Category: Antitrust & Trade Regulation

Prepared for the Border Adjustment Tax? A U.S. and Global Perspective

border adjustment taxWe have been monitoring the potential impact of the Border Adjustment Tax (BAT) across a number of jurisdictions.

In our 14 February 2017 update, we commented that issues regarding the legality of BAT and the serious and significant international implications of its application meant that the introduction of BAT was uncertain.

In this further update we consider further the issues being raised in the United States about the BAT, look at potential challenges to the BAT by the World Trade Organization (WTO) and consider what the BAT may mean for jurisdictions outside the U.S. trading with U.S. business.

U.S. concerns

The BAT is part of a comprehensive tax reform plan that would shift the U.S. system from an income tax to a cash-flow destination based consumption tax. It would operate by exempting gross receipts from exports from U.S. federal income tax, and denying any deductions for the cost of imports. The BAT would apply to sales and imports of products, services and intangibles, and affect all forms of businesses, including corporations, “pass-throughs” and sole proprietorships.

The blueprint is vague as to whether the BAT applies to financial transactions and advice. The expectation is that financial transactions will be exempted from the BAT base in some form, but that investment management services would be included in the base.

The policy of the BAT is to incentivize business activity in the U.S. by effectively penalizing imports and subsidizing exports. It is intended to discourage corporate inversions and erosion of the U.S. tax base by making transfer pricing issues moot. It also is estimated to pay for one-third of the cost of the overall tax reform bill.

The U.S. business community is pushing for tax reform in order to make U.S. companies more competitive in a global marketplace. However, because the BAT rewards exporters and punishes importers, the proposal has ironically divided the very business community that is driving reform. While importers could potentially have a larger tax liability than book income, exporters could potentially experience a negative tax situation, since their costs would remain fully deductible (assuming they were not imported). The controversy extends beyond the business community. Consumer groups fear the BAT will result in higher prices. Importers fear U.S. consumers would work around the tax by buying directly from offshore vendors. The BAT could spur increased mergers and acquisitions, as net exporters seek companies with income sufficient to offset negative taxable incomes.

House Republicans, who proposed the BAT, say the value of the U.S. dollar will increase concomitantly with the tax increase, effectively increasing the buying power of importers and thus mitigating the impact of the BAT. Economists and other analysts are mixed in their reaction as to how the dollar will react. Since many international contracts are denominated in the U.S. dollar and because many currencies are not free floating, it is unclear to what extent any fluctuation in the dollar will offset the impact of the BAT.

Further, it is unclear whether the Trump Administration will endorse the BAT. There have been mixed messages from the White House, but President Trump has made it clear he would like to impose some sort of levy on imports to level the playing field for U.S. businesses and to bring jobs back to the U.S.

WTO Implications

While the focus has been on the impact on U.S. businesses and consumers, there are significant and serious international implications of the BAT. It is unclear whether the BAT would violate WTO protocols and a challenge from the WTO seems almost certain.

The WTO’s Agreement on Subsidies and Countervailing Measures (SCM Agreement) only allows border adjustability for taxes imposed on products, the most common of these being value added taxes, sales tax and stamp duties. Whilst there seems to be some argument that a BAT is similar to a value added tax as it is focused on destination based consumption, the majority of commentators disagree with this analysis saying that the proposed BAT is a true corporate tax which in effect imposes a discriminatory subsidy in favour of net exporters. Further, the SCM Agreement prohibits the subsidizing of exports and of the use of domestic over imported goods.

Article II of the General Agreement on Tariffs and Trade (GATT) prohibits charging tariffs in excess of those in each country’s tariff schedule. The denial of deductions for the cost of imports could be considered equivalent to a tax on the imports themselves. In WTO terms, this could be viewed as the imposition of tariffs in excess of those provided for in the U.S. schedule or might violate the Article II requirement not to impose “other” duties or charges on imports. Article III of the GATT, which sets forth what are known as “national treatment” principles, generally requires that imports be treated no less favorably than domestically-produced goods. To the extent the BAT permits certain deductions (such as the cost of domestic wages), and thus generates lower tax rates for domestically-produced goods, while denying the same deductions for the same imported products, it would seem to violate the basic national treatment rules of the WTO.

The Effects of the BAT will extend far beyond the U.S. border

The European Union (EU) has already clarified it will not stand by without taking responsive action. Officials from jurisdictions like Canada, Mexico and Germany, have indicated their disapproval and concerns about the BAT. The impact on tax treaties, intended to prevent double taxation, is unclear. Many think a U.S. exemption from taxation of exports will result in a shift of the location of taxation, with non-U.S. jurisdictions taking custody of the income and taxing it. Countries around the world are concerned about how the denial of a deduction for the cost of imports and the strengthening of the U.S. dollar will affect the demand for their products, and their ability to afford products from the U.S.

Being a destination based cash flow tax, the BAT is not consistent with a corporate tax system, it goes against current principles of international taxation underlying the double tax treaties, and is not in alignment with the more recent global Base Erosion and Profit Shifting Rules (BEPS) initiatives launched by the Organisation for Economic
Co-operation and Development (OECD), Australia and the European Union.

Initial observations as to the BAT:

  • Granting a corporate income tax exemption on income derived from exports leads to a reduction of the income tax base and qualifies economically as a subsidy.

  • Disallowing a deduction for expenses relating to imports from the U.S. corporate tax base is effectively an increase of the tax base.

  • Due to its nature as a destination-based (cash-flow) tax, it is often compared to the European style value added tax (VAT) or the Australian goods and services tax (GST). However, the proposed BAT substantially differs from VAT and GST, e.g., in that:

    • VAT and GST is typically economically neutral for most businesses; and

    • end-consumers bear the same VAT burden irrespective of whether the services and supplies originate from the domestic market or from abroad.

  • Materially, the BAT appears to be a customs duty collection tool dressed in an income tax garment.

Economically, it has been said that BAT will eventually be trade neutral, due to the expected increase of the value of the U.S. dollar, however the value of a currency is also influenced by many other factors. In addition, it may be questioned whether (potential) effects on the exchange rate can be taken into consideration when analyzing and discussing the application of existing domestic and international tax law.

It is too early to finally assess the potential reaction of other countries on a potential enactment of the BAT by the U.S. In case of an enactment, many details will have to be better understood such as whether and how cross-border income payments from outside the U.S. (e.g., interest, royalties, dividends) will be subject to tax but exempted or rather be excluded from tax. In case of substantial frictions with the current tax systems, the reaction in Europe for example, may be a combination of both, a reaction at EU level as well as consequences drawn by individual member states.

Some states may question the income tax nature of the BAT or deny certain benefits such as treaty benefits based on applicable “subject-to-tax” clauses or alike. Whether or not certain states will go beyond that by requesting changes to the existing Double Taxation Treaties or their interpretation remains to be seen. Why for example should a country apply reduced withholding tax rates on royalties or alike if the respective income is not taxed in the U.S. for reasons of impeding the free trade between the U.S. and that particular country?

BAT may well also impact the current approach to globally harmonize the common understanding of fair international taxation, including the battle against the so-called BEPS which was triggered by biased rules governing international taxation.

Australia

Australia has been an early adopter for many of the OECD BEPS measures. It has recently passed legislation to implement a diverted profits tax, similar to that in the United Kingdom, a “Netflix” tax being a GST on intangible supplies via a digital platform operator by non-resident suppliers to Australian consumers. It has also introduced the Multinational Anti Avoidance Law to combat tax avoidance by multinational companies operating in Australia.

These measures show an increasing focus on cross border flows of business, and a move toward a destination model of taxing rather than an origination model. That is consistent with the BAT principles. However, given that the U.S. is Australia’s biggest trading partner and a destination of choice for many Australian companies seeking to expand globally, the impact of the BAT for Australian business cannot be underestimated.

While much of the focus in the U.S. has been on the impact of BAT on the import and expect of manufactured goods and products, cross border utilisation of intellectual property, intangibles, and management and head office charges are likely to be an area of ongoing focus as the BAT works its way through the legislative agenda.

France

The BAT could jeopardise the application of the tax treaty entered into by the U.S. and France. According to the most recent case law of the French high administrative court (Conseil d’Etat), treaty benefits must only be granted where there is an effective double taxation. If a French company pays a royalty to a U.S. company, such royalty will be exempt in the U.S. and the French revenue may take the view that the treaty does not apply. French domestic withholding tax of 30% may apply accordingly.

The BAT would clearly contradict some of the provisions of this treaty. By way of example, Article 7 provides that in determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are reasonably connected with such profits, whether incurred in the State in which the permanent establishment is situated or elsewhere.

Germany

Germany has also been an early adopter of the BEPS rules – to the extent such rules were not already enacted before as German rules fighting cross-border base erosion and profit shifting were already rather sophisticated.

A mere reduction of the U.S. corporate income tax rate itself should generally not be of a concern from a German tax perspective. However, for purposes of the application of the Controlled Foreign Corporation (CFC) and Passive Foreign Investment Company (PFIC) rules pursuant to the German Foreign Tax Act, there will be an issue where the effective corporate income tax burden in the U.S. drops below 25%, measured by German tax standards.

However, Germany would certainly not welcome substantial single-sided impediments on the free trade imposed by BAT or other means.

United Kingdom

For United Kingdom businesses that export to the U.S., the introduction of a BAT could have far reaching consequences for sales, FX strategy and business organisation.

One area of particular difficulty relates to cross-border financial services (UK outbound and inbound): it is not yet clear how a BAT would deal with these (VAT systems are themselves complex in this area). Useful practical strategies may be drawn by U.S. businesses in conjunction with advisers both in the U.S. and jurisdictions with VAT systems, like the United Kingdom, as and when any BAT reform is rolled out in detail.

On a more general level, tax issues have gained a higher profile in the UK over the last few years. Like many other jurisdictions the UK is actively adopting the recommendations of the OECD’s BEPS initiative and actively encouraging EU policy to endorse the same. The UK’s implementation of these OECD recommendations has resulted in the UK seeking to tax profits created in UK, and trying to ensure that where value has been created in the UK that value is not artificially diverted for tax purposes to offshore jurisdictions.

The current UK Government’s enthusiasm for these OECD initiatives (and the automatic exchange of tax information including private tax rulings) is a continuation from the previous administration, faces little or no political opposition and is not in any way contaminated by BREXIT.

