CONFIDENTIAL© Copyright Baker Botts 2017. All Rights Reserved.

Shari Sacks, Matthew T. West, Dr. Georg M. Berrisch, Ginger Faulk

May 3, 2017

Outlook for International Trade and Foreign

Policy and its Impact on Cross-Border

Transactions

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Agenda

1) U.S. Trade Policy: Changing Perspectives

– The President's Top Trade Priorities and Objectives

– The President's Trade Policy Tools

– Impacts and Considerations (China and NAFTA)

2) EU Perspective and Options for EU Companies

– EU Approach

– Border Tax Adjustment

– WTO Process

– Trade Implications of Brexit

3) U.S. Sanctions Updates and Impacts

– Iran and Russia Sanctions

– Trends in U.S. Enforcement

– M&A Considerations2

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U.S. Trade Policy – Changing Perspectives

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President's Top Trade Priorities

1. Defending our national sovereignty over trade

policy

4

2. Strictly enforcing US trade

laws

3. Using leverage to open

foreign markets

4. Negotiating new and better

trade deals

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U.S. Trade Policy Objectives

"Expand trade in a way that is freer and fairer for all Americans"

• Every action with respect to trade will be designed to–

– Increase U.S. economic growth

– Promote job creation in the U.S.

– Promote reciprocity with our trading partners

– Strengthen U.S. manufacturing base and our ability to defend ourselves

– Expand U.S. agricultural and services industry exports

• Focus on bilateral negotiations rather than multilateral negotiations

• Renegotiate trade agreements when U.S. goals are not being met

• Reject position that the U.S. should, for geopolitical advantage, ignore

unfair trade practices that disadvantage American workers, farmers,

and businesses in global markets

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Trade Tools – New Taxes on Imports

• The border adjustment tax is intended to stimulate U.S.

economic activity, and deter corporate inversions and base

erosion

• Permanently denying tax deductions for the costs of imports

(including products, services, and intangibles), and

permanently exempting sales of exports from U.S. tax

• The Administration also has floated the idea of a border tax

that works by imposing a tax on imports

• President Trump’s recent tax reform proposal does not include

a border adjustment tax

• Congress may still press forward with a border adjustment tax

as part of the tax reform package

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Trade Tools – U.S. Trade Laws: AD/CVD

Antidumping

Dumped imports

Domestic industry materially injured

or threatened with material injury

Duties on imports equal to the

dumping found

Countervailing Duties

Foreign subsidized imports

Domestic industry materially injured

or threatened with material injury

Countervailing duty equal to the ad

valorem value of subsidies

Statutory time limits for investigations

Final outcome is nondiscretionary

Relief is prospective only

Fear of retaliation in foreign countries that are subject to investigation

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Trade Tools – U.S. Trade Laws: Other Petitions

• US escape clause (safeguard) law (Section 201 of the Trade Act of 1974)

– Volume of imports of an article cause serious injury (no allegation of unfair trade)

– President decides on relief to provide (limited time period and other restrictions)

• Section 337 of the Tariff Act of 1930

– Addresses other unfair trade practices not covered by AD or CVD laws

– Practices must threaten or destroy/injure an industry or monopolize trade in US

(except for IP infringing acts) -- U.S. Steel Corporation complaint

• Section 232 of the Trade Expansion Act of 1962

– National security threatened by imports of an article

– Recently invoked by Administration against foreign steel and aluminum imports

• Section 301 of the Trade Act of 1974

– formal method for private interest to raise issues of actions of trading partners

that either violate agreements or are otherwise unfair to US interests.

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Trade Tools – U.S. Trade Laws: Delegations

President wields delegated authority to impose trade relief measures under a

number of U.S. trade laws:

• Trading with the Enemy Act of 1917 §5(b)(1)(B) -- broad power during time of war

• Tariff Act of 1930 §338(a) -- duties in response to unfair treatment of US exports

• Trade Act of 1974 §122 -- temporary import relief for balance of payments problem

• Trade Act of 1974 §501 -- duty free treatment from beneficiary developing country

• International Emergency Economic Powers Act of 1977 §203 -- national emergency

Limited by defined conditions and frequently include time restrictions

President can withdraw from existing trade agreements (e.g., WTO, NAFTA) with

6 months notice

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Trade Tools – National Security Reviews/CFIUS

Committee on Foreign Investment in the United States (CFIUS)

• Seeing enhanced scrutiny under current authority

• Potential enhancements/changes to CFIUS review jurisdiction

– Addition of food safety, biotech, agriculture products and technology to

definition of national security

– Require consideration of acquisition’s effect on labor and employment,

environmental effects

– Apply a net economic benefit analysis (similar to Canadian reviews)

