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Brexit Talks: Why ‘Sufficient Progress’ is Critical to European Trade Stakeholders

US businesses have growing numbers of shipments of export cargo and import cargo in international trade with the UK.
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Brexit Talks: Why ‘Sufficient Progress’ is Critical to European Trade Stakeholders

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Amid waves of negative news reports that Brexit talks were headed for a hard “no deal”, the European Commission made a significant announcement last week. The commission now recommends to the European Council that “sufficient progress” has been achieved in the first phase of talks to negotiate the terms of the United Kingdom’s exit from the European Union.

Finally, there is a glimmer of certainty that the two sides will achieve a timely overall agreement which is so critical to the interests of concerned stakeholders, but especially for European traders and multinationals.

That glimmer of hope was likely welcomed by US business interests, who have substantial investments in US-UK trade. In fact, according to recent testimony by the US Chamber of Commerce to the House Foreign Affairs Committee’s Subcommittee on Europe, Eurasia, and Emerging Threats, two-way trade between the US and UK amounts to more than $235 billion annually and 2.5 million US jobs depend on US-UK trade. That testimony described a “no deal” outcome of the Brexit talks as “a disaster for US companies” and also noted the adverse impact it would have on British consumers in terms of price increases.

According to the EU provisions under Article 50, there must first be sufficient progress declared prior to further negotiations regarding a future arrangement between the EU and UK. The European Council will take the official vote on 15-December, but are fully expected to follow the recommendation of the Commission.

The UK and EU Brexit negotiators issued a joint report. Briefly, the key points include:

Agreeing on a financial settlement methodology that will result in an exit fee amounting to €40-45 billion (conditional on an overall agreement), including all previous financial obligations and the UK’s share of the EU budget through to the end of 2020.

Giving the European Court of Justice jurisdiction to sunset after eight years following Brexit Day to allow certainty for business concerns.

Providing reciprocal protection for EU and UK citizens, to enable the effective exercise of rights resulting from Union law and based on individual circumstances.

Assuring that the border with Ireland will not require border checks, there will be free access for Northern Ireland’s businesses, and affirms the 1998 Good Friday Agreement.

Regarding the future arrangement, the UK may be seeking a hybrid agreement; stronger than what Canada has in the Comprehensive Economic and Trade Agreement (CETA), but without as many restrictions as Norway has today under the European Free Trade Association (EFTA). The plan would be to complete the negotiations by the fourth quarter of 2018 to allow time for consent of the European Parliament and approval by the UK before March 29, 2019.

There remains much work to do with little time remaining before Brexit. However, there is hope on both sides the declaration of sufficient progress will reduce the oftentimes acrimonious tone and constant posturing that has characterized the negotiations thus far and lean towards clear and orderly decision making. International traders need details – currently scant – to support their strategic plans on such things as duty and tax exposure, broker and clearance procedures, system updates, regulatory changes, and free trade agreement administration.

Both sides have the incentive to get this right and retain a seamless flow of goods between the UK and EU. They know the risks of a “cliff’s edge” outcome. And the importance of getting it right extends beyond Europe. Many multinationals, like those in the US, use the UK as an entry or exit point for European trade. They fear the potential of disparate regulatory regimes between the two entities and the possibility of ongoing regulatory shifts in the UK for key sectors like pharma and aviation.

There will likely be at least a two-year implementation period. This will give the governments and businesses alike more time to make the necessary arrangements. Additional extensions may be possible in certain industry sectors.

At a high level, an anticipated future agreement must still focus on the EU’s four freedoms; freedom of movement of goods, people, services and capital over borders. Both sides are probably largely in sync on three of the four. The sticking point of the ensuing negotiations, and the crux of the Brexit referendum from the beginning, is the movement of people. The question is, how much are the two sides willing to give and take on that point?

There is still much opportunity for relations to turn sour, but the accomplishment that is the declaration of “sufficient progress” shouldn’t be understated and should be recognized and relished. The negotiators worked hard to reach this point and for the sake of trade between Europe and its partners, the momentum must continue.

Philip Sutter is Director of Strategic Analysis in the Global Trade Management division of trade services firm Livingston International. 

Brexit negotiations impact shipments of export cargo and import cargo in international trade.
Commentary, EU Trade, Free Trade Agreements, Global Trade Daily, Imports/Exports, In The News, International Trade

Why October Will Be Critical to Brexit Stakeholders

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For European traders and multinationals with a stake in the ongoing Brexit negotiations, October 2017 will represent a series of watershed moments that will set the tone for the future of EU-UK commerce — and things aren’t looking up.

Last week, the members of the European Parliament held a non-binding vote in which MEPs agreed 557 to 92 that “sufficient progress has not been achieved” on the three big issues, namely financial settlement, Ireland’s border, and EU citizens’ rights in the UK.