It can be noted that the OECD BEPS initiative’s overarching economic goal to ensure that value is taxed where it is created (not located) in fact, with increased attribution to human resource (rather than capital or IP), is not necessarily incompatible with the political objective of the Blueprint to increase value creation in the U.S. (and taxing it there).

Global high brand value service and product suppliers, and other businesses which are head-quartered outside of the UK, argue that the value of their sales derives from their domestic jurisdictions where their global high value brand products or IP was developed and where their technicians, designers, board etc. are based. As a result, value is not derived from a UK based sales centre, the services of which, if outsourced, would only cost a small amount in fees or commissions. It will be interesting to see how the lobby groups for U.S. based multinationals and a post-BREXIT UK each respond to the EU Commission’s state aid challenges, which were aimed at preventing low EU tax on EU sales. It may prove harder to resist greater taxation in the EU if there is no domestic tax in the U.S. in relation to the EU operations.

In addition to the policy arguments there are also technical issues with how the UK’s value based approach will sit with the proposed destination based approach in the US. For example, the U.S.-UK double tax treaty currently deals with direct taxes (such as federal profits, income and gains taxes) and is predicated on traditional tax bases such as residence and source and does not address indirect taxes (like VAT) at all. How this will be applied in the context of the U.S.-UK double tax treaty is not clear.

Conclusion

Given both the uncertainty regarding the intricacies and workings of the BAT as well as how it will interact with existing Double Tax Treaties, the introduction and operation of the BAT remains unclear

The impact of the proposed tax on net importers vs net exporters divides the business community and creates further uncertainty in an already uncertain economy. The same applies to the consequences on the application and interpretation of domestic tax and international tax law outside the U.S. It is hoped that detailed legislation as well as commentary addressing the concerns of the U.S. domestic and international community will go some way in resolving these issues in a time efficient manner.

ARTICLE BY Betsy-Ann Howe, Mary Burke Baker, Rainer Schmitt, Bertrand Dussert, Giles Bavister & Stacy J. Ettinger of K&L Gates

Copyright 2017 K & L Gates

U.S. Airways Vs. Sabre: 3 Ways To Prove Healthy Market Competition

Airplane, Sky, U.S. AirwaysAt the heart of any antitrust suit lies the intent to foster healthy competition in the market. But what, exactly, does healthy competition foster? Lower prices, sure. But, more importantly, better products, better services, and more innovative ways to provide them, as well as fair negotiations among vendors.

Successful defense of an antitrust suit starts with proof of healthy competition. A recent battle of the experts in the $134M trial between airline giant, U.S. Airways (recently merged with American Airways), and Sabre Holdings Corp., a trip-planning conglomerate, offered three indicators to successfully prove healthy market competition:

Innovation

In the trial, U.S. Airways claimed Sabre—as part of a conspiracy to increase airfares and damage U.S. Airway’s position in the market—forced it into an unfair, anti-competitive contract in 2006. At the time Sabre, which boasted a large share of the trip-booking market, served as one of the primary sources of airfare data for a massive network of travel agents responsible for a significant portion of U.S. Airways bookings. In the suit, U.S. Airways claimed it had no choice but to contract with Sabre in order to maintain access to this large travel agent network. Sabre’s expert, however, University of Chicago economics professor Kevin Murphy, pointed to U.S. Airway’s plea as the exact type of reasoning that is detrimental to the market, i.e., lack of innovation.

According to Murphy, U.S. Airways could have researched, planned and implemented the creation of a new technical platform, a “bridge” Murphy called it, to the numerous travel agents that would have alleviated the need to utilize Sabre’s connection. In other words, there was opportunity to innovate had U.S. Airways found the cost of the project in conjunction with the end result—which would have alleviated the need to partner with Sabre—more valuable than the contract with Sabre. Motive and opportunity to innovate around stagnant models is a sign of healthy market competition. In addition, the “threat” of creating a new model, as Murphy put it, also has value and would have impacted negotiations.

Negotiation

To further his argument that the Sabre-U.S. Airways contract was the result of healthy competition, Murphy also pointed to the stern negotiations U.S. Airways and Sabre entered into prior to execution of the contract. Witnesses at the trial testified that U.S. Airways took very stern negotiating positions before a final value was agreed upon between the parties. Murphy explained this could not have occurred had Sabre truly possessed the type of anticompetitive market power U.S. Airways claimed. If that had been the case, Sabre would have simply named their price and left U.S. Airways powerless to refuse. Fair bartering among vendors for provision of unique, in-demand services is another indicator of healthy market competition.

Valuation

One of the primary points of contention between U.S. Airways’ expert and economist Murphy was Sabre’s “full content” contracts, a requirement by Sabre that air carriers provide access to any and all fares they offer. U.S. Airways’ expert referred to this as a “no discount” constraint. In other words, if the consumer knows the carrier has previously priced a flight at $200, that prevents the carrier from now telling the consumer—with a straight face, at least—that the true value of the flight is $300 but will be generously offered at a discount for only $200. Full disclosure, according to U.S. Airways, limits the carrier’s ability to alter pricing to suit demand. Murphy, however, explained “full content” actually increases competition because it drives prices down. If consumers have all options available at the time of booking, they will often choose the lowest priced option that suits their need. This is the cornerstone of competition. Full disclosure allows for unfettered comparison shopping and enables the consumer to value all options according to personal preference and necessity. If certain options (which are often not simply the lowest-priced) begin to advance, this spawns innovation among market competitors to match consumer desire and the cycle begins anew: innovation, negotiation, valuation.

ARTICLE BY Annie Dike of IMS ExpertServices

© Copyright 2002-2017 IMS ExpertServices, All Rights Reserved.

Data Breaches Will Cost Yahoo and Verizon Long After Sale

data breach Yahoo VerizonFive Things You (and Your M&A Diligence Team) Should Know

Recently it was announced that Verizon would pay $350 million less than it had been prepared to pay previously for Yahoo as a result of data breaches that affected over 1.5 billion users, pending Yahoo shareholder approval. Verizon Chief Executive Lowell McAdam led the negotiations for the price reduction. Yahoo took two years, until September of 2016, to disclose a 2014 data breach that Yahoo has said affected at least 500 million users, while Verizon Communications was in the process of acquiring Yahoo. In December of 2016, Yahoo further disclosed that it had recently discovered a breach of around 1 billion Yahoo user accounts that likely took place in 2013.

While some may be thinking that the $350 million price reduction has effectively settled the matter, unfortunately, this is far from the case. These data breaches will likely continue to cost both Verizon and Yahoo for years to come.  Merger and acquisition events that are complicated by pre-existing data breaches will likely face at least four categories of on-going liabilities.  The cost of each of these events will be difficult to estimate during the deal process, even if the breach event is disclosed during initial diligence. First, the breach event will probably render integration of the systems of the target and acquirer difficult, as the full extent of the security issues is often difficult to assess and may evolve through time. According to Verizon executives, Yahoo’s data breaches created integration issues that had not been previously understood.  The eventual monetary cost of this issue remains unknown.

Second, where the target is subject to the authority of the Security and Exchange Commission (SEC), an SEC investigation and penalties if applicable, is likely, along with related shareholder lawsuits. As we wrote previously, The SEC is currently investigating if Yahoo should have reported the two massive data breaches it experienced earlier to investors, according to individuals with knowledge. Under the current agreement, Yahoo will bear sole liability for shareholder lawsuits and any penalties that result from the SEC investigation.

Third, there will likely be additional private party actions due to the breach. Exactly what these liabilities will be will depend on the data subject to exfiltration as a result of the breach.  In Yahoo’s case, Verizon and Yahoo have agreed to equally share in costs and liabilities created by lawsuits from customers and partners.  Multiple private party lawsuits have already been filed against Yahoo alleging negligence.

Fourth, other government investigations, such as by the Federal Bureau of Investigation (FBI), could result in additional costs, both monetary and reputational. The FBI is currently investing the Yahoo breaches.  Verizon and Yahoo will share the costs of the FBI investigation and other potential third party investigations.

Fifth, depending on the scope of the breach, there would likely be on-going remediation costs after the deal closes. According to a knowledgeable source, as of February 2017, Yahoo had sent notifications to a “mostly final” list of users, indicating that some remaining remediation activities may yet occur.

As we have seen, merger and acquisition events involving a target with a pre-existing data breach issues create difficult to assess costs and liabilities that will survive the closing of the transaction.

ARTICLE BY Cynthia J. Larose & Brian H. Lam of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

©1994-2017 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

NAFTA: Mexican Trucking Program

NAFTA Mexican carriers long-haul deliveriesPresident Trump’s plans to renegotiate the North American Free Trade Agreement (NAFTA) may also impact a controversial program that allows Mexican carriers to make long-haul deliveries in the U.S.

As part of the NAFTA agreement, the U.S. and Mexico agreed to allow trucks from each country to carry goods across the border for deliveries anywhere inside each of their respective countries, but the program faced challenges from the get-go.  In 2007, the George W. Bush Administration launched a trial program to expand Mexico’s trucking operations beyond the border. However, the program ended in 2009 after Congress defunded the program following pressure from labor unions.

Following retaliatory tariffs imposed by Mexico, the Obama Administration established a new pilot program in 2011 that would allow long-haul operations in the United States by Mexican drivers, beyond the 25-mile “buffer zone” that allows U.S. truckers to transfer and begin transport of merchandise further into U.S. territory.   U.S. labor unions objected but failed in their legal challenges against the program, and it was made permanent in January 2015.  The International Brotherhood of Teamsters, together with other groups, sued the Department of Transportation in 2015 over a report that they argued was not based on sufficient data to allow for these long-haul deliveries.  The program remains in effect while that case is still pending.

Safety has been one of the biggest concerns raised by critics of the program.  However, a 2014 Congressional Research Service report suggests safety likely has less to do with whether the truck originates in the U.S. or Mexico, and more to do with the type of truck being used:

Drayage carriers, whose trucks make short-haul movements and spend much time idling while awaiting customs processing, tend to use older equipment. Long-haul trucks tend to carry relatively high-value goods or temperature-controlled cargo, because lower-value goods and less time-sensitive goods can be carried over long distances much more economically by rail or water. If shippers are willing to pay a substantial premium over rail or water transport to truck their product long distances, it seems plausible that they would choose a reliable trucker with modern equipment to avoid risk of delay or spoilage.

Opponents of the program are almost certain to call for its repeal as part of any new NAFTA negotiations.  Representative Peter DeFazio (D-Oregon), Ranking Member of the House Transportation Committee, opposes the long-haul program and has already said he plans to raise the issue with Trump Administration officials.

