More Good News on Trade: Cracks in US Embargoes

What are two things that Cuba and Iran have in common? First, a US trade embargo which has been in place for decades. Second, emerging cracks in these embargoes that promise new, if limited, trade opportunities.

Iran Embargo

Concerns about Iran’s nuclear ambitions had resulted in multilateral sanctions against Iran, imposed by the United Nations, the European Union, and the United States. It is these sanctions that are credited with bringing Iran to finally conclude a deal.

The just-concluded nuclear pact with Iran indicates that the rest of the world should soon be lifting their embargoes against doing trade with Iran. Not so with the United States. US sanctions against Iran, unfortunately, go beyond these security concerns. They also have to do with regime change – the hope that pressure on the Iranian economy will lead to political change.

So, while the rest of the world can expect to begin resuming normal business activities with Iran, US sanctions imposed by the US Congress will remain in place. US trade with Iran will be limited to imports from Iran of food and carpets and the export to Iran of replacement parts for civilian airplanes. In the words of this Washington Post reporter,

. . . for US firms, the agreement means pistachios, airplane parts and carpets.

Persian Rug at the Louvre  (Courtesy of Wikipedia)

Persian Rug at the Louvre (Courtesy of Wikipedia)

Cuban Embargo

Unlike the Iran sanctions, the US embargo against Cuba has been unilateral in nature. The United States is the only country in the world which maintains this outdated cold war stance against Cuba. On October 29, 2014, the UN General Assembly voted for the consecutive 22nd year in support of a resolution urging an end to the US blockade of Cuba.

Like the Iran sanctions, the US embargo against Cuba is driven by a desire for regime change. Nevertheless, with the congressionally-imposed embargo still in place, Executive action has carved out limited opportunities for US-Cuba trade and travel. A limited list of commercial goods and services – primarily those of independent craft producers can also now be imported from Cuba into the United States. In fact, it’s easier to produce the list of items, including alcohol and tobacco products, which cannot be imported for commercial use from Cuba. However, if you fall within the category of persons allowed to travel to Cuba, you can bring back your own, limited, supply of Cuban cigars and rum.

The Future

Should the US Congress fail to ratify the Iran deal, the United States will, as it does in its relations with Cuba, again be isolated on this issue. Diplomatic ties are key to fostering and smoothing commercial relationships. These are just being re-established with Cuba, and remain broken with Iran. Still, we can hope that more cracks will continue to appear in these sanctions barriers to trade until they are entirely whittled away.

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Trade Happenings

Since the start of 2015, there have been several interesting developments on the trade front. Here are some highlights:

Flag of Cuba

US-Cuba Relations:  Previous posts on ILG have discussed the improved tenor of US-Cuba relations, including some limited opportunities to trade with Cuba and lifting of designation of Cuba as a state-sponsor of terrorism. These developments have been followed by news of plans to re-establish direct phone links, increased flights and launch of a ferry service between Florida and Cuba, and the arrival of Airbnb and of Netflix in Cuba. Nevertheless, the laws imposing the U.S. embargo against Cuba remain in place and are being enforced. This includes the repressive Helms-Burton Act which extends the U.S. embargo to non-U.S. actors. As a result, non-U.S. persons may still be penalized for taking actions in Cuba that some U.S. persons are now able to do. And, because of the embargo, while it will be possible to import goods and services from independent entrepreneurs in Cuba, goods will still be subject to higher tariffs than those placed on the goods of most U.S. trade partners. Legislation to normalize trade with Cuba has been introduced in the U.S. House and Senate (HR 403, HR 274, HR 735, S 491). However, Congress is now focused on issues more essential to the Obama Administration trade agenda.

US Trade Agenda:  Legislation to provide Trade Promotion Authority (TPA) to President Obama has been introduced in Congress. TPA gives the U.S. President a mandate from the U.S. Congress to negotiate trade agreements that meet specified criteria. Also known as “fast-track”, TPA has been a key tool of U.S. trade policy since 1974 but lapsed in 2007. As we discussed in an earlier post, the Republican-led Congress provides President Obama with his best hope of getting TPA enacted in time to successfully conclude ongoing trade negotiations that face strong opposition within his own party. With the introduction of TPA legislation, a furious battle has begun to sway U.S. legislators to vote for or against. As always, it will be a close fight.

