Trade compliance issues keeping us up at night
January 31, 2020
As I embark on the exciting journey of running my own trade law practice, I am thinking about the issues that are most likely to be on top of mind for you - fellow legal and trade compliance professionals. This is why I decided to name this blog Thinking Trade. Here I plan to periodically highlight and analyze regulatory developments and trends that are (or should be) high on the minds of people charged with keeping their companies’ cross-border trade operations efficient and compliant.
International trade continues to grow the economic pie of the world and contribute to the prosperity of countries and companies that participate in it. However, in today’s turbulent times there is a clear trend toward de-globalization and imposition of restrictions on cross-border trade to implement a multitude of policy objectives: protection of domestic industries, government revenue, foreign policy, national security, human rights, consumer protection, and environmental protection, just to name a few. The United States government leads the world in regulating international trade, but some other countries and jurisdictions are quickly catching up. Add to this world-altering technological developments, and we get an environment of ever-increasing complexity for trade operations.
So what are some of the top areas of concern today for participants in cross-border trade in goods and technology? Some of them have been making headlines regularly, and others are less obvious, but no less significant for trade compliance professionals. I myself have lost sleep over many of these issues in my previous work, so we are in the same boat.
Below I provide a list of topics that I think are currently among the top international trade issues. In later blog entries I will go into some of these issues in more detail.
Among the issues that have made headlines are the following:
- Trade war with China - Notwithstanding the “phase one” deal concluded in January 2020, tariffs imposed under Section 301 on roughly $360 billion of Chinese imports into the U.S. and $60 billion of U.S. imports into China remain, slightly mitigated by the possibility of obtaining exclusions.
- Trade wars with the rest of the world - U.S. continues to impose tariffs on steel and aluminium imports from most countries under Section 232 authority for national security reasons, and threatens to impose such tariffs on auto imports. In addition, U.S. importers could face new tariffs on EU goods as a result of the US-EU Aircraft dispute, and as a result of retaliation against French digital tax.
- USMCA - the new North American trade agreement replacing NAFTA is in fact an update rather than a wholesale replacement. It changes rules on automotive trade to encourage more car production in the U.S., strengthens labor protections, provides greater access for U.S. dairy products, and contains a new chapter on digital trade. Still, implementation of certain new rules, and the long-term future of the trade agreement can be a concern, given the controversial sunset rules.
- Restrictions on Huawei - due to U.S. government’s concerns that Chinese telecommunications technology represents significant risks to the national security and information security, the U.S. has placed Huawei and its affiliates worldwide on the Entity List, requiring an export license for transfers of U.S. products. There are also restrictions on using Huawei equipment in the U.S. and further restrictions on transfers of U.S. technology to Huawei are contemplated.
- Sanctions on Iran - beyond prohibiting almost all transactions with Iran by U.S. persons, the U.S. government enforces “secondary” sanctions, under which it can penalize non-U.S. entities for engaging in business in Iran in violation of the extensive U.S. restrictions on Iran. This gives the U.S. embargo on Iran truly global reach.
- Sanctions on Russia - although the United States does not prohibit trade with Russia, there are several overlapping layers of sanctions and restrictions on various Russian persons and sectors of the economy, making business in Russia very complicated. Under CAATSA legislation adopted in 2017, U.S. can also impose secondary sanctions on non-U.S. entities for certain transactions in Russia.
- Sanctions on Venezuela - U.S. sanctions now prohibit transactions with the Government of Venezuela and the state-owned oil company PdVSA and its subsidiaries. This is especially significant because PdVSA’s subsidiaries operate throughout Americas and Europe.
- BREXIT - Now that the United Kingdom is officially leaving the European Union, it will need to negotiate with the EU how to extricate itself from the Customs Union by the end of 2020. Although it will likely negotiate a new trade agreement with the EU, its contours are not yet certain, putting at risk the supply chains of all companies that depend on the free flow of goods between the UK and the EU.
Beyond the headline-grabbing trade issues, there is a host of issues that arise from more obscure laws and regulations and from technological developments. Often these less visible issues occupy the minds of trade compliance professionals no less, and sometimes more, than the headline-issues. Some of them include:
- Implementation of global ERP systems - Enterprise Resource Planning systems that span company operations across multiple instances and countries can have enormous trade compliance implications. From changing cost accounting and thereby affecting valuation and origin of products for import purposes, to potentially providing global access to sensitive export-controlled technologies, implementation of ERP systems requires painstaking planning and attention from trade compliance professionals.
- Increasing volumes and transferability of data - companies’ possession of vast amounts of data that can be easily transferred presents trade compliance risks along with other risks. For example, companies that point-of-sale (POS) data from their channel partners may have increased trade compliance due diligence responsibility with respect to that data, and companies that have export-controlled data need to ensure that it is protected from unauthorized disclosure.
- Blocking laws - certain laws in the European Union, Germany, Canada, and Mexico prohibit compliance with certain U.S. sanctions, in particular those on Cuba and Iran. Companies that conduct business in these jurisdiction must navigate the legal complexity of complying with both U.S. sanctions and with blocking laws.
- CFIUS Reform - pursuant to FIRRMA legislation adopted in August 2018 and new regulations issued in January 2020, the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) is now substantially expanded to certain non-controlling investments in critical technologies, critical infrastructure, and sensitive personal data. Companies engaging in mergers and acquisitions with foreign companies need to pay increased attention to these rules.
- OFAC’s Framework for Compliance Commitments - published in May 2019, the Framework makes clear Office of Foreign Assets Control (OFAC)’s high expectations for sanctions compliance programs. Virtually all companies engaging in substantial cross-border business operations, even those that do not import or export physical goods, should evaluate whether their sanctions compliance programs are meeting OFAC’s expectations.
- OFAC’s “50 percent” rule - prohibits transactions not only with the specifically designated restricted persons, but also with entities that are 50 or more owned by the designated persons. This creates special compliance challenges for business in high-risk sanctions countries such as Russia and Venezuela.
- New export controls on “emerging” and “foundational” technologies - U.S. government has announced its intention to impose unilateral export controls on certain “emerging” and “foundational” technologies. These may include certain technologies in biotech, artificial intelligence, advanced materials, advanced computing, 3D printing, robotics, and other categories. However, to date “emerging” and “foundational” technologies have not been defined, leaving many companies trying to anticipate the scope of future export controls.
- Increasing customs enforcement around the world - Customs authorities around the world are changing rules and increasing the level of their sophistication in scrutinizing import transactions. Their particular focus is on valuation of goods, questioning transfer prices and royalty payments to ensure all appropriate value is captured. This presents special challenges to multinationals whose supply chains rely on intercompany shipments at transfer prices.
No doubt I am missing some of the trade issues that may be of top concern to your company. In addition, significant legal and regulatory developments that affect trade compliance take place virtually every day. This is why I am eager to learn about your particular interests and concerns. Please do not hesitate to get in touch to let me know what you would like me to think about and cover in Thinking Trade. This way I can make the information and general advice provided in this blog as relevant for you as possible.