ARTICLE BY Mayte Gutierrez of Squire Patton Boggs (US) LLP

© Copyright 2017 Squire Patton Boggs (US) LLP

CFIUS and the New Trump Administration: Your Top Ten Questions Answered

One of the themes of the Trump campaign was the need for enhanced national security. Although the Committee of Foreign Investment in the United States (CFIUS) is not mentioned in Mr. Trump’s 100-day plan, it is highly likely that CFIUS reviews will become more stringent under the new administration. CFIUS reviews are the mechanism by which the U.S. government can vet merger and acquisition (M&A) activity involving the potential transfer of ownership or control of companies or assets to foreign interests.

CFIUS reviews have always been something of a black box. The information submitted to the committee is proprietary and not subject to release to anyone outside of Congress; the deliberations are confidential; and the reasons supporting any approval or disapproval are not released. The decisions are entrusted to the committee with little in the way of judicial oversight, giving the president a great deal of discretion to reshape the process.

This combination of secrecy and discretion in the CFIUS process has led to a great deal of uncertainty regarding potential sales of companies or assets to foreign interests, such as:

  • What types of deals will receive heightened scrutiny?

  • Will it become more difficult to get clearance for acquisitions that raise national security concerns?

  • Will the review process become a tool to halt Chinese acquisitions?

  • Will the Trump administration use the CFIUS process as leverage to ensure reciprocal access by U.S. investors to foreign countries?

  • Will the committee give a more prominent role to economic security issues instead of only focusing on national security, as is the current case?

To help deal with questions such as these, this client alert presents the “Top Ten” questions that every company engaged in M&A activity with a foreign dimension should be thinking about. This client alert is part of a series of “Top Ten” articles on the future of key international trade and regulatory issues expected to change under the Trump administration. Previously issued client alerts discuss the future of NAFTA and international trade litigation (including antidumping and countervailing duty actions) under the Trump administration. Future client alerts will deal comprehensively with all international trade and regulatory areas, where significant change could occur under the new administration.

The Top Ten CFIUS and Foreign Investment Questions Answered (or Is This the Dawning of the Age of the CFIUS?)

1. So what exactly is CFIUS, and what role does it play in protecting U.S. national security?

Although post-WWII U.S. policy has been to maintain an open posture for foreign investment, the Exon-Florio amendment in 1988 created CFIUS, which provided a mechanism to scrutinize foreign investments and acquisitions to determine if they have national security implications.1 After a controversy regarding the proposed acquisition of the commercial operations of six ports by Dubai Ports World, the Foreign Investment and National Security Act of 2007 (FINSA) increased the scope of transactions subject to potential CFIUS review by adding critical infrastructure investments.2

The Exon-Florio provision, as amended, gives the committee the right to review proposed foreign “mergers, acquisitions, or takeovers” and to present recommendations regarding whether they should be approved by the president, who has the authority to block proposed foreign transactions that threaten to impair the U.S. national security. CFIUS functions as an interagency committee to review the national security implications of foreign investments in U.S. companies or assets.

As per Executive Order 13,456, the committee consists of nine members, including the secretaries of commerce, defense, energy, homeland security, state, and treasury; the attorney general; the U.S. trade representative (USTR); and the director of the Office of Science and Technology Policy.3 The secretary of labor and the director of national intelligence also serve as ex officio members. The committee completes its review based upon jointly provided information regarding the proposed transaction, with the information provided in response to a lengthy set of questions as outlined in section 800.402 and other parts of the CFIUS regulations.4

CFIUS filings are voluntary in nature. Parties go to the time and expense of seeking committee review because, if a voluntary filing is made, and the committee approves it, then the U.S. government loses the ability to challenge a transaction, unwind it, or require mitigating actions. By contrast, any acquisition not reviewed is subject to divestment or other actions designed to address any national security threat inherent in the transaction. Through this carrot and avoidance of a potential stick strategy, parties to M&A activity are encouraged to self-evaluate transactions involving the potential transfer of ownership or control to a foreign person, and to seek a voluntary review where national security concerns potentially arise.

2. What has President Trump promised?

The CFIUS review evaluates the impact of sales to foreign entities, with the Defense Security Service separately reviewing foreign ownership, control, and influence where the National Industrial Security Program is involved. In the campaign, Mr. Trump frequently stated his view that foreign direct investment should be viewed through a national security prism, and was critical of Chinese acquisitions in particular, such as the purchase of the Chicago Stock Exchange. These views are consistent with those of key Republicans in Congress, who have sought to strengthen U.S. government review of transactions with a potential national security impact.

Mr. Trump’s transition team reportedly has determined that the CFIUS process will play an enhanced role in the new administration. The planned nomination of Mr. Lighthizer as the USTR is also potentially significant, as the USTR is one of the nine standing members of the committee. Mr. Lighthizer, who has worked for three decades as a prominent lawyer representing U.S. steel interests in antidumping and countervailing duty actions, and who has prior experience under the Reagan administration as a negotiator of voluntary restraint agreements to protect troubled U.S. companies, is expected to be an active supporter of the international trade themes espoused by Mr. Trump during his campaign for president.

There also have been indications that the new administration will favor an informal “reciprocity” test for foreign investment — i.e., that countries that do not allow a comparable investment in the same sector would not see CFIUS approvals. This is a mindset that could have special resonance for China, which often restricts foreign investment by other countries, including the United States.

3. What are the current trends in CFIUS enforcement? Will Mr. Trump’s pronouncements on national security work within, or potentially change, these trends?

The vast bulk of CFIUS filings occur in four sectors:

  1. Manufacturing

  2. Finance, information, and services

  3. Mining, utilities, and construction

  4. Wholesale and retail trade

Although reviews can arise for any country, in recent years they generally involve China, the United Kingdom, Canada, Japan, France, Germany, Switzerland, The Netherlands, Singapore, Israel, and South Korea.5

The Obama administration generally had a hands-off CFIUS approach. Despite the increasing number of filings over the last eight years, including those involving China (which is viewed as a problematic purchasing country), the Obama White House let most matters be resolved at the CFIUS level, without overt action by the White House. As a result, only two transactions were halted or required significant divestments by President Obama (for Aixtron, a semiconductor company, and for Ralls Corp., which was required to divest windfarm assets located near a defense facility). The transactions cleared included controversial transactions, such as the Smithfield Foods acquisition by China’s Shuanghui International Holdings Ltd., which raised concerns about a Chinese company taking over 26 percent of the U.S. hog market and food-processing facilities in more than a dozen states, key U.S. food-processing technology, and Smithfield intellectual property.6 Certain other transactions were abandoned by the parties due to opposition at the committee level.

The biggest change in CFIUS reviews over the Obama administration was the increasing prevalence of Chinese acquisitions. In the most recent three-year period for which data is available (2012 – 2014), the committee reviewed 68 potential acquisitions involving China, whereas in the three years right before the FINSA enactment there were only four. When Congress requested that the Government Accountability Office (GAO), an independent agency that conducts audits and investigations on behalf of Congress, prepare a report regarding the CFIUS process, the request specifically noted that Chinese transactions may pose “a strategic rather than overt national security threat.”7

An additional trend is the increasing use of mitigation measures, which can include such conditions as restricting which persons can access certain technologies/information, establishing procedures regarding U.S. government contracting, establishing corporate security committees to oversee classified or export-controlled products or technical data, requiring divestments of critical business units, providing periodic monitoring reports to the U.S. government regarding national security issues, or giving the U.S. government the right to review future business decisions that implicate national security.8 The increasing prevalence of such measures, as well as the increased staff time required to monitor the implementation of mitigating measures, is one of the key reasons why increased staffing and resources for the committee process are likely under the new administration.

The implication of these developments is that while the number of transactions definitively killed by presidential action may not increase (as it is rare for companies to pursue transactions where the committee indicates strong concerns), it is likely that an increasingly stringent review process will result in more companies backing off of transactions that encounter resistance from the committee. National and economic security concerns will also likely lead to U.S. companies increasingly selling to safe buyers, as sales to U.S. purchasers or those in NATO countries are less likely to run into CFIUS opposition (or may not need CFIUS filings at all.

4. What does the committee currently consider in its reviews?

The current list of factors considered by the committee is established by statute, and consists of the following:

  • Whether the transaction impacts the domestic production needed for national defense requirements

  • Whether the transaction impacts the capability and capacity of domestic industries to meet national defense requirements

  • Whether the transaction relates to the control of domestic industries and commercial activity by non-U.S. citizens as it relates to national security

  • The potential effect on sales of military goods, equipment, or technology to a country that supports terrorism, proliferates missile technology or chemical/biological weapons, or where there is an identification by the secretary of defense that the transaction poses “a regional military threat” to U.S. interests

  • Whether the transaction could impact U.S. technological leadership in areas affecting U.S. national security

  • Whether the transaction has a security-related impact on critical U.S. infrastructure

  • The potential effects on U.S. critical infrastructure, including major energy assets

  • The potential effects on U.S. critical technologies

  • Whether the transaction is a foreign government-controlled transaction

  • In cases involving a government-controlled transaction, additional review of the adherence of the country to nonproliferation control regimes, the foreign country’s record on cooperating in counter-terrorism efforts, the potential for transshipment or diversion of technologies with military applications, and future U.S. requirements for sources of energy and other critical resources

  • Such other factors as the president or the committee determine to be appropriate.9

The manner in which these factors are applied in any specific transaction is entirely within the discretion of the committee. In particular, the view of what constitutes a national security issue is amorphous, allowing for the expansion of review to areas of concern not traditionally covered in prior reviewed transactions.

5. How might CFIUS reviews change at the Executive level?

There are a number of ways in which CFIUS reviews could change at the Executive level, even absent any changes to the statutory basis for the reviews:

  • Appointing new members with heightened national security concerns. As noted above, the committee is an inter-agency committee composed of key secretaries and other actors, such as the attorney general, that bring expertise and institutional knowledge regarding national security issues. The appointment of new actors to these positions will have a major impact on the type of review that occurs, as new committee members replace the more accommodating Obama appointees.

