Russian Trade Sanctions and WTO Law — Now It’s Really Getting Interesting.

Posted on April 17, 2014 by Stuart Malawer

Russia and Wto Flags

Do U.S. trade sanctions imposed on Russia because of its annexation  Crimea violate WTO law?
The general question of trade sanctions for foreign policy or national security concerns and WTO law has never been litigated by the WTO. Are such sanctions consistent with or inconsistent with WTO obligations?
Article XXI of the GATT is dispositive of this issue. It allows sanctions for the protection of essential security interests, those taken in time of war or other emergency in international relations, or pursuance to obligations under the U.N. Charter.
So here are a few questions when applying trade sanctions for geopolitical reason.
Are U.S. trade sanctions imposed for the protection of essential U.S. security interests? Does this territorial dispute amount to a war or an emergency? Hasn’t the U.N. Security Council refused to take Article VII enforcement action?
My only point here is that the imposition of trade sanctions on Russia, as in many other cases, is a violation of WTO rules unless they fall within the security and related exceptions. The U.S. has trade sanctions on a long list of countries, from Belarus to Cuba to  Zimbabwe. They have have never been litigated before the WTO.
The Obama administration argues that Russian actions should be assessed in terms of the 21st century  rules of inter-state relations. But in addition to the rules contained in the U.N. Charter, treaties  and customary international law, WTO rules area also at the center of the 21st century global system.
WTO rules regulate trade and commerce. To the extent that those rules apply to state actions (trade sanctions) when relying on foreign policy or national security concerns is a critical issue. This has never been decided by the WTO dispute resolution system. Maybe it’s time for such legal clarification. The next question is of course the effectiveness of trade sanctions. That’s another question.
….. “Russia Threatens US with WTO Action Over Crimea Sanctions.” Financial Times (April 17, 2014).
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Global Trade & Geopolitics Today — China, Cyberespionage, Sanctions, Bribery ……. Trade is More than Trade.

Posted on April 7, 2014 by Stuart Malawer
      Global Trade (8.6.13)
     Huge issues concerning global trade policy have emerged the last few weeks. They range from new economic sanctions, inequality and trade agreements,  foreign investment treaties, global bribery, new WTO panel decisions against China, multinational taxation, and cyberespionage for commercial gain. These issues further evidence the complexity and growing areas of connection concerning global trade especially as they relate to national security, and geopolitics.
  •  The Crimea crisis has raised the issue of whether or not economic sanctions have become more important in foreign policy and diplomacy given the increased globalization and inter-connectedness of the global system. More so since the 2008 Georgia crisis and the increased U.S. experience with the Iranian sanctions. “Crimea: Globalization and Economic Sanctions.” Financial Times (March 4, 2014). The United States is planning to use its new energy (natural gas) production and exports as a trade weapon in its foreign policy and diplomacy aimed at Russia. “Energy and Diplomacy — U.S. & Putin (Crimea).” New York Times (March 6, 2014). It is argued that sanctions against individuals are more like painless drone attacks (“Magnitsky” type of illusions) rather than more effective financial sanctions against major financial institutions (government and private). “Londongrad and Financial Sanctions.” Financial Times (March 6, 2014). 
  • This article by Joseph Stiglitz is a frontal assault on the TPP, trade agreements and globalization.  He equates recent trade agreements to those stemming from the Opium Wars, they contain noxious provisions, rely on the discredited theory of free trade, they reflect global inequality and promote the same within the U.S., and he rejects ‘trickle-down’ economics as a myth.  “On the Wrong Side of Globalization.” New York Times (March 17, 2014).
  • Investor-state provisions in trade agreements and investment treaties promote greater foreign direct investment. It takes governments out of the game of bringing actions on behalf of companies and allow private corporate actions. This reduces government friction and promotes the normalization and commercialization of FDI. In fact, this approach is a more modern approach to settling transnational disputes than the 19th century prohibition in international relations against giving ‘standing’ to private parties in international arbitration. That approach is dysfunctional and outdated. Trade and investment today are conducted by corporations and they should have a viable recourse over contract disputes often involving nationalization and bad state behavior. “Investor-State Treaties Promote the Law. Financial Times (March 26, 2014). 
  • U.S. DOJ bribery crackdown since 2007 has increased significantly but has had a slight decrease last year (2013). “Global Bribery Crackdown Gains Steam.” Wall Street Journal (March 26, 2014).
  •  A WTO panel ruled against China in the Rare Earth Case brought by the United States and others. The United States argued that the Chinese export duties on rare earth materials were not justified under the “General Exception” of Article XX to protect health, they were not valid under Article XX conservation of resources, and China’s restrictions violated ‘trading rights.’  “WTO Issues Panel Reports on China’s Rare Earths Exports” WTO News (March 26, 2014). “U.S. Wins Victory in Rare Earths.” USTR News (March 26, 2014). “China’s Curbs on Metal Exports are Found to Violate Trade Laws.” New York Times (March 27, 2014).
  • A WTO panel gave a split decision to China’s complaint against the United States in applying its new 2012 legislation allowing a countervailing duty action on imports from non-market economies. It upheld the U.S. legislation but held against it for failure to investigate possible ‘double remedies’ arising out of related antidumping actions. “WTO Issues Panel Report on US Measures on Chinese Products.” WTO  News (March 27, 2014). “U.S. Welcomes WTO’s Rejection.” USTR News (March 27, 2014).
  • In the last 13 years since 9/11 sanctions for domestic political and foreign policy reasons have exploded worldwide. “Sanctions: War by Other Means.” Financial Times (March 31, 2014).
  •  China’s trade policy is now not just to join the global trading system but to help write the rules for 21st century global commerce and trade. “China Craves Invitation to join Global Trade Club.” Financial Times (April 3, 2014). China wants to be included in the new rule-making efforts for global commerce led by the U.S. The U.S. is taking the lead in the TPP, TTIP and Geneva Services negotiations. This explains the push by China for a new China- EU trade agreement. “Xi Urges Sino-EU Agreement on Trade.” Financial Times (April 2, 2014).
  • The issue of tax avoidance by U.S. multinationals has been highlighted again by Senate hearings concerning Caterpillar. “Switching Names to Save on Taxes.” New York Times (April 4, 2014). 
  • China wants to be included in the new rule-making efforts for global commerce led by the U.S. The U.S. is taking the lead in the TPP, TTIP and the Geneva Services negotiations. This explains the push by China for a new China –  EU trade agreement. “China Courts EU on Bilateral Trade Agreements.” Financial Times (April 20, 2014). 
  • The proposed federal increase in spending on cyber technology by the Defense Dept. over the next five years is over $26 billion. We say this is only for national security and not commercial espionage. Don’t think the Chinese are buying this. They view economic and national security interests as the same. “U.S. Assures China on Cyberespionage Policy (Not for Commercial Gain).” New York Times (April 7, 2014).

