Trade, Mercantilism and Cybersecurity — Better U.S. Legislation & Cooperation?

Posted on November 4, 2011 by Stuart Malawer

It’s been reported recently by the National Office of Counterintelligence that agencies and companies from Russia and China are conducting economic espionage and stealing U.S. corporate secrets. We’ve heard this story before.
Trade secrets, technology and intellectual property are being stolen from corporate and government computer systems at an increasing rate. This often state-sponsored activity is a threat to the U.S. economy and national security.
U.S. companies need to realize that foreign governments have a different relationship with their domestic firms than the U.S. government has to American firms. Foreign governments view their firms as full partners in state-corporate enterprises that compete aggressively in the global trading system.
How should the U.S. respond to this ever-growing set of inter-related problems of corporate espionage, cybersecurity, and global competition?
Four suggestions.
One, U.S. counterintelligence should not focus only on traditional military and diplomatic assets. It should focus on protecting domestic infrastructure including corporate networks. Two, establish a national counter-cyber center that promotes better government-business cooperation on cybersecurity. Three, more forcefully prosecute foreign actors under the Economic Espionage Act and other legislation. Four, adopt new legislation that specifically criminalizes extraterritorial cyber activity that impacts the security of U.S. corporate networks.
This would be a serious beginning. But don’t hold your breath.
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Limiting Extraterritoriality of U.S. Securities Law — Disincentive for Global Investors?

Posted on November 3, 2011 by Stuart Malawer

The Financial Times recently wrote glowingly of legal innovation. It claimed that lawyers were innovative because they were able to convince the Supreme Court last year to limit the application of federal fraud provisions in a case involving the purchase of a U.S. servicer of residential mortgages by a foreign bank. (Morrison v. National Australia Bank) This is a field that is close to the epicenter of the financial meltdown in the U.S. economy.
The lawyers argued that U.S. law should not apply to a scheme to defraud investors that was culminated abroad when the foreign bank purchased the U.S. firm. The Supreme Court held that the presumption of territoriality was not overcome; therefore, Rule 10(b)(5) did not have extraterritorial reach. There was plenty of evidence that fraudulent acts took place in the United States. The Financial Times argued incredibly that by adopting such a position the court helps protect corporations from unreasonable liability. Thus, it promotes foreign investment in the U.S. Really?
Given the obvious fact that the fraud in this case was perpetuated by a U.S. company doing business in the U.S. and related to valuation of U.S. assets, the court’s decision is baffling. Money and investors tend to go where legal systems provide protection and predictability. In case of fraud corporate investors want an opportunity to have a fair and transparent adjudication.
It seems uncontestable that investors want to know that once a cross-border fraudulent scheme is detected, they get a fair hearing in a well developed legal system against  corporations participating in the fraud.  (The Russian Federation is finding out that its shaky legal system of rules, prosecutions, courts and arbitrations is a huge stumbling block for encouraging foreign and domestic investors.)
In light of the continuing and growing financial chaos it doesn’t make sense for U.S. courts to shut its doors to global investors contesting cross-border financial transactions involving the purchase of American companies doing business in the United States and involving valuation of U.S. assets. Laws drafted years ago need to be interpreted in context of today’s globalized  environment. The decision of the Supreme Court amounts to corporate protectionism that places the court on the wrong side of history. The Supreme Court should be far less restrictive in reading economic legislation.
It is in the genuine interest of all investors that U.S. courts welcome litigation of this sort. Not all innovation is good.
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Presidential Politics — Forget National Security, Isn’t it all about Jobs and the Domestic Economy?

Posted on November 1, 2011 by Stuart Malawer

The latest WSJ / NBC poll found that 61% of Americans approve of President Obama’s handling of national security. That’s the good news. The bad news is only 6% really care and believe that national security should be the top issue in the presidential election. The remaining 94% of Americans think the primary issue is the domestic economy and jobs. And only 39% of Americans approve of the way the President is handling the economy. Given the continuing poor state of the global and domestic economies this spells trouble for the Obama reelection campaign.

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Domestic Compromise and Competitive Globalism – Isn’t it Obvious?