Courtesy of Wikipedia

Courtesy of Wikipedia

Trade Preferences, in the form of the Generalized System of Preferences (GSP), is another key tool in U.S. trade policy. GSP allows over 5,000 products from about 127 developing countries to enter the U.S. market duty-free. The program helps exports from developing countries to be competitive in the U.S. market. U.S. importers rely on the program to access lower-priced consumer goods and manufacturing inputs. The program has been lapsed since August 1, 2013, disrupting many small traders who rely on its benefits. Some members of Congress have been reluctant to renew GSP legislation without taking steps to exclude countries like Brazil and India which, they believe, are not compliant enough on issues of importance to the U.S. However, legislation to extend GSP for a short period has been introduced into Congress.

So too, has legislation to extend the Trade Adjustment Assistance (TAA) which provides federal funding to retrain workers who have lost their jobs as a result of a foreign trade. TAA is current but scheduled to lapse this year, unless extended. TAA is favored by many Democrats. According to reports, there are efforts to bundle these, and other, trade issues into one piece of legislation that will have something for everyone. Early results show the risk of this strategy, including the possible demise of all these issues.

Thawing of US-Cuba Relations: What to Expect Next?

On December 17, 2014, President Obama announced significant changes to U.S. foreign relations with Cuba. As noted in another ILG post by

Margaret Spicer, these changes reflect a new policy at the level of the U.S. Executive (the President). The sanctions imposed by U.S. Congress remain fully in place. In Washington DC’s politically-charged environment, US-Cubans and Republicans in Congress have been vocal about their opposition to any change in US-Cuban policy. Republicans assume control of both the House and the Senate in January, 2015.

So, what are the announced changes and what can we expect to happen next?

US-Cuba diplomatic relations re-established: High-level talks will begin in January, 2015 with the goal of re-establishing full diplomatic relations. President Obama announced plans to re-open a U.S. Embassy in Havana within a few months. Led by US-Cuban-American Senator Marco Rubio, opponents have threatened to block the required Senate confirmation of anyone nominated by President Obama as U.S. Ambassador to Cuba. US Congress also holds the purse strings and will need to fund the new Embassy. We will need to observe how much support these opponents will receive from other leading Republicans in the US Congress. Senator Bob Corker, incoming Chair of the Senate Foreign Relations Committee, has said only that he will be “examining the implications” of the policy change in the new Congress. Senator Orrin Hatch, presumptive new Chair of the Senate Finance Committee has issued a pro forma statement of opposition to the announcement. Representative Paul Ryan, incoming Chair of the House Ways & Means Committee (in charge of budgetary and trade issues in the House of Representatives) had, until 2007, voted to lift the embargo against Cuba. Senator Rand Paul (Rep.-KY) has been openly critical of Senator Rubio’s position. And Republican Senator Jeff Flake who flew to Havana to cement the prisoner exchange accompanying the deal, has been a vocal supporter of lifting the embargo. Flake and Paul both sit on the Senate Foreign Relations Committee. They, and others, will be heavily lobbied by US commercial interests lining up to take advantage of the announced policy and begin trade with Cuba.

In the event of a prolonged battle over funds and the nomination process, it is speculated that President Obama can take the interim step of scaling up the existing US Interests Section in Havana. Similarly, the Cuban Interests Section in Washington, D.C. will presumably be scaled up into an Embassy, headed by an Ambassador.

Increased travel and remittances to and small imports from Cuba: Travel to Cuba will still be restricted under the embargo. However, twelve categories of travelers currently authorized to travel to Cuba will no longer need to apply for permission (specific license) to do so: Continue reading

2014 Mid-Term Election Results & Impact on US Trade Agenda

Courtesy of Wikipedia

Courtesy of Wikipedia

One bright spot exists for President Obama in the Republican take-over of the U.S. Congress as a result of the 2014 mid-term elections. That is a shared agenda on trade. Republicans tend to be supportive of trade negotiations and tout their potential for economic growth and job creation. The Democrats, on the other hand, typically reflect the concerns of their constituents — trade unions and environmentalists concerned about potential negative impact of such agreements on jobs, labor standards and the environment.