 

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Victims of Terrorism — Do They Deserve a Day in a U.S. Court? Of Course.

Posted on April 2, 2014 by Stuart Malawer
   Terrorism 2  
     Linde v. Arab Bank, a pending S. Ct. case,  is a multibillion dollar case. It’s an intricate one  involving terrorism, claims on behalf of terrorist victims, bank secrecy laws, tax evasion, foreign policy, diplomacy, and the role of the Executive branch in judicial decisions. It also has the potential of violating the rights of terrorist victims.
      Unfortunately, both the State Dept. and now perhaps the Obama administration are promoting arguments that might bar Americans injured in terrorist actions from following the money trail to impose liability. The State Dept. needs to get its priorities in order. Helping American terrorist victims should be the top priority and not some fuzzy diplomatic goal. Jordanian and Saudi banks have long been critical in supporting terrorist actions.
     What needs to be done is obvious. Let the federal courts impose costs on those supporting terrorism. Judicial sanctions can be more effective than merely words. This is not judicial intervention into the foreign policy process but judicial support of stated objectives.
     The Supreme Court needs to get this right. It needs to impose real sanctions on foreign financial institutions and not be blocked by foreign bank secrecy laws.
…………… “Terrorist Suit Against Bank Test Diplomacy and Bank Secrecy Laws.” New York Times (April 2, 2014).
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Multinationals & Global Taxation — Avoidance or Evasion? — Let’s Get Real.

