (including intellectual property), labor, or human rights protections undermine the appropriateness of using a particular surrogate value in Commerce's analysis."
• Including consideration of weak, ineffective, or nonexistent property (including intellectual property), human rights, labor, and environmental protections that lower and distort costs of production as examples of a "particular market situation," under proposed § 351.416.

In the final rule, the DOC said that it had "received numerous comments on those proposals," and in response made "minor edits to the surrogate value proposed regulation" as well as "some changes to the PMS regulation."

In explaining its changes, it noted several points: Certain commenters "expressed overarching concerns about Commerce’s proposals, claiming that Commerce did not have the appropriate expertise or statutory authority to address the lack of various 'social' protections in its analysis"; one commenter suggested that the DOC was "attempting to set itself up as judge, jury and executioner" on matters of property rights, human rights, labor rights and environmental protections, and that by analyzing the protections provided by various countries, it was "unilaterally" "asserting authority to stand in judgment of the enforcement of various rights by other sovereign nations"; and another commenter claimed that the DOC was trying to "insert social considerations into AD calculations" through "social dumping."

On the other hand, other commenters stated that "not only was Commerce acting within its statutory and inherent authority, but that Commerce’s proposal is too narrow, and Commerce should consider even more scenarios involving property (including intellectual property), human rights, labor, and environmental protections (and the resulting low or nonexistent compliance costs)."

In response, the DOC said it "has the statutory and inherent authority to consider the impact of weak, ineffective, or nonexistent protections on its analysis of surrogate values, benchmark prices, and costs of production in its PMS analysis." It also said that "Commerce’s intent through these regulations is not to consider foreign government policies into its calculations to effectuate change in those policies, but instead to focus on one overarching analysis relevant to its calculations: whether the record reflects that certain prices or costs at issue were, more likely than not, distorted by identified weak, ineffective, or nonexistent protections." Accordingly, "there is no validity to the concerns that Commerce is trying to be a 'judge, jury and executioner' on the property rights (including intellectual property), human rights, labor rights, and environmental protections administered and enforced by other countries, nor that it is trying to be act as 'global rights police' through these regulatory changes, nor that it is trying to push certain United States 'policy preferences'."

The DOC further stated that it "will analyze weak or ineffective protections by entities entrusted or directed by the government to provide such protections"; that the revised regulations "are consistent with the United States’ WTO obligations"; and that it will not issue a regulation in the final rule that countervails government inaction with respect to property (including intellectual property), human rights, labor, and environmental protections as a subsidy, noting that the "[t]he purpose of these regulations is not to treat weak, ineffective, or nonexistent government protections as a countervailable subsidy, but instead to consider that the lack of protections has real-world impacts on costs of production and prices, and reject the use of distorted surrogate values, benchmark prices, or input costs if Commerce determines that government inaction resulted in such distortions."

These changes could have an impact on many countries that are subject to U.S. anti-dumping/countervailing duties, and China has faced accusations in all of the areas of government inaction noted above. However, it is worth noting that Chinese products already experience very high AD/CVD tariffs due to other calculation methodologies used by the DOC, so the impact on China in terms of higher tariffs may not be that great. At the same time, any discussion of these issues is sensitive for China, so there may be political implications even beyond the impact on duties.