  • Tightening discretionary review. Because the CFIUS process is subject to a high degree of discretion and confidentiality, there is considerable leeway to change the way in which transactions are reviewed. Expansion could occur through informal influence, as noted, or through formal expansion of the parameters of review, such as occurred with Executive Order 13,456 (issued by President George W. Bush), which altered the scope of CFIUS review in the aftermath of the FINSA passage.10

  • Direction and control from President Trump. The CFIUS statute, as amended, lays out a concrete role for the president only at the end of the process. Nonetheless, given the high degree of confidentiality of the process and the likely interest of the president in national security matters, Mr. Trump will be in a position to exert influence on high-profile matters as they arise. Since CFIUS actions are generally not reviewed by courts, the new administration will have great leeway to change the scope of review even without any statutory changes.

  • Increasing use of mitigating measures. Although the statute does not contemplate the use of mitigating measures, the practice by now is well-established. Such measures are often agreed to by the parties because the alternatives of abandoning the deal or the risk of proceeding while ignoring such requests are unpalatable. It would not be surprising to see the increased use of such measures for companies that produce goods that are controlled under the International Traffic in Arms Regulations (ITAR) or the Export Administration Regulations (EAR), where the U.S. company is a major supplier to the federal or state governments, or for companies that possess key high-tech patents that could be used to help jump-start foreign competition in a strategic sector.

  • Increasing scrutiny of China and other countries viewed as problematic. The CFIUS review process increasingly is the mechanism through which Chinese M&A activity is vetted, with Chinese companies having overtaken UK companies several years ago as the largest source of CFIUS requests. Republicans in Congress have requested that the GAO determine whether CFIUS reviews “have effectively kept pace with the growing scope of foreign acquisitions in strategically important sectors in the U.S.,” while specifically singling out Chinese and Russian state-owned enterprise investments as causes of concern.11 Given the large international trade deficit with China, as well as concerns that China discriminates against U.S. investment, while seeking open access to the U.S. market, the scrutiny of transactions involving Chinese companies is likely to increase. The same could be true of other countries that lie outside the trusted realm of NATO-plus countries (i.e., while NATO countries like France, Germany, the UK, and Australia/Japan/South Korea may still see relatively relaxed reviews, countries like Russia could see increased scrutiny).

  • Increasing scrutiny of state actors. For the last few years, there have been concerns that state-owned entities may be using their foreign commercial enterprises to advance the home country’s political agenda. This issue arises not only with regard to Chinese companies, but also with other countries where there are company ties to the government (including for countries where the ties may not be known publicly). The committee already requires the submission of extensive information regarding shareholders and owners, but sometimes is satisfied with the provision of information that only addresses immediate owners. The committee may require the submission of more complete information regarding ownership and control, both for indirect owners and for other avenues through which a foreign government might exert control or indirect influence (board members, etc.). This information could be used to support a more probing review of the role that the foreign government would have if the acquisition were to be completed.

  • Increasing scrutiny of sectors of concern. Certain sectors are viewed as presenting opportunities for foreign governments to treat U.S. acquisitions as supporting foreign policy initiatives or other activities inimical to U.S. interests. For example, acquisitions by Chinese telecom companies have been viewed as problematic due to the risk of potential electronic eavesdropping. Since such concerns fall squarely within the rubric of national security, increased inquiry into such ties easily could occur without any changes to the CFIUS legislation or regulations.

  • Expanding the definition of what constitutes a “national security” issue. FINSA added “critical industries” and “homeland security” as categories of economic security subject to a CFIUS review. “Critical infrastructure” is a concept that allows for ready expansion of the scope of review. Although not directly part of the CFIUS authorization, the USA PATRIOT Act of 2001 (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism)12 provides that the term “critical infrastructure” includes “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.” Sectors identified as potentially meeting this definition include telecommunications, energy, financial services, water, transportation sectors,13 and the “cyber and physical infrastructure services critical to maintaining the national defense, continuity of government, economic prosperity, and quality of life in the United States.”14 Expanding the CFIUS review process to cover similar concerns could occur without any changes to the existing legislation.

6. How might CFIUS reviews change at the congressional level?

Congress is not likely to be a passive bystander in the process. Republicans in Congress have been trying for years to alter the scope of the CFIUS review process and likely will view the election of Mr. Trump as an opportunity to enact this agenda. The advantage of action through legislation is that it can overhaul the CFIUS review process in one fell swoop, while implementing long-standing congressional concerns. Items in legislative play include the following:

  • Expanding the definition of national security to include economic security. Republicans in recent years have introduced legislation (but not secured passage) that would expand CFIUS reviews to cover economic security issues. Republicans will be emboldened to reintroduce these measures in the new Congress. If such legislation is passed, it is highly likely the number of submitted CFIUS filings will sharply increase.

  • Increasing committee staffing. There have been Republican proposals to expand committee staffing. Increased staffing will allow for more careful vetting of transactions and monitoring of mitigation measures, expanding the role of the committee in overseeing foreign direct investment on an ongoing basis.

  • Adding oversight of greenfield investments. In 2013, the Russian space agency Roscosmos proposed building Global Positioning System monitor stations in the United States. Although the proposal was blocked by CFIUS (due to concerns raised by the Central Intelligence Agency and the U.S. Department of Defense),15 the proposal raised the issue of whether the CFIUS process should be expanded to cover greenfield investments or new start-up ventures explicitly. Because the CFIUS provisions are designed to address M&A activity rather than new investments, there arguably is a gap in coverage that Congress could seek to fill by amending the statute.

  • Adding oversight of passive investments. Under the current law, transactions “solely for the purpose of investment,” or where the foreign investor has “no intention of determining or directing the basic business decisions of the issuer,” are exempt from review.16 Given the many ways in which owners can guide investment decisions behind the scenes, these provisions could be viewed as loopholes that should be eliminated.

  • Enhancing reporting to Congress. As originally drafted, the CFIUS process left Congress as a bystander. The amendments contained in FINSA added significantly increased reporting obligations (among other changes). Given Congressional interest in the area, additions to the current statutory reporting, including the possibility of extensive real-time reporting on pending transactions, is a possibility. Giving congressional actors’ access to ongoing filing information, even on a confidential basis, could make the CFIUS process a great deal messier.

  • Expanding areas of scrutiny. Due to prior controversies, food and agricultural acquisitions are likely targets for enhanced scrutiny under an amended statute, as are pharmaceutical, biotechnology, biologics, and high-tech products. For example, the Republican letter to the GAO mentioned food safety as a potential security issue, using the security concerns regarding the committee’s clearance of the $43 billion acquisition of Syngenta (an agricultural seed and chemical provider) by ChemChina.17 Legislation could detail areas of special concern, which would greatly increase the number of filings in areas considered sensitive.

  • Adding consideration of a “net benefit” test. Some congressional leaders believe that the CFIUS review should include a “net economic benefit test.”18 Such a test would allow the committee to examine the impact of transactions on economic security, labor and employment effects, and whether the country at issue allows for reciprocal investment. Support for such an expansion can be found in China’s own national security review, which is broad and arguably includes such a test, extending special scrutiny in the areas of agriculture, assembly manufacturing, and transportation.

  • Adding the authority to consider whether a transaction would “hollow out” U.S. manufacturing. The 2016 annual report to Congress from the U.S.-China Economic Security Review Commission raised concerns about whether the “large-scale out-sourcing of manufacturing activities to China is leading to the hollowing out of the U.S. defense industrial base.” Statutory amendments could make consideration of such issues a requirement of any CFIUS clearance.

  • Implementing recommendations of the GAO review. The GAO is conducting a review of the CFIUS process at the request of 16 members of Congress. The review will result in a report sometime in 2017 that will highlight perceived shortfalls or gaps in the process. Any issue identified will likely spur legislative efforts to address the identified shortcomings.

  • Implementing provisions targeted at Chinese state-owned entities. Due to concerns about the influence of state-owned entities in general, and Chinese state-owned entities in particular, the Exon-Florio/FINSA statute could be amended either to mandate increased scrutiny of state-owned entity purchases or to bar such sales entirely.

  • Increasing the role for national security agencies. The nine members of the CFIUS process do not draw from the national security agencies, such as the U.S. Department of Defense. Although these actors can be consulted on a case-by-case basis, the statute could be amended to make these agencies permanent parts of the CFIUS review process

7. Are there other potential ways in which the CFIUS process may be impacted by the change in administration?

If filings increase, this could increase the length of time for CFIUS review. Although the regulations provide for a strict 30-day review process (with additional time if a full investigation is needed), the committee has developed ways to stretch out this time period, including by taking a week or more to “log in” filings, requesting that parties provide “pre-filing” (draft) review requests to allow extra time for consideration, and requesting additional information from the parties (which stretches out the time for final decision). Prudent parties leave 90 to 120 days for completion of the process. An increased number of reviews could stretch this time period further.

Additionally, the change of administration could lead to turnover in career CFIUS staff (which is where most of the hard work of analysis occurs). The loss of this institutional knowledge could lead to increased delay, confusion regarding information to be submitted and what information is considered most relevant, additional supplemental questions, and less predictability in results

8. Can the Trump administration potentially undo or alter prior CFIUS approvals?

Although it is possible the new administration might try to undo previously approved transactions, it is unlikely. The statute provides for undoing previous approvals only if information submitted turns out to be false, misleading, or to have had material omissions. The chance of such misstatements being uncovered is low, given that most participants are careful to provide vetted and accurate information. Further, the ability to check the accuracy of information submitted is difficult because the information is confidential and exempt from Freedom of Information Act requests.19

While an argument could be made that the president has the authority to reopen a transaction under the International Emergency Economic Powers Act,20 the entire basis of encouraging CFIUS filings on a voluntary basis would be undermined if the carrot of no review were put into question. Further, parties who worked through the process likely would mount challenges in federal courts arguing that the rescission of a lawfully granted clearance amounted to a violation of due process or a taking.21 Although one could argue that actions taken pursuant to the International Emergency Economic Powers Act (which an unwinding of a cleared transaction would be) are not subject to judicial review, rather than court this kind of trouble, it is more likely the Trump administration will focus on tightening the standards for new transactions rather than seeking to unwind previously approved ones.

9. Sounds scary. What can I do to cope?

CFIUS practitioners have long benefited from developing a sense as to what types of transactions are potentially problematic, allowing for accurate triaging of the types of deals that should consider filing for CFIUS review. Unfortunately, these finely honed instincts will no longer be of much use. It will take years to establish the operation of the new CFIUS ground rules.

