Trade Watch 2018: NAFTA Lives

The United States, Canada, and Mexico have reached agreement on a modernized NAFTA (North American Free Trade Agreement), now to be called the U.S.-Mexico-Canada Agreement (USMCA).

After months of negotiating trilaterally, the US and Mexico reached an agreement that excluded Canada, which was left to negotiate separately with the U.S. Several deadlines for conclusion of the US-Canada negotiations came and went. Despite the public trading of words between the Trump and Trudeau Administrations, however, American and Canadian trade negotiators continued to work to reach an agreement.

Both the US and Canada needed to find a compromise on their major areas of contention. And they did. Canada agreed to give US dairy farmers greater access to its market and to extend patent protection for biologics, sticking points for the US negotiators. The U.S., for its part, agreed to keep the provisions for resolving trade disputes and to protect Canada’s auto industry from any future tariffs on auto imports.

NAFTA lives but with significant changes. The trade community will now begin to read the text of the new agreement to more fully understand its provisions. How could your company be impacted by the new “NAFTA”? Contact us to learn more or for assistance.

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Trade Watch 2018: UK Brexit Proposal

The British government’s proposal for the United Kingdom’s post-Brexit relationship with the European Union has pleased neither the Brexiters nor the EU. It is easy to understand why.

The White Paper, The Future Relationship Between the UK and the European Union, boldly proposes that the UK leave the EU while keeping those aspects of EU membership the Theresa May government considers important or necessary. Boris Johnson, leading voice of the Brexiters, has resigned as UK Foreign Secretary in response to the White Paper. So has David Davis from his post as UK Brexit Secretary. The EU has questioned whether the proposals are workable.

The UK has already concluded a Withdrawal Agreement with the EU under the terms of which the UK is scheduled to leave on March 29, 2019. However, the terms of its post-Brexit relationship with the EU must be negotiated in the next few months – by October 2018. How does one unravel a complex trading relationship established over several decades?

Through a proposal to establish a “deep and comprehensive economic partnership,” along with carefully balanced appeals to both the British people and EU regulators, the UK proposal seeks to maintain the benefits of this trading relationship even after leaving the EU. The proposal documents “the unique ties that exist between the UK and the EU economies”. These ties include the “deeply integrated” supply chains and markets, to which the proposal refers, and which have made the EU the UK’s biggest trading partner.

Of course, these unique ties exist because of the UK’s membership in the European Union for the past 40-plus years. These ties and patterns of trade have helped the UK to achieve and maintain its current position as the world’s 5th largest economy. Disrupting these existing patterns of trade threatens the UK’s economic standing, which could take years, if not decades, to rebuild with new trading partners. This is the dilemma the UK government faces. And the need to avoid re-establishment of a border between Northern Ireland as part of the UK and the Republic of Ireland which remains in the EU has emerged as an unanticipated and complex issue of the Brexit process.

The EU is able to operate as a single market for the free movement of goods, people, and capital because of the negotiated rules that govern the economies of EU members –the very rules that Brexiters voted to escape. To maintain its economic relationship with the EU, a core element of the proposal for the new partnership is the establishment of a “common rule book”of only those EU rules the UK considers necessary for friction less trade between the EU and the UK. This approach is the “cherry-picking” the EU has said it will not allow. Appealing to Brexiters, these rules would be implemented autonomously by UK agencies. At the same time, the proposal assures the EU regulators that it knows how to implement EU rules and would also participate, without a vote, on relevant EU technical committees.Not surprisingly,the proposal on the “common rule book” is at the core of Brexiters’ displeasure with the White Paper.

To manage the relationship, the UK also proposes the introduction a new overarching institutional framework.With the aim of keeping the relationship “practical and flexible”, this new framework would include a Governing Body to provide political direction and a Joint Committee to underpin its technical and administrative functions and to address issues of non-compliance. Rights would be enforced in the UK by UK courts and in the EU by EU courts, with each taking into account the other’s rulings in order to get consistent interpretations.

Although the proposed institutional framework is probably not pleasing to Brexiters either, it may be one of the more thoughtful aspects of the proposal. In fact, the EU may wish to incorporate some of them in the future.

