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The Month in International Trade – January 2018

Client Alert | 22 min read | 02.09.18

In this issue:


This news bulletin is provided by the International Trade Group of Crowell & Moring. If you have questions or need assistance on trade law matters, please contact Jeff Snyder or any member of the International Trade Group.

TOP TRADE DEVELOPMENTS

NAFTA ROUND 6: CONSTRUCTIVE PROGRESS, NO BLOWUPS

During the long-anticipated sixth round of talks in Montreal to update NAFTA, from January 23-29, negotiators made progress in some issue areas while avoiding any major clashes that might have led to U.S. withdrawal from the existing agreement. Officials advanced discussions on digital trade, sanitary and phytosanitary measures, and technical barriers to trade to near completion while closing a chapter on anti-corruption measures.

Following the round, U.S. Trade Representative (USTR) Robert Lighthizer acknowledged progress in these areas, while highlighting the importance of the need to make progress on the “core issues” of greatest interest to the United States. These core issues, which could include the rules of origin for automobiles as well as other difficult issues (i.e., investment, procurement, dispute settlement and the U.S. proposal for a five-year “sunset clause” in the agreement), are ultimately what the U.S. will judge as determining the success or failure of the talks.

Despite some initial constructive engagement, however, negotiators remain far from resolving these issues. Canada responded to a few U.S. proposals during the round:

  • On the rule of origin for autos, Canada reportedly proposed expanding the formula for calculating regional and national content values to include intellectual property and new technologies. Lighthizer rejected this approach in his closing remarks, finding it to be the “opposite” of U.S. interests because it would lead to less regional content than the status quo. The initial U.S. proposal would increase the regional value content for automobiles from the current 62.5 percent to 85 percent, with 50 percent reserved for U.S.-origin content.
  • On investor-state dispute settlement (ISDS), Canada proposed a mechanism that would exclude the U.S., while maintaining mutual protections only for Canada and Mexico. While it is unclear whether USTR will favor this approach, U.S. industry groups will likely be opposed.
  • On the “sunset clause,” Canada made a counterproposal of a five-year review process for the agreement, without the threat of automatic termination.

Canada also proposed departing from a proposed rule that would require the NAFTA parties to automatically extend to one another the same level of market access for services as each commits to in future trade agreements—the so-called “MFN-forward” rule that Canada had already agreed to in TPP. Lighthizer said in his closing remarks that the proposal was “unacceptable” and referred to it as a “poison pill.”

The Trump Administration overall appears to be signaling that negotiations are likely to proceed without disruption at least through the next round, which will take place in Mexico City from February 26-March 6.

While officials initially set a target date of concluding talks by March 31, there are hints that negotiations could last beyond that date, even perhaps after Mexico’s general election on July 1. President Trump said on January 11 that he could be flexible on the timetable, and U.S. Secretary of Agriculture Sonny Purdue testified to the House Agriculture Committee on February 6 that he expects talks to be extended beyond March but completed before the end of the year.

Members of Congress representing agricultural interests continue to press the Trump administration to conclude an agreement that will “do no harm” to the U.S. agricultural sector, which has benefited from expanded access to Canada and Mexico under NAFTA. These Members would prefer to see the negotiations extended beyond March, provided that the overall result remains favorable for U.S. agribusiness.

For more information, contact: Robert Holleyman, Melissa Morris, Evan Yu

CFIUS REFORM: WHITE HOUSE ENDORSES FIRRMA LEGISLATION AHEAD OF SENATE HEARING

 On January 24, a day ahead of a Senate Banking Committee hearing on reforming the Committee on Foreign Investment in the United States (CFIUS), the White House issued its official endorsement of Senator John Cornyn’s (R-TX) bill, “Foreign Investment Risk Review Modernization Act” (“FIRRMA,” S. 2098). Congressman Robert Pittenger (R-NC) has introduced companion legislation in the House of Representatives (H.R. 4311).