– Elimination of the “greenfield” acquisition exemption to CFIUS review

– Blocking acquisitions where certain foreign governments (e.g., China and Russia)

would control the U.S. business

• Changes would likely have wide bipartisan support

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Impacts of U.S. Trade Policy – China

• Existing concerns with trade with China

– Dumped or subsidized imports causing economic harm to U.S. industries

– Unfair competitive behavior by state-owned enterprises

– Currency manipulation

– Barriers to investment, in-country operations, and market access

– Theft of intellectual property and American trade secrets

– Cybersecurity

• Aggressive U.S. trade measures could cause U.S. companies operating

in China to face higher scrutiny

• U.S. companies may be subject to regulatory harassment, including –

– Customs and tax audits

– Antitrust and anticorruption investigations

– National security threat accusations

– Delays in processing licensing applications

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Impacts of U.S. Trade Policy – NAFTA

• NAFTA came into force on January 1, 1994

• Eliminated tariffs and non-tariff barriers on goods produced and traded

within North America

• Potential changes if NAFTA discussions reopened (NAFTA 2.0)

– Country of Origin : Raise content requirements & eliminate loopholes

– Dispute Settlement : Eliminate trade and investor-state mechanisms

– Buy American : Eliminate waiver for Mexico and Canada

– E-Commerce : Update NAFTA to include rules, using TPP as a model

– Services : Eliminate obstacles to services (e.g., express delivery) exports

– Currency Manipulation : Create binding rules, subject to trade sanctions

– Labor Mobility : Increase versus restrict labor mobility

– Customs : Simplify paperwork and raise shipment value thresholds

– Border Infrastructure : Improve infrastructure to facilitate cross-border trade

– Labor & Environment : Strengthen provisions and include in NAFTA 2.0

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Trade Considerations for Companies

• Negotiations create unpredictability which

disrupts supply chains

• Border adjustment tax raises goods and services

costs

• Statements and actions have chilling effect on

foreign direct investment

• Tighter NAFTA rules of origin limit content from

outside North America

• Exporters vulnerable to retaliatory measures by

trading partners

• Focus on Buy American is a double edged sword

for government contracts

• Trade protection may help some domestic

industries while raising costs for others.

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Business Planning for the Possible

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Trade

Policy

Monitor

developments

& timetables

Assess

impact on

your business

Develop

contingency

plans

Build

industry

alliances

Engage with

government

officials

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EU Perspective

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Options for (EU) Companies Affected by (possible) U.S.

Measures Affecting Exports to the US

1. Try to prevent

– political and legal arguments

2. Explore domestic remedies in the U.S.

3. Alert European Commission and EU Member States

4. Pressure for WTO case

5. Counterveiling duty (CVD) complaint in EU

6. International Centre for Settlement of Investment Disputes (ICSID) arbitration against US

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General EU Approach

• Committed to multilateral trading system

– negotiates at WTO on behalf of all EU Member States

– seeks to ensure market access for European companies

• Committed to rules-based approach

– does not support unilateral measures

– appears regularly before WTO dispute settlement body (DSB) (as complainant and defendant)

– generally complies with WTO rulings (exceptions politically very sensitive cases, e.g., beef)

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Border tax adjustment

• Proposal

– x% cash flow tax on revenue of domestic sales

• domestic input can be deducted from domestic revenue

• imported input canot be deducted from domestic revenue

– 0% corporate tax on revenue of export sales

• WTO inconsistent discrimination of imported products vs domestic products

– tax on imported products exceeds tax on domestic products

– VAT is the same for domestic and imported products

• Prohibited export subsidy

– direct or indirect tax?

– if indirect tax: same as for domestic products?

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Domestic sales / input

Wages (not

taxed)

Other (taxed)

Imports

Wages

(taxed)

Other

(taxed)

Export sales

Wages (not

taxed)

Other (not

taxed)

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WTO Dispute Settlement - Process

• Step 1: Consultation

– Countries must attempt to settle dispute

• Step 2: Panel

– 3/5 experts consider arguments & evidence and issue a report

• Step 3: Appeal to Appellate Body

– Appeal on points of law only - cannot re-examine evidence

– Can uphold / modify / reverse Panel's legal findings

• Step 4: DSB adopts Panel / Appellate Body Report

• Step 5: Implementation

• Step 6: Dispute on implementation and arbitration on compensatory measures

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WTO Dispute Settlement - Implementation /

Compensation

• Losing defendant must comply with DSB ruling within a "reasonable period of time"

• Consequences of non-compliance:

1. Compensation for complainant (e.g., tariff reductions)

2. Retaliatory measures by complainant (e.g., increasing import duties)

• DSB must grant permission for retaliation

• DSB continues to monitor defendant's compliance even if retaliatory measures are authorized

3. Amount of compensation / retaliation = amount of trade affected by WTO-inconsistent measure

4. $ 4 trillion in US-Foreign Sales corporations

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WTO Dispute Settlement - Timeline

• Targets

– 1 year for Panel Report + 3 months for

Appeal + time for implementation

• Reality

– Surge in complaints has strained DSB

resources and created backlog

– 3 years panel + 1 year AB + 3 years

implementation / authorization to impose

adopt retaliation

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Options for (EU) Companies Affected by (possible) U.S.

Measures Affecting Exports to the US

1. Try to prevent

– political and legal arguments

2. Explore domestic remedies in the U.S.

3. Alert European Commission and EU Member States

4. Pressure for WTO case

5. Counterveiling duty (CVD) complaint in EU

6. International Centre for Settlement of Investment Disputes (ICSID) arbitration against US

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Trade Implications of Brexit

1. UK-EU 27 Trade

– UK headed for "hard" Brexit

– UK companies no longer have access to EU internal market

– Worst-case scenario: trade on WTO terms

2. UK-US Trade

– UK no longer covered by any EU trade agreements

– EU trade measures (including AD and CVD duties) no longer applicable to imports into the UK

– UK can only start negotiating deal with US after it has formally left the EU (i.e., after March 2019)

3. EU 27-US Trade

– No immediate consequences

– But companies importing to the EU through the UK may need to adapt

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Some Conclusions

• Uncertain times lie ahead

– Will the Trump administration implement unilateral measures?

– How will the EU, China, and others react?

– Can the WTO survive--and how--if the US were to systematically ignore adverse

rulings or adopt unilateral measures to challenge real or perceived WTO violations?

– What about the future of NAFTA?

– What will Brexit look like?

• Unpredictable effects on all companies relying on a global supply and sales

chain

• Companies should explain to decision-makers the benefits of open markets

• Hope for the best and prepare for the worst

– detailed analysis of current supply and sales chains and assessment of possible

adverse effects and possible counter measures

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U.S. Sanctions Policies and Enforcement

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IRAN

• 2016 Implementation of Joint Comprehensive Plan of Action ("JCPOA)

– U.S. persons remain broadly prohibited from engaging in

transactions or dealings involving Iran, including the Government of

Iran.

– Three aspects of primary sanctions were eased:

• General License H authorizes:

– U.S.-owned or -controlled foreign subsidiaries permitted to engage in Iran

related activities, subject to limitations; and

– Limited exceptions to U.S. person "facilitation" prohibition with respect to

their foreign subsidiaries' initial engagements in or with Iran.

• Aviation

– Favorable licensing policy for sale or lease of commercial passenger

aircraft, spare parts/components, and associated services

• Imports

– U.S. persons are generally authorized to import certain Iranian-origin

carpets and foodstuffs and conduct related dealings. 26

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IRAN: Challenges Beyond Implementation Day

• Partial easing of Iran sanctions presents opportunities for (non-U.S.)

companies and banks but also key challenges:

1. Greater disparity between U.S. and EU sanctions laws

2. Uncertainty arising from prospect of “Sanctions Re-Implementation Day” due to

snap-back

3. Concerns surrounding the enduring enforcement consequences of failing to

comply with sanctions regulations

4. Risk of disguised/indirect transactions with Iran

• U.S. sanctions against Iran will continue to be strongly enforced by the

USG.

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RUSSIA/CRIMEA

▪ "Specially Designated Nationals"

(SDNs)

▪ Blocked property and imposed travel

restrictions on designated parties

▪ Russian officials, politicians,

businessmen

▪ Russian and Ukrainian entities

▪ Russian defense companies

• "Sectoral sanctions" prohibit

targeted activity in banking, defense

and oil and gas development and

production

• Embargo on trade with Crimea

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DOJ (National Security Division) Guidance on Voluntary Self-Disclosures,

Cooperation, and Remediation in Export Control and Sanctions Investigations

Overview

o Encourages voluntary self-disclosure ("VSD")

of potential criminal violations of U.S. export

controls or sanctions to NSD's Export

Control Section ("CES") in order to

potentially receive reduced penalties

o Sets out the criteria CES will use in

exercising prosecutorial discretion and

determining potential benefits to businesses

that make a VSD

o Resolution depends on the totality of the

circumstances and the specific facts

o Does not alter the standard practice

requiring companies to submit a VSD to the

appropriate regulatory agency (i.e., OFAC,

BIS, or DDTC)

What's New

o To receive cooperation credit, a company

must make a separate VSD within a

"reasonably prompt time" to NSD (CES) at

the outset after determining that the

conduct disclosed to the other agency "may

have been willful"

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Sanctions Enforcement- ZTE Corp.