With respect to Brexit, however, it is difficult to see why the EU would be willing to add an entire new layer of institutions just to manage its relationship with one country. And there is also the concern that other countries might want to “leave” and negotiate similar arrangements.

Upcoming posts will discuss in greater detail the UK Brexit White Paper, which includes proposals on –

  • Trade in Goods
  • Services and Investment
  • Framework for Mobility
  • Institutional Framework for the new EU-UK Relationship

The UK government plans to use these proposals to engage the EU as they negotiate the EU-UK post-Brexit relationship. We will have to see – is the UK-EU relationship as important to the EU as it is to the UK?

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Should the system of investor-state dispute settlement (ISDS) be reformed?

Should the system of investor-state dispute settlement (ISDS) be reformed? That is the question being considered by the United Nations Commission on Trade Law (UNCITRAL).

ISDS provisions are contained in about 3,000 investment treaties and investment chapters of free trade agreements. The provisions permit a foreign investor in the form of a company or individual to bring a claim directly against a State where the investor believes that its investment is being threatened by an action of the State.Foreign-Direct-Investment

FDI and ISDS

FDI can be a valuable tool to exploit resources and build production facilities while creating jobs and infrastructure, particularly in developing countries. Investment agreements aim to create an enabling environment for foreign investors. Among other things, the provisions protect them against expropriation without adequate compensation and guarantee their ability to freely move assets in and out of the country. Sovereign States, on the other hand, need to govern with a multiplicity of interests in mind and their actions can, inadvertently or deliberately, deprive the foreign investor of an intended benefit. ISDS procedures provide the mechanism by which such disputes are resolved.

The most common procedures are drawn from the world of commercial arbitration, used to determine disputes between two commercial parties. They involve the use of an arbitral tribunal which gives equal standing to the investor and the State and whose decisions are binding.

The majority of developing countries rely on foreign direct investment to foster economic growth and development. The overwhelming majority of defendants in arbitral proceedings are the governments of developing and emerging economies. The outcome of ISDS arbitral tribunals can and do impact the ability of governments to develop and implement policy.

Concerns Regarding ISDS

A note by the UNCITRAL Secretariat – “Possible reform of investor-State dispute settlement” and the Report of its Working Group on ISDS summarize expressed concerns regarding ISDS. They include:

  • Inconsistency of arbitral decisions – instances where the host State is sued by different investors on the same issue but with different outcomes from different tribunals;
  • Lengthy duration and extensive cost of ISDS – States that have been sued may not have the resources to adequately defend its policies and actions or to pay arbitral awards;
  • Lack of transparency – States are using public funds and tribunal decisions may be sealed;
  • Lack of an early dismissal mechanism to address unfounded claims;
  • Lack of a mechanism to address counterclaims by respondent States;
  • Heavy reliance on arbitrators from the investor States and who may not understand policy.

Questions at the heart of these concerns address the overall legitimacy of the process. Should a system created to address disputes between two commercial parties be used to resolve policy issues that may impact millions of people? Is it acceptable to exclude domestic investors from the same recourse available to foreign investors?

Proponents of ISDS acknowledge the validity of some of these concerns and say they can be addressed by reforming the current system of ISDS. They also point to the underlying concerns that led to the use of ISDS in the first place – politicization from the use of diplomacy to address dispute and the slow judicial processes in some countries’ domestic legal system.

Concerns are not limited to those expressed by emerging economies. The EU’s submission to the UNCITRAL Working Group highlights systemic issues it believes warrants establishment of a multilateral investment court that would replace the use of arbitral tribunals. A March 2018 ruling of the European Court of Justice concluded that the ISDS clauses in an intra-EU investment treaty were incompatible with EU law.

The Trump Administration has also inserted its perspective on ISDS in the context of the NAFTA re-negotiations. The U.S. Government has consistently expressed its displeasure at being required to abide by the decisions of international panel decisions it finds not to its liking. In August 2017, the Trump Administration floated the idea of opting out of NAFTA ISDS provisions (Chapter 11). Should the US remove itself from the NAFTA ISDS provisions this would be a major departure in US policy and a disappointment for US corporations but a shot in the arm for opponents of ISDS.

