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U.S. LAW & GLOBAL TRADE Dr. Stuart S. Malawer

U.S. LAW & GLOBAL TRADE Dr. Stuart S. Malawer. Outline of Topics. Extraterritoriality. Notes: Multi- jurisdiction & Corporate Structure. Branch v. Subsidiary. Boycott & Corrupt Practices. U.S. Taxation: Worldwide System & Tax Deferral. Exports & “Reexports” (Technology & Encryption)

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U.S. LAW & GLOBAL TRADE Dr. Stuart S. Malawer

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  1. U.S. LAW & GLOBAL TRADEDr. Stuart S. Malawer Dr. Malawer, J.D. Ph.D. (2014)

  2. Outline of Topics. • Extraterritoriality. • Notes: Multi- jurisdiction & Corporate Structure. • Branch v. Subsidiary. • Boycott & Corrupt Practices. • U.S. Taxation: Worldwide System & Tax Deferral. • Exports & “Reexports”(Technology & Encryption) • Import Relief & Controls. • Retaliation (Section 301). • Trade Sanctions. • Trade Agreements (Constitutionality) • “Fast Track Authority (TPA).” • Uruguay Agreements (1995) & Doha Negotiations. Dr. Malawer, J.D. Ph.D. (2014)

  3. 1. EXTRATERRITORIALITY. Dr. Malawer, J.D. Ph.D. (2014)

  4. Extraterritoriality: Basic Dilemma • Potential Regulation by Two Governments – Often lawful under foreign law & unlawful under U.S. law. Can the U.S. & EU regulate the foreign branch or subsidiary? When does U.S. law apply? EU Applies -- U.S. Branch / Subsidiary Corporate Group EU U.S. Parent “Clash of competing legislation” as to foreign actors ,foreign actions & foreign law. Dr. Malawer, J.D. Ph.D. (2014)

  5. Note -- Transnational Transactions & Multi-jurisdictional World. – Private Transactions & Transnational Regulation - EU U.S. Third Country • - ISSUE - • Global transactions occur in many countries, but each country has own rules, e.g., antitrust, export controls, sanctions ….. Not much global regulation. Dr. Malawer, J.D. Ph.D. (2014)

  6. Note – Corporate Structure & Corporate Groups. Corporation (Separate Entity / Depends on Incorporation) [Provides limited liability of shareholders -- Liability only on the corporation. Fosters capital formation.] Parent Corporation (As a shareholder limited liability -- no liability for subsidiary) Subsidiary Corporation (Parent is shareholder / control of corporation) Shareholders (Equity Owners) Note – In a General Partnership all partners are individually liable for partnership debts -- no limited liability. Different from corporate organization. Dr. Malawer, J.D. Ph.D. (2014)

  7. Extraterritoriality: “Clash of Competing Antitrust Laws ”(Domestic Mergers) U.S. U.S. antitrust rules EU Merger impact on European & global markets (assets w / in those markets). Citicorp EU Regulation Merger Travelers European antitrust rules • Financial Services • Telecommunications & Internet • Defense industry MCIWorldCom - Sprint(2000) Northrop Grumman – TRW (2002) GE-Honeywell (2001) Dr. Malawer, J.D. Ph.D. (2014)

  8. Extraterritoriality – Mergers & Other Regulatory Issues. U.S. Antitrust & otherregulatory rules for specific industries (e.g. FCC) Merger E.U. WorldCom MCI • Industry specific & other regulations. • Recent Mergers or Proposals: • AOL-Time Warner • GE-Honeywell • Deutsche Telekom – VoiceStream • NTTDoComo – Verio • Lucent – Alcatel. Dr. Malawer, J.D. Ph.D. (2014)

  9. Extraterritoriality(Transborder Mergers /Alliances) Competing Laws & Regulations U.S. U.K. AT&T BT Alliance U.K. Company U.S. Company Auto: Daimler-Benz / Chrysler (1998) Oil: BP - Amoco (1998) Aviation: American Airlines - British Airways Financial: Deutsche Bank - Bankers Trust; Credit Suisse – DLJ. Dr. Malawer, J.D. Ph.D. (2014)