In the meantime, transactions that involve the transfer of ownership or control to a foreign party (including transactions where one foreign company is selling U.S. interests to another foreign company) should be looking carefully at national and economic security interests in every deal and considering whether a CFIUS filing is prudent. Parties to transactions should plan for potentially wide-ranging CFIUS reviews (and the accompanying delay) from the outset for any deal that raises potential national or economic security considerations. Merger contracts for such deals should include contingencies as to what will happen if CFIUS reviews are negative or involve unanticipated conditions, require divestments of key technology or assets, or restrict what purchaser personnel can have access to key technology.

With the range of potential mitigating measures including conditions on ownership and governance, the establishment of security committees to oversee controlled technical data, goods, patents, or intellectual property, potentially intrusive monitoring requirements, and other mitigating measures, the possibility that the committee could impose conditions that significantly impair the rationale for the transaction needs to be taken into account from the outset. Incorporating such considerations into the contract, the value assigned to the U.S. business, and into the timing of the deal can avoid unanticipated commercial issues that could kill an otherwise mutually acceptable deal.

Most CFIUS reviews have been relatively non-political. This may change in the new administration. Companies should accordingly consider the public and government relations aspects of transactions from the outset. The CFIUS process may play out in a new and more public/political fashion, especially if proposals to give Congress more of a role in the process are realized. Having sophisticated government and public relations teams at the ready to coordinate with the CFIUS legal and transactions team may turn out to be important in future reviews. Having a coordinated strategy to deal with various contingencies from the start offer the best chances for a favorable outcome.

10. What types of M&A activity should be most seriously considering CFIUS requests?

The type of transactions that will merit consideration of filing for a CFIUS review are in flux, for all the reasons noted above. Nonetheless, there are certain recurring situations that likely will merit serious consideration of a CFIUS filing. These include sales with the following attributes:

  • U.S. interests that produce, sell, or broker goods or technical data controlled under the ITAR (U.S. Munitions List products or goods modified to meet military specifications or for military use)

  • U.S. interests that produce, sell, or broker goods or technical data controlled under the EAR, especially if 600-series (commercial military goods) are involved

  • U.S. interests that produce, sell, or broker goods or technical data controlled under the nuclear-related export controls

  • U.S. entities that possess a classified facility or some form of top-secret clearance

  • U.S. interests that have significant sales to federal or state governments

  • U.S. interests in sectors of key concern, such as telecommunications, agriculture, food, high-technology, bio-technology, energy, critical infrastructure, or pharmaceutical products

  • U.S. interests that possess key intellectual property that is not generally available worldwide

  • U.S. interests that manufacture products where there are few competitors in either the United States or abroad, such that the sale would arguably move control of a limited-supply product to sole foreign control

  • U.S. interests that have property close to U.S. military assets;

  • U.S. interests that are part of the defense or police supply sectors

  • Sales to problematic countries, especially China

Conclusion

The entire international regulatory scheme is potentially in play under the new administration, especially so in the area of CFIUS reviews. While the contours of how the reviews will change is as yet unknown, in some ways, the prospect of change is a self-fulfilling prophecy. Because CFIUS reviews are voluntarily requested when the parties believe there is a chance the deal could come under post-transaction inquiry, rumors of increasingly close scrutiny by the U.S. government, in and of itself, will increase the number of voluntary filings made by risk-averse investors. This will result in the committee having increased clout as the number of transactions where review is sought increases.
U.S. companies looking to sell to foreign interests, or foreign interests looking to purchase U.S. companies or assets, should closely consider the potential national or economic security aspects of their transactions, with the level of concern and likelihood of seeking a CFIUS review rising as the country of acquisition moves away from the relative safe haven of NATO and similar-level countries. One thing is clear: the CFIUS process is likely to change, and potentially to a large degree. Prudent companies will not want to be on the wrong side of the evolving standards for CFIUS clearance.

ARTICLE BY Gregory Husisian of Foley & Lardner LLP

1 50 U.S.C. app. § 2170, transferred to 50 U.S.C.A. § 4565.
2 Id.
3 See Exec. Order No. 13,456, Further Amendment of Exec. Order No. 11,858 Concerning Foreign Inv. in the U.S., 73 Fed. Reg. 4677 (Jan. 23, 2008).
4 See Dep’t of the Treasury, Regulations Pertaining to Mergers, Acquisitions, and Takeovers by Foreign Persons, 73 Fed. Reg. 70,702 (Nov. 21, 2008).
5 Id. at 27.
6 Id. at 12.
7 See Letter from Robert Pittenger et al., Member of Cong., to Hon. Gene L. Dodaro, Comptroller General, U.S. Gov’t Accountability Off. (Sept. 15, 2016).
8 See Cong. Research Serv., RL33388 (2016) at 27-28.
9 See 50 U.S.C. App. § 2170(f), transferred to 50 U.S.C.A. § 4565(f).
10 See Exec. Order No. 13456, Further Amendment of Exec. Order No. 11858 Concerning Foreign Inv. in the U.S., 73 Fed. Reg. 4677 (Jan. 25, 2008).
11 See Letter from Robert Pittenger to Hon. Gene L. Dodaro, supra note 3, at 1.
12 Pub. L. No. 107-56, Title X, § 1014, October 26, 2001; 42 U.S.C. § 5195c(e).
13 42 U.S.C. § 5195c(b)(2).
14 42 U.S.C. § 5195c(b)(3).
15 See Cong. Research Serv., RL33388 (2016) at 13.
16 Id. at 16.
17 See Letter from Robert Pittenger to Gene L. Dodaro, supra note 3, at 1.
18 Id. at 1-2.
19 See 50 U.S.C. App. § 2170(c), transferred to 50 U.S.C.A. § 4565(c).
20 50 U.S.C. §§ 1701-1707.
21 See Ralls Corp. v. CFIUS, 758 F.3d 296 (D.C. Cir. 2014).

Negotiation By Tweet: The Uncertain Future of U.S. Cuba Relations

U.S. Cuba relationsAfter the announcement of Fidel Castro’s death on November 26, 2016, President Barack Obama sent a message to the Cuban people highlighting his administration’s efforts to improve relations between the United States and Cuba. “History will record and judge the enormous impact of this singular figure on the people and world around him…[T]he Cuban people must know that they have a friend and partner in the United States of America,” Obama said.

President-Elect Donald Trump took a different tack, tweeting simply, “Fidel Castro is dead!”

The following Monday, as the first U.S. direct commercial flight in over 50 years landed in Havana, Mr. Trump tweeted: “If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate deal.” It is unclear what he means by the “deal.” President Obama’s relaxation of restrictions on Cuba is not part of a single deal. Rather, the President’s decision to increase engagement and shift policy toward the island nation has been implemented through a gradual series of Presidential Executive Orders, regulatory changes, and shifts in licensing policy.

Mr. Trump’s threat to terminate the “deal” might be read as a threat to reverse the steps the Obama administration has taken to ease travel and trade restrictions on Cuba. That threat has created a great deal of uncertainty for the future of U.S.-Cuba relations. During his campaign, Mr. Trump sent mixed signals about his approach on Cuba. In September 2015, Mr. Trump reportedly commented that “the concept of opening Cuba is fine.” His stance hardened closer to the election (as he fought for votes in the key electoral state of Florida), reportedly saying that he would close the newly opened U.S. Embassy in Havana and undo President Obama’s policies on Cuba.

Other influences may tend to harden Mr. Trump’s views further. His choice of Reince Priebus has a reputation as a Cuba hawk, as do influential members of the Republican Congressional delegation, including Marco Rubio and Ted Cruz.  Mr. Trump’s choice to head the National Security Council, Michael Flynn, has written that he sees Cuba as a country “allied with” Radical Islamists in a war against the United States.

Theoretically, undoing President Obama’s efforts would be easy for the new Trump administration. There is no legal barrier to reversing most or all of the Obama administration’s Cuba initiatives.

On the other hand, it is somewhat possible that the businessman in President-elect Trump could influence his views on Cuba, especially considering that his own organization reportedly investigated business opportunities in the Cuban hospitality sector as recently as six months ago. Since hospitality is one of the major sectors benefitting from Obama administration’s Cuba policies, it might provide fertile ground for further opening of the relationship.

There may be a possible approach lying between normalization and retrenchment. As noted by the US-Cuba Trade and Economic Council, Mr. Trump may choose to require that the Cuban government meet certain requirements as conditions to continuing the existing initiatives. Such conditions might include concrete steps on human rights. At the same time, enforcement of existing restrictions (which are many) could be beefed up through allocations to the chronically underfunded and understaffed Office of Foreign Assets Control within the U.S. Department of Treasury. But negotiating this middle path will be delicate. The Cuban leadership is extremely sensitive to criticism of its human rights record, but there are small signs of movement. For example, when President Obama visited the island in March 2016, he met personally with dissidents critical of both Castro and the United States. And Fox News reported after Fidel Castro’s death that Raul Castro’s regime has moved away from the worst abuses, including executions of dissidents and long-term sentences of political prisoners. But according to the same report, under the Raoul Castro regime, harassment and short-term detention reportedly continues to be used to disrupt the activities of dissident groups. Navigating those issues will place high demands on the diplomatic skills of Mr. Trump’s administration.

According to a recent Pew Research poll, there is broad approval across party lines for reestablishing diplomatic relations with Cuba and ending the embargo. Many sectors of the American business community would likely oppose rolling back President Obama’s changes, which have broken down economic and social barriers between the United States and Cuba. Travel to Cuba is immensely popular. Many companies have invested millions to enter the Cuban market, with the U.S. government’s authorization. As White House Press Secretary Josh Earnest argued, “unrolling” Obama’s policy is “just not as simple as one tweet might make it seem.” But this may not be enough to sway Mr. Trump.

For American businesses exploring opportunities in Cuba, it is important to be mindful that the next administration is likely to freeze any expansion of Cuba initiatives, at least while the new President sorts out his priorities. In the best case, existing policies might be made contingent on Cuba meeting certain human rights and other objectives important to the new President. Some of the more permissive Obama administration policies could be rescinded, and there may be increased enforcement by OFAC of the restrictions that remain. We also expect that after Inauguration Day, January 20, 2017, work on pending OFAC license applications is likely to be frozen until a clear agenda is set. While the uncertainty is unsettling, we will continue to look to a future, as President Obama stated, “in which the relationship between our two countries is defined not by our differences but by the many things that we share as neighbors and friends – bonds of family, culture, commerce, and common humanity.”