Investment Facilitation

UNCITRAL will continue its deliberations. A growing consensus appears to be that while ISDS serves a role the system needs to be reformed. Meanwhile, in December 2017, 70 WTO members agreed to begin discussions to develop the framework for a Multilateral Investment Facilitation Agreement. Discussions will not address ISDS reform, but the purpose will be to minimize the likelihood of disputes by creating a more transparent, efficient, and predictable environment for facilitating cross-border investment.

To the extent that disputes arise because of tension between development-oriented policies of host States and investor goals, conflicts can best be minimized by incorporating a true development dimension into whatever frameworks are used to manage the FDI inflows into developing countries.

(Cross-posted from DevelopTradeLaw blog.)

GSP is Back! What To Do

GSP is back! As of April 22, 2018 importers can once again take advantage of the retroactive renewal of the Generalized System of Preferences (GSP) program. This means:

  1. Entering GSP-eligible products without having to pay duties; and
  2. Claiming refunds for duties paid while the program was lapsed (January 1, 2018 – April 21, 2018)

Entering GSP-Eligible Products

Products eligible for duty-free entry into the United States should be filed by placing before the tariff number one of these special indicators – “A”, “A+” or “A*” (as explained in General Note 4 of the Harmonized Tariff Schedule of the United States). One of these indicators in the “Special” column of the HTSUS indicates that the product is eligible for duty-free entry under GSP when imported from an eligible country.

Claiming Your Refund

Refund claims forduties paid while the program was lapsed are being processed by CBP as follows:

  1. Product was entered in ABI using the Special Indicator: No action is required by the importer. CBP has indicated its intention to begin automated processing of these refunds shortly. This process should be completed by mid-July, 2018.
  2. Product was entered in ABI without the Special Indicator: The importer must file a written request for a refund with the relevant Port Director.
  3. Product was manually entered: Whether entered with or without the special indicator, the importer must file a written request for refund with the relevant Port Director. This includes duties paid on baggage brought in by travelers using Customs Declaration Form CF 6059B.

Written requests must be submitted by September 19, 2018. No interest will be paid on the amounts owed to the importer.

Planning Ahead

GSP was renewed for only two years, and again lapses on December 31, 2020, unless renewed before that date. Sadly, importers probably need to anticipate the possible lapse of GSP and hope for the possibility of claiming a refund on duties paid while the program was lapsed. Should this situation recur, importers using the Automated BrokerInterface (ABI) will, again, be able to receive automatic processing of refunds.

Also note that for importers of aluminum and steel GSP-eligible goods subject to Section 232 duties their eligibility ended on March 23, 2018.

Contact us for more information and/or assistance with requesting your refund!

Trump Trade Agenda

The Trump trade agenda is in the news. Since January (2018), the Trump Administration has imposed tariffs on steel and aluminum imports, started a trade war with China, and re-negotiated the 6-year old Korea-US Free Trade Agreement (KORUS). The Administration also continues NAFTA re-negotiations and most recently is considering having the U.S. re-join the Trans Pacific Partnership (TPP) Agreement left within three days of Trump taking office.

Trade wars and trade deals appear contradictory. Can we look to some coherent agenda to explain these seemingly disparate actions? The Trump trade agenda is enunciated in its 2018 Trade Agenda Report, sent to Congress in February (2018).

The Trump Trade Agenda rests on the following five pillars:

Supporting US National Security: US trade policy and trade deals must –

  • Help to build a strong American economy, first and foremost;
  • Aggressively defend US national sovereignty in the face of multilateral trade obligations;
  • Respond to economic competitors, notably China;
  • Preserve the US lead in research and technology; and
  • Cooperate with countries that give the US reciprocal treatment and act to defend US interests against those that do not.

