The rise of environmental, social and governance (ESG)-focused trade and supply chain activities could mean some corporates find themselves at a disadvantage in international trade disputes, according to a new report by law firm White & Case.

Recent months have seen an uptick in awareness of sustainability among corporates, as the Covid-19 crisis brought environmental action, inequalities and social justice to the fore. As companies rethink their supply chains and the way they operate, there is a growing sense in some quarters that trade has a historic opportunity to build back better post-pandemic.

However, moves to support ESG principles in trade – such as preferential export credit agency (ECA) financing or government incentives – could see firms fall foul of US anti-dumping and countervailing duty cases, and these issues are yet to be considered by Congress or the World Trade Organization (WTO), the firm says in its report, titled US trade: The rise of benefit corporations and stakeholder- capitalism businesses.

“To promote legal consistency and maintain fairness in the international trading system, WTO member countries should act jointly by adapting agreements to consider the growing stakeholder-capitalism model,” say the report’s authors, Walter Spak, partner, and Jessica Lynd, associate. “Until then, parties will need carefully to construct their arguments when a benefit corporation or stakeholder-capitalism business is involved in either side of an international trade case in the US.”

Speaking to GTR, Spak and Lynd explain further, and highlight the need for a shift in legal and regulatory frameworks in order to better meet the needs of the changing landscape of trade.


GTR: What led White & Case to release this report?

Lynd: Several of our clients have sustainability programmes, and in addition to that we have witnessed the recent growth of the benefit corporation initiative, as a result of changes in legislation and the work by B Lab. More and more multinationals are joining that movement, and this raises some serious questions since trade laws are primarily based on price and profit, and that’s not the only consideration that these companies are looking at.

Spak: There are many places where there will be issues coming up in trade, and people might not have thought about them. There are potential clashes with anti-dumping laws and countervailing duty laws, but also in the context of so-called safeguards which are used by countries when they apply duties or quantitative restraints on imports in order to protect industries and allow them to adjust to competition. Within all of those laws, there is the basic premise that there’s a free market, a fair market, and a market that is focused on profit. So the question then becomes, what happens when corporations start operating not just to maximise profits, but also to achieve some social benefits?


GTR: In practice, what kind of issues might be faced by benefit corporations engaging in international trade?

Spak: One potential issue could be where a foreign government provides some kind of financial benefit to their company who may be incurring additional costs because of the way they produce their products – for example preferential export credit agency finance for compliance with ESG standards.

Because trade remedy laws focus on practices such as countervailable subsidies, the US could consider that these companies that have received assistance to meet ESG objectives have been subsidised, and that therefore imports from them could injure its domestic industry. If injury to the domestic industry could be demonstrated, the US would then apply a countervailing duty to offset those benefits that have been provided.

Conversely, many benefit corporations in the US and in other countries do not receive inducements from their governments, but instead take on additional costs to meet ESG standards. Under the current profit-focused model, they could be at a disadvantage. For example, as a US domestic benefit corporation, they have to compete with foreign imports that do not assume these additional costs. On the other hand, a benefit corporation exporter to the US might have higher costs of production that could lead to higher antidumping duty margins.


GTR: What are the options for companies who find themselves faced with these issues?

Lynd: There are two ways to argue this. One is by proving that consumers view the products differently because they are produced differently, and that there are separate markets for the conventionally produced and the benefit corporation produced goods.

Then there is the conditions of competition argument that is similar to the analysis that the United States International Trade Commission (ITC) does on whether two goods are actually competing, because if consumers aren’t preferring one good just because it has a cheaper price, then why are they preferring it? They’re competing for a different reason than price and that has to be factored into the analysis.


GTR: Is there any evidence that trade laws might change?

Spak: What we have seen in the past on similar types of issues is that over time, trade laws have to change because trade itself has changed.

For example, the WTO has implemented rules in the past that exempt certain types of subsidies from countervailing duties, and this so-called green light subsidy model could in the future be used in the context of benefit corporations.

Lynd: We have also seen some developments in the case of agriculture, and organic and non-organic goods, which I would say is foreshadowing what we might see with benefit corporations. The law did adapt – there are separate tariff headings under the Harmonised Tariff Schedule for some organic products.

The Biden administration has made positive statements around benefit corporations, and there could be some good opportunities to include ESG into the administration’s goals around jobs and climate change. However, if an administration wants to support benefit corporations, or if WTO members want to support this movement, they might need to help them compete. And, in fairness, conventional companies need to know the rules too.


GTR: What do benefit corporations need to consider now?

Spak: For now, they need to look closely at subsidies and go through the legal analysis before they accept help from governments. We don’t know what the Biden administration or what the European authorities plans to do, and at first, any disputes are going to be decided on a case-by-case basis and the outcome will depend upon who is making the decision and the arguments being made. We’re preparing for those arguments, we’re advising clients of the risks, and for the time being, we will have to work through the process unless trade laws change to include stakeholder values other than profit.