ARTICLE BY J. Scott Maberry & Fatema K. Merchant of Sheppard, Mullin, Richter & Hampton LLP

Copyright © 2016, Sheppard Mullin Richter & Hampton LLP.

NAFTA and the New Trump Administration: Your Top Ten Questions Answered

With the recent U.S. election finally reaching its close, the unexpected election of Mr. Trump has left many multinational companies wondering how the change in administration will impact their business operations. One of the chief issues of concern is Mr. Trump’s campaign rhetoric that the United States should withdraw from the North American Free Trade Agreement (NAFTA) or, perhaps, substantially renegotiate it (with Mr. Trump taking both positions at times).

Many multinational companies have structured their operations on the assumption that the free trade of goods within the NAFTA region was a given, and understandably are nervous regarding the future of the agreement. To help deal with this insecurity, this client alert presents the “top ten” questions every company that relies on NAFTA should be thinking about. Future client alerts will deal comprehensively with all international trade and regulatory areas where significant change could occur under the new administration.

The Top 10 NAFTA Questions

1. What has President-elect Trump promised?

2. Is the promised repeal of NAFTA a real possibility or just campaign rhetoric?

3. Can the Trump administration just withdraw from NAFTA on its own?

4. Will Congress have any role in the withdrawal or be able to alter the way in which any withdrawal occurs?

5 .What are the most likely options — withdrawal, amendment, or no change?

6. Are there limits to how high tariffs could go if there is a full withdrawal?

7. If there is a full withdrawal, what will be the consequences in addition to higher tariffs?

8. Are there countries other than Mexico that are potentially a target for major changes in U.S. trade policy?

9. If NAFTA withdrawal is part of a “war on international trade,” what are some other types of international trade issues I should be monitoring?

10. The possibilities sound pretty scary. What can my company do to help mitigate the risk of a NAFTA exit?

The Top Ten NAFTA Questions Answered (or, What to Do If the New Administration Plays the NAFTA Trump Card)

1. What has President-elect Trump promised?

After calling NAFTA “the worst trade deal maybe ever signed anywhere,”1 Mr. Trump stated that he either would seek a full repeal of the agreement or would seek to renegotiate it to remove incentives to transfer manufacturing and jobs to Mexico. Mr. Trump’s “100-day action plan to Make America Great Again” confirmed that NAFTA would be a focus of the early days of the administration, as it promised that within 100 days of taking office, Mr. Trump would “announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205.”2 Action on NAFTA likely will be a priority of the Trump administration.

2. Is the promised repeal of NAFTA a real possibility or just campaign rhetoric?

The election of Mr. Trump ran straight through such manufacturing states as Wisconsin, Ohio, and Pennsylvania. In each of these states, anger about lost manufacturing jobs, and their often high wages, was a deciding factor for key swing voters. It is fair to say that discontent about the loss of manufacturing jobs in general, and the accompanying anger with NAFTA in particular, likely tipped these closely contested states — and therefore the election — to Mr. Trump.

With the high visibility given to NAFTA, it is highly likely that there will be either a NAFTA withdrawal or at least enough of a renegotiation of its terms that Mr. Trump can claim that his administration has “fixed” NAFTA. Certainly the Mexican and Canadian governments believe Mr. Trump is serious: Leaders of both countries have stated they are open to renegotiating the terms of NAFTA, although Mexico stated its willingness was more along the lines of having a “discussion” of potential changes.3

3. Can the Trump administration just withdraw from NAFTA on its own?

Article 2205 of NAFTA provides that “{a} party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.” Thus, withdrawal could potentially be effective as early as the summer of 2017. In all likelihood, however, there would initially be a period where renegotiation is attempted, thus delaying any unilateral withdrawal. The likelihood of a withdrawal by this summer accordingly is very small. Further, as noted below, duties would not change for likely a year or more after any withdrawal occurs.

4. Will Congress have any role in the withdrawal or be able to alter the way in which any withdrawal occurs?

Although NAFTA was approved by Congress, it is technically not a treaty. Rather, it is a congressional-executive agreement approved by a majority vote of each house of Congress, as are the World Trade Organization (WTO) agreements). NAFTA was put in place pursuant to the Trade Act of 1974, which gives the president authority to negotiate agreements dealing with tariff and non-tariff barriers. Section 125 of the 1974 act gives the right to terminate and withdraw solely to the president, after giving appropriate notice (six months, as specified in NAFTA).4

5 .What are the most likely options — withdrawal, amendment, or no change?

Although Mr. Trump has repeatedly criticized NAFTA (as well as other trade agreements, such as the WTO agreements), he did not state that he was against all trade agreements. Instead, he stated his view that many existing free trade agreements (FTAs) were poorly negotiated, and thus were not in the interest of the United States and U.S. manufacturers. This position opens up several possibilities regarding NAFTA, ranging from complete withdrawal to severe or even moderate renegotiation. The criticism of NAFTA thus could be used as a way of creating negotiating leverage to allow for the targeted reopening of the agreement.

Despite the campaign rhetoric, millions of U.S. jobs depend on trade between the United States, Canada, and Mexico. Canada and Mexico are, respectively, the first and second largest export markets for the United States. (Although China is a larger overall trading partner, China trade is heavily weighted towards exports to the United States.)5 Much of the trade with Mexico, in particular, involves the shipment of U.S. goods to Mexico for assembly and then the return of the downstream products to the United States. Eliminating NAFTA without any replacement would create tremendous upheaval in these international supply chains. This would lead to significant job losses in the short term and the stranding of significant investments that were made based on the promise of free trade benefits.

As a result, impacted companies likely will exert tremendous pressure on Mr. Trump to amend, rather than repeal, NAFTA. Significant changes to NAFTA would support Mr. Trump’s claim that business negotiators would be able to achieve better FTAs than “career diplomats,” while still allowing him to claim that he has carried through on his NAFTA promises.

There are also strong reasons on the partner side to believe that renegotiation, rather than withdrawal, is most likely to occur. Since Canada shares concerns about the transfer of jobs to Mexico, it would not be surprising if Canada were to align with the United States on certain issues that it would prefer to see amended. As for Mexico, NAFTA is too important to the Mexican economy for Mexico to give up its free trade access to the United States without a fight. Even if Mexico would prefer that the agreement remain as written, giving up trade concessions would be far preferable to risking the likely recession and economic upheaval that would accompany withdrawal and the shift of U.S. multinational companies to other locations.

The effect of NAFTA withdrawal also could have the side effect of increasing illegal immigration — another Trump signature issue. Upheaval in the Mexican economy and any recession as a result would almost certainly lead to an increased desire for Mexican workers to leave Mexico for the much stronger U.S. economy. Avoiding a large increase in illegal immigration from Mexico (which actually has been falling in recent years) may pressure Mr. Trump to amend, rather than eliminate, NAFTA.

6. Are there limits to how high tariffs could go if there is a full withdrawal?

As a general matter, the Trade Act of 1974 provides that after any withdrawal from a covered agreement, impacted tariff rates will remain unchanged for one year. This is to allow businesses time to adjust to any change. The president is allowed to raise tariffs more quickly if there is a need for expeditious action, so long as Congress is notified and a public hearing is held, but this option is unlikely to be triggered.6 Thus, for all intents and purposes, there will be no increase in tariffs for at least 18 months (the six-month notice period plus the additional year of frozen duty rates).

Beyond that, if the United States withdraws from NAFTA, there are two sets of default options that come into play. The U.S.-Canada Free Trade Agreement — which preceded NAFTA — is still in effect, as it was only suspended when NAFTA came into force. So withdrawal from NAFTA would likely bring the U.S.-Canada FTA back into play. Although not automatic, reinstatement of that U.S.-Canada FTA likely would be politically acceptable, both because Mr. Trump did not focus any attention on Canada in particular when criticizing NAFTA, and because the trade deficit with Canada itself is quite small when compared to the deficit with Mexico. Further, with Canada often exporting natural resources such as petroleum to the United States, its exports are not viewed as displacing U.S. manufacturing jobs. Indeed, with there being some concern in Canada that its own manufacturing base has been hollowed out in recent years, Canada might even join the United States in seeking certain modifications to NAFTA.

If the U.S.-Canada FTA is brought out of suspension, trade between the two countries may be a lot like it is under NAFTA. The tariff rates under the U.S.-Canada FTA are often the same as the rates under the NAFTA (i.e., often zero). The U.S.-Canada FTA also includes many of the same types of FTA protections as contained in NAFTA, such as providing the means of appealing disputes to special arbitrator panels. Thus, the impact of repeal with regard to dealings with Canada is limited because the fallback position is another FTA.

It is trade with Mexico that could potentially see more changes. NAFTA is the only FTA possibility in place between the United States and Mexico. Without any type of FTA in place, the tariffs between the United States and Mexico would be based on pre-NAFTA levels. The extent of the rise is dictated by two different legal documents:

  • Under U.S. law, tariffs are allowed to rise to a level that is between 20 and 50 percent higher than the rates in effect on January 1, 1975.7 Because tariff rates were much higher in 1975, this would allow for very large tariff increases.

  • This degree of increase would not occur, however, because the extent of any increase in tariffs is limited by the WTO agreements, which are multilateral agreements that are independent of NAFTA. Due to the operation of the most favored nation (MFN) tariff rules, tariffs for Mexico and the United States would be set based upon the average tariff rates in place for each country. The United States has a low MFN rate, which means that even though U.S. law otherwise allows for large increases based on 1975 tariff levels, existing WTO rules would limit the increase to a general maximum of 3.5 percent.

The irony is that the increase in Mexican tariffs would be much greater than 3.5 percent. The Mexico MFN rate is much higher than the U.S. rate, meaning that Mexican duties could increase to as much as 36 percent. This means that the tariff impact of NAFTA withdrawal would actually be felt more acutely on the U.S. side of the border, as the rate levied by Mexico on exports from the United States would rise to a much greater degree than the rate that could be levied by U.S. Customs & Border Patrol on imports from Mexico. Withdrawal, supposedly intended to aid U.S. manufacturing, would asymmetrically result in much higher tariffs for U.S. exports.

7. If there is a full withdrawal, what will be the consequences in addition to higher tariffs?

Including negotiated annexes, NAFTA is more than 2,000 pages long. In addition to a full phase-out of tariffs, NAFTA also eliminated a variety of non-tariff barriers (import licenses, local-content requirements, export-performance requirements, and other non-tariff barriers). NAFTA helped unify customs procedures and regulations, provided uniform investment rules, established fair and open procurement procedures, and gave firms the right to repatriate profits and capital, among other trade and investment provisions. It also provided a mechanism for settlement of many bilateral disputes. All of these investments in trade stability could disappear if NAFTA is no longer in force.