Posted on April 2, 2014 by Stuart Malawer
Global Tax 50
     Taxation and trade are intricately related. More effective taxation of cross-border transactions of multinational corporations is necessary to ensure growth of global trade and national economic  development. 
   The recent Congressional hearings concerning Caterpillar and its Swiss subsidiary, once again, raises this issue of multinational corporate taxation. 
      Specifically, were these corporate actions by Caterpillar permissible tax planning or willful evasion?
      We have heard this story before.
      U.S. corporations are using foreign subsidiaries to avoid U.S. taxation of corporate income. Usually  through only paper transactions with no real economic justification. These transactions allow  Caterpillar, Google, Amazon, Apple and a host of other multinationals to accumulate billions of dollars of retained capital offshore. Their defense is always that this is allowed by the tax code.
      Really?
     These tax-generated corporate transactions result from abuse of various tax rules concerning transfer-pricing, cross-licensing arrangements, overseas subsidiaries, related corporate groups among a host of other provisions. Lax Internal Revenue Service oversight, lack of litigation and prosecution by the U.S. Dept. of Justice don’t change the nature of these transactions.  They have resulted in billions of dollars lost to the United States in term of tax collection and reinvestment of profits back into the U.S.
      That costs us jobs and economic development here. 
     The usual defense is that the worldwide tax system, as opposed to a territorial one, that is employed by U.S. law is the real culprit as well as the high corporate rates. (Of course, never talking about the real or effective tax rates.)
   It is clear that an international consensus is finally building to address the unsustainable disconnect between global corporate taxation and the realities of today’s world. Recent actions by the G-8 and the OECD are encouraging. This will be a long process. But the popular support across the world has been building as well as the dire needs of national governments for revenues during this long period of economic misery and uncertainty.
      It is obvious that there is a split between multinationals over global taxation and its reform. For example, between Boeing that produces things here and Microsoft that relies upon royalty income abroad from intellectual property. Corporate coalitions are already forming in the U.S.,  such as the Alliance for Competitive Taxation (ACT) and Tax Innovation and Equality (TIE), to oppose any global tax reform, whatsoever.
      Of course, others as the editorial board of the Wall Street Journal, just simply think any tax reform, except reducing rates or doing away with all taxes on foreign source income, are part of a policy “to combat fictional plague of tax avoidance.” Just what you would expect from the Wall Street Journal on this issue.
      Today’s global tax system largely emerged prior to tax havens, bank secrecy, offshore banking, and the digital economy. More than anything else cyber space has clouded the geographical  location of global transactions. Changes brought about by online transactions, cyber space and cloud computing have created significant issues in determining where cross-border transactions take place.  
     Unilateral national regulation as it is today is detrimental to the growth of global trade. The issue of reforming the international tax system under U.S. law in order to better track real economic activity is critically important. I’m just not holding my breath.

 

….. “At Hearing, Caterpillar Defends Tax Practices.” New York Times (April 2, 2014).
….. “Switching Names to Save on Taxes.” New York Times (April 3, 2014).
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Global Economic Sanctions — Many of Them by Many Players — But How Effective?

Posted on March 31, 2014 by Stuart Malawer
Sanction Map (FT 3.31.14)
       In the last 13 years since 9/11 sanctions for domestic political and foreign policy reasons have exploded worldwide.
     They include financial sanctions, trade and investment restrictions, sanctions on travel, arms embargos, commodity restrictions, financial controls and disclosures, diplomatic sanctions, sanctions on aviation and shipping, among others.
      These sanctions have been imposed by the U.S., the EU, the U.N. and others.
      The real impact and effectiveness of sanctions are open to serious question. Sanctions are often  imposed as a default response when no other action is realistically available. All to often they are authorized to  appease domestic political pressures. They may or may not have realistic chances of  success. They are feel-good measures.
    Rarely do sanctions alter the targeted countries policies.  They impose undue burdens on their domestic populations not their leaders. It’s the U.S. and international business communities that feel the sting  of sanctions and retribution from counter-measures. Unexpected consequences impose new problems.
     My point is very simple. A sanction is an easy answer. But hard to undo.  It’s hard to find much international success.

 

…. “Sanctions: War by Other Means.” Financial Times (March 31, 2014).

 

 

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Foreign Corruption — More Aggressive U.S. Prosecutions? Yes, They are Needed.

Posted on March 30, 2014 by Stuart Malawer
Corruption 1
      The U.S. Dept. of Justice should be more aggressive in prosecuting firms for bribing foreign officials.
      Bribery is illegal under U.S. and foreign law. It’s unethical and counter-productive for economic and political development. Forget the U.S. Chamber of Commerce. The OECD Convention of Bribery and actions by all governments should be expanded.
     Corporate officials should do jail time. Bribery results in only more expensive products and services at higher costs. It results in keeping illegitimate and corrupt leaders in power at the expense of developing a viable civil society. It’s regulation would in fact increase competitiveness and global trade. It would put all firms on an even playing field. Corruption is a nontariff barrier to trade and investment.
     By the way illegal and unethical activity abroad often leads to dubious corporate actions domestically. The international response to corruption over the last forty years is something the U.S. actually initiated by its unilateral efforts and legislation in the post-Watergate era of the 1970’s.
     One of the few examples of good unilateral actions by the United States in the global trade area.

 

………… “Global Bribery Crackdown Gains Steam.” Wall Street Journal (March 26, 2014).

 

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National Interest, International Relations and International Law — Is Power Politics Dead in this Era of Globalization?