Posted on October 30, 2011 by Stuart Malawer

President Bill Clinton and Stuart Malawer (Oct. 2011)

I was at an event last week when former President Bill Clinton made a great point. As global competition becomes fiercer there is a need for greater political cooperation domestically within the United States. This cooperation between political parties is needed to formulate policies to allow private companies to compete globally. Who can disagree?
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Extraterritorial U.S. Economic Regulation and Prosecution — What’s the Impact? — Not Much?

Posted on October 26, 2011 by Stuart Malawer

What are the U.S. policy implications of extraterritorial application of U.S. economic legislation?
Many pieces of U.S. economic legislation apply to operations and transactions of U.S. firms outside of the United States. They also apply to transactions of foreign corporation outside of the U.S. on various jurisdictional grounds.
Transactions subject to extraterritorial U.S. regulation and prosecution include among others global mergers, corruption of foreign government officials, taxation of foreign income of U.S. firms, reporting foreign bank holdings of  U.S. nationals, participation in foreign government boycotts, securities violations (disclosure and inside trading), rules concerning commodity trading, antitrust violations such as price-fixing, violation of export and reexport controls, trade sanctions including financial transactions, and corporate governance especially as to firms listed on public markets within the U.S.
So what is the impact of all this legislation as to foreign transactions and foreign actors? It’s hard to say. But what is amazing is that the U.S. still remains the number one location for foreign investment.
The answer is somewhat unclear as to the competitiveness of U.S. firms abroad. However, it should be noted that U.S. multinational corporations are thriving with huge amounts of retained earnings in both the U.S. and abroad. (The same can’t be said for the U.S. government or economy.)
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Russia’s Accession to the WTO, Almost — It’s Long Overdue.

Posted on October 22, 2011 by Stuart Malawer

        

With the EU’s favorable action this week and Moscow’s announcement of its plan to join the Information Technology Agreement, the Russian Federation’s accession to the WTO has moved forward significantly. It’s almost completed. Only the opposition of Georgia seems to be holding it up.
Russia’s membership in the WTO is long overdue. The integration of Russian Federation into the global economy is essential. The WTO is the only major multilateral organization that really works. Its goal is the creation of a rule-based trading system and its dispute-resolution system is extraordinarily effective.
 Global trade has expanded exponentially since the organization’s founding in 1995. The underlying premise of the WTO is that, as a rule-based system developed to govern global trade, it will help foster rules and institutions within the civil society of member states, making them more democratic and wed to the free market. This system is the critical link between global trade, economic prosperity and political development — as envisioned by the United States as the principal architect of the WTO.
Russia’s membership in the WTO is in the interest of the EU, the U.S. and the global trading system.
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Solar Panel Litigation & the Emerging Clean Energy Trade War — Good for Whom?

Posted on October 21, 2011 by Stuart Malawer

A new dumping / subsidies case was filed recently by American solar panel makers attacking China’s subsidies to its manufacturers. This filing with the International Trade Administration / U.S. International Trade Commission is a new skirmish in the emerging clean energy trade war between the U.S. and China.
Actions by related manufacturers, such as the steel towers for wind turbines, are being contemplated in this emerging front in global trade actions by the U.S. and its firms against China in the green energy sector. (The U.S. previously brought an action in the WTO against China concerning wind turbine subsidies .)
This case may or may not be easy to win. Even with reliance on the fact that China is considered a non-market economy, so it’s easier to establish trade remedy violations, this could be a difficult case to win. This is because of the complex nature of the corporate structures and financial transactions involved.
If trade restrictions are eventually imposed Chinese firms could establish American operations to avoid these newer  restrictions. The same way foreign auto firms did throughout the American south in the 1980’s and 1990’s and continue to do so. Just note the poor shape the rustbelt auto producers found themselves in after the establishment of these foreign plants.
Undoubtedly, states throughout the U.S. would seek this new foreign investment from Chinese firms. Which would actually be good for workers but not the firms or the employees of those firms that brought this new litigation.
Trade protection doesn’t necessarily really help U.S. manufacturers. In fact, some U.S. firms might move to China to partner with Chinese firms in order to have access to those foreign subsidies.  It’s not only multinationals that can enter into cross-border transactions and take advantage of foreign regulations and financing. It’s a globalized world.
To me the better answer is not more domestic litigation by industry but more effective trade negotiations by the USTR.  Get China to fully report existing subsidies  as required by its accession agreement. Address them diplomatically and if that fails through the WTO litigation process. This process has proven to be fairly quick and effective. The U.S. has won most its cases brought against China.
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Foreign Investment and National Security – Restricting Huawei’s Contracts & Investments – Wrong Signal?