Another wild card is the impact of any withdrawal of the maquiladora rules. The maquiladora rules pre-date NAFTA, and provide for special tariff rates and other advantages for companies in the maquiladora region (generally, within 75 miles of the U.S. border, although they can be located elsewhere). Such industries as the automotive, aerospace, medical devices, and electronics industries have turned the maquiladora region into a sophisticated manufacturing hub, making maquiladora operations essential parts of the complex supply chains established by U.S. companies that operate within this region. There was no discussion of the maquiladora special tariffs during the campaign, and it is unknown whether there will be any changes in these rules. Although it is a program run by Mexico, its growth in use has been spurred by NAFTA, and the United States has cooperated in many aspects of the maquiladora program. It is unknown whether the rules will change in light of any NAFTA modifications or withdrawal.

8. Are there countries other than Mexico that are potentially a target for major changes in U.S. trade policy?

Equal to the criticisms of NAFTA (which are largely criticisms of trade with Mexico, not Canada) were criticisms of China. China is a juicy target for campaign rhetoric, since it not only is a large trade partner, but also is a country that frequently exports while importing far less. Far more manufacturing jobs depend on exports to Mexico than to exports to China.

The 100-day plan states that Mr. Trump will “direct my Secretary of the Treasury to label China a currency manipulator.”8 This designation takes advantage of a law passed this year that allows for retaliation against countries that manipulate currencies to give their goods an artificial advantage. Any such designation might be accompanied by other actions against China, such as designating currency manipulation as a countervailable subsidy in countervailing duty investigations and administrative reviews or taking action against Chinese imports in other ways, such as through safeguard actions. Mr. Trump’s 7-Point Plan to Rebuild the American Economy by Fighting for Free Trade also vowed to raise tariffs on Chinese imports and to bring cases against China for any violations of international trade agreements, as well as to incorporate the campaign promise to label China a currency manipulator.9

China also is not a member of any FTA with the United States, and thus is reliant on its membership in the WTO to provide what trade protections are available to it. Any attempts to lower the trade deficit have to include China, as trade with China represents more than 40 percent of the overall trade deficit.10 Yet proposals by Mr. Trump to place high tariffs on imports from China likely would run afoul of WTO rules, which may mean that fights against Chinese imports need to take place using international trade litigation (described below).

Looking past China and Mexico, there are three other countries with significant trade deficits with the United States: Japan, South Korea, and Germany. None of these countries was singled out the way Mexico and China were during the campaign; nonetheless, the trade deficit represented by these countries is also significant. There is a heightened probability that these countries will, at the very least, be singled out through such international trade remedies as antidumping, countervailing duty, and safeguard actions, as discussed below.

9. If NAFTA withdrawal is part of a “war on international trade,” what are some other types of international trade issues I should be monitoring?

Regardless of whether NAFTA is terminated, there is a wide variety of international trade actions that can be taken to limit the amount of imports from Canada, Mexico, and other countries that are not parties to NAFTA. These include:

  • Section 301 proceedings. Section 301 of the Trade Act of 1974 gives the U.S. trade representative, at the direction of the president, the ability to impose tariffs based on “an act, policy, or practice of a foreign country that is unreasonable or discriminatory and burdens or restricts U.S. commerce.” One of the remedies that can be imposed is higher tariffs on imports from a chosen country.

  • Section 122 balance-of-payment proceedings. Section 122 of the Trade Act of 1974 authorizes the president to deal with “large and serious United States balance-of-payments deficits” by imposing temporary import surcharges or temporary quotas or a combination of both. This relief is limited and temporary, however, as it can only last 150 days, and the charge cannot exceed 15 percent of the ad valorem value of the imported goods.

  • Section 232(b) national security actions. Where there is a deemed threat to national security, Section 232(b) of the Trade Expansion Act of 1962 authorizes the secretary of commerce to investigate imports and then take actions to limit or restrict them, or to “take such other actions as the president deems necessary to adjust the imports of such articles so that such imports will not threaten to impair the national security.”

  • International trade remedies (safeguard proceedings and antidumping/countervailing duty investigations). These forms of international trade remedies focus on relief for individual products, types of products, or industries. They do not provide the same type of general relief as afforded by a wholesale increase in customs duties, but can offer powerful relief in a more targeted fashion. Duties in antidumping and countervailing duty proceedings often exceed 10 – 20 percent of the entered value of subject merchandise (depending upon the information submitted in lengthy and detailed questionnaire submissions). If non-U.S. companies do not respond to the detailed requests for information, the duties imposed are based upon “facts available,” which is intended to be punitive and can result in duties that exceed the value of the goods themselves by more than 100 percent. Safeguard proceedings can result in targeted duties on entire industries as well.

  • Section 337 unfair trade practices proceedings. These proceedings target unfair trade practices, including the abuse of patent and trademark rights. In some recent cases, U.S. companies have created novel theories that would allow the International Trade Commission to reach a wide variety of conduct, thereby expanding the use of the section 337 process to address perceived unfair trade practices.

The potential increase in international trade remedies is a complicated subject in and of itself. This is especially true for certain industries of concern to Mexico and Canada, such as the steel and softwood lumber industries. (In this regard, antidumping and countervailing duty petitions on softwood lumber from Canada were filed on November 25, 2016.) This topic will be explored in a future client alert devoted to international trade remedies under the Trump administration.

10. The possibilities sound pretty scary. What can my company do to help mitigate the risk of a NAFTA exit?

As noted above, there is a wide set of possibilities, ranging from moderate (or even no) change to complete revocation of the agreement. Predicting the exact impact of any change to NAFTA can be difficult. Multinational corporations with operations in Mexico should, however, consider the following topics when determining how best to cope with the uncertainty of a potential NAFTA exit:

  • Customs Issues

    • Assess which party is the importer of record. Because of the absence of duties, many companies in the NAFTA region paid little attention to which company acts as the importer of record. Because the importer of record is responsible for the payment of duties, a review of the entity that is acting as the importer of record, and assessing whether this arrangement makes sense in a post-NAFTA world, could help avoid unpleasant surprises.

    • Assess whether processing outside the customs territory can be used. Depending on which way the trade is occurring and the form of the transaction, there are various types of warehousing and manufacturing options that are deemed to be outside the customs territory of the country at issue, such as through the use of foreign trade zones (FTZs). Goods that are in an FTZ are considered not to have entered into the customs territory of the country, thus delaying any payment of duties. If the goods are later shipped to a different country — even the originating country — then no duties are ever paid, even if the goods were further manufactured while in the FTZ. This is a valid option to consider for goods that require processing before they are shipped to another country or back to the originating country.

    • Assess whether other customs options exist. In addition to FTZs, there are additional options for goods that can delay or eliminate duties, including the use of customs bonded warehouses or Temporary Importation Under Bond. Such options become more valuable if NAFTA tariff relief is eliminated.

    • Assess whether refunds of duties are possible. For goods that are involved in a round trip, there can be options where duty refunds can occur, including the use of the American Goods Returned program (where the goods are not further improved while abroad), Mexican and U.S. duty drawback procedures, and other refund programs. Eligibility can vary and depends upon the exact form of the importation pattern.

    • Determine if all customs valuation options are being used. When the tariff rate is zero, the precise value of the goods entered is of little moment. But in a tariff environment, strategies such as the first-sale doctrine (which allows for value to be entered based on the first sale to a middle man, rather than the final price) become more valuable as a means of minimizing duties.

  • Supply Chain Options

    • Assess the supply base and what alternatives exist. Companies that have the option of using NAFTA generally have found Mexico to be the cheapest option, due not only to NAFTA regional preferences, but also due to inexpensive transportation options between the two countries. Companies should assess whether Mexico-sourcing still makes sense in a post-NAFTA world, and be prepared with a contingency plan if NAFTA exit becomes a reality. Options would include taking advantage of other FTAs, reshoring manufacturing options, or some of the other customs alternatives outlined above.

    • Assess maquiladora manufacturing options. NAFTA withdrawal might not impact all operations equally, due to the fact that the maquiladora benefits (which are granted by Mexico) will likely remain. The benefits of the maquiladora program include the ability to temporarily import goods and services that will be manufactured, transformed, or repaired, and then re-exported back to the United States, without paying taxes, being subject to compensatory quotas, and other designated benefits. For companies whose operations qualify, these benefits may make continuing Mexican operations profitable, even if duties increase. Companies that are not taking advantage of these cost-saving opportunities might want to consider them as a means of potentially offsetting some measure of any increased tariffs.

  • Political Options

    • Consider seeking miscellaneous tariff bill options. From time to time, Congress passes a Miscellaneous Tariff Bill (MTB), which allows for the grant of customs duty forbearance for specific products. Companies that operate in Mexico have not needed to pay attention to this repeated Washington rite, because their products already enjoyed duty-free status. In a post-NAFTA world, the MTB might become an option worth monitoring and pursuing for products that meet the requirements for consideration.11

    • Consider options for political pressure. NAFTA represents a trillion dollars of annual bilateral trade. Any actions to up-end that arrangement are going to be contentious, heavily lobbied, and feature winners and losers. Companies that are part of well-connected industries and trade associations will be able to enhance their ability to come out on top if the agreement is renegotiated.

  • International Trade Litigation Issues

    • Assess if trade litigation is likely to impact important products and inputs. Regardless of how NAFTA changes, the likelihood of increased trade frictions in the form of international trade litigation is highly likely. Antidumping and countervailing duty actions are likely to increase in the new administration, as potentially will Section 337 and safeguard actions. To deal with this possibility, companies that deal with goods from other countries, including Canada and Mexico, should consider monitoring rumors of potential filings, assessing whether important goods are in industries where trade actions are common (steel products, chemicals), products where there are rumors regarding potential filings (various steel products, softwood lumber from Canada, and so forth), and monitoring whether imports are of products where imports have been sharply rising, especially if at low prices. Import trends can be monitored for any Harmonized Tariff System number on the website of the International Trade Commission.12

    • Consider going on offense. It is widely anticipated that the new administration will be more receptive to the filing of antidumping and countervailing duty actions, safeguard proceedings, and other forms of international trade remedies. If a case can be made that products are being sold at low prices in the United States by foreign producers or are receiving subsidies, and these imports are causing material injury to the U.S. industry producing the same product, it may make sense to consider filing a petition to seek import relief. Questionnaires to help assess whether such an action has a potential basis are available by contacting the author at the contact information listed at the end of this alert.