  10. Extraterritoriality --Corporate Governance. (Sarbanes –Oxley Act 2002) • SOX federalizes corporate governance (from state law) & applies extraterritorial – when have listed foreign firms. • Corp. Governance – Newer trade issue. From a state law issue, to a national issue, now a global trade & business issue (particularly U.S. - EU). U.S. Law U.S. EU (Auditor) [Selling shares in U.S.] (Listed) • U.S. securities law requires registration with oversight board (PCAOB) & may have penalties. • EU auditing firm auditing another EU firm listed in U.S. • Enhanced financial disclosures. • Criminal penalties for fraud & white-collar crimes. • Personal liability of senior executives. • Oversight of public accounting firms. Dr. Malawer, J.D. Ph.D. (2014)

  11. Dual Principles Concerning U.S. Extraterritorial Legislation:“Effects Principle” & “Principle of Reasonableness” U.S. Effect w/in U.S. Extraterritorial Application of U.S. Law(e.g. antitrust, mergers, alliances and contracts) “Effects Principle” World Act outside of U.S. (by foreign actor) “Effects Principle” now qualified by “Reasonableness Principle” (both international & U.S. law) S. malawer @ 2002 Dr. Malawer, J.D. Ph.D. (2014)

  12. 2. EXPORT & “REEXPORT” CONTROLS. • U.S. Department of Justice • United States Attorney Western District of Virginia • THE GUILTY PLEA OF ITT CORPORATION FOR ILLEGALLY TRANSFERRING CLASSIFIED AND EXPORT CONTROLLED NIGHT VISION TECHNOLOGY TO FOREIGN COUNTRIES • -- $100 Million Fine -- • March 27, 2007 Dr. Malawer, J.D. Ph.D. (2014)

  13. Export Control’s Legislation. • Export Administration Act & related acts (1979), (1985), (1988) provide for a range of export controls. • Basic Law -- Export Administration Act of 1979 (foreign policy & national security controls). Applies to both goods & technology. • Note -- This law reaches foreign technology sold by U.S. subsidiaries abroad. (Extraterritoriality). • Possible violations of Economic Espionage Act of 1996 if involves transfer of a trade secret to a foreign government. Dr. Malawer, J.D. Ph.D. (2014)

  14. Export & “Reexport” Controls. U.S. E.g., Chinese Satellite / Missile Technology * Export controls govern both goods & technology Export ‘ForeignOrigin’ ‘U.S. origin’ EU Subsidiary For. Co. Reexport Russia Dr. Malawer, J.D. Ph.D. (2014)

  15. COMPUTER EXPORTS & U.S. CONTROLS--The Case of IBM & Russian Sales -- IBM / Parent Criminal violation by IBM Subsidiary (1998) P / S Sales & Installation Contract Russian Corp. IBM Russian Sub. Offshore production ? Seller Buyer Dr. Malawer, J.D. Ph.D. (2014)

  16. Network Associates, Inc. U.S. Parent ‘Encourages’ offshore development (Contract or Alliance) P / S Dutch Subsidiary Swiss Corp. (Cnlab Software) Marketing or Production also? Software European Sales [Foreign origin or publicly available program code] Europe Malawer @1998 Dr. Malawer, J.D. Ph.D. (2014)

  17. U.S. EXTRATERRITORIAL: LEGISLATION --Unrelated Firm, Branch v. Subsidiary -- • Note: Branch v. Subsidiary • Branch is part of U.S. firm. • Foreign subsidiary is incorporated in foreign country. (It is a foreign corporation.) • Foreign subsidiary has controlling equity ownership by U.S. parent. • U.S. Taxation: No tax on foreign subsidiary until repatriated. Tax on branch (maybe tax credit). • Antitrust (also unrelated firms) • Securities legislation (also unrelated firms) • Taxation (branches / subsidiaries) • Commercial Corruption (not foreign subsidiaries) • Foreign Boycotts (foreign subsidiaries) Dr. Malawer, J.D. Ph.D. (2014)

  18. Foreign Branch & Foreign Subsidiary: Extraterritorial Application of U.S. Law. U.S. Law. U.S. Law. U.S. Corporation U.S. Parent Corporation Maybe. Yes. Part of corporation. No separate ownership or entity. Equity Ownership. Separate corporate entity. Incorporated in foreign country. Foreign Branch Foreign Subsidiary Dr. Malawer, J.D. Ph.D. (2014)

  19. Antiboycott & Corrupt Practices: Extraterritorial Application – Foreign Subsidiaries. Antiboycott Law Corrupt Practices Law U.S. Law. U.S. Parent Corp. U.S. Parent Corp. No Yes Foreign Subsidiary Foreign Subsidiary • Applicable to branch. Dr. Malawer, J.D. Ph.D. (2014)