The European Council will meet on October 19 and 20 to take a vote of their members. Without an affirmative result, discussions on the UK-EU future relationship cannot commence. This leaves international traders to mind quite a gap of uncertainties; duty and tax exposure, higher broker costs, clearance delays, system changes, regulatory changes, and free trade agreement administration to name just a few.

Despite British Prime Minister Theresa May’s recent attempts to assuage such fears with a proposed two-year implementation period following Brexit Day (March 29, 2019), a significant chasm remains between the negotiating parties. Much of that is tied to the UK’s financial obligations associated with Brexit.

May wants continued benefit from the EU Single Market and has said Britain will uphold its financial obligations, but to the chagrin of many failed to specify a number. The EU could request as much as €100 billion from the UK for Brexit, but there is speculation the UK’s initial offer may be only €20 billion. A resolution could come down to an exhausting and time consuming line-by-line negotiation.

The UK rebuffed the EU Parliament vote. The usually optimistic UK Chief Negotiator, David Davis, warned the “UK is ready to walk away with no deal,” sentiments echoed by May who reiterated the red line she has drawn on several occasions; “no deal is better than a bad deal”. While such statements may simply be posturing, it leaves the trading community on both sides of the English Channel looking for guarantees that may never come.

Critically, the fifth round of negotiations will be held this week and will be the last talks prior to the European Council’s decision. Both sides must be ready to bargain and make concessions. Unfortunately, the financial settlement chasm casts a pall over talks that are already handicapped by the complexity and breadth of the exit issues.

Brexit compromise is hard to come by, though. The EU so far has staunchly abided by its negotiating imperative; “nothing is agreed until everything is agreed”. There will be no cherry-picking permitted. At risk is the UK and EU disbanding further talks and waiting for the Brexit Day and fall over the so-called “cliffs edge” to an abrupt hard-Brexit under WTO rules only.

While the UK and EU treat the Brexit negotiations as a high-stakes poker game over the coming weeks, businesses with financial commitments are forced to look on and consider contingency plans in the face of widespread uncertainty.

Trade threats must be addressed by the business community with sound solutions. Risk management is called for to plot the “what-if” scenarios, supply-chain disruptions, and the likely impact on their unique vulnerabilities. These plans must be updated as negotiation facts are revealed or altered.

It is in every company’s self-interest to be proactive, rather than wait for events to unfold.

Philip Sutter is director of strategic analysis in the Global Trade Management division of trade services firm Livingston International.

Brexit will impact shipments of export cargo and import cargo in international trade.
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And Now for Something Completely Different

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For international businesses whose supply chains rely heavily on unfettered access to the UK, the ongoing Brexit negotiations leave room for a great deal of uncertainty and, in turn, business risk. This uncertainty is likely to last throughout the Brexit negotiations and possibly into the post-Brexit transition period.

But if there’s some semblance of stability to be found in Brexit thus far, it was evident in remarks made on September 22 by British Prime Minister Theresa May during a critical speech today in Italy. Perhaps in hopes of inspiring momentum for the ongoing Brexit negotiations and/or reassuring the business community, Ms. May offered some insight into her expectations of how Brexit might roll out.

Ms. May stressed the importance of a gradual implementation period, rather than what has been called “the cliff’s edge”. To provide citizens and business with “valuable certainty,” the integration period should be strictly time-limited and guaranteed to run from March 29, 2019 until March 29, 2021.

Ms. May also addressed a critical sticking point, namely that the UK would cover its share of Brexit costs estimated to be anywhere from 20 to 100 billion euros. This will continue to be a critical sticking point with the EU that stakeholders and observers will be watch in the coming week.

Such remarks offer the business community hope that maintaining stability remains a core goal of the Brexit negotiations and some mild comfort that the level of risk of doing business across the English Channel isn’t nearly as great as one might presume.

At the same time, Ms. May also made remarks that are cause for trepidation. While acknowledging the UK’s past, present and future is inherently tied to Europe, she succinctly summed up what lies at the heart of Brexit by stating; “We never felt at home in the EU.”

Clearly, these sentiments are not shared by the many companies with integrated supply-chains throughout the UK and the rest of the EU, that must amend business plans to something completely different.

Analysts have been pondering what the future of a UK-EU relationship would look like ever since the Brexit referendum in June 2016. What Ms. May made clear today is the future relationship between Britain and its European neighbors is unlikely to look anything like the relationships between the EU and Norway, Switzerland, Turkey, and more recently, Canada. “We can do so much better than this,” said Ms. May rather unequivocally.