Strengthening the U.S. Economy: Key elements of this pillar are –

  • Anticipated benefits to corporations of the new tax regime; and
  • Reduction in regulatory burdens imposed by trade policy;

Negotiating Better Trade Deals:

  • Renegotiate NAFTA, KORUS, and any other trade deals the Administration considers bad for American workers and farmers with a view to –
  • Achieving outcomes that improve U.S. export opportunities and reduce the US trade deficit;
  • Resolving outstanding implementation issues that harm or undermine U.S. interests and U.S. export potential;
  • Rebalancing commitments on tariffs necessary to maintain a general level of reciprocal and mutually advantageous commitments under the agreement;
  • Reducing and eliminating barriers to exports of U.S. made motor vehicles and motor vehicle parts; and
  • Improving other terms to ensure the benefits of the agreement are more directly supportive of job creation in the United States.
  • Negotiate new trade agreements with other countries, noticeably, the United Kingdom and the countries of the Trans-Pacific; and
  • Focus on increasing US agricultural exports.

Enforcing and Defending U.S. Trade Laws:  Key elements of this pillar include –

  • Aggressive use of all tools available under US trade law to address violations;
  • Imposition of available remedies, as appropriate, including suspension of trade agreement concessions, imposition of tariffs, negotiation to remove the offending practice or for compensatory benefits to the United States, fees or restrictions on services; and
  • Investigation of China’s acts, policies and practices related to technology transfer, intellectual property, and innovation.

Strengthening the Multilateral Trading System: Key actions to be taken under this pillar include –

  • Vigorously defend use of US trade laws against complaints brought at the WTO, notably by China, Canada, the EU;
  • Aggressively challenge other countries’ trade laws and policies that negatively impact US exports, notably China, Canada, and India;
  • Address US concerns regarding the WTO Appellate Body, which makes final decisions on disputes brought before the organization;
  • Work with WTO Members who are ready and able to negotiate free, fair and reciprocal agreements commensurate with their status in the global economy;
  • Work to change how the WTO approaches questions of development, so that emerging economies like Brazil, China, India, and South Africa do not receive the same flexibilities as very low-income countries; and
  • Pursue negotiations on agriculture, fisheries subsidies, and digital trade at the WTO.

These pillars weave together a protectionist, America-first agenda that provides context for the seemingly disparate actions of trade wars alongside trade negotiations.

The strong anti-China bias exists because China is undoubtedly playing by its own set of rules, violating the spirit, if not the letter, of international trade law. It is not clear, however, that imposing tariffs is the solution.

More importantly, this protectionist agenda ignores the reality that all countries negotiate from their perceived national interests as well. This results in a balancing of compromises – give and take.

For example, under the re-negotiated Korea FTA, the U.S. got to export more cars, but Korea won partial exemption from the steel tariffs. NAFTA re-negotiations are struggling to address unreasonable US demands. The United Kingdom, which is considered to be in a weak negotiating position as it also negotiates its new trading landscape outside of the EU, probably does not plan to roll over to aggressive US proposals either.

Then, there is the interconnectedness of today’s global markets. US imposition of tariffs on China threatens US manufacturers who rely on imported inputs. China’s retaliation threatens the livelihood of US farmers dependent on exports to the Chinese. Which is why the Administration may be exploring another approach – coming full circle to re-join the rejected Trans-Pacific Partnership (TPP), a 12-nation pact covering 40 percent of the global economy envisioned by the Obama Administration as a multilateral counterweight to China. The other 11 countries have moved on to conclude the Comprehensive & Progressive Agreement for Trans-Pacific Partnership (CPTPP) so this time, the U.S. would be the one negotiating its way back in.

(Crossposted from DevelopTradeLaw.)

Trade Watch 2018: Brexit

On March 29, 2019 the United Kingdom (UK)is scheduled to leave the European Union (EU). On what terms?What will Brexit mean for the future of the UK’s trading relations with the EU and the rest of the world?

Just over a year ago (on March 29, 2017), UK Prime Minister, Theresa May, informed the EU of its intention to withdraw from the European Union. Her act honored the outcome of the June 23rd Brexit referendum.This act also triggered a one-year deadline for the UK to negotiate the terms of its two-phased departure process from the EU.