  20. U.S. Corporate Taxation: Multinational Global Corporations -- Worldwide System & Tax Deferral[Extraterritoriality & Related Problems.] General Rule -- U.S. taxes foreign income of corporations. This involves issues of double taxation, foreign tax credits, tax treaties and tax havens . Also involves issue of transfer-pricing as to where to take corporate profits. U.S. Firm For. Buyer U.S. taxes foreign source income. U.S. WORLDWIDE TAX SYSTEM EXPORT TAX DEFERRAL & EXPORT SUBSIDY U.S. Parent Export sales income U.S. Firm For. Subsidiary Foreign income No U.S. income tax (deferral) on foreign sales / export income of U.S. firm. Problem of the DISC and FSC legislation. WTO decisions against this. No U.S. income tax on foreign subsidiary’s income until repatriated back to U.S. * Obama proposal to change tax deferral on foreign income / transfer pricing. Considering temporary reduction of repatriation of overseas income to help spur domestic growth and employment. In addition to this cross-border tax evasion and tax havens are major concerns. The new policy for greater information exchange via OECD provisions is supported by the G-20 to limit tax evasion that utilizes bank secrecy laws. The OECD produces both model conventions and proposals for national standards – a dual approach --- creating international obligations & “harmonizing” national legislation. Dr. Malawer, J.D. Ph.D. (2014)

  21. 3. IMPORT RELIEF LEGISLATION. Dr. Malawer, J.D. Ph.D. (2014)

  22. “Unfair” & “Fair” Import Relief. “Unfair” “Fair” 301 201 406 22 232(B) 204 A/D CVD 337 1337 Dr. Malawer, J.D. Ph.D. (2014)

  23. Import Relief: “Trigger Mechanism.” • 201 “Escape Clause.” (substantial cause of serious injury) • 406. (market disruption) (communist). • 22 “Agriculture.” (materially interfere w/ USDA) • 301. Retaliation. (USTR: unfair or illegal foreign trade practices). Market access. • Special 301 (Intellectual Property Rights). • Section 1376 (telecom). • 232b (Commerce: impair national security). • A/D. Dumping. (sale in the U.S. for LTFV -- less than FMV & material injury) • CVD. Subsidies. (foreign export subsidy & material injury) • 337 (unfair acts of importation or competition– violation of patents & trademarks) • *Procedural Note -- Injury / ITC; Wrongful Act /ITA. • Remedy Note – Remedy is generally a tariff surcharge. Dr. Malawer, J.D. Ph.D. (2014)

  24. Antidumping (LTFV) German Firm [Private party price discrimination.] (Sales Priceless than FMV in foreign country.) U.S. (Unfair Practice) Sales Price in Germany (Higher in Germany) Sales Price in U.S. (Lower in the U.S.) • Predatory price discrimination with intent to gain market share. • Statute protects domestic manufacturers, not consumers. • Traditional economists concerned about monopoly . Remedy – ADD (tariff surcharge) equal to margin of dumping Dr. Malawer, J.D. Ph.D. (2014)

  25. Countervailing Duty (Export Subsidies) German Gov’t [Foreign Government Export Subsidy] Gov’t Subsidy U.S. (Unfair Practice) REMEDY NOTE The remedy for Dumping and Subsidies are tariff surcharges – ADD or CVD. To be equal to the margin of dumping or amount of subsidy. German Firm Sale to the U.S. Remedy – CVD (tariff surcharge) equal to amount of subsidy. Dr. Malawer, J.D. Ph.D. (2014)

  26. Escape Clause (Safeguard) (§201) U.S. Foreign Firm “Fair Import” (Nothing Wrong) WTO Litigation Note. Two methods of litigation over foreign restriction – U.S. can contest foreign act directly in WTO or it can apply own measures and have them attacked in WTO. In either case the WTO will then review the contested foreign restriction. General WTO Note. The WTO agreements on Dumping, Subsidies and Safeguards provides rules when trade remedies (tariff surcharges) may be levied. National laws mirror WTO obligations. With the DSU a system of multilateral review is established of national measures. Remedy – Tariff surcharge or quotas. (Surge is a Substantial Cause of Serious Injury to Domestic Industry caused by imports. ) Dr. Malawer, J.D. Ph.D. (2014)

