Price: New trade rules will help domestic industries fight "unfair" trade

Domestic steel producers have long alleged that the DOC’s rules have not adapted to modern unfair trade practices. Based on dozens of comments, including comments from members of the steel industry, the DOC has adopted new tools to “enhance, improve, and strengthen” its enforcement capabilities. The changes address the impact of cross-border subsidies, government inaction, and macroeconomic distortions that previously limited the effectiveness of US trade law.

A particularly notable change is the DOC’s decision to remove a self-imposed prohibition on accounting for cross-border subsidies. Traditionally, the DOC could not apply duties for subsidies that the government of Country A provided to companies located in Country B. The DOC’s underlying assumption was that a government would not provide subsidies to benefit companies and citizens in another country.

Now, however, the DOC acknowledges that this prohibition “was promulgated over 25 years ago in a global trade environment much different than the current trade environment.” Since then, China’s Belt and Road Initiative changed the basic assumption that subsidies are restricted to the grantor’s territory. “[Cross-border subsidies] are provided to promote the grantor country as well as the recipient country’s manufacturing capacities for a particular industry,” the DOC explained.

The DOC cites the government of China’s “direct investments in a third country from state-owned enterprises, with backings from state-owned policy banks, promoting [China’s] industrial policy.” Several years ago, the EU changed its practice to allow third-country subsidies to be addressed, and the DOC’s recent action is an example of the US government catching up to address evolving problems.

This regulation may have direct applications to steel. Subsidized state-owned and state-supported Chinese steel companies have invested heavily in new capacity in Association of Southeast Asian Nations (ASEAN) countries. The Organization for Economic Co-operation and Development (OECD) reports that “Chinese steel companies are investing significantly overseas, specifically in ASEAN and other parts of Asia, as well as Africa,” accounting for 65 percent of all cross-border investments in new capacity.

Much of this capacity has been identified by the OECD as high emission BF/BOF capacity that is adding to the global excess capacity crisis and contributing to climate change. Steel products imported from these producers will now be vulnerable to higher subsidy rates under the DOC’s new approach to cross-border subsidies.

The new rules also counteract foreign government inaction. “Both government action and inaction can benefit producers or exporters,” the DOC explains. According to the DOC, this is most obvious when a government foregoes collecting a fee, fine, or penalty for a particular company or provides a carve out for a specific industry. The foregone revenue provides a financial benefit to a company, which the DOC will now include when calculating a subsidy duty. Because having a robust steel industry is a priority for foreign governments, steel companies are particularly likely to receive preferential treatment, such as exemption from environmental protection penalties that other companies would be required to pay.

Similarly, the DOC recognizes for the first time that “nonexistent, weak, or ineffective property (including intellectual property), human rights, labor, and environmental protections” can have distortive impacts on the prices used to calculate dumping and subsidy duty rates. As an example, the DOC explains that “[w]hen governments decide not to enact environmental restrictions on a factory’s pollution . . . it is logical and reasonable that other countries may consider the impact such decisions have on the costs of production for that factory.”

While the DOC stopped short of treating government inaction as a subsidy, the DOC may disregard certain prices used to calculate dumping or subsidy rates where there is evidence of distortive government inaction. This will allow the DOC to calculate stronger dumping and subsidy rates because it will be able to exclude artificially low prices distorted by government inaction from its benchmark and surrogate value data sets.

The DOC’s rules also target broader cost and pricing distortions through a new “particular market situation” regulation. According to Commerce’s new regulation, “a particular market situation is a circumstance or set of circumstances” that prevents comparing prices or distorts the reported costs of productions used to develop a dumping duty rate. The new regulation responds to recent court decisions by clarifying the DOC’s legal authority to find a particular market situation.

The particular market situation authority was previously used to address the impacts of global excess capacity and oversupply in steel markets. In multiple trade remedy cases, the DOC found that the oversupply of steel distorted prices for upstream steel inputs, such as hot-rolled and cold-rolled steel. It also distorted the prices and costs of downstream steel products, such as pipes and tubes. The DOC’s new rule incorporates this situation into a non-exhaustive list of circumstances that may constitute a particular market situation.

Defenders of unfairly traded imports make provocative claims that trade has been weaponized and that the threat of war is increasing because of these regulatory improvements. These claims are farfetched. The DOC’s regulations simply patch holes in a regulatory framework that empowered foreign governments to support their companies and advance national priorities at the expense of US producers and foreign producers of fairly traded merchandise.

Editor’s note: This is an opinion column. The views in this article are those of experienced trade attorneys on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.