The U.S. Constitution gives shared responsibility to the President and the Congress for the US trade agenda. While it is the President, through his US Trade Representative, who conducts trade negotiations, concluded agreements must be approved by a two-thirds majority of the Senate in order to become law.

The United States is currently negotiating two large trade agreements. The Trans Pacific Partnership (TPP) is being negotiated among twelve countries – Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The TransAtlantic Trade & Investment Partnership (TTIP) negotiations between the United States and the European Union will create the world’s largest trade bloc.

To facilitate such negotiations, U.S. Presidents over the past thirty (30) years have relied on the Trade Promotion Authority (TPA) legislation passed by the US Congress. TPA defines US trade negotiating objectives to which the President must adhere in concluding trade agreements. In return, the US Congress accepts, or rejects, the negotiated agreement in its entirety. This process provides some assurance to US trade partners that the agreements they sign with the United States will not be subjected to further requirements in order to win Congressional approval.

The last grant of Trade Promotion Authority to the President expired in 2007. President Obama first sought renewal of TPA in 2012. Under the Democratic-led Senate, the response to this request has been a resounding and consistent “no”.

Meanwhile, the Republican Party’s platform on trade includes the demand to “restore Presidential Trade Promotion Authority”. The document goes on to say that international trade is crucial for the US economy because it means more jobs, higher wages and better standard of living.

As a result of the November 4, 2014 elections the Republicans now hold a majority in the Senate, as well as the House. The incoming Senate Majority Leader, Senator Mitch McConnell (R-KY) has already signaled his desire to work with President Obama on trade:

“I’ve got a lot of members who believe that international trade agreements are a winner for America.”

This is why, on this front at least, President Obama may be able to find a silver lining in this changed political environment. The Republicans may keep trying to repeal Obamacare, but are more likely to approve his trade deals.

Foreign Direct Investment & Development

I recently watched a 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. The dire poverty, environmental degradation and the violence in that oil-rich region add poignancy to the Ghanians’ opposition, even as one wonders about the real motives of the Ghanian officials.

For the Texan-based investors (which included the 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 Role of FDI

Developing countries seek to attract foreign direct investment (FDI) to foster economic growth and development. FDI can be a valuable tool to exploit resources, build production facilities while creating jobs and infrastructure in developing 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 the country’s development needs.

The events that unfold in Ghana illustrate this tension. 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? Needed are rules to facilitate and support the honest brokers in these transactions.

A Way Forward?

At the end of the day, what Ghana, and other responsible governments want is access to jobs, decent housing, roads, education and other social services for its citizens. Hotels built with foreign capital using workers who live in shacks across the streets is an untenable outcome. Yet, we see this all across the Caribbean, for example.

Rules-based frameworks for trade and investment focus almost exclusively on creating an open playing field for FDI, or on managing disputes. As essential as these are, we also need trade and investment rules that can provide a pathway toward more development-oriented and sustainable outcomes for FDI. Are there guidelines that can help honest governments and fair-minded investors to determine an equitable distribution of profits derived from exploitation of a country’s resources?

What about best practice tools and suggestions to help developing countries negotiate these deals with international capital? For example, can investor agreements contain provisions for investors to make such in-kind contributions as building houses and roads or providing other services that they do well?

Perhaps such tools already exist. If so, they need to be made more visible. The world does not need any more Nigerian Deltas.

US Ex-Im Bank Ceases Operations Unless Reauthorized by Congress!

The largest barrier facing small businesses as they seek to grow is access to capital. This presents an even bigger barrier to many women owners of small to medium-sized businesses who are shut out from accessing capital by their local banks.

Export-Import Banks fill that gap for companies that do business internationally. The US Export-Import (Ex-Im) Bank is the official export credit agency of the United States. Its mission is to provide trade financing for US exporters.Imports

Trade Financing provides exporters with a form of insurance that minimizes the risk that they will either not be paid or not receive the goods for which they have paid. Ex-Im Bank programs include export credit insurance which protects an exporter of products and services against the risk of non-payment by a foreign buyer. Export working capital advances the business the capital it needs to deliver on an export order that it has received. Only with the guarantees provided by the EX-Im Bank, can small businesses receive the capital that they need from their local banks.