The Prime Minister does not want to follow any pre-existing model. She wants a new UK-EU treaty that leverages the shared principles, high regulatory standards, and security relationships that are already in place, while definitively breaking the UK away to be self-determinative on matters such as immigration, court jurisdiction, and trade policy.

Even while granting that the EU’s four freedoms of goods, services, capital, and people will remain indivisible, she maintains a totally new framework is necessary. The UK will be starting from an unprecedented position of having to convert EU laws into domestic laws and make the break from that point forward. She stated; “Life for us will be different”.

When asked following her speech about the possibility of Brexit talks failing, she reiterated a comment from a prior speech; “No deal is better than a bad deal”. In other words, Ms. May is prepared to place the onus on the EU to come to the negotiating table with a willingness to be flexible. During October, the EU Commission will decide whether or not sufficient progress has been made and whether or not the negotiations can move forward to construct the future framework of the relationship.

Ms. May closed by saying; “This is the future within our grasp, so together let’s seize it.”

From an international trader’s perspective, certainty is essential. That is why Brexit is difficult for business, it represents change and upheaval. However, if Ms. May’s remarks will lead to a smooth transition, laid out clearly and in advance, then business can adapt and prosper in the new arrangement.

Philip Sutter is director of strategic analysis in the Global Trade Management division of trade services firm Livingston International.

New NAFTA will govern North American shipments of export cargo and import cargo in international trade.
Commentary, Free Trade Agreements, Global Trade Daily, Imports/Exports, In The News, International Trade

Modernizing NAFTA

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The North American Free Trade Agreement (NAFTA) between the United States, Mexico, and Canada, entered into force in 1994 is to be renegotiated. Talks began earlier this month following the conclusion of the 90-day US Congressional notification period. The status quo is not an option; NAFTA will emerge with a new look.

There’s angst within the trade community, fearful of the impact changes may have on their business plans. The US Trade Representative (USTR) website shows 12,549 comments received during the recent public solicitation period. At the annual meeting of the American Association of Exporters and Importers in June 2017, the NAFTA renegotiation dominated many of the panel presentations.

Does this pending renegotiation now bring an opportunity to modernize the decades-old agreement? Could NAFTA be brought into conformance with more recent trade agreements and accrue benefits to all parties and their citizens?

Dispute settlement issues

One area to look at is NAFTA’s Chapter 11 regarding investment. This provision is intended to guarantee investors protection for operations in one of the other parties. It’s controversial because of the clauses that allow for an investor-state dispute settlement (ISDS) system. ISDS allows an investor to file claims against alleged violations by the foreign government. The suits are decided by private arbitrators, who may award significant monetary awards to the investor.

So far, under NAFTA, the US has not lost a single case, while Canada and Mexico have lost cases amounting to over $100 million in compensation. Opposition to Chapter 11 may be common ground among the parties. They concur in the opinion that many of these cases circumvent their sovereignty and confuse the domestic populace.

Alternatives being suggested vary. Many recommend the elimination of ISDS and in favor of relying on their own government’s diplomatic efforts. Some think the solution is to move to a state-to-state enforcement. Others advocate moving to a proposed multilateral investment court. However, these ideas can be negatively viewed as moves towards “secret courts” and “globalism”. In the end, the easiest and least controversial idea is to adopt the investment chapter contained in the Trans-Pacific Partnership (TPP). This system would maintain investor rights, while also defining the sovereign governments’ rights and obligations. To its advantage, it’s already on the shelf and ready to use.

Labor issues

Another long-standing gripe among those opposing NAFTA is the lack of provisions to protect labor standards. Although there’s nothing in the NAFTA text, a side agreement called the North American Agreement on Labor Cooperation (NAALC) was signed by the three parties coincident with NAFTA to allay those concerns. However, critics state that the NAALC is not adequate to uphold Mexican labor rights (i.e., protect against low wages and subpar occupational health standards). They maintain that while the NAALC puts forward eleven labor standards along with certain oversight mechanisms monitored by the parties, it lacks enforcement provisions through sanctions or other means. Of 39 cases brought forward to date, none have gone beyond the consultation stage.

Under a NAFTA renegotiation, it may be possible to incorporate provisions of the NAALC along with the introduction of an independent oversight body with enforcement empowerment. The control could also be extended to monitor corporations.

Environmental issues

Although NAFTA was recognized as the first agreement to include environmental provisions, it immediately came under fire. Side agreements such as the North American Agreement on Environmental Cooperation (NAAEC) were put into place attempting to assuage the deficiencies of those original provisions. Still, those opposed, continued to assail the agreements for the lack of effective enforcement. The issue is that if stronger rules exist in one Party, it tends to create a competitive advantage in the country with less restrictive standards. A new NAFTA clause may require parties to put into place stronger environmental domestic laws, enforce them, and not make concessions to attract trade and investment.

