New Articles

TENSIONS MOUNT BETWEEN SECURITY AND EFFICIENCY IN GLOBAL TRADE

trade

TENSIONS MOUNT BETWEEN SECURITY AND EFFICIENCY IN GLOBAL TRADE

The coronavirus pandemic has caused both governments and businesses to question some of the assumptions that have underpinned global trade for decades. By the time the dust settles, the world’s approach to trade could look quite different.

Extended global supply chains brought unprecedented economic efficiencies generated by extreme specialization of production and the ability to reduce costs through just-in-time inventories. These benefits are now being weighed against the risks created by the lack of redundancy and the consequences of severe disruption when key suppliers are not available. Rising economic nationalism and strategic rivalries are prompting multinational companies to rethink their investment and production strategies.

Weighing security over efficiency

In the balance between economic efficiency and security of supply, the pendulum may be swinging back toward security. This shift will apply not only to essential medical supplies and medicines but across the full spectrum of trade. Many automotive production facilities in South Korea, Japan and elsewhere were forced to suspend operations at the onset of the coronavirus outbreak when the flow of critical components from China was interrupted.

Companies may not only rethink supplier relationships. They might also consider further diversifying their own production. Take for example the recently announced decision by Taiwanese semiconductor giant TSMC to build a $12 billion production facility in the state of Arizona, which may represent an attempt to mitigate business risks emerging as a result of geostrategic rivalries, in particular between the United States and China. The compelling economic rationale for TSMC’s Arizona facility is not readily apparent. The costs of semiconductor fabrication are relatively higher when compared to TSMC’s facilities in Taiwan, where the bulk of its manufacturing is done.

Reducing over-dependence on Asia supply chains

The TSMC facility might represent an industry step toward a more U.S.-based high technology supply chain. But there might actually be less to the proposed plant than meets the eye. By the time it is operational in 2024, it is expected to produce semiconductors based on existing (rather than next generation) technologies, and it will lack capacity to produce at a game-changing scale. The 20,000 silicon wafers the Arizona plant is expected to produce each month is only one-fifth the capacity of the larger Taiwan-based fabrication facilities.

However, as the Trump Administration has been vocal in its desire to repatriate elements of vulnerable supply chains wherever possible, the move could also represent an opportunity to hedge against the risk that more production of critical industrial products will be compelled to be manufactured and procured in the United States, something other governments are contemplating as well.

At the recent G20 Finance Ministers meeting in Riyadh, French Finance Minister Bruno Le Maire — a staunch advocate of deepening economic integration — posed a question which just a few years ago would have seemed inconceivable:
“Do we want to still depend at the level of 90 per cent or 95 per cent on the supply chain of China for the automobile industry, for the drug industry, for the aeronautical industry or do we draw the consequences of that situation to build new factories, new productions, and to be more independent and sovereign? That’s not protectionism — that’s just the necessity of being sovereign and independent from an industrial point of view.”

Le Maire’s comment captures the policy debate officials around the world are wrestling with, even in countries that have traditionally been strong pro-trade and pro-integration advocates.

Doubling down on regional trade agreements

Broader strategic considerations were undoubtedly at play in the decision. Taiwan’s position as a global supplier of chips – as well as a highly sensitive flashpoint in U.S.-China relations – means that TSMC is inevitably caught up in the technology and strategic rivalry between the U.S. and China.

TSMC’s investment may not be a bellwether that U.S. companies will re-shore or that multinationals will flock to the United States. More likely, companies will build more diversity into their supply chains with more emphasis on regional trade and less reliance on a single trade partner.

This could have big implications for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Although neither China nor the United States are currently parties to the CPTPP, the agreement is a useful vehicle to achieve greater trade and investment diversification for its current members. As a self-selected, voluntary grouping of economies ostensibly committed to promoting trade and investment among members, the CPTPP could provide some degree of insulation against the surge of export restrictions.

With the CPTPP positioned to take on greater relevance in the post-COVID-19 world, Thailand, South Korea, Indonesia and the Philippines have indicated interest in joining. Japan seems to be the informal new member recruitment manager, with Japanese officials already working closely with their Thai counterparts on the mechanics of accession.