  27. National Security (§232[b]). EU U.S. [ Impair National Security ] Imports (Fair) Dr. Malawer, J.D. Ph.D. (2014)

  28. Retaliation (§301) [U.S. Restricts Foreign Imports in Retaliation] Basic Issue – Is §301 contra to WTO? [USTR required to follow DSU?] Japan U.S. Imports (Fair) U.S. Exports Counter-Restriction Foreign Market Access Restriction Operation of Statute -- “Unjustifiable” (mandatory) or “Unreasonable” (discretionary) Illegal -- Violates agreement Discriminatory / Unfair Dr. Malawer, J.D. Ph.D. (2014)

  29. Special §301(Intellectual Property). China U.S. Imports (Fair) U.S. Exports USTR required to have annual reviews – leading to PFC & possible investigation. Same as Basic 301. U.S. Restricts Foreign Imports in retaliation. Foreign Market Access Restricted (“Unfair or Illegal foreign trade practice” as to Intellectual Property even if in compliance with WTO / TRIPS). Dr. Malawer, J.D. Ph.D. (2014)

  30. Telecommunications (§1377). EU U.S. Imports (Fair) U.S. Exports USTR required to have annual reviews – leading to PFC & possible investigation. Same as Basic 301. U.S. Restricts Foreign Imports in retaliation. Foreign Market Access Restricted (“Unfair or Illegal foreign trade practice” as to Telecommunications. Dr. Malawer, J.D. Ph.D. (2014)

  31. Illegal or Unfair Importation / IP (§337). Major issue in ITC litigation today Issue – Is this consistent with National Treatment Principle? EU U.S. Imports (Unfair Import or Method of Competition) -- Violation of Patents or Trademarks. Remedy: Cease & Desist Order Dr. Malawer, J.D. Ph.D. (2014)

  32. Section 337 of Tariff Act of 1930. Declares unlawful “unfair acts of importation.” • Specific language applies to class of intellectual property rights (patent, trademark, registered mask work of semiconductor chip product) as to imports. No injury standard for this group (compared to non-IPR imports). • Different (lower) standard as to violation than patent laws generally in the U.S. • GATT panel in 1988 found this to violate “national treatment principle.” Art. III (4) Dr. Malawer, J.D. Ph.D. (2014)

  33. OTHER IMPORT LEGISLATION & IMPORT SANCTIONS. • Sec. 204 of 1956 Agriculture Act. Adjustments to textile imports under former MultiFiber Agreement (MFA) & now the ATC . • Various import restrictions authorized for violation of laws via international environmental conventions: • Marine Mammal Protection Act (1972). Importation ban when have incidental kills. • 1973 Endangered Species Act. Importation ban on specified species. • Sec. 8 of Fisherman’s Protective Act (Pelly Amend.)Import sanctions when practices diminishes int’l programs. • Note: • Trade sanctions are used as to imports for non- trade violations. • Sanctions often used for exports (but also imports). • Sec. 122 of ‘74 Trade Act. Import restrictions for balance of payments. Dr. Malawer, J.D. Ph.D. (2014)

  34. Note – “Gray Market” Imports • Imports back into the U.S. after first sale abroad by either goods shipped from the U.S. or manufactured abroad and sold first abroad – at a lower prices than sold in the U.S. First Sale / export abroad Upheld by S.Ct. Reexported to U.S. Sold back to the U.S. consumer at a lower price than sold by U.S. retailer. Produced & sold abroad Pending in S.Ct. Exported to U.S. Dr. Malawer, J.D. Ph.D. (2014)

  35. 4. UNILATERAL RETALIATION (Section 301). Dr. Malawer, J.D. Ph.D. (2014)

  36. Section 301 Actions“Retaliation” • Section 301 • Super 301 • Special 301 • Section 1337 Dr. Malawer, J.D. Ph.D. (2014)

  37. “Retaliation” (con’t). • Regular 301: USTR -- violation of trade agreements or unreasonable or unfair practices (dual investigation). • Super-301: USTR annually reviews to identify priority foreign country practices (PFC) & possible action. (Not renewed) • Special 301: Annual review of barriers in intellectual property rights to identify priority foreign country practices (PFC) & possible action. • Sec. 1377: Annual review of barriers in foreign telecommunication markets to identify priority foreign country practices (PFC) & possible action. Dr. Malawer, J.D. Ph.D. (2014)