Agreement on Leaving the EU

withdrawal agreement finalized between the UK and the EU one-day short of the deadline, on March 28th (2018), outlines the status of the UK during the first phase – a transition period which will end March 29, 2019. During this transition period:

  • The UK will legally remain part of the EU Single Market and be bound by its EU obligations.UK citizens will retain their rights within the EU. EU citizens living in the UK (or who arrive during the transition period) will retain their residency rights during and beyond the transition period.The UK will continue to be bound by its obligations under EU international treaties, including those on trade and investment.
  • The UK will have to abide by and comply with EU laws and policies but will no longer have a voteon EU decision-making bodies.
  • The UK won the right to begin trade negotiations with other countries during the transition period. This is a questionable win as the countries seeking to negotiate during this period of uncertainty about UK’s relations with the EU may perceive the UK as weakened and unable to negotiate on equal terms. UK’s weakened negotiating position can also be said to apply in its negotiations with the EU.

During an implementation phase which will end December 31, 2020, the EU’s laws and regulations will continue to apply in the UK. The European Court of Justice will retain ultimate authority to resolve disputes during this period. The UK will continue to pay into the EU budget up through this date.

The withdrawal agreement is comprised of 168 articles covering a full gamut of the issues that will need to be addressed during this separation phase.

Negotiating Future EU-UK Trading Relations

The EU and UK now turn to negotiating the terms of EU-UK trading relationship after the end of the transition period. Observers believe this process will be complex and requires several years to get it right. However, the UK has only several months until October 2018. The following two issues illustrate the complexity of the task.

Financial Services

London is Europe’s largest financial center and benefits greatly from its ability to move capital and services freely within the single market. In 2016, financial and insurance services contributed 7.2% to UK’s GDP.  The EU’s single market is based on the “four freedoms” – free movement of goods, capital, services, and people. Brexiters’ vote to leave the EU was in large part fueled by disenchantment and fears from the inflow of persons under this free movement regime. However, leaving the EU means losing all obligations and rights under this free movement regime. The UK is hoping to negotiate an exception for its financial services. The EU, however, has emphatically stated that Britain as a non-EU member will be treated as a third country in all aspects of EU-UK trading relations. According to the EU, countries over which EU laws, regulations and judicial decisions do not apply will have only the same or similar limited access to the single market as do other non-EU trading partners. The UK will therefore be seeking to negotiate terms for its financial services sector in the future EU-UK trading relationship that come as close as possible to the position enjoyed in the single market.

Irish Border Question

The hard-won peaceful and open Irish border of the Good Friday Agreement is one unintended victim of Brexit. The Republic of Ireland, an independent country will remain in the EU. Northern Ireland, part of the United Kingdom, will not. The British government has committed to maintaining a “frictionless and invisible Irish border”. This commitment can be assured by the UK’s continued participation in the EU customs union, which provides freedom of trade in goods only. Monaco and UK bases in Cyprus are currently part of the EU customs union but not of the single market and a customs union seems a workable compromise for the UK. However, the British government is so far resisting this idea(possibly because of concerns about the financial services sector which would be excluded).

However, the withdrawal agreement has stated that if the parties fail to reach an alternative approach for the post-Brexit period, a common customs area will be maintained across all of Ireland. This “backstop agreement” will effectively leave Northern Ireland within the EU customs union if the EU-UK trade agreement does not include an alternative solution.

Questions Remain

In the withdrawal agreement, the EU and UK have agreed that “nothing is agreed until everything is agreed”. What will happen if the EU and UK are unable to negotiate terms of their future relationship by the October 2018 deadline? The transition period may need to be extended. This option is not at all advantageous to the UK which will have to abide by policies and rules it may not have had a role in shaping and continue to pay into the EU budget.

Alternatively, the UK may leave the EU without an agreement. This alternative is a worst-case scenario which no one wants or expects to happen but cannot be completely discounted.We can hope that the high stakes guarantee the parties’ commitments to staying at the negotiating table.

Opportunity to Advance a Development Dimension to Investment Facilitation

The Joint Ministerial Statement on Investment Facilitation for Development adopted on the last day of the 11th World Trade Organization (WTO) Ministerial Conference (for our discussion on the Ministerial click here), signals an opportunity to advance a development dimension to investment facilitation. The Joint Ministerial Statement called for the start of structured discussions with the aim of developing a multilateral framework for facilitating foreign direct investments (FDI).