Japan’s role is not a matter of happenstance. Japanese officials understand the dangers of over-reliance on a single market. Japan relies on China for about 37 per cent of its imports of automotive parts and 21 per cent of its imports of intermediary goods overall. In light of the COVID-19 disruptions, Japan is making a concerted effort to reduce its supply chain dependencies on China. The recent stimulus bill passed by the Japanese legislature allocated US$2.2 billion to help Japanese manufacturers shift production out of China.

A lasting impact

The COVID-19 pandemic will recede at some point. But its impact on trade will endure. The world can expect to see less China-reliant supply chains and increased use of regional trade agreements, providing a particular boost to the economies of Asia that multinationals see as the alternative to China.

________________________________________________________________

Stephen Olson is a Research Fellow at the Hinrich Foundation. Over the course of his 25 year international career, Stephen has lived and worked in Asia, the Middle East, and the United States, holding senior executive positions in the private sector, international organizations, government, and academia. He is currently a Visiting Scholar at the Hong Kong University of Science and Technology.

This article originally appeared on TradeVistas.org. Republished with permission.
regulatory

White House Issues Executive Order Providing Agencies with Regulatory Enforcement Discretion to Promote Economic Recovery

The Trump Administration issued its Executive Order on Regulatory Relief to Support Economic Recovery (the “EO”) on May 19, 2020 (Executive Order). The EO seeks to remedy the economic impact of the ongoing COVID-19 pandemic by removing certain administrative barriers and providing flexibility in the implementation and enforcement of other administrative provisions and requirements.

Although certain provisions of the EO are vague, Section 1 states the EO’s policy that “Agencies should address this economic emergency by rescinding, modifying, waiving, or providing exemptions from regulations and other requirements that may inhibit economic recovery, consistent with applicable law and with protection of the public health and safety, with national and homeland security, and with budgetary priorities and operational feasibility.”

Section 4 of the EO asks the heads of all federal government agencies to “temporarily or permanently rescind, modify, waive, or exempt persons or entities” from regulatory standards “that may inhibit economic recovery.”  Significantly, Section 5(b) of the EO gives agency heads the discretion to “decline enforcement against persons and entities that have attempted in reasonable good faith to comply with applicable statutory and regulatory standards, including those persons and entities acting in conformity with a pre-enforcement ruling.”  (Emphasis added.)

Of course, agencies must act within their statutory and regulatory frameworks and must also comply with the Administrative Procedure Act, but the EO potentially has broad implications across sectors and agencies, including for international trade.  As an example of how this EO might affect certain trade issues, consider the following:

-Importers should not expect to be exempted from exercising reasonable care, paying duties, participating in antidumping or countervailing duty investigations,  or complying with any other CBP, Commerce or ITC statutory or regulatory requirements.  Per Section 5(b) of the EO, Agency heads have enforcement discretion “as permitted by law,” meaning agency heads cannot override a statute, even if they believe that doing so would aid economic recovery. However, for matters that have already been placed within the “enforcement discretion” of an agency, the government has the ability to be more lenient in accordance with the EO. For instance, an agency could seek to enforce minimum penalties within a range of statutory options, although the agency could not ignore statutory requirements altogether.

-Similarly, if CBP discovered that certain imported apparel violated CPSC lead content standards, CBP and the CPSC could extend a more lenient resolution by permitting the shipment to be reconditioned or reexported rather than destroyed.

Another potential question is how evenly any leniency in trade and customs matters will be applied since the Trump administration has made tariffs and restrictions on Chinese imports and exports a pillar of its political platform. Because of the broad nature of the EO and because any action will be at the agency head’s discretion, we reiterate that it is difficult to determine the EO’s exact effects at this time. However, we can expect that affected companies and individuals will seek to use the flexibility and leniency provisions of the EO, effective immediately.

__________________________________________________________________

Robert Stang is a Washington, D.C.-based partner with the law firm Husch Blackwell LLP. He leads the firm’s Customs group.

Jeffrey Neeley is a Washington-based partner with the law firm Husch Blackwell LLP. He leads the firm’s International Trade Remedies team.

Julia Banegas is an attorney in Husch Blackwell LLP’s Washington, D.C. office.

 Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

Charleston Harbor

Charleston Harbor Deepening Project: Federal Funding Confirmed

Following President Donald Trump’s signing of the FY2020 Energy and Water Appropriations bill on December 20th, South Carolina Ports Authority is pleased to announce the Charleston Harbor Deepening Project is officially confirmed for complete funding. Details on the announcement noted Trump’s inclusion of the $138 million project previously, creating opportunities for direct appropriations from Congress.

“This huge infusion of federal funding reflects the importance of ensuring South Carolina has a deep harbor capable of handling mega container ships,” S.C. Ports Authority Board Chairman Bill Stern said. “We are grateful to the Trump Administration for recognizing the value a 52-foot depth in Charleston Harbor brings to the Southeast. Thank you to our Congressional delegation, Governor McMaster, and the state and local leaders who have supported this critical project and worked tirelessly to complete it.”
The project is currently being projected for completion in 2021 at a 52-foot depth to withstand 19,000 twenty-foot TEU vessels without concern for tidal or navigation restrictions.
“The Charleston Harbor Deepening Project is one of the most significant infrastructure projects in S.C. history,” Newsome said. “A 52-foot deep harbor will ensure we remain competitive for decades to come as bigger ships bring more cargo to S.C. Ports. A thriving port drives economic development and attracts business to the state, which ultimately creates high-paying jobs for South Carolinians. Port operations generate a $63.4 billion economic impact on the state each year and create 1 in 10 S.C. jobs.
This amount is in addition to the $108 million from the Army Corps of Engineers’ work plans, a $50 million state loan, and the $300 million (estimated state share) set aside by S.C. General Assembly in 2012.
“We have been working diligently on this project with the U.S. Army Corps of Engineers for 10 years and it is great to see construction progressing. This impressive progress would not be possible without the unwavering support from the S.C. Legislature, who set aside funding years ago,” S.C. Ports COO Barbara Melvin said. “Today, we are incredibly grateful to our Congressional delegation and the Trump Administration for funding this vital project to completion.”

U.S. Strengthens Sanctions Targeting the Government of Venezuela

On August 5, 2019, the Trump Administration intensified pressure on the administration of Nicolás Maduro by imposing broad economic sanctions against the Government of Venezuela, a move that could escalate existing tensions with Venezuela’s supporters, Russia and China.  In a late-night Executive Order, President Trump announced that all property, and interests in property, of the Government of Venezuela, including its agencies, instrumentalities, and any entity owned or controlled by the foregoing, that are within the jurisdiction of the United States would be blocked.

The Order further suspended entry into the United States of sanctioned persons absent a determination from the Secretary of State. The Order also authorizes the Secretary of the Treasury to impose additional secondary sanctions on non-U.S. persons who materially support or provide goods or services to the Government of Venezuela.

Background

In January 2019, after months of economic turmoil and political unrest under Venezuelan President Nicolás Maduro, the United States formally recognized Juan Guaidó, the leader of the Venezuelan National Assembly, as the country’s legitimate head of state.  More than fifty nations followed suit, asserting that President Maduro’s 2017 reelection was illegitimate and that Guaidó was the rightful interim president under the Venezuelan constitution.

The Trump Administration followed its recognition of Mr. Guaidó as interim president with sweeping sanctions on the Venezuelan government. The measures included designating Venezuela’s state-run oil company, Petróleos de Venezuela, S.A. (“PdVSA”), as a Specially Designated National (“SDN”), thereby prohibiting U.S. persons from engaging in transactions with PdVSA, as well as transactions by non-U.S. persons conducted in U.S. dollars, unless otherwise authorized by the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”).  (We previously summarized the PdVSA SDN designation here.)

Despite the increasing U.S. pressure, President Maduro has refused to cede power.  He retains the support of the Venezuelan military, and Russia, China, Iran, Cuba, and Turkey have continued their economic and diplomatic relationships with the regime.

Sanctions Overview

Through this new Executive Order, the Trump Administration has ratcheted up its efforts against the Maduro regime, asserting that further measures are necessary to combat “human rights abuses,” “interference with freedom of expression,” and “ongoing attempts to undermine Interim President Juan Guaidó and the Venezuelan National Assembly’s exercise of legitimate authority in Venezuela.”