All major industrial and emerging economies, as well as several developing countries, provide similar export credit services to their domestic industries. The World Trade Organization (WTO) has estimated that 80% to 90% of world trade relies on trade finance.

Yet, a campaign is underway to stop the U.S. Congress from re-authorizing the Bank’s Charter before it expires on September 30th, 2014. Such campaigns allege that the US Ex-Im Bank provides “subsidies” to large US corporations. Such allegations ignore the fact that the Ex-Im Bank’s clients pay for these services, providing the agency with the funding that it needs for its operations. They also mischaracterize Ex-Im Bank’s clients, 90% of which are small businesses (by US standards). Finally, such statements ignore the role of women in the US economy. According to the U.S. Chamber of Commerce Foundation,  women-owned firms in the U.S. have grown at one-and-a-half times the rate of other small enterprises in the last 15 years and now account for nearly 30% of all new businesses.

Should this campaign succeed, for the first time in its 80-year history, the US Ex-Im Bank would have to cease operations, at least until common sense prevailed. Failure to re-authorize would make the U.S. an anomaly among its industrial counterparts.

A counter-campaign #ExIm reauthorization and #ExIm4Jobs has been underway to prevent this from happening. As can be expected, there is some hyperbole on both sides. However, this author supports the campaign to reauthorize the Bank and hope that you will too. #ExIm reauthorization!

Bali Update: What has happened since the WTO Ministerial?, Part II

WTO LogoSo, the July 31, 2014 deadline for adopting the WTO Trade Facilitation Agreement (TFA), as reported in Bali Update, Part I, has come and gone, and the Agreement has not been adopted. On July 31, 2014, the WTO General Council met to adopt the protocol that will insert the TFA into the WTO regulatory framework. However, as Director-General Azevêdo reported just before the midnight deadline:

At this late hour, with the deadline just a matter of moments away, I don’t have anything in my hands that makes me believe that we can successfully reach consensus. . .. On the one side we have the firm conviction, shared by many, that the decisions that ministers reached in Bali cannot be changed or amended in any way — and that those decisions have to be fully respected. And on the other side of the debate we have some who believe that those decisions leave unresolved concerns that need to be addressed in ways that, in the view of others, change the balance of what was agreed in Bali. These are the two sides. We have not been able to find a solution that would allow us to bridge that gap.

The “other side of the debate” refers to India’s insistence that the Bali Package agreed to in December be adjusted to address its food security concerns before the Trade Facilitation Agreement is adopted.

At Bali, the members agreed to continue discussions to arrive at a permanent solution on how to treat food subsidies. Meanwhile, they instituted a “peace clause” of four years during which such programs by developing countries that meet certain criteria are to be shielded from trade challenges, even if they negatively impact other countries’ trade. India wants this agreement to be interpreted to mean that the “peace clause” remains in place permanently until a comprehensive agricultural package is reached. India believes its interpretation will put more pressure on both sides to adhere to the December 31, 2014 deadline to arrive at an agreement on this issue.

Its refusal to budge on this position means that the Trade Facilitation Agreement remains draft text. This impasse will be revisited in September.

Launch of TFA Technical Assistance Programs

Nevertheless, some steps have already been taken on a key component of the Trade Facilitation Agreement (TFA). The TFA introduces requirements for members to improve the efficiency, effectiveness, and transparency of their customs procedures. The text further provides for technical assistance to developing countries to build the capacity needed to implement its requirements.

The WTO Trade Facilitation Agreement Facility (TFAF) has been launched to provide this assistance.

In a meeting on July 22, 2014, a group of major international organizations declared their intention to work together to assist developing and least-developed Members through a range of technical assistance and capacity-building initiatives. The joint statement is signed by the following international organizations, some of which have already also launched their programs:Imports

The US Agency for International Development (USAID) is establishing an Alliance for the Trade Facilitation Agreement as a public-private partnership. Other multilateral and bilateral donors are expected to launch their assistance programs shortly.

The WTO TFAF will act as a focal point for these efforts by supporting needs assessment, facilitating information flow among development partners and requests for technical assistance, disseminating best practices, and providing grants to support project development and implementation.

Fruition on these commitments is being made contingent on the still-pending adoption of the TFA. Will this reality pressure India to fall in line? (To be continued)