Rules of origin

An area of possible change, different from those discussed thus far and with an immediate bottom-line impact would be changes to NAFTA rules of origin. Rules of origin are used to determine whether or not duties will be assessed on imported goods. The slightest wording change may move a product out of eligible status.

If rules are changed, the likely focus and easiest lever of change would be to adjust content thresholds. Certainly, a higher regional value content (RVC) requirement would force reductions in non-NAFTA inputs. Going a step further, it is possible that the RVC thresholds will be made specific to individual NAFTA Parties rather than regionally applicable as they are today. Certain sensitive industries may be the targets of such a change to reduce trade deficits. For example, imagine qualification rules that require specific levels of US content in combination with overall NAFTA content.

NAFTA Article 303, which prohibits duty drawback, is another possible negotiating target. It applies to all parties, but Canada and Mexico have regimes that reduce the impact of the restrictions (e.g., Mexico sectoral programs) by allowing duty reductions for specific industries. Opponents state that US manufacturers are disadvantaged by these work-arounds and Article 303 should be eliminated.

The subject of additional border imposed value-add taxes such as Mexico’s Impuesto al Valor Agregado (IVA) and Canada’s Goods and Services Tax (GST) has come under scrutiny.

These taxes are not prohibited under World Trade Organization rules because they are ultimately assessed on final consumers (whether an import is involved or not). However, it’s argued that these taxes subsidize tariffs as a non-tariff barrier to the detriment of US exports. The US Congress has contemplated the institution of a Border Adjustment Tax (BAT) to be similar to IVA or GST. The role of these taxes is likely to be addressed in the renegotiation talks.

Be ready for change

The foregoing represents some of what may materialize from the renegotiation. They are politically-charged topics with controversy for every alteration assured. In any negotiation, there is give and take. Changes that are difficult to accept on their own may be palatable in conjunction with the full slate of adjustments. The conclusion is that NAFTA can be modernized and brought into conformance with contemporary free trade agreements, but not everyone will be pleased with the changes. Knowing that NAFTA will not stand still, be diligent, be informed, and be ready for the new NAFTA.

Philip Sutter is director of strategic analysis at Livingston International. 

Avoid ADD and CVD orders on shipments of export cargo and import cargo in international trade.
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Antidumping and Countervailing Duties Overview

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As an importer,‭ ‬you must ensure that proper visibility and attention is given to reduce or eliminate your company’s exposure to antidumping duties‭ (‬ADD‭) ‬and countervailing duties‭ (‬CVD‭)‬.‭ ‬ADD/CVD duties can be substantial.‭ ‬Duty percentages are sometimes in the double or triple digits.‭ ‬However,‭ ‬with the proper due diligence,‭ ‬surprises can be avoided and appropriate business plans established.

Duty Assessment
ADD/CVD are duties assessed on imports in reaction to unfair trade practices.‭ ‬ADD duties are assessed when a foreign firm sells merchandise in the US market at‭ “‬less than fair value‭” (‬a price lower than the price it charges for a comparable product sold in its home market‭)‬.‭ ‬CVD duties are assessed when foreign governments unfairly subsidize industries that export to the US.

From a US perspective,‭ ‬the US Department of Commerce‭ (‬DOC‭) ‬and the US International Trade Commission (‬ITC‭) ‬administer ADD/CVD proceedings.‭ ‬Cases may be initiated in response to a petition from the competing domestic industry or under the DOC’s own authority.‭ ‬The DOC determines whether the imports in question are being dumped and/or unfairly subsidized,‭ ‬and if so,‭ ‬by how much.‭ ‬The ITC determines whether the imports are causing material injury or threat of material injury to the competing domestic industry,‭ ‬or whether the establishment of an industry is materially harmed by reason of imports that are being sold at less than fair value and/or subsidized.

If both agencies find dumping/subsidizing and material injury have occurred,‭ ‬the DOC then issues an order directing US Customs and Border Protection‭ (‬CBP‭) ‬to levy a duty equal to the amount by which the price of the import is less than the fair value and/or offset by unfair subsidies.‭ ‬Importers are then required to post a cash deposit equal to the amount of the estimated antidumping and/or countervailing duties pending liquidation of entries of the merchandise.

The subject goods are defined by a written description or‭ “‬scope‭”‬.‭ ‬The scope is dispositive,‭ ‬not the Harmonized System‭ (‬HS‭) ‬classification.‭ ‬However,‭ ‬HS classifications are listed in the scope of orders and are used to begin most ADD/CVD analyses.