The 70 WTO Member States that endorsed the Joint Ministerial Statement agreed to begin discussions early in 2018 to develop the elements of the framework to:

  • improve the transparency and predictability of investment measures;
  • streamline and speed up administrative procedures and requirements;
  • enhance international cooperation, information sharing, the exchange of best practices, and relations with relevant stakeholders, including dispute prevention; and
  • seek to clarify the framework’s relationship and interaction with existing WTO provisions, with current investment commitments among Members, and with the investment facilitation work of other international organizations.

The overall goal is to create a more “transparent, efficient, and predictable environment” for facilitating cross-border investment. These outlined elements appear to focus on creating a platform that will address the “resource curse” – the high levels of poverty and inequality present in many oil-rich countries and other developing/emerging economies with the “greatest natural resource endowments”.

The underlying assumption is that the framework is needed to provide greater accountability and transparency. We believe this is only a partial solution to the challenges that developing countries face with regards to FDI. These discussions provide an opportunity to advance a development dimension to investment facilitation by also providing rules of engagement to enhance development-oriented and sustainable outcomes for FDI.

FDI & Developing Countries

The majority of developing countries need foreign direct investment to foster economic growth and development. FDI can be a valuable tool to exploit resources and build production facilities while creating jobs and infrastructure in these countries. At the same time, because for the most part this investment is introduced and controlled by private companies, there is a tension that can, and often does, arise between the goals of private international capital and a country’s development needs.

In an earlier post, we discussed the PBS documentary, The Big Men, which tells the story of the discovery of the first commercial oil field in Ghana’s history. As events unfold, the Texan-based venture capitalists who bore all the financial risk butt heads with a newly-elected government whose officials refuse to endorse the initial agreement allocating to the investors the overwhelming majority of the profits. Juxtaposed with these events is the story and images from Nigeria’s Niger Delta where the “resource curse” is plain for all to see. The dire poverty, environmental degradation and the violence in that oil-rich region add poignancy to the position of the Ghanian officials, even as one wonders about their real motives.

For the Texan-based investors (which included a Ghanian who had initially discovered the resource but lacked the capital to fully exploit it) the issue was couched in the language of risk, adequate return on their investment, as well as respect for the initial contract signed with the Ghanian government. For the Ghanians, the issue was discussed in terms of their need to be able to use the resources located on their sovereign land to properly house, feed, and educate the populace.

The events that unfold in Ghana illustrate the tensions that can exist between the goals of private international capital and a country’s development needs. On the one hand, we have the private venture capitalists who invested where no one else would probably have. Ghana was not known for its oil resources. In return, however, they demanded a hefty return on their investment. But, does any government have the right to sell a country’s birthright to these investors? Yet, of what use to the country is the oil, or the diamond, or the gold left unmined?

How does the framework provide an opportunity to advance a development dimension to investment facilitation?

The Framework’s Development Dimension

The Joint Ministerial Statement recognizes the “dynamic links between investment, trade and development”. The Members also agreed that “facilitating greater developing and least-developed Members’ participation in global investment flows should constitute a core objective of the framework”.

To this end, the Members will seek to assess the needs of developing and least developed country Members to implement the multilateral framework so that technical assistance and capacity building support can be made available to address these identified needs. An integral part of the framework will be the right of Members to meet their policy objectives.

The policy objectives of responsible governments include helping their citizens gain access to jobs, decent housing, roads, education and other social services. Rich-oil countries with energy-deprived citizens is an untenable outcome. So are hotels built with foreign capital and by workers who live in shacks across the street.

Rules are needed to provide guidelines to help honest governments and fair-minded investors determine an equitable distribution of profits derived from exploitation of a country’s resources. These rules should provide tools to help countries negotiate fair deals. These rules should provide a pathway towards more development-oriented and sustainable outcomes for FDI.

These rules can and should be incorporated within the elements of the multilateral framework for facilitating foreign direct investments.

(Cross-posted from DevelopTradeLaw blog)