In its press statement, the White House noted that CFIUS modernization as outlined in FIRRMA would “achieve the twin aims of protecting national security and preserving the longstanding United States open investment policy.” If passed, FIRRMA would expressly expand CFIUS’ scope to review certain additional transactions, such as purchases of land near sensitive U.S. military facilities and joint ventures where U.S. firms share technology with foreign entities, although as a practical matter, CFIUS already reviews many such transactions. Of particular note, FIRRMA would direct CFIUS to more closely examine foreign investment in “critical emerging technologies,” which may have military uses in the future.

Critics of the FIRRMA legislation point to the bill’s broad and vague language as potentially deterring foreign investment into the United States. The statement from the White House emphasized the importance of maintaining an open investment environment – a theme that was echoed during President Trump’s speech at Davos when he claimed America was “open for business.”

Given the need to strike the right balance between protecting national security and attracting foreign investment, Congress has convened several hearings within the past three months to debate how best to approach CFIUS reform. Conveying a sense of urgency to address the perceived gaps within current CFIUS review, some Members of Congress have even indicated that they would like to put a bill on the President’s desk before the August recess. FIRRMA remains the most widely supported legislation both within Congress and the Trump administration. However, a difficult legislative year and mixed reactions from the U.S. business community could delay passage of a final bill.

The following lists the key takeaways from witness testimony during the four most recent Congressional hearings on CFIUS reform:

  • China dominates the conversation: Across Members of Congress and witnesses, there is agreement that China’s aggressive industrial policy is a real threat that can come from the private sector in addition to state-owned enterprises. Proponents of FIRRMA suggest that China has weaponized foreign investment in emerging technologies to erode U.S. military advantage and U.S. dominance in high-tech industries. These proponents further assert that an expansion in CFIUS’ scope will help close perceived gaps in the U.S. investment review process that have allowed potentially malicious Chinese firms to invest in emerging critical technologies.
  • Critics of FIRRMA worry about the impact on U.S. enterprise: Among some in the U.S. business community, there is concern that an expansion of CFIUS’ review of minority investments and joint ventures would disadvantage U.S. firms. The regulatory burden imposed by FIRRMA on transaction reviews might dissuade foreign companies from entering into deals with U.S. partners, which could diminish U.S. competitiveness in the long run.
  • Export controls vs. CFIUS: Other critics of FIRRMA emphasize that CFIUS was meant to act as a complement to existing export control regimes that already regulate technology transfers to countries of concern and that the CFIUS process is a blunt instrument that cannot and should not attempt to supplant those controls. Existing export controls can be updated to encompass new categories of critical technologies and would also invite coordination with other advanced markets like Europe and Australia to ensure consistency and thoroughness of control.
  • CFIUS needs more resources: There is a near-unanimous plea for more resources for CFIUS. FIRRMA would introduce filing fees at 1 percent of the transaction value (capped at $300,000) for each written notice and would and facilitate the addition of staff to undertake what will likely be an increase in the transactions identified to the Committee through the new contemplated process of voluntary and in some cases mandatory declaration. 

Even without FIRRMA, Chinese transactions have faced increased scrutiny over the past few years, a trend continuing under the Trump administration. In September 2017, President Trump acted on a recommendation from CFIUS and blocked a $1.3 billion M&A deal between Oregon-based Lattice Semiconductors and Canyon Bridge Capital Partners – a private equity firm with Chinese backers. More recently this year, a $1.2 billion transaction between Dallas-based MoneyGram and AliPay (the financial payments subsidiary of Chinese internet giant Alibaba) collapsed after CFIUS indicated that it would not clear the proposed acquisition by AliPay.

While the Lattice-Canyon Bridge deal raised concerns about the dual-use capabilities of Lattice’s semiconductor technologies, the MoneyGram-AliPay transaction drew national security concerns around access to personal data. If AliPay had successfully acquired MoneyGram, then it (and presumably its parent company Alibaba) would have received access to the personal information of U.S. citizens. CFIUS’ failure to clear the transaction demonstrates the broad view of U.S. national security that the Committee has taken.

