ESG Considerations in Trade Remedies: The Past, Present and Future

ESG is an increasing fixture in corporate boardrooms. States enter into international treaties requiring and encouraging them to adopt measures to protect environmental, labour and human rights standards. States also adopt legislation requiring and encouraging private actors to behave in accordance with those same standards.

ESG compliance has now become part of the standard business model. Indeed, it is becoming increasingly important as states move beyond regulating activities in their own jurisdictions and also require companies to ensure ESG compliance in international supply chains. Relevant considerations are thus finding their way into trade remedies investigations.

Though under different rubrics, ESG considerations have been recognised in international trade law for decades. In fact, 70 years ago the Panel in Belgian Family Allowances, one of the very first GATT disputes, stated that workers’ compensation could not be used as a basis upon which to discriminate between imports.

More recently, the international trade community has been examining whether trade remedies authorities can (and should) take these considerations into account in their investigations. They can (and have done so) in a number of ways:

1. By examining higher ESG compliance costs of domestic producers, compared to lower non-compliance costs of exporting producers. This is relevant to both the standard injury determination (which is necessary for a trade remedy to be imposed), and the lesser duty rule (when determining the extent of injury caused).

(a) Injury determination:  WTO law provides that an authority must examine “all relevant economic factors and indices having a bearing of the state of the industry” in the injury determination. While the list of criteria to be assessed does not specifically include ESG costs, the list is non-exhaustive. In 2022, the South African International Trade Administration Commission (ITAC), referred to such criteria in an investigation into the alleged dumping of frozen potato chips from Belgium, Germany and the Netherlands. ITAC commented that the domestic business’ employees’ wellbeing – and therefore productivity – was negatively affected by the dumped imports, as “the stress the dumped imports place on the business negatively affects employee wellness (morale) and decreases worker productivity”. While ITAC provided no further comment on this point in its report, it did conclude that the domestic industry was experiencing material injury as a result of the dumped imports.

(b) Lesser duty rule: The European Commission (the Commission) operationalises the lesser duty rule in cases where domestic sales prices are considered to be artificially depressed, by constructing a ‘target sales price’ to determine the viability of domestic producers. In 2018, the EU’s trade defence rules were changed specifically to allow for the factoring into the ‘target sales price’ current – and also future – costs resulting from compliance with the EU’s multilateral environmental agreements and certain International Labour Organisation Conventions. The Commission has used this tool in numerous recent anti-dumping investigations.

2. By accounting for lower export costs by virtue of exporters not complying with ESG standards. However, trade remedies authorities have generally found it more difficult to take this into account, with the Appellate Body in the case of EU – Biodiesel (Argentina) pushing back on the EU’s attempt to do so and finding that the issue of cost distortion is irrelevant, as long as the exporters’ records are accurate and reflect the actual costs incurred in producing and selling the product in question.

3. In the determination of ‘like products’. In any injury investigation, the authority is required to determine the ‘like product’ (or ‘like or directly competitive product’ in the safeguards context). It is only when domestic like products are injured by the imports at issue that there can be any trade remedies. Article 2.6 of the Anti-dumping Agreement (ADA) provides that it is not necessary for products to be completely identical for them to be ‘like products’ – it is sufficient for the products to have ‘characteristics closely resembling those of the product under consideration’. This raises the question whether a product that is produced to higher ESG standards is ‘like’ a domestic product that is not made according to these standards. There are several examples in which exporters attempted these arguments (albeit unsuccessfully). For example, in Australia – A4 Paper (Brazil, China, Indonesia, Thailand), the exporters argued that their A4 paper was recycled, and hence not ‘like’ the domestic A4 paper. The Australian authority rejected these arguments, stating that all of the products had the same intrinsic physical characteristics and end uses and that they all compete for market share.

4. In price undertakings offered by exporting producers in an anti-dumping investigation. According to Article 8.3 of the ADA, undertakings need not be accepted if the authorities consider their acceptance impractical, including for reasons of general policy. In 2018, the EU amended its Basic Anti-dumping Regulation to state that such reasons of general policy comprise “in particular the principles and obligations set out in multilateral environmental agreements and protocols thereunder, to which the Union is a party, and of ILO Conventions listed in [the annexes to the] Regulation.” If the exporter’s country is not a signatory to these agreements, the price undertaking offer can be automatically rejected without conducting the usual analysis of whether it is workable. The result is inevitably more trade remedies.

5. In the economic interest test. The UK’s Trade Remedies Authority (TRA) is permitted to consider ESG standards in investigations in the context of the economic interest test. The relevant legislative provisions are broad and permit the TRA to consider essentially any matters that it considers as relevant. The EU has previously considered ESG standards under its version of this test, the Union interest test, when determining whether it would be in the interest of the EU to impose anti-dumping duties. For example, in the anti-dumping investigation into solar panels from China, the Commission considered whether the duties would make the final product, PV solar panel installations, more expensive for the ultimate consumer and concluded that they would not. It also examined the importance of renewable energy sources to the EU but found that the EU’s goals did not depend on solar energy exclusively.

ESG compliance is becoming an increasingly real part of doing business today. For this reason, there is a legitimate argument that trade remedies should reflect these considerations. As the solutions are currently limited to various unilateral measures, such as those outlined above, businesses should bear in mind the potential impact of these considerations in any trade remedy investigation to which they may be party.