When Issues Arise‭…
Sometimes,‭ ‬issues arise because the descriptions of subject merchandise contained in the DOC’s determinations must be written in general terms.‭ ‬When such issues arise,‭ ‬the DOC issues‭ ‘‘‬scope rulings,‭” ‬generally at the importer’s request,‭ ‬that clarify the scope of an order.‭ ‬Frequently,‭ ‬the US Court of International Trade‭ (‬CIT‭) ‬must intercede to settle disputes.‭ ‬For example,‭ ‬the order on aluminum extrusions from China is especially complicated due to the parameters for exclusions from the order.‭ ‬There are sixty scope rulings issued to-date and there have been‭ ‬25‭ ‬CIT decisions on this specific commodity.

It is important to study the scope rulings and court cases to be well informed on the parameters that may relate to your product.‭ ‬However,‭ ‬these rulings are very product-specific,‭ ‬so if your product falls in a gray area,‭ ‬it may be prudent to request your own scope ruling.

When ADD Applies
CBP is responsible for collecting all revenue due to the US government,‭ ‬inclusive of the ADD/CVD.‭ ‬If an order is issued retroactively,‭ ‬this requires CBP to issue bills to importers,‭ ‬possibly years after an entry has occurred.‭ ‬Tracking the progress of potential orders can at least provide some time to advise management of the possible risk.

When ADD does apply,‭ ‬the importer is required by law to submit a certificate to CBP attesting that the exporter has not reimbursed the importer for the ADD.‭ ‬If the certificate is not submitted,‭ ‬CBP will assess the importer two times the ADD when the entry is finalized.

ADD And CVD By The Numbers
As of March‭ ‬2017,‭ ‬there are‭ ‬224‭ ‬different products that encompass‭ ‬586‭ ‬open ADD/CVD orders.‭ ‬There are‭ ‬59‭ ‬different countries of origin involved in these orders.

The top five countries of origin subject to these orders are China‭ ‬26.8%,‭ ‬India‭ ‬7.7%,‭ ‬Korea‭ ‬6.3%,‭ ‬Taiwan‭ ‬5.3%,‭ ‬and Japan‭ ‬4.1%.‭ ‬The products impacted are typically metal industrial inputs and products,‭ ‬minerals,‭ ‬chemicals,‭ ‬but anything is possible.

Avoid Surprises.‭ ‬Be Prepared.
From a company compliance perspective,‭ ‬the place to start the analysis is with the current active orders.‭ ‬CBP’s Automated Commercial Environment‭ (‬ACE‭) ‬portal will provide you with an active case list.‭ ‬Any suspect products should undergo a deep-dive analysis to determine if it meets the scope definition of an open order.‭ ‬Obtain copies of the orders from the Federal Register and study the scope rulings and court cases.

Communication is important,‭ ‬upstream departments such as Purchasing should be aware of the impact or potential impact of importing parts subject to ADD/CVD.‭ ‬It’s essential to have supply chain integrity and know who you are buying from.‭ ‬Some foreign exporters route goods through third party countries or show a different country of origin on shipping documents in order to evade ADD/CVD on sales to the United States.‭ ‬The importer is liable for duties and penalties in these instances.

Classification analysts should be trained to identify and flag potential in-scope part numbers.‭ ‬Engineers may be called on to help you to understand a product’s scope applicability.

Downstream,‭ ‬you should establish business rules with your broker to capture potential hits and have them referred to you for review prior to entry submission.‭ ‬You should also retroactively audit entry records as a further control in the event the broker did not capture the applicable ADD/CVD.

ADD/CVD is perpetually a priority enforcement issue.‭ ‬However,‭ ‬a General Accounting Office‭ (‬GAO‭) ‬audit revealed significant issues with enforcement effectiveness.‭ ‬The GAO estimated that about‭ ‬$2.3‭ ‬billion in ADD/CVD owed to the US government were uncollected as of mid-May‭ ‬2015.‭ ‬President Trump’s‭ ‬2018‭ ‬budget addresses this gap through additional funding of for the International Trade Administration’s ADD/CVD investigations.

On February‭ ‬24,‭ ‬2016,‭ ‬the US Congress passed the Enforce and Protect Act of‭ ‬2015‭ ‬or EAPA.‭ ‬EAPA establishes formal procedures for submitting and investigating ADD/CVD allegations of evasion against US importers,‭ ‬such as transshipment or false invoicing.‭ ‬CBP has responsibility for tracking and reporting allegations of evasion from initial receipt,‭ ‬vetting and enforcement actions,‭ ‬to final disposition of an investigation.

On March‭ ‬31,‭ ‬2017,‭ ‬President Trump signed an executive order that will,‭ ‬by June‭ ‬29,‭ ‬2017,‭ ‬subject importers of record with no record of imports or a record of failing to pay ADD/CVD to be subject to a CBP risk assessment.‭ ‬CBP will be empowered to require enhanced bonding and impose other legal measures.