1. Companies are operating in an active enforcement

environment

• "We are putting the world on notice. . .Those who

flout our economic sanctions and export control

laws will not go unpunished - they will suffer the

harshest of consequences." - Commerce Secretary

Wilbur Ross

2. Mandatory independent compliance monitors as part

of plea agreements will likely increase; potential for

export debarment

3. Vigilant third-party due diligence is a must

• If you are working with intermediaries, ensure a

risk-based compliance program

4. Ethical considerations raised by the ZTE case

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Sanctions Considerations in International M&A:

Limiting/Avoiding Successor Liability

• Pre-Closing Diligence

• Diligence questionnaires/information requests

• Contract considerations

• Dealings with lending institutions

• Post-Closing Compliance Review and Integration

• Continued diligence

• Compliance training

• Consider risks/benefits of pre/post-closing Voluntary Self-

Disclosure(s)

• USG licensing

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Questions or Comments?

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Panelists

Shari Sacks

Senior Counsel │ Praxair, Inc. │ +1.203.837.2550 │ Shari_Sacks@praxair.com

Shari Sacks is Senior Counsel for Praxair, Inc. and has been with the company for over 17 years. Ms. Sacks

received her Juris Doctor from New York University and practices in the areas of corporate and finance,

healthcare, procurement and international trade. She provides legal support for the company’s global

trade management program, working closely with the business and the company’s corporate trade

compliance department in a variety of transactions for various industries the company serves, including

healthcare, aerospace, chemicals, food and beverage, electronics, energy, manufacturing, primary metals

and many others. Praxair, Inc., a Fortune 300 company, is the largest industrial gases company in North

and South America and one of the largest worldwide. The company produces, sells and distributes

atmospheric, process and specialty gases, and high-performance surface coatings.

Matthew West

Partner │Baker Botts L.L.P. │ +1.202.639.7729 │matthew.west@bakerbotts.com

Matthew West is a partner in Baker Botts’ Global Projects Practice Group in Washington, DC. His practice

focuses on international transactions, U.S. regulation of international trade and investment and global

trade policy. Mr. West represents clients in trade remedy and customs proceedings before the U.S.

government. Additionally he assists clients with all aspects of export controls and economic sanctions,

U.S. Antiboycott Regulations, the U.S. Foreign Corrupt Practices Act, and Exon-Florio (CFIUS) proceedings

and customs issues. Mr. West has worked extensively with clients on compliance systems planning in

these areas.

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BAKER BOTTS

Panelists (continued)

Georg Berrisch

Partner │Baker Botts L.L.P. │+32.2.891.7340 │georg.berrisch@bakerbotts.com

Dr. Georg M. Berrisch, a German Rechtsanwalt, is recognized as one of the most experienced trade

lawyers in Brussels, having practiced a broad range of trade matters for over 25 years. He is highly

regarded by clients for his practical advice on external trade, including export control of Dual Use Goods

and the operation of the EU’s economic sanctions against Russia, Iran, Syria and other countries. He also

regularly represents clients in EU anti-dumping and anti-subsidy investigations and assists them on issues

arising in the World Trade Organization.

Outside the area of International Trade, Dr. Berrisch is recognized as an effective litigator before the Court

of Justice and the General Court of the EU. He is known for developing innovative legal and political

strategies in complex contentious proceedings before the European Commission and other EU

institutions, in areas such as competition, state aid and trade.

Ginger Faulk

Partner │ Baker Botts L.L.P. │1.202.639.7756 │ginger.faulk@bakerbotts.com

Ginger Faulk is a partner in Baker Botts’ Global Projects Practice Group based in the Washington office.

Ms. Faulk advises and represents multinational companies on matters involving U.S. government

regulation of foreign trade and investment and international transactions. She has broad and deep

experience advising companies in a variety of industries in compliance and enforcement matters involving

U.S. export controls, U.S. economic sanctions, and the Foreign Corrupt Practices Act (FCPA) and

frequently represents buyers and sellers in U.S. national security reviews conducted by the Committee on

Foreign Investment in the United States (CFIUS).

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AUSTIN

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BRUSSELS

DALLAS

DUBAI

HONG KONG

HOUSTON

LONDON

MOSCOW

NEW YORK

PALO ALTO

RIYADH

SAN FRANCISCO

WASHINGTON

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