Posted on March 28, 2014 by Stuart Malawer
     Globe and Conflict (FT)
     The simple answer is that power politics is not dead in this new era of globalization.
      Yes, we have new rules for inter-state relations brought about by globalization.  But calculations of national interests in foreign policy decision-making is done throughout the capitals of the world. The calculations vary and new global rules have not fully evolved or accepted by all. The tensions between economic interdependence and regional relations are still playing out.
    Most importantly, as the  crisis over the Ukraine and the Crimea illustrate, the clash of newer global rules with older national concerns is unsettled. The new international political system is a work in progress. The era of pre-World War I globalization died in August 1914. This new era of  globalization in the early 21st Century is confronting critical challenges. 
     As we approach this August, the one-hundredth anniversary of the outbreak of the Great War, we need to pause and reassess the interplay between national interests, global rules, and globalization. No outcome is historically mandated. Good policy and good leaders will make the difference.
….. “21st-century Power Politics.” Washington Post (March 28, 2014).
….. Article.Globalization — Best of Times (FT 3.26.14))” Financial Times (March 28, 2014).
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Two New U.S. – China WTO Decisions — Who is the Biggest Winner?

Posted on March 27, 2014 by Stuart Malawer
         China and WTO
      This week two WTO panels  decided the first two cases involving China – U.S. litigation in 2014. These were two major cases.
     The first case was brought by the United States involving China’s export restriction on rare earths. The second case was brought against the United States involving its 2012 legislation allowing countervailing duties on imports from non-market economies (China) and the issue of ‘double remedies’ (whether both countervailing duties and anti-dumping duties can be levied at the same time).
      The first case was a solid win for the United States. The second case was a split decision. It upheld the U.S. legislation but not ‘double remedies.’
     To me these cases are in a long line of cases involving U.S. – China trade litigation in the WTO. Both parties are submitting their trade disputes to the WTO’s dispute resolution system. This is good. This takes these commercial disputes away from the glare of realpolitik and put them in a more regularized context that leads to peaceful solutions. This is a plus for both China and the U.S. Historically, this is a bigger deal ford the global trading system.

 

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Investor-State Treaties and Evolution of the Law — Yes, It is a Positive Development.

Posted on March 26, 2014 by Stuart Malawer

             Global Investment

 

     The move by various countries,  both developed and developing such as Indonesia, South Africa and Australia, to redraw bilateral treaties providing for investor-state provisions, should be resisted. The EU should continue to negotiate such provisions within the context of the TPP.
     Investor-state provisions in bilateral trade agreements and investment treaties promote greater foreign direct investment. It takes governments out of the game of bringing actions on behalf of companies and allow private corporate actions. This reduces government friction and promotes the normalization and commercialization of FDI.
      In fact, this approach is a more modern approach to settling transnational disputes than the 19th century prohibition in international relations against giving ‘standing’ to private parties in international arbitration. The now discredited “Calvo Clause.” That approach is dysfunctional and outdated.
     Trade and investment today are conducted by corporations and they should have a viable recourse over contract disputes often involving nationalization and bad state behavior. 
….. “Investor-State Treaties Promote the Law. Financial Times (March 26, 2014).
….. “Indonesia to Redraw Terms for Investors as Litigation Rises.” Financial Times (March 27, 2014).
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Cybsersecurity — NSA and Huawei — Just National Security?

Posted on March 23, 2014 by Stuart Malawer
         Web
      
     NSA hacked into the servers and network equipment of Huawei, the private Chinese telecom firm, to determine its ties to Beijing and to exploit those networks and equipment when purchased by third countries or companies in those countries. Isn’t this the mirror image of our reasons to keep Huawei out of the U.S. and to deny them the right to direct investment under CFIUS? 
     The U.S. government does not want U.S. telecom firms to buy Huawei equipment because it fears they might be used to compromise U.S. networks and to gain access to U.S. government information. Huawei has been shut out of the U.S. market. It is now the second largest supplier of wireless gear in the world. It is second only to Cisco Systems. NSA snooping into Huawei’s produced equipment must be giving foreign buyers some serious concerns.
     I wonder to what extent plain old considerations of international commercial competitiveness is behind this latest action by the NSA and not just legitimate political and national security concerns.
    This is a fair question since the NSA always argues that its actions are only for national security and not for the commercial advantage of the U.S. or a particular U.S. firm. Don’t think China is buying this argument.
….    “U.S. Briefs China on Cybersecurity Policies.” New York Times (April 7, 2014).
……  “NSA Breach Chinese Servers.” New York Times (March 23, 2014).
…… “NSA Accused of Breaching Networks.” Financial Times (March 24, 2014).
…… “Cheap and Now Ubiquitous: Huawei.” Wall Street Journal (March 25, 2014).
…… “Cyberwarfare Force will Grow Significantly.” Washington Post (March 29, 2014).
……  Malawer, “Cyberwarfare — Law and Proposals.” (2010).

 

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