Candidate and then President Trump’s statements, as well as some of his actions, on international trade and investment issues call into question the legal framework on which businesses and investors have relied in developing their global supply chains and businesses more generally. President Trump has, for example:
- Withdrawn the US from further participation in the Trans-Pacific Partnership
- Pledged to "pull out" of the WTO if it is not renegotiated so as to permit higher US tariffs on Chinese products
- Called for a renegotiation of and potential withdrawal from NAFTA
- Pledged to impose tariffs on Mexican and Chinese products
- Threatened to punish US manufactures for their Mexican investments and operations
- Launched investigations under Section 232(b) of the Trade Expansion Act, to determine whether to levy tariffs on steel and aluminum on national security grounds
- Started a Section 301 investigation into China’s intellectual property rights practices
- Made it more difficult for US businesses seeking to do business in Cuba
- Appointed Peter Navarro, who predicted the US's "economic death" due to China's trade practices and weak consumer protections, and claimed that NAFTA has caused the loss of 700,000 US jobs
On the other hand, much of the President’s protectionist rhetoric has not yet translated into action. The US has not labelled China a currency manipulator, for example, and has not pulled out of NAFTA or the WTO.
Planning for the future
It is difficult to predict what this US administration will attempt to do on the trade front, let alone what it will be able to do given international and domestic political constraints. Nevertheless, companies with international supply chains be asking questions that will help them identify potential risks - and opportunities - presented by the administration's international trade and investment agenda.
We have a dedicated team of international trade and commercial experts who are able to help companies navigate their future. If you would like to discuss the implications of the Trump administration's trade policies for your company, please get in touch with your usual Baker McKenzie contact or, alternatively, Paul Burns, Raymundo Enriquez, Rod Hunter, Janet Kim, Amy de la Lama, Ted Murphy or Miguel Noyola.
For media enquiries, contact Stephen Stewart.
NAFTA in Play: Supply Chain Questions
We live in a globalized world. Multinational companies, over decades, have come to be links in a massive global value chain in which they collaborate with NAFTA partners and other allies around the world to create, manufacture, distribute and sell products of every kind.
The President's (as well as his transition team’s) rhetoric about international trade agreements, and in particular NAFTA, has understandably generated anxiety within the US multinational business community.
A renegotiation of at least some NAFTA provisions is likely. The President has focused extensively on this issue, and the Canadian and Mexican governments have expressed a willingness to negotiate.
Accordingly, US manufacturers whose operations rely on NAFTA should be considering now how best to engage in this process. At a minimum, any company that utilizes NAFTA should examine its supply chains and begin to consider possible adjustment. The questions they should ask include the following:
- If material changes to NAFTA are implemented, what will that do to the landed cost of goods produced at the company’s facilities in Mexico? (For example: Estimate the additional cost a company would incur if it is required to pay MFN rate duties on imports from Mexico. Estimate the additional cost company would incur due to the non-deductibility of payments for imported products, which is a key feature of the Border Adjustment Tax under discussion. Then factor in the lower corporate income tax rate - 20% - that would likely be instituted together with the Border Tax Adjustment.)
- How would the landed cost of goods produced in Mexico compare to the landed cost of goods produced in other countries such as China or another FTA partner?
- Who is the importer of record for customs purposes? (That party, technically, would be obligated to pay any import duties that may be imposed.)
- Has the company contractually passed to third parties the obligation to pay duties that may be imposed on imports from Mexico?
- Is the company minimizing the value of the goods to the extent allowed?
- Might duties be avoided through the use of foreign trade zones, customs bonded warehouses, maquiladora, Temporary Importation Under Bond, the American Goods Returned program, or duty drawback?
- Would it make sense for the company to begin constructing trade remedy petitions? (The President has indicated a partiality for such remedies.)
- Does the company have any significant potential claims against Mexico (or Canada) for government actions that adversely affected the company's Mexican (or Canadian) investments? (It is prudent to have this information to be able to promptly file arbitration notices if and when the US issues a NAFTA withdrawal notice.)
In addition, companies should consider options to engage the administration to either try to preserve the benefits that NAFTA has brought, or to influence the negotiations to achieve additional benefits. Given the substantial sums at stake (over USD $1 trillion annually), any proposal to withdraw or overhaul the agreement will attract substantial lobbying efforts from many angles. Disputes should be expected in connection not only with the tariffs to be applied, but also with the numerous non-tariff barriers that NAFTA eliminated (e.g., import license and local content requirements) and over the various other trade and investment-favorable mechanisms that NAFTA established (e.g., procurement rules, dispute resolution mechanisms).