Posted on October 17, 2011 by Stuart Malawer

Various attempts to acquire business opportunities in the U.S. by the Chinese telecom company, Huawei, have been blocked by the federal government. These federal actions have been based upon national security concerns over technology transfer and cybersecurity.
 Global mergers and foreign investment are essential to the economic prosperity of the U.S. While there is a “security exception” under the WTO rules governing trade relations it has never been relied upon or adjudicated. 
The U .S. needs to clarify its dealings with Huawei. It should fully address the issues of technology security and foreign government ownership. This clarification would help ensure that U.S. policies are sound and are consistent with its general policy of  attracting foreign investment.
 Greater transparency that encourages foreign investment is good for jobs, economic development, and global transactions.
National security restrictions need to be justifiable and not provide cover for protectionist actions. We do not want foreign governments to use national security as an excuse to preclude U.S. investment into their markets. Global investment into the U.S. should be welcomed and not scared away.
During this presidential election season the clash of interests in Washington between national security and global trade is obvious. But this domestic political debate cannot become self-destructive. Sensible policies should be formulated and implemented to encourage direct investment but also to protect our national interests.
It is a tricky balance to engage in the global trading system, to manage important bilateral economic relations, and to provide for the national defense in the 21st century.
 It is a globalized world, hyper-charged by technology and greater connectivity. We need to embrace this global environment in order compete aggressively to succeed. But we also need to be safe.
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Three New Bilateral Trade Agreements — What’s the Real Impact? — Economic or Political?

Posted on October 13, 2011 by Stuart Malawer

Congress just passed the bilateral trade agreements with South Korea, Colombia and Panama. This is clearly a rare bipartisan act and a success for President Obama. But what is the real significance of these new free-trade agreements? Is it economic (read American jobs) or political?
It seems to me that in the context of interlocking issues of globalization and global commerce these agreements are not particularly important. It appears to many that the impact will be small in terms of new U.S. jobs.
It’s interesting that these agreements were passed by Congress while it was voting favorably for the restrictive currency legislation aimed at China.  Perhaps the vote for the protectionist legislation provided cover for those voting for the free-trade agreements.
Nevertheless, the passage of the bilaterals is a real political achievement for President Obama.  It may have significant and beneficial overtones for U.S. foreign policy.
Hopefully, the passage of this legislation will lead to a more robust American trade policy and leadership in global trade relations generally. The Congress should start by renewing the fast track authority (“Trade Promotion Authority”) for the President. This would help make the U.S. look more serious in its trade negotiations.
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Trade Remedy Actions — Which countries are the biggest users and biggest targets? — Some Surprises.

Posted on October 12, 2011 by Stuart Malawer

Which countries are the biggest users of trade remedy actions? Which countries are the most often targets of these investigations? What are the global trends in these cases?
Here’s some very interesting data from the WTO concerning antidumping cases, countervailing duty proceeding and safeguard actions:
  • The two leading countries initiating countervailing duty investigations in 1995-2010 were: India 48 and China 43. (The U.S. had 12.)
  • The two leading countries initiating antidumping investigations in 1995-2010 were: China 804 and Korea 273. (The U.S. had 224.)
  • The two leading countries initiating safeguard investigations in 1995-2010 were: India 26 and Turkey / Jordan 15. (The U.S. had 10.)
  • New antidumping investigations declined 29% from 2009 to 2010. India and the EU reported the most new ones.
  • New safeguard actions declined worldwide from 43 to 26 in 2010 (3rd quarter compared to the 1st quarter).
The following is data from the Congressional Research Service concerning antidumping actions for 1995 – 2005:
  • The three most often targets of antidumping actions were India, U.S. and the EU.
  • The four most often initiating antidumping actions were China, the EU, South Korea and the U.S.
The above is very interesting. The U.S. is not the biggest user of trade remedy actions or the biggest target for such global actions. In fact, the numbers of such actions globally have actually been declining.
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