  38. 5. U.S.TRADE SANCTIONS. Dr. Malawer, J.D. Ph.D. (2014)

  39. Trade Sanction Legislation:General Legislation – Peace & War. External Threat / Peace time. International Emergency Economics Powers Act (IEEPA) Time of war. Trading with the Enemy Act. Dr. Malawer, J.D. Ph.D. (2014)

  40. Trade Sanctions Legislation: Basic Characteristics. • Trade sanctions only by delegation of authority by Congress. (Not within the President’s inherent authority.) • Have general sanctions legislation and country specific: • General legislation includes IEEPA & Trading with the Enemy Act. • Country specific legislation: Syria, Iraq, Iran, Cuba …. • Trade sanctions take various forms: • Restrictions on exports from the U.S. (export controls). • Restrictions on imports into the U.S. • Restrictions on financial transactions from the U.S. and on U.S. firms. • Some trade restrictions enforce other statutes or treaties – environment. Dr. Malawer, J.D. Ph.D. (2014)

  41. Trade Sanctions: Policy Issues. • Empirical issue of effectiveness. • Assessment in terms of impact on both corporate transactions and foreign policy objectives. • Need to consider unilateral v. multilateral sanctions as to issue of effectiveness. • “Cost-Benefit analysis.” Hurting primarily ourselves because of ineffective sanctions? • Sanctions often impacts trade relations with our allies when U.S. tries to enforce extraterritorially. • Issue of using trade measures for non-trade issues (for foreign policy or national security reasons). • As to firms when impose sanctions they allow foreign firms to still compete – issue of competitiveness. • Raises issues of reliability of U.S. contractors. Dr. Malawer, J.D. Ph.D. (2014)

  42. TRADE SANCTION LEGISLATION. • Country specific Sanctions: • Iran & Libya Sanctions Act, 1996 (amended 2006). • Cuba -- Helms - Burton, 1996: Sue for confiscated property & denial of admission. (Codifies prior sanctions.) • “Glenn Amendment” to Nuclear Proliferation Act, 1994. (Applied to India, Pakistan, 1998) • Syrian Sanctions Act. (2003). • Magnitsky Bill (2012). • Russian Sanctions / Crimea (2014). • Various forms -- often involves an embargo (imports & exports), foreign investment restrictions (for political or security rationale). • Have general sanctions legislation and country specific sanctions. • General Sanctions : • Int’l Emergency Economic Powers Act (IEEPA): “extraordinary external threat.” (peace time) • Trading with the Enemy Act (time of war). Dr. Malawer, J.D. Ph.D. (2014)

  43. Trade Sanction Legislation. • Note -- Various trade restrictions for non-trade reasons: • Exon-Florio (CFIUS). • Pres. prohibit U.S. merger by foreign firm for national security. • DP World (2006). • CNOOC – UNOCAL (2005). • Huawei (2012). • Merchant Marine Act (Jones Act)(1920). Restrictions on foreign ships. • Int’l Religious Freedom Act (1998). Discretionary authority in the President. • Country-specific sanctions: • Cuban Trade Embargo Sec. 620a of 1961 For. Assist. Act. • Iraq Sanctions Act (1990). Trade embargo. Prohibition of almost all U.S. transactions. Dr. Malawer, J.D. Ph.D. (2014)

  44. Seven Lessons from Economic Sanctions, Reconsidered (2007). • Don’t bite off more than you can chew. • Careful of inflated expectations. • Friends are more likely to comply than adversaries. • Closer trading partners comply. {What about greater integration into global economy and institutions?} • Beware autocratic regimes. • Hard to bully a bully. • Slam the hammer, don’t turn the screw. • Don’t do incremental. • More is not necessary merrier. • Large coalitions not necessary. • Choose the right tool. • Use companion measures (non-economic). • Don’t be a cheapskate or a spendthrift. • Careful of self-inflicted costs. • Generally – Look before you leap! Dr. Malawer, J.D. Ph.D. (2014)

  45. D’Amato Sanctions (Iranian Sanctions): Foreign Joint Venture in Iranian Oil. Total, SA Gazprom Russian Petronas Malaysia French IRAN [Sanctions waived Summer 1998] Oil field development agreement Dr. Malawer, J.D. Ph.D. (2014)

  46. Note: Export Promotion Legislation. • Export Enhancement Act (1988). • Agricultural Export Sales (PL 480). