The new 2022 International Trade guide covers 11 high-profile jurisdictions. The guide provides the latest information on World Trade Organization (WTO) membership, plurilateral agreements, free trade agreements, authorities governing customs, sanctions, export controls, restricted persons, anti-dumping and countervailing (AD/CVD) duties and safeguard measures, subsidy and incentive programmes for domestic production, and geographical protections.
Last Updated: December 16, 2021
Emerging from Lockdown into Continuing Trade Tensions
For many stakeholders, the reconsideration of global trade, combined with COVID-19, economic distress, and a widening sense of inequality, has led to significant changes in how they conduct business globally. The world looks to a return to normality in 2022, but already strained cross-border supply chains threaten quick progress. At the same time, political leaders integrate rules that, at least ostensibly, champion workers’ rights, environmental stewardship, and improved health and safety measures.
Even as the world appears to move towards a different model of globalisation, new and meaningful co-operation between countries will persist, whether it is collaboration on clean technologies, more information-sharing between countries, or new (or updated) bilateral and regional trade arrangements, such as the US–EU Trade and Technology Council inaugurated in September 2021.
Business leaders charged with developing strategies for the future have their work cut out for them. They will need to adapt to the new reality of increased export controls and tariffs, more regionalised supply chains, increased trade remedy protections, and complex foreign investment screenings. However, while risks abound, so do opportunities.
Not long ago, tariffs remained something of an afterthought for most products imported into the USA – but, in 2018, the country doubled its tariff revenue. Furthermore, in 2020, the UK left the EU, sparking discussions on the tariff treatment for goods moving between the EU and UK.
Although the spike in US tariffs emanated in large part from trade tensions with China, they led to tariff duels with the likes of Turkey, India and the EU. The result was an increase in prices for goods such as aluminium, steel and washing machines.
On the export side, there has been a concurrent rise in the application and enforcement of economic sanctions and export controls, involving, for example, China, Iran and Russia – often with conflicting regulations from the USA and EU. In these jurisdictions, there has also been a stronger focus on human rights and sustainable sourcing, adding an additional layer of complexity to compliance. China introduced new export control regulations as well as the regulatory structure for an “Unreliable Entity List”, perhaps to counter the US Entity List.
The importance of technology has also brought tech companies – even early-stage start-ups – into the fray.
Here are five things that business leaders, and their international trade counsel, must consider in navigating the regulatory challenges ahead.
Understand your supply chain – and look for patterns
There are hundreds of international trade agreements – bilateral, regional – that remain in force and serve as a bulwark against protectionist forces. Multinational leaders have to analyse that web of agreements and take advantage of reliable supply chain relationships.
Leverage government allies
Executives and board members at large corporations should activate their network of natural government partners to ensure that a diversified supply chain does not fall apart in other parts of the world.
Sourcing decisions are not just about efficiency – politics is a key factor
In the past, business leaders and legal counsel spoke of rationalising supply chains. Executives would look at an overlay of different trade agreements and decide, for example, that it would make sense to do a degree of manufacturing in Colombia, take the finished product to Peru, and then assemble it in Mexico. The decisions were based almost entirely on efficiency. Going forward, these decisions should factor in the politics of trade.
Diligence and rationalising third-party reliance
Third parties can pose risks – especially if business leaders are not aware of, for example, the source of foreign manufacturers’ materials or the markets that channel partners are serving. From an enforcement perspective, authorities expect operators to take responsibility and exert more control over their supply chain.
Think about exports in co-ordination with imports
Companies need to think holistically about international trade compliance, which means considering imports and exports in tandem. For instance, the USA has put a number of restrictions on technology transfers to certain Chinese companies. Thus, even if tariffs may not pose a danger, a global company will need to consider relationships with manufacturers with respect to these technology transfers.
The recent slide toward economic nationalism is not historically unique; governments have long responded to economic downturns with policies intended to bolster domestic industry, often at the expense of competitors abroad. Trade agreements limit the discriminatory action that governments can take at moments they are most inclined to do so.
COVID-19 and the consequent recession prompted governments worldwide to offer subsidies aimed at bolstering domestic businesses. Just as in previous recessions, experienced observers agree that the new polices will trigger a slew of anti-dumping and anti-subsidy litigation – at the WTO and elsewhere – claiming the subsidies had a discriminatory or otherwise unfair impact on foreign competitors.
Governments are generally permitted to give below-market funding to domestic players in a given industry – as long as they stay within certain bounds. If subsidies go on to cause aggravated economic harm to foreign competitors in global markets, it can be cause for litigation. However, legal counsel will need to manage clients’ expectations before launching trade litigation – it will take effort to generate the econometric evidence needed to prove economic harm in a foreign market.
Foreign Investment: Impediments Here to Stay
During 2020, long-awaited regulations came into force that greatly expanded the reach and authority of the Committee on Foreign Investment in the United States (CFIUS). At the same time, the EU foreign investment screening framework entered into full application. Despite being subject to each member state’s interpretation, this framework reflects a growing movement towards a more US-type approach to investment screening by governments around the world.
As with seemingly every other element of international trade, COVID-19 accelerated and expanded that trend – and not just to the usual suspects.
Historically, investment screening was perceived to be necessary only for very sensitive sectors, if at all. However, the COVID-19 pandemic and related issues around the supply of PPE and medicines – plus a more general concern of foreign investors raiding undervalued assets – created an urgency for screening foreign investment in much wider sectors of the economy.
Hence, several EU member states – including Germany, Italy and Spain – accelerated (repeated) reform to provide additional protections to, for instance, domestic healthcare industries. Other jurisdictions around the world similarly adopted new or more stringent investment screening legislation. For example, a comprehensive investment screening regime in the UK will start applying in January 2022. In the USA, some fear predatory investment in distressed assets, although CFIUS is likely to rely on the existing expansions of its jurisdiction and mandatory filing requirements to address these fears.
Investors into the USA, the EU and other jurisdictions, even when only making indirect investments, may have to regularly file mandatory notifications where they did not before; sectors such as healthcare, pharmaceuticals and information technology now fall under that umbrella. The scope of investments covered has been significantly expanded.
This means that investors need to take a more strategic approach. Business leaders and their counsel need to consider at least the following factors:
The prevalence of foreign investment screening among like-minded countries may also lead to increased collaboration, which could force companies to co-ordinate various filings for multi-jurisdictional investments. One of the newer aspects of CFIUS regulations offers certain exemptions to investors from select countries; while the UK and Canada are currently the only two countries on this list – and for a trial period – others may very well be added down the line.
In the EU, the EU Investment Screening Regulation (No 2019/452) fully applies since October 2020. Notably, the EU Investment Screening Regulation requires co-ordination amongst member states and with the European Commission’s Directorate-General for Trade. Initial experience suggests that (at least some) member states are making extensive use of the co-ordination mechanism.
Moreover, the EU Investment Screening Regulation significantly contributed to the harmonisation of more expansive screening legislation across the EU. As a result, more transactions undergo investment screening in the EU. Investors should be ready to assess investment risks relating to investment screening upfront and adopt risk mitigation strategies to address potential issues concerning the impact of a planned investment in the EU member state(s) of investment and in other member states.
In particular, investors should take care when entering into negotiations and arrangements with targets, especially as to information-sharing in the context of due diligence and the implications of investment screening on the transaction timeline. In that regard, it is important to take into account investment screening when drafting transactional documents, including by considering the appropriateness of:
Separately, on 20 May 2021, the European Commission published a legislative proposal for tools to address the potentially distortive effects of subsidies from non-EU governments that benefit companies active in the EU. The proposed tools include pre-closing reviews of inbound EU M&A deals that involve investors benefiting from such foreign subsidies. The proposal is currently under discussion by the other EU legislative bodies.
As with the other issues and challenges buzzing around international trade right now, heightened investment screenings present both a slide towards protectionism and opportunities for enhanced co-operation.