For more information, contact: Alan W. H. Gourley, Robert Holleyman, Adelicia R. Cliffe, Jing Jing Zhang

Please click here to see our article on the FIRRMA from our November 2017 issue.

VENEZUELA SANCTIONS UPDATE

‘Petro’: OFAC Warns against Prospective Venezuelan Cryptocurrency

In December 2017, the Government of Venezuela announced the adoption of a new digital currency called Petro—backed by Venezuelan oil resources—in what it described as an attempt to avoid the impact of U.S. Financial Sanctions. On January 19, OFAC published a new Frequently Asked Question (FAQ) offering its view that the proposed currency may be exposed to U.S. sanctions.

As previously reported by Crowell, on August 24, 2017, President Trump issued Executive Order (E.O.) 13808, prohibiting U.S. persons from dealing in new debt (of certain maturities), bonds (previously issued ones other than those identified by general license), and all new securities with the Government of Venezuela, and entities it owns or controls, including Petróleos de Venezuela (PDVSA) (but generally excluding CITGO Holdings Inc.).
According to OFAC, investing in the Petro could infringe these requirements.

Specifically, while OFAC offers very little insight into the structure of the Petro, the FAQ states that the new digital currency would carry rights to receive commodities in specified quantities at a later date. The new FAQ explains that a digital currency with these characteristics “would appear to be an extension of credit” to the Venezuelan Government, and therefore, U.S. persons engaging in transactions involving the Petro “may be exposed to U.S. sanctions risk.” The E.O. defines “new debt” broadly, including extension of credit. The FAQ makes no reference to the duration of any investment but appears to assume that any investment would be for a maturity in excess of that permitted under U.S. sanctions.

For more on the Petro, please see Crowell & Moring’s International Trade News blog.

New EU Sanctions and UK Acts on EU Arms Embargo

On January 22, the European Union announced new sanctions targeting seven Venezuelan officials, who, according to the EU Council, have been involved in the violation of democratic principles, the rule of law, and human rights, particularly against members of the opposition. The EU Council stated that these restrictive measures would be implemented in a gradual and flexible manner and could be expanded to other officials.


On February 1, the U.K. passed the Export Control (Venezuela Sanctions) Order 2018, which provides an enforcement mechanism for the arms embargo the EU implemented against Venezuela last November. The order escalates any prohibited activity or transaction to a criminal offense with the possibility of imprisonment for up to two years. It becomes effective on February 26.

As the situation in Venezuela worsens and sanctions increase, it is recommended that companies doing business in Venezuela continue to monitor developments relating to possible future measures by the U.S. and/or other countries against Venezuela.

For more information, contact: Cari Stinebower, Jeff Snyder, Carlton Greene, Dj Wolff, Eduardo Mathison, Alexandra Solórzano

POST-BREXIT U.K. SANCTIONS AND AML BILLS PROCEED THROUGH HOUSE OF COMMONS

As reported in Crowell & Moring’s previous post, the U.K. government announced a Sanctions and Anti-Money Laundering (AML) Bill to provide the U.K. with the necessary framework and powers to implement economic sanctions and AML regulations once it formally exits the European Union.

The Sanctions and AML Bill was introduced in the House of Lords in October 2017. Several matters were discussed and amended during the Report stage in the House of Lords:

Sanctions:

The government restricted the regulation-making powers of the executive branch to cases in which there is good and reasonable cause for action and where the Parliament has issued a report.

Designations require procedural fairness and proportionality. In addition, the power to designate by description is now limited to cases in which it is not practicable for the Minister to identify by name all the persons falling within the description, and the description is sufficiently precise that a reasonable person would know whether any person falls within it.

The licensing regime was also discussed and the U.K. government stated that an initial framework for exceptions and licenses will be published and the interested parties will continue to be consulted before the Sanctions and AML Bill enters into force. 

 

 

AML:

The government did not establish a broad power to create new criminal offenses in the AML context.

The new Bill will not implement a beneficial owner registry in overseas territories or a register of beneficial ownership of U.K. property registered outside the U.K. However, Clause 44 of the report requires the Secretary of State to publish and lay before Parliament three reports on the progress that has been made to put in place a register of beneficial owners of overseas entities.