ADD/CVD is an area that can be a source of concern if not a total surprise when non-compliance is discovered.‭ ‬The duty exposure and penalty potential are significant.‭ ‬The wise compliance manager should know and preach within the organization that preparation and risk analysis on this subject is well worth the investment.

Philip Sutter is director of strategic analysis at Livingston International.

Trump's policies will affect shipments of export cargo and import cargo in international trade.
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US Trade Policy Shift

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The 2016 US presidential election was a vote to initiate change. Central to the campaign rhetoric on both sides was dissatisfaction with US trade policy.

It is expected that President Donald J. Trump will follow through on many of the proposed changes, and the trade industry must prepare itself. This article focuses on two of the most impactful trade policies subject to change; the future of the North American Free Trade Agreement (NAFTA) and the potential for a Border Adjustment Mechanism to replace the current corporate income tax.

North American Free Trade Agreement
NAFTA entered into force in 1994 between the U.S., Canada, and Mexico. It was controversial from the outset and remains so. In the 1992 U.S. presidential campaign, third party candidate and billionaire Ross Perot based his campaign on the negative impacts of NAFTA; his slogan was to warn about the “giant sucking sound” of jobs that would leave the United States. Its detractors, such as the US labor unions, provide statistics that they maintain prove Mr. Perot was correct, while international companies see NAFTA as a model for global competitiveness.

Critics cite that the US to Mexico cumulative current account balance (difference between savings and its investment) has gone from breakeven in 1994 to about a trillion-dollar deficit today. They also observe that US productivity has steadily increased while hourly compensation has stagnated and the manufacturing base has fallen. Although conceding that overall trade has increased after NAFTA, they say this has only benefited corporate investors at the expense of worker protections in all three countries.

Proponents of NAFTA believe that the agreement has been overall beneficial to the U.S. as well as Mexico and Canada. For example, consumers have been the recipients of lower cost goods through reduced tariffs. Also, NAFTA has created an integrated North American supply chain that mitigated the loss of jobs and investments primarily to Asia while improving global competitiveness.

Trade among the NAFTA countries has increased by 3.8 times, showing that free trade agreements benefit each nation through their comparative advantages. U.S. foreign direct investment in Mexico has risen over 700 percent. Mexico has been transformed through a growing economy. Despite the serious issues with drug cartels and border security, NAFTA has helped Mexico become a more modern and open U.S. neighbor.

Is NAFTA repeal possible?
Article 2205 of NAFTA allows a Party to withdraw with six months’ advance notice. Further, Article 125 of the Trade Act of 1974 gives the president the authority to do so.

A reasonable alternative to repealing NAFTA is to update portions of it. As one of the first U.S. free trade agreements, many would agree that a refresh is needed. A renegotiation could include revisions to address investor-state dispute systems, labor and environment obligations, currency manipulation, and enforcement provisions. Also, the rules of origin of NAFTA are very complex. A rewrite could look at simplifying the rules especially for the qualification of vehicles and automobile parts. Changes can be expected, but how quickly and extensively is unknown.

Border Adjustment Mechanism
The proposed Border Adjustment Mechanism (BAM) is a potential major change to the U.S. corporate tax structure with a particular emphasis on the promotion of exports over imports. If enacted, it will convert the income tax to a form of cash flow consumption tax. The BAM seeks to reverse trends such as the decline in the number of large global companies headquartered in the U.S., which has decreased from seventeen in 1960 to just six today. The Trump Administration is evaluating plans best suited to rectify this.

According to taxfoundation.org, the current BAM design has five major components:

Lower corporate income tax rate from 35 percent to 20 percent.
Allow capital investments to be treated as expenses.
Eliminate tax on foreign profits.
Eliminate interest expense deductions.
Make border tax adjustment based on a destination basis.

The point is to exempt export revenues from taxes while not allowing the cost of goods imported to be deducted from revenue. The corporate tax would be centered on activity that occurs in the United States. The BAM will eliminate the tax incentive for US-based multinationals to shift profitable production to low tax countries or become foreign-resident companies. Simply, the tax is applied based on where the goods are consumed rather than where they are produced.

It’s expected that once in place, the BAM will strengthen the US dollar. The import tax raises the price of foreign goods and reduces domestic demand for them and thereby reduces the demand for the US dollar that drives up its value compared to other currencies. Meanwhile, the export tax exemption works as a subsidy allowing US producers to lower their prices driving up foreign demand which also increases the value of the US dollar. It is complicated economic modelling, but overall its proponents say it will increase US gross domestic product, wages, and employment.