The issues outlined in this alert are only the tip of the international trade iceberg. Companies that have significant operations that could be impacted by the potential NAFTA changes should consider lining up counsel to monitor ongoing developments in the area, suggest coping strategies, and take other measures to mitigate the risk of a NAFTA exit. Billions of dollars of exports, and millions of manufacturing jobs, will be impacted based on how the NAFTA withdrawal/renegotiation is handled. With that much money at stake, it behooves companies with operations, sales, imports, and exports that depend on or are impacted by NAFTA to closely monitor any changes in the Agreement.

ARTICLE BY Gregory Husisian of Foley & Lardner LLP

1 See http://money.cnn.com/2016/09/27/news/economy/donald-trump-nafta-hillary-clinton-debate/?iid=EL.

2 See https://assets.donaldjtrump.com/_landings/contract/O-TRU-102316-Contractv02.pdf.

3 See http://abcnews.go.com/International/wireStory/canadian-immigration-website-crashes-amid-trump-victory-43413321 and https://www.yahoo.com/news/mexico-says-ready-modernize-nafta-trump-181527988.html.

4 NAFTA was negotiated under the fast-track authority of the Omnibus Trade and Tariff Act of 1988, which made the termination and withdrawal provisions of Section 125 of the 1974 Act applicable to NAFTA.

5 See https://www.census.gov/foreign-trade/statistics/highlights/top/top1312yr.html.

6 See Trade Act of 1974, Public Law 93-618 as amended), P.L. 114-125, § 125 (available at https://legcounsel.house.gov/Comps/93-618.pdf).

7 See Trade Act of 1974, Public Law 93-618 as amended), P.L. 114-125, § 125(c) (available at https://legcounsel.house.gov/Comps/93-618.pdf).

8 See https://assets.donaldjtrump.com/_landings/contract/O-TRU-102316-Contractv02.pdf.

9 See https://www.donaldjtrump.com/policies/trade.

10 See https://www.census.gov/foreign-trade/statistics/highlights/top/top1312yr.html.

11 See The International Trade Commission, Miscellaneous Tariff Bill Petition System (MTBPS) (available at https://mtbps.usitc.gov/external/).

12 See https://dataweb.usitc.gov/.

Elections 2016, Trans Pacific Partnership, TTIP: Trade Talk 7-13 November 2016

meting trade globe Trans Pacific PartnershipDonald Trump won the U.S. presidential election against former Secretary of State Hillary Clinton on 8 November in what many are describing as an upset. President-Elect Trump’s transition team is now tasked with vetting possible Cabinet officials and lower-level appointees, receiving background briefings from the Obama Administration, and crafting policy proposals based on his campaign promises.  President-Elect Trump will be sworn-in as the 45th President of the United States on 20 January.

TPP – No-Go.  President-Elect Trump remains opposed to the TPP agreement in its current form, and lawmakers on both sides of the aisle continue to express concerns with certain issues in the final deal that reportedly have not yet been addressed by the Obama Administration. Ongoing concerns with the TPP deal include longer intellectual property protections for biologic drugs and concerns with the tobacco industry’s carve-out from the deal’s investor-state dispute resolution mechanism. Shortly after the elections, Republican Congressional leaders in both chambers issued statements indicating the deal will not be brought up for a vote before the end of 2016 and must be revisited after President-Elect Trump takes office. According to a draft 100-day plan leaked by Politico, Trump advisors are proposing the U.S. withdraw from the deal soon after Trump takes office – however, other TPP countries are likely to keep advocating for the deal with the next Administration.

TTIP – On Hold.  With the uncertainty surrounding President-Elect Trump’s trade priorities, European Union Trade Commissioner Cecilia Malmström said of the Transatlantic Trade and Investment Partnership (TTIP) negotiations on 11 November:

For quite some time TTIP will be in the freezer. What happens when it’s defrosted, I think we’ll have to wait and see.”

The EU and United States are not expecting to schedule any more formal negotiating rounds this year.

JCCT Meeting Ahead.  U.S. Secretary of Commerce Penny Pritzker and U.S. Trade Representative Michael Froman will host the 27th session of the U.S.-China Joint Commission on Commerce and Trade (JCCT) next week in Washington.  Vice Premier of the State Council Wang Yang will lead the Chinese delegation.  U.S. Secretary of Agriculture Tom Vilsack is also expected to join the JCCT meeting to address bilateral agricultural trade issues.  President-Elect Trump made it clear during the campaign that China’s perceived unfair trade practices will be addressed in his Administration, including labeling the country as a currency manipulator.

ARTICLE BY International Trade Practice at Squire Patton Boggs

© Copyright 2016 Squire Patton Boggs (US) LLP

DOJ, FTC Announce New Antitrust Guidance for Recruiting and Hiring; Criminal Enforcement Possible

handcuffs, criminal enforcementMany companies—and the HR professionals and other executives who worked for them—have found out the hard way that business-to-business agreements on compensation and recruiting can violate the antitrust laws and bring huge corporate and personal penalties.

Last week, the Federal Trade Commission (FTC) and the Department of Justice Antitrust Division (DOJ) jointly issued antitrust guidance for anyone who deals with recruiting and compensation. The guidance is written for HR professionals, not antitrust experts. It avoids jargon and applies antitrust basics in plain English. It expands on those basics by providing short and direct answers to real-life questions.

The guidance comes in the wake of several actions in recent years by the federal antitrust agencies against so-called “no-poaching” or “wage-fixing” agreements entered by companies competing for the same talent. It announces that DOJ will prosecute criminally some antitrust violations in this space. While the new guidance is explicitly aimed at HR professionals, senior executives should understand it as well.

The guidance starts with the basics: The antitrust laws establish the rules for a competitive marketplace, including how competitors interact with each other. From an antitrust perspective, firms that compete to recruit or retain employees are competitors, even if they do not compete when selling products or services. Therefore, agreements among employers not to recruit certain employees (no-poaching) or not to compete on various terms of compensation (wage-fixing) can violate the antitrust laws.

To be illegal, these agreements need not be explicit or formal. Evidence of exchanges of information on compensation, recruiting, or similar topics followed by parallel behavior can lead to an inference of agreement. Intent to lower a company’s labor costs is no defense. Also, there is no “non-profit” defense: while they might not compete to sell services, non-profits are considered competitors for the staff they hire.

The potential costs of antitrust violations are huge: fines by the agencies; treble damages for injured actual or potential employees; and intrusive regulation of basic company operations from consent decrees and judgments. In addition, the DOJ used this guidance to announce that it will now prosecute criminally any naked wage-fixing or no-poaching agreements. According to DOJ, these naked agreements—“separate from or not reasonably necessary to a larger legitimate collaboration between the employers”—harm competition in the same irredeemable way as hardcore price-fixing cartels. So now, any executives involved in such agreements—whether HR professionals or not—face personal consequences, including threats of potential jail time.

Even unsuccessful attempts to reach an anticompetitive agreement on these topics can be illegal in the eyes of the regulators. As the guidance makes clear, so-called “invitations to collude” have been and will continue to be pursued by the FTC as actions that might violate the Federal Trade Commission Act.

Some of these information exchanges and agreements do not automatically violate the antitrust laws and there is nothing in this new guidance that suggests otherwise. If the agreements are reasonably necessary to an actual or potential joint venture or merger, legitimate benchmarking activity, or other collaboration that might help consumers, their net effect on competition would need to be judged. In prior actions, the agencies also have recognized as legitimate certain no-poaching clauses in agreements with consultants and recruiting agencies. Even such common uses as employment or severance agreements might not run afoul of the antitrust law’s prohibitions.

The guidance does not—and really cannot—go into all the detail necessary to determine when any particular effort will pass antitrust muster. It does refer readers to the earlier Health Care Guidelines but those helpful tips relate only to information exchanges. The guidance also provides links to the many prior civil actions taken by the agencies on these types of matters. It is accompanied by a two-sided index card entitled Antitrust Red Flags for Employment Practices that could be part of an effective compliance program.

ARTICLE BY Steven J. Cernak of Schiff Hardin LLP

© 2016 Schiff Hardin LLP

OFAC Allows Joint Medical Research with Cuba

OFAC Medical ResearchThe Department of the Treasury, Office of Foreign Assets Control (OFAC), has modified the Cuban Assets Control Regulations (CACR) (31 C.F.R. Part 515) to allow joint medical research between persons subject to U.S. jurisdiction and Cuban nationals. In the context of the CACR, a “person subject to U.S. jurisdiction” includes any non-U.S. entity owned or controlled by a U.S. person or company directly or indirectly.

It is important to note that the focus of this rule is the development and sale of Cuban origin pharmaceutical products into the United Sates and not the sale of U.S. origin products into Cuba. The changes published today have no impact on the sale of U.S. origin pharmaceutical products into Cuba, and the modified rules do not eliminate the need for sales into Cuba to be licensed by the U.S. Department of Commerce and/or the Department of the Treasury.

As a result of this rule change, effective October 17, 2016, U.S. pharmaceutical companies and their foreign subsidiaries, as well as U.S. nationals, are authorized to engage in various types of transactions “incident to obtaining approval from the U.S. Food and Drug Administration (FDA) of Cuban origin pharmaceuticals, including discovery and development, pre-clinical research, clinical research, regulatory review, regulatory approval and licensing, regulatory post-market activities, and the importation into the United States of Cuban-origin pharmaceuticals,” as well as the “marketing, sale, or other distribution in the United States of FDA-approved Cuban-origin pharmaceuticals, including the importation into the United States of Cuban-origin pharmaceuticals.”

In its most recent Portfolio of Opportunities for Foreign Investment, Cuba identified the biotechnology and pharmaceutical sector, where BioCubaFarma has been producing vaccines and drug products for years, as one of the targets of foreign investment through strategic partnerships. Specifically, the Cuban government stated that it was promoting joint R&D projects, distribution and representation arrangements and technology transfer arrangements that complemented domestic projects in the sector. This week’s changes to the CACR will facilitate participation in these types of investments and activities in Cuba by U.S. companies.

ARTICLE BY Joan Koenig & Mollie D. Sitkowski of Drinker Biddle & Reath LLP

©2016 Drinker Biddle & Reath LLP. All Rights Reserved