 

The review of the Sanctions and AML Bill in the House of Lords was completed on January 24. The Bill was then introduced in the House of Commons for first reading on January 25. The version of the Bill introduced in the House of Commons can be found here, along with Explanatory Notes.

No amendments were made during this first reading, and the Bill’s second reading is scheduled for February 20. Three more steps are still necessary within the House of Commons (Committee Stage, Report Stage, and Third Reading) before the Bill is ready to receive royal assent and be enacted into law. There is no set time period for the discussion of amendments and royal assent.

For more information, contact: Charles De Jager, Mariana Pendas

EU AND U.K. SEEK TO MAINTAIN FULL FTA APPLICABILITY DURING BREXIT TRANSITION

In the context of the negotiations on the terms of the transition period during which the U.K. will remain bound by EU rules following its official exit, the applicability and enforcement of international trade agreements between the EU and third countries is an important question. Although the U.K. would remain bound by the terms of the free trade agreements (FTA) concluded by the EU, the major trading partners with which these FTAs have been concluded would not necessarily be bound to respect the terms of the agreements in relation to the U.K.

Certain trading partners including Canada and Japan appear determined to follow a more conciliatory approach, emphasizing the desirability of preserving a degree of predictability in their trade relations with the U.K. Japanese officials have mentioned the onerous nature of renegotiating existing trading terms with the U.K., while Canadian officials refer to the fact that the FTA with the EU (CETA) has been concluded and entered into force so recently.

However, other trading partners including Chile and South Korea have suggested they might seek to condition the extension of their FTAs’ applicability to the U.K. during the transition period. South Korea in particular appears to see two opportunities to extract concessions from the U.K. to remedy the trade deficit it has maintained with the U.K. in recent years. The first opportunity would arise in the context of agreeing to the transition period, and the second in the subsequent negotiation of bilateral trade terms with the U.K. to apply after the transition period.

As a result, in an attempt to protect FTAs from renegotiation, the EU and U.K. will likely agree on a declaration confirming the continued applicability of these FTAs to the U.K. during the transition period.

For more information, contact: Charles De Jager

COMMERCE REVIEWING SECTION 232 PETITION ON URANIUM IMPORTS

Ur-Energy and Energy Fuels Resources signed a joint petition on January 16 regarding imports of uranium from state-owned and state-subsidized companies primarily in Russia, Kazakhstan, Uzbekistan, and possibly China. The petitioners claim that “[the United States] cannot afford to depend on foreign sources – particularly Russia, and those in its sphere of influence, and China – for the element that provides the backbone of our nuclear deterrent, powers the ships and submarines of America’s nuclear Navy, and supplies 20 percent of the nation’s electricity.”

The Petitioners have asked the Department of Commerce to expedite the investigation and for the President to impose quota restrictions on uranium products from Russia. Specifically, they seek to reserve 25 percent of the U.S. market for domestic uranium and a requirement for U.S. government agencies to purchase uranium from domestic sources.

Senator John Barrasso (R-WY) also asked for Commerce to launch an investigation under Section 232 on the effects of uranium imports on national security. According to the U.S. Senate Committee on Environment and Public Works, uranium from state-subsidized companies in Russia, Kazakhstan, and Uzbekistan, provides approximately 40 percent of U.S. uranium. Barrasso argues that the United States, however, produces less than 5 percent of the yellowcake (uranium oxide) it consumes, with the majority of U.S. uranium production in Wyoming.

Commerce’s Bureau of Industry and Security (BIS) is still reviewing the petition to determine if it meets the threshold to begin an investigation. If Commerce decides to act, it has 270 days to report their findings to the President. The President then has 90 days to decide whether an article that is imported into the United States has threatened or impaired national security. If the President determines that the article is impairing national security, he has 15 days to implement any potential action. Once the President makes a decision, he has 30 days to write a public statement on why he decided to take (or refused to take) such action.