However, contrary to initial press reports, the action does not create a comprehensive embargo against Venezuela (on the model of the U.S. sanctions against Iran) that would prevent U.S. persons from engaging in almost all transactions. Instead, the new measures focus on the Venezuelan government by blocking all property and interests in property of the government that are currently in the United States, will be brought into the United States, or come into the possession or control of a U.S. person. There is, however, an exception for humanitarian goods, such as food, clothing, and medicine.  The Order applies regardless of contracts entered into, or licenses or permits granted, prior to the Order.

Further, the Order could have a broad impact outside of the United States by authorizing secondary sanctions against any party determined by OFAC to “have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of” the Government of Venezuela.  U.S. National Security Advisor John Bolton warned the day after the Order, “We are sending a signal to third parties that want to do business with the Maduro regime: proceed with extreme caution.  There is no need to risk your business interests with the United States for the purposes of profiting from a corrupt and dying regime.”

In conjunction with the Order, OFAC also revised twelve existing general licenses (“GLs”) and issued thirteen new GLs.  Notably, GL 28 authorizes through 12:01 a.m. on September 4, 2019, transactions necessary to wind-down contracts with the Government of Venezuela.  GL 31 also authorizes transactions with the Venezuelan National Assembly and the shadow government of Interim President Juan Guaidó, underscoring that the target of the action is the administration of Nicolás Maduro.

The GLs and related guidance make clear that the people of Venezuela are not the target of the sanctions.  Specifically, OFAC released a document entitled “Guidance Related to the Provision of Humanitarian Assistance and Support to the Venezuelan People,” which emphasized that “humanitarian assistance and activities to promote democracy are not the target of U.S. sanctions and are generally excepted from sanctions . . . ”  OFAC simultaneously issued four new Frequently Asked Questions (FAQs).  FAQ 680 stresses that “U.S. persons are not prohibited from engaging in transactions involving the country or people of Venezuela, provided blocked persons or any conduct prohibited by any other Executive order imposing sanctions measures related to the situation in Venezuela, are not involved.”

OFAC also issued a number of GLs to authorize humanitarian transactions and transactions necessary for communications involving Venezuela, including new GLs 24 (telecommunications and common carriers), 25 (Internet communications), 26(medical services), and 29 (broadly authorizing certain non-governmental organizations).

Further, U.S. persons in Venezuela are not targeted by the sanctions.  Section 6(d) of the Order exempts from the definition of Government of Venezuela “any United States citizen, any permanent resident alien of the United States, any alien lawfully admitted to the United States, or any alien holding a valid United States visa.”  Further, GL 32authorizes U.S. persons resident in Venezuela to engage in ordinary and necessary personal “maintenance” transactions, including “payment of housing expenses, acquisition of goods or services for personal use, payment of taxes or fees, and purchase or receipt of permits, licenses, or public utility services.”

Such measures targeting an entire government have rarely been used by the United States, and there are many questions about how the restrictions and related authorizations will be interpreted and applied.  As Bolton observed, “This is the first time in 30 years that [the U.S. is] imposing an asset freeze against a government in this hemisphere.”

Effect of the Sanctions

There has been some confusion in the media over the breadth of the measures.  Some reports have mischaracterized the Order as a “total embargo;” however, the scope of the Order is limited to property, and interests in property, of the Venezuelan government, its agencies, instrumentalities, and entities owned or controlled by these.  Because many major Venezuelan government entities have already been designated as SDNs in earlier actions, including PdVSA and the Central Bank of Venezuela, the measures appear to be only an incremental expansion of the existing sanctions program.

More significantly, the Order creates a secondary sanctions regime for OFAC to designate non-U.S. parties who continue to do business with the Maduro government.  While these secondary sanctions are most likely to target Cuban, Russian, and Chinese entities that continue to provide aid to the ailing regime, all non-U.S. persons engaging in transactions in the country should carefully assess whether those transactions could benefit the government.  In particular, companies trading with Venezuela should conduct due diligence sufficient to ensure that their counterparties are not owned fifty percent or more by the Government of Venezuela, or are not otherwise controlled by the government.

In addition, from a practical standpoint, although the sanctions only apply to Government of Venezuelan and related entities, the measures may cause financial institutions, insurers, freight forwarders and other companies – who often apply a heighted level of compliance going beyond the minimum required by OFAC – to avoid dealing with Venezuelan entities altogether.