NAFTA in Play: Immigration Questions
If NAFTA is renegotiated or the US government decides to withdraw from this important trade agreement, companies may face hurdles related to the movement of professional talent. Specifically, the TN visa classification (special nonimmigrant category provided to certain professional occupations) that is currently used by many companies to move professionals across the borders for temporary assignments may be impacted.
Global companies with cross-border populations moving between the United States, Canada and Mexico need to closely monitor the incoming administration's messages regarding NAFTA to assess the potential impact on the TN work authorization category and business visitor admissibility requirements.
At this time we recommend review of your expatriate populations in the United States, Canada and Mexico to identify those workers holding NAFTA visa classifications, as well as the evaluation of alternative non-immigrant solutions and long-term immigration solutions that are not reliant on NAFTA.
NAFTA in Play: Privacy Issues
The impact of a shift in US trade policy on data privacy and protection and related issues is not altogether clear. Nevertheless, the undermining of the TPP and/or NAFTA could conceivably lead countries to implement rules under the guise or justification of data protection or privacy but with an underlying intent and/or practical effect to restrict trade with the United States.
For example, data localization rules, restrictions on cross-border transfers of personal data or rules with regard to mandatory disclosures of source code or other intellectual property could in practice significantly impact commerce that relies on the free or nearly free flow of data. Similarly, this shift could impact countries' willingness to cooperate with the United States on important issues such as cybersecurity and related cyber threats, something that was expressly called for under the TPP and something that is critically important to combatting a problem that is essentially global in nature.
Therefore, as the new US administration evolves, US companies will need to watch for these types of changes and build flexibility into their privacy programs to account for the potential for greater regulation and restrictions and less consistency across different countries.
NAFTA in Play: Energy Industry Considerations
Energy companies would likely be impacted by a material revision of NAFTA. Below are energy-related considerations that may be relevant to such companies as the NAFTA debates unfold.
- NAFTA petroleum markets are highly integrated. In 2015, 48% of US petroleum imports came from Canada and Mexico, and 35% of US petroleum exports went to Canada and Mexico.
- The energy sector is one area in which a NAFTA renegotiation could actually expand enhance opportunities for US and Canadian investors in Mexico. The NAFTA chapter on energy and basic petrochemical products in essence reserves to the Mexican government a long list of energy-related activities such as crude oil and natural gas exploration, exploitation and refining. This reservation conflicts with the energy sector reforms that have taken place in Mexico in recent years, including the ending of the longstanding monopoly of the state-owned oil and gas company (Pemex), and allowing foreign companies to invest in the exploitation of offshore oil fields and shale gas. A NAFTA overhaul that brings the energy-related provisions in line with the Mexican reforms would provide legal comfort to US companies hoping to become involved in (or already involved in) such activities. On the other hand, in the context of a contentious NAFTA renegotiation Mexico might use the existing NAFTA energy-related restrictions to improve its bargaining position.
- In recent years US companies have invested substantial sums in pipelines to transport gas to Mexico. Those companies should closely monitor possible shifts in US (and Mexican) trade policies that could affect the utilization of such pipelines and related infrastructure.
- In an effort to demonstrate the attainment of a "better deal," the new administration could impose a tax on Mexican imports of US gasoline, diesel and liquid petroleum gas, which, depending on the tax amount, could drive Mexico to approach alternative sources in Asia, Europe and the Mediterranean.
- A material renegotiation of NAFTA could encourage foreign competition in the Mexican energy sector. The Chinese are already on the playing field, having recently been awarded two deep water exploration blocks in the Gulf of Mexico.
Although President Trump recently agreed to honor the one-China policy in exchange for Beijing to address concerns about trade and currency issues, the US-China relationship will continue to influence trade, currency, investment, and cyber-security.
- In the trade sphere, we can expect continued trade tensions with China with an emphasis on trade practices that the administration perceives to be unfair such as subsidies, dumping, intellectual property theft, and currency manipulation
- In the investment sphere, there will likely be continued attention to national security implications of foreign investments from China and other countries, and there have been suggestions of a need for Congress to re-evaluate the effectiveness of the current foreign investment regime
- In the cyber-security sphere, we will continue to watch as China implements its cybersecurity laws that place restrictions and controls on cross-border data flows, network operators, service providers and a broad range of online products and services
International businesses will need to continue to navigate the changing landscape as both countries recalibrate and forge new trade relations.