A novel form of corporate regulation is on the rise. The “trade police,” as my article calls them, are the front-line bureaucrats who enforce the laws surrounding cross-border business.  Their efforts determine whether billions of dollars of goods and services enter or exit the United States, and, in the last five years, lawmakers have overhauled their functions dramatically. The new trade policing regime is a corporate accountability system unlike its predecessor government-to-government regime for which the World Trade Organization served as the core.  Private actors are increasingly under the microscope of a broad swath of innovative deployments of government action: detainment of goods, financial penalties, export constraints, extensive reporting requirements, and import bans.

Trade policing’s extraterritoriality sets it apart from the work of everyday regulatory monitoring agencies, including trade monitoring agencies.  Trade police have jurisdiction not just over companies operating at home but also those abroad, including companies with no apparent jurisdictional nexus to the United States. In an untested and unprecedented change, U.S. foreign commercial officials are administering not only U.S. law against cross-border companies, but also local law in countries where those companies operate.

Policymakers celebrate this shift. Ambassador Katherine Tai, the U.S. Trade Representative and lead Cabinet official for the United States on cross-border commerce, has spoken publicly about her decision to use our trade police to pursue corporate accountability objectives: “A point of emphasis for me . . . is the importance of corporate accountability in our trade policy. We need to hold corporate actors accountable.”  This is radical language for trade observers—a clear departure from what trade police used to do and from what the law has told them to do.  This approach is a firm-centered trade policy.

The Emergence of the Novel Trade Governance Mechanisms

Trade law’s move toward the corporation came on subtly, but it was abrupt to observers who were concentrated on the absence of major trade programming. To be sure, some longstanding parts of trade law have been firm-centric for some time. Companies pay tariffs, and they can be subject to administrative proceedings for their violations of domestic trade law. But those actions against individual companies reflect the transnational two-step: states have agreed to certain parameters in which to develop their domestic law and enforce the law. What they agree internationally, they then enforce domestically on their local companies.

The transformation that this study captures, however, is that of eliminating step one of trade’s traditional two-step. The new trade policing does not rely on reciprocal agreements among governments to maintain standards or on international dispute settlement. Firm-centrism is the only step. Moreover, it does so without any of the administrative or domestic law protections that accompany the application of the two-step tools like in the repertoire of customs authorities and trade remedies administrators.

Social and Environmental Sustainability Tools

The new trade corporate governance toolkit focuses on two areas: sustainability and security.  With respect to the former, consider the U.S. Trade Representative’s Facility-Specific Rapid-Response Labor Mechanism (“RRM”).  The RRM permits U.S. trade agencies to detain goods at the border if those goods come from a factory that is denying workers their collective bargaining rights under Mexican law, such as by tampering with a union voting process.  For example, Customs can stop cars manufactured in Mexico at the Texas border and hold them there until the problematic labor issue at the General Motors factory from which they came is resolved to U.S. trade officials’ satisfaction; and, it has done just that. General Motors was the first company targeted by this tool.

Trade police have also pursued companies on sustainability grounds through targeted bans on entry or exit.  For example, the 2021 Uyghur Forced Labor Prevention Act (“UFLPA”) is designed to address growing concerns about human rights abuses in the Xinjiang province of China, particularly connected to the textiles industry.  The UFLPA reflects a far more aggressive and company-demanding posture in the regulation of human rights abuses abroad than its predecessor law. Among other features, the UFLPA creates a rebuttable presumption that goods produced or manufactured in Xinjiang or by certain entities with ties to the region are made with forced labor unless Customs determines otherwise.

Other governments are now considering comparable tools.  Out of concern for the environmentally problematic harvesting of palm oil, Switzerland now requires all vegetable oils and their derivatives to be traded according to the “laws, policies and practices aiming at protecting primary forests, peatlands, and related ecosystems, halting deforestation, peat drainage and fire clearing in land preparation, reducing air and water pollution, and respecting rights of local and Indigenous communities and workers.”  Swiss authorities are empowered to withhold permission for certain palm oil imports to enter Switzerland where those imports fail to comply with what Swiss law considers to be the requisite sustainability certification schemes.  And, readers of this Forum will be familiar with the European Union’s several new similar initiatives.

Economic Security and Supply Chain Protection Devices

Security is another area for trade police enforcement, such as in the form of export controls.  The exponential growth in the use of export controls into areas beyond those with clear military applications is illustrative.  Beginning in 2018, Congress and the executive branch have substantially revamped the export control regime. The newer controls take a much broader view of goods that ought to be controlled. For example, in October 2022, the U.S. Department of Commerce announced two rules intended to restrict China’s ability to “obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors.”  These rules expand the reach of “dual-use” controls to include chips that are regularly used in military and non-military contexts. The rules also extend U.S. export control jurisdiction to foreign-produced items that are the “direct product” of certain controlled U.S. technology. Apart from these already firm-centric enhancements, exemption from these rules requires acquiring a license that will be judged company by company. Taken together, the inflated use of its entity list, the far-reaching product lists, and the license process indicate that the U.S. government has greatly enhanced its corporate trade policing authority.

The justifications for the extensive use of export controls have likewise expanded.  The company-specific exercise is driven in this instance by a spacious reconstruction of economic security and its importance not just to U.S. economic prowess but as a means to work with likeminded allies to limit the threat posed by China’s economic growth.  Here, U.S. officials are enforcing U.S. law to safeguard U.S. innovation in response to an identified threat posed by foreign actors. A principal ramification of this extensive use, both for export controls and export bans, is increased pressure on companies in both circumstances to know their supply chains all the way down—inbound and outbound.

Other security-premised moves in the last five years also reflect this paradigm shift.  A new outbound investment screening mechanism proposed by the Biden Administration seeks to control company offshoring, broadly defined, for security reasons.  Rather than force behavioral changes from China, the Administration aims to police company behavior.

Early Takeaways for Corporate Governance Observers

Simply put, trade policing has become another thread among many in the legal tapestry with an impact on the powers of and protections for corporations and their stakeholders.  Two early harvest takeaways for corporate governance matters surface: a reconsideration of trade’s theory of the firm and the amplification of transnational disclosure and compliance concerns.  Trade policing inserts new regulatory actors in places where they did not previously operate. It adds new and substantial uncertainty to businesses engaged in complex cross-border deals, disrupting well understood contract theory about deal costs and deal planning. These moves suggest that perhaps the cross-border movement of goods is approaching the cross-border movement of capital.  Trade policing also distorts typical public law distinctions: the focus on corporate accountability prioritizes not private law as in contract, nor public law as in property, but rather the law and policy of another state.

Finally, and unexpectedly, through the new corporate trade policing, trade law now occupies a space more akin to what advocates of business and human rights, corporate social responsibility, and still other related movements have sought. This disciplinary convergence, however, is only as durable as its progressive aims. It is a fusion of unlikely bedfellows—an unexpected intersection among fields that, until recently, largely saw themselves as somewhat antithetical to one another.  Trade law now offers a framework for state action toward companies as a means of maintaining the norms advanced by these other agenda – and what we have seen so far is likely just the tip of the iceberg.

The full article is available here.