An investigation on uranium imports would be the third probe under Section 232 of the Trade Expansion Act of 1962 since President Trump took office early 2017. Commerce Secretary Wilbur Ross submitted the Section 232 reports to the White House on steel and aluminum on January 11 and January 22, respectively.

For more information, contact: Dan Cannistra, Bob LaFrankie, Cherie Walterman

FEDERAL CIRCUIT REJECTS COMMERCE ANTIDUMPING RULE CHANGE VIA GUIDANCE DOCUMENT

The U.S. Court of Appeals Federal Circuit handed a win to a U.S. importer of glycine from China on January 23 when it determined that the U.S. Department of Commerce (DOC) could not amend a regulation promulgated through formal notice and comment rulemaking by means of a guidance document.

Specifically at issue was the DOC’s policy regarding extensions of time to withdraw from anti-dumping duty review requests. In accordance with the Administrative Procedure Act, the DOC promulgated rules for evaluating timely and untimely withdrawals from an administrative review:

(d) Rescission of administrative review—(1) Withdrawal of request for review. The Secretary will rescind an administrative review under this section, in whole or in part, if a party that requested a review withdraws the request within 90 days of the date of publication of notice of initiation of the requested review. The Secretary may extend this time limit if the Secretary decides that it is reasonable to do so. See 19 C.F.R. § 351.213(d)(1).

However, in 2011, the agency published a guidance document that indicated that extensions would only be granted under extraordinary circumstances. This new position effectively changed the last sentence of the regulation.

In 2012, Chinese glycine exporter Baoding Mantong and U.S. producer of chemicals GEO Specialty Chemicals (GEO) separately requested an administrative review of an anti-dumping order on imports of glycine from China. After Commerce announced that it was initiating the review, GEO filed a notice to withdraw its petition for review towards the end of the 90-day period. Baoding Mantong also filed its notice of withdrawal, accompanied with a request for extension of time to file its withdrawal, shortly after the 90-day period expired. 

Commerce denied Baoding’s request to extend the 90-day time limit for a withdrawal, thus causing the withdrawal to be ineffective. That led the U.S. importer of glycine manufactured by Baoding Mantong, Glycine & More, to appeal to the U.S. Court of International Trade (CIT), arguing that Commerce had violated its own regulation by amending the 2011 notice.

The CIT agreed with the plaintiff in 2015 and remanded the case, which led Commerce to issue Baoding an extension. GEO asked the Federal Circuit to overturn the CIT’s ruling because the CIT allegedly failed to give proper deference to the Secretary’s interpretation of its own amended regulation. However, the Federal Circuit aligned with the CIT and Glycine & More, arguing that the purpose of a guidance document is to clear up ambiguities within the regulation, not to amend the regulation in its entirety as the DOC had done in this instance.

For more information, contact: John Brew, Dan Cannistra, Frances Hadfield

MEXICO SIGNS ON TO WORLD BANK INVESTMENT DISPUTE CONVENTION

On January 11, Mexico signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). ICSID is a World Bank organization that administers investor-State arbitrations and is the leading institution for the resolution of international investment disputes.

It is important to note that Mexico signed the ICSID Convention but has not yet ratified the ICSID Convention, something that would be necessary to formally join ICSID. Under the Mexican Constitution, the Mexican Senate must first ratify the Convention before it becomes effective. Under ICSID Convention rules, the treaty will not enter into force for Mexico until 30 days after Mexico deposits its instrument of ratification with ICSID. Given the upcoming presidential elections in the summer of 2018 and the intrinsic uncertainty that elections sometimes bring, it is possible that Mexico’s membership in ICSID may be delayed or never confirmed.

If the ICSID Convention is ratified, investors may be able to choose to initiate international investment arbitration against Mexico before ICSID. Favorable awards would be directly enforceable in the courts of any of the over 150 ICSID State Parties as if they were final judgments of their own local courts. As a member State, Mexico would participate in ICSID’s Administrative Council and would also have the right to name arbitrators and conciliators to the ICSID Panels.