Conversely, the opponents of BAM are import-heavy industries such as retailers and electronics companies. They believe their interests will be disproportionally harmed by inflation-driven consumer price increases. They are skeptical of the anticipated exchange rate offset which is supposed to raise their profits and negate the tax applied to imports.

Many other countries impose value added taxes (VAT), which are considered indirect taxes. Although the BAM has a similar impact as a VAT, the World Trade Organization (WTO) may judge it to be a direct tax that favors domestic producers over foreign producers. There may arise a challenge to the BAM on that basis.

To be sure, the trade industry should be prepared to follow NAFTA, BAM, and other 2017 US trade policy developments closely, understand the impact to their business, and be ready to adjust. Change to long held policies can be harmful, however, winners will emerge from those able to adapt and recognize new opportunities.

Philip Sutter heads GTM Governance, United States, at Livingston International.

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China’s Global Trade Impact

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Global business experts are aware of China’s historical impact on trade, especially its comeback over the past thirty years. In the coming decades, China will continue to emerge. Given all the talk in the media about international trade, it’s a good time to review the trade-related issues that confront China, and how China may present opportunities and challenges to global traders in the coming years.

China’s economy
By the numbers alone, China is formidable. Its population is nearly 1.4 billion. China’s economic growth outpaces the rest of the world at 6.7 percent. The gross domestic product (GDP) is $10.9 trillion trailing only the U.S. at $17.9 trillion. Its economy is almost as large as that of all of Europe. By 2030, China’s economy is forecast to be number one, a position it previously held in 1820.

China’s gains have been led by being an export-based economy providing low-cost, labor-intensive manufactured goods. China’s economy is reaching a maturation point where it must continue to evolve, not as much by investment, but by innovation as other modern economies do.

A non-market economy
Looking back, post-World War II China was a very insular communist economic regime. In the mid-1980s, China’s Open Door Policy permitted some foreign investment. It also let China take steps to moderate the state-control, move toward a market economy and allow some private ownership. However, turmoil prevailed through these years exemplified by the deadly crackdown on the Tiananmen Square protests in 1989.

Since then, a major change that led China into the world economic fraternity was its accession to the World Trade Organization (WTO) in December of 2001. Still, China’s status in the WTO remains controversial. For example, there are 38 WTO dispute cases open against China over such matters as the violation of intellectual property rights, discriminatory quotas, unfair government subsidies, export duties on raw materials, and restrictive regulations.

One of the biggest issues with China that keeps it from equal footing with other WTO member countries is over its designation as a non-market economy (NME). It is so designated, because the economy is principally state-run and directed by China’s communist party rather than by market forces. As an NME, the United States and other WTO countries may adjust anti-dumping and countervailing duties on Chinese imports to account for market costs. The US has 116 anti-dumping and 41 countervailing duty cases open against China. The cases involve a variety of raw materials and manufactured products such as chemicals, steel, aluminum, paper, etc.

Having been a member of the WTO for more than fifteen years, China is initiating a WTO dispute to eliminate the NME label. However, according to the US Department of Commerce, several issues will vie against China in this quest, including: its currency manipulation policies, labor bargaining rights, limitations on foreign investment, government ownership of production, centralized price fixing, and lack of transparent trading policies. China has some leverage with the US as it is a holder of about $1.1 trillion of US debt. Selling off this debt could adversely affect US economic growth.

During its economic assent, China was frequently cited for using forced labor via the Laogai System (re-education through labor) camps in mines, factories, and farms to produce consumer and manufactured goods. In 2013, China pledged to abolish this practice, however, human rights groups maintain it still persists. The Trade Facilitation and Trade Enforcement Act of 2015 now gives US Customs and Border Protection (CBP) greater power to exclude these goods from US importation. CBP uses forced labor lists published by the U.S. Department of Labor to issue withhold release orders to detain the goods. If found to be in violation, the goods are subject to seizure.

Free trade: ASEAN and RCEP
China signed a free trade agreement with the ten country Association of Southeast Asia Nations (ASEAN) that came into force on January 1, 2010. It is the largest global free trade agreement in terms of population, and third largest in GDP moving China ahead of the US in ASEAN trade. At present, China is seeking to expand this agreement with the ASEAN to include the other five large Asian countries (Japan, India, Korea, Australia, and New Zealand) by negotiating the Regional Comprehensive Economic Partnership (RCEP). If successful, the RCEP will represent an unprecedented global trading bloc and bring China on par both economically and politically with these other nations. It will ensure that China continues to counter the U.S. in Asian trade leadership.8 There’s a strong push to get RCEP signed in 2017.