The measures against Venezuela could also escalate existing tensions with Russia and China if the sanctions further restrict the countries’ access to Venezuelan oil.  Russia and China, which have continued to back the Maduro regime, currently import Venezuelan oil as part of a debt relief program.  China is slated to continue receiving oil from Venezuela until 2021, so it stands to suffer substantial losses if it is unable to continue the shipments.  This uncertainty comes in the midst of deteriorating relations between the United States and China due to the ongoing trade war, relations which suffered another blow this week when the Trump Administration labeled China a “currency manipulator.”

Maybe Trade Wars Aren’t So Easy To Win After All

“Trade wars are good, and easy to win.” — Donald Trump, March 2, 2018

“We don’t want to fight, but we are not afraid to fight and, given no choice, we will fight.” — Official statement of the government of China, May 6, 2019

If trade wars are easy to win, why hasn’t Trump won this one? It’s been going on for more than a year and he just escalated it by announcing that tariffs on $200 billion worth of Chinese imports would go from 10% to 25% on May 9.

A week ago, the two sides were to meet in Washington for what was expected to be the final round of negotiations. They were that close to a done deal. But then, Trump accused the Chinese of reneging on commitments they had made – the Chinese denied it – and the battle was rejoined.

China fired back by announcing that it would hit $60 billion worth of U.S. imports with tariffs ranging from 5% to 25% on June 1.

This led the Trump administration to roll out the big guns: it said it would impose 25% tariffs on all remaining Chinese imports “shortly.” That’s about $300 billion worth of goods.

But not to worry, Trump said. The U.S. tariffs would be paid “largely” by the Chinese. This is false. The tariffs have been and will be paid almost entirely by American businesses and consumers.

U.S. Sen. Tom Cotton, R-Ark., acknowledged this on Monday during an appearance on CBS This Morning.

“There will be some sacrifice on the part of Americans, I grant you that,” he said. “But also, that sacrifice is pretty minimal compared to the sacrifices that our soldiers make overseas that are fallen heroes or laid to rest.”

American soybean farmers who have filed for bankruptcy protection because the trade war has cut off their access to China, their largest market, will no doubt take comfort in Cotton’s rationale.

The trade war has yet to visit more than minor damage on the U.S. or Chinese economy. But if it does, China will be better able to mitigate harm than the United States will be, because “the government plays a much bigger role in the economy” than the U.S. government does, said Brad Setser, an economist at the Council on Foreign Relations.

For example, communist China can pump stimulus money into the economy much more easily than the United States can. It was doing that until 2018 and “China’s economy was slowing of its own accord when the (U.S.) tariffs were introduced,” Setser said. “I think there wasn’t much of an impact from the tariffs in 2018, but you definitely see a slow-down in 2019.” Consequently, “China went back to some of its stimulative policies,” he said.

Trump, on the other hand, doesn’t believe in government intervention in the economy.

China has other tricks up its sleeve, some of which it has already used; it has strategically deployed its tariffs in states and congressional districts whose voters favored Trump in 2016. More of the same can be expected when China’s next round of tariffs takes effect.

China can use any number of non-tariff barriers against U.S. imports, such as slow-walking customs approvals at the border. Of course, the U.S. can do this, too, but not without a lot of loud squawking by affected businesses and their elected representatives, all of which would be reported in the press.

China can withstand a prolonged trade war for longer than the United States can. There is no independent press there and its communist leaders don’t have to worry about getting re-elected.

America’s leaders do, so Trump announced on Monday that he would be throwing more money at “our great patriot farmers” who have been hurt by the trade war.

“Out of the billions of dollars that we’re taking in (from tariffs), a small portion of that will be going to our farmers,” he said.

This will be the second round of payments to farmers, most of whom voted for Trump in 2016 but are now losing patience with his trade war. They don’t want hand-outs; they want their foreign markets re-opened.

Trump is all about winning, but when this trade war ends, it’s hard to imagine how he’ll be able to legitimately say that he’s won it. It will be a Pyrrhic victory at best.

John Brinkley was speechwriter for U.S. Trade Representative Michael Froman and for Korean Ambasador Han Duk-soo during the Korean government’s quest for ratification of the Korea-US Free Trade Agreement.

This article originally appeared on Forbes.