By signing the ICSID Convention, some commentators have suggested that Mexico may be viewing the dispute settlement provisions of ICSID as a “plan B” in the event that the NAFTA renegotiations with the United States fail. If the United States were to pull out of NAFTA, the signing of the ICSID Convention would signal investors that it is still open to investor-State dispute resolution.

Mexico’s signing of the ICSID Convention should be viewed as a significant step forward not only for Mexico but for the investor-State Dispute Settlement (ISDS) system. By signing the ICSID Convention the Mexican government is sending a message to investors that it apparently intends to continue to provide international dispute resolution protections to foreign investors as a way to continue to attract foreign investment. Moreover, by signing the ICSID Convention Mexico is also signaling a vote of confidence to the ISDS system—despite recent criticisms—which may influence other countries in the region.

For more information, contact: David Baron, Ian Laird, Eduardo Mathison, Alexandra Solórzano

ENFORCEMENT ACTIONS FOR January

Bureau of Industry and Security (BIS)

On January 11, BIS announced a Settlement Agreement with MHz Electronics, Inc. of Phoenix, AZ, to settle its potential civil liability for two alleged violations of the Export Administration Regulations (EAR).

Charges

Details

Summary

Enforcement Action

§ 764.2(a)

Engaging in Prohibited Conduct

On two occasions in 2013, the company exported pressure transducers subject to the Export Administration Regulations (EAR) under Export Control Classification Number (ECCN) 2B230 without a license to China and Taiwan.

Civil Monetary Penalty of $10,000;
Complete an external audit of its export controls compliance program.


BIS found the company did not seek to determine the ECCN of the items, intended end use, end users, or otherwise determine if an export license was required. MHz Electronics, at the time, did not have any program in place to ensure U.S. export control compliance.

For more information, contact: Jeff Snyder, Edward Goetz

CROWELL & MORING SPEAKS

On January 25, Alan Gourley, Addie Cliffe, and Jana del-Cerro discussed International Procurement, Domestic Preferences, Sanctions, and Export Controls on Crowell’s webinar, “What will the New Year Bring for Government Contractors?” 

Patricia Wu spoke at the First Latin American Week of Bio Pharmaceutical Innovation in Mexico City on February 7. She was a panelist for “Ethics and Compliance: Our DNA When Doing Business”.

On February 9, Erik Woodhouse and Frances Hadfield will be speaking at the Federal Bar Association’s 5th Annual Fashion Law Conference at the Theresa Lang Center at The New School in New York. Erik will be a panelist for "Financial Crimes and Fashion.” This panel will examine the risks of economic sanctions and money laundering liability in the fashion industry as well as whistleblower litigation pursuant to the False Claims Act. Frances will be speaking on a panel entitled, “Trump’s NAFTA Renegotiation: Potential Changes and Impacts to Brands, Apparel, and Textiles.” This panel will survey the impact of the Trump administration’s renegotiation of NAFTA on the fashion industry, and how counsel should advise clients in navigating this potential new landscape.

On March 12-13, Chris Monahan and Jennifer Giblin will be speaking at the International Compliance Professionals (ICPA) 2018 Conference in San Diego, CA. Chris’ talk will be “2017 Export Year in Review,” while Jennifer will be discussing “Understanding IATA Hazardous Materials.”

Robert Holleyman will be speaking at the Biennial IBA Latin American Regional Forum Conference in Mexico City on March 15. He will be a panelist discussing “Free trade or protectionism: are we going local? The renegotiation of Brexit, NAFTA, and others – what are the challenges and opportunities.”

Jeff Snyder will moderate panels and speak on “BEPS & Tax and Customs Efficient Supply Chain Management," including the Customs law impact of international supply chain optimization in the light of the OECD BEPS initiative, on 15 March 2018, at the Inter-Pacific Bar Association Annual Conference in Manila.

CROWELL & MORING's International Trade Law Blog

Don’t forget to check out Crowell & Moring’s new International Trade Law Blog at cmtradelaw.com.

The blog combines “The Month in International Trade” content with regular updates and analysis on International Trade news. Additionally, we have made available many of our recent articles organized by topic in the blog’s archive.

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