Big plans, and considerable tension
Harkening back to ancient times, China is in the midst of funding a massive infrastructure project called Silk Road. The original Silk Road began around 200 BCE as the trading routes to support the silk commerce from China to the Mediterranean Sea. It played a major role in the development of those regions. The modern Silk Road, also known as One Belt One Road, is an improvement venture for connectivity between China, Eurasia, Africa, and Oceania. It encompasses about sixty countries and investment of up to $8 trillion for both roads, high speed rail, sea ports, and other infrastructure.

Adding to the mix is China’s intention to expand its geopolitical influence in the Asia-Pacific region. This presents itself in the matter of Taiwan and the South China Sea, both are potential military flash points that threaten trade and security in the region.

Tension has existed between China and Taiwan since the Chinese government fled the mainland to Taiwan during the Chinese communist revolution of 1949. The 1992 Consensus between the two concluded that there is only one China; however, the disagreement prevails as to how it should be governed. Over 60 percent of the population identifies solely as Taiwanese. China meanwhile continues to resist any notion of a separate Taiwan.

Governance over islands in the South China Sea known, as the Spratlys, has been long disputed by neighboring countries. The Philippines, Taiwan, Malaysia, and Brunei lay claim to some portion of the area versus the feared Chinese hegemony. In recent years, China has demonstrated the Spratlys’ strategic military value with a large naval presence. China is resisting negotiations with the others who are seeking to use ASEAN to broker a resolution.

Of greater concern to the west and its neighbors is China’s military relationship with so-called rogue nations. In November of 2016, China signed a Military Cooperation Agreement with Iran to include joint exercises and training. In the past China has supplied Iran with missiles and other hardware. China has also supplied military aid to Syria and Venezuela. Meanwhile, North Korea sees China as its closest neighbor, ally, and largest trading partner. China has taken no action to deter North Korea’s nuclear and ballistic missile tests.

Risk and reward abound for international trading firms and countries when it comes to positioning China into their trade strategies. A successful plan must account for, and take advantage of, the opportunity to deal with one of the worlds’ largest and growing economies while recognizing the potential for adverse and volatile change either from within or outside of China.

Philip Sutter is director of global governance policy at Livingston International.

Harmonized System pertains to shipments of export cargo and import cargo in international trade.
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Plan Ahead For 2017 WCO Harmonized System Updates

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The World Customs Organization updates the Harmonized Commodity Description and Coding System, or Harmonized System (HS), every five years. The next update is coming up soon, on January 1, 2017. There are 153 contracting parties to the HS each with their own country specific tariff. The Harmonized System is used by 206 countries – all will require updates and translation. It’s a big deal!

The HS is a multipurpose international product nomenclature that countries use to assess customs tariffs, collect international trade statistics, designate preferential trade program rules of origin, track quotas, and many other purposes.

The HS is organized into 21 sections and 96 chapters. To ensure harmonization, the contracting parties must employ the HS six-digit provisions and international rules and notes. Each country is free to adopt additional subcategories and notes, usually up to eight or ten-digits. Chapter 77 is reserved for future international use only. Chapters 98 and 99 are reserved for national use.

The 2017 HS changes encompass 233 sets of amendments relating to a wide range of products and product groups, including: fish and fishery products; forestry products; antimalarial products; substances controlled under the Chemical Weapons Convention; hazardous chemicals controlled under the Rotterdam Convention; persistent organic pollutants controlled under the Stockholm Convention; ceramic tiles; newsprint; light-emitting diode lamps; monopods, bipods, and tripods; multi-component integrated circuits; and hybrid, plug-in hybrid, and all-electric vehicles.

Whether your company is a big or small international trader, you should be aware of changes, and make plans to prepare in 2016 as appropriate. The place to start is with your product classification database. On January 1, 2017, or such other date the country you import to or export from designates to adopt the changes, your product numbers will need to have the latest HS code.

The World Customs Organization provides a six-digit correlation table showing the expiring classification and the one or more new classifications to be considered for that product. This is available now. Also, subject to further refinement, the US has already published a 10-digit correlation. Other countries may wait until very close to the deadline.

By comparing the product database to the correlation table, you can assess the degree of difficulty to make the necessary changes. Typically, it involves obtaining some new piece of information. This information may or may not be evident in the description or audit trail for the existing records so you may need to review material specifications, engineering drawings, product bills of material, or other information to make an accurate update. If possible, segregate out obsolete product numbers for archiving. Be careful to collect any new part numbers classified between now and the adoption date. Each of these will require a new classification as well.

It is necessary to study and take in the details in the correlation table. Also, there are critical section and chapter note changes that require close scrutiny. Finally work closely with your classification subject

Philip Sutter is director of governance policy at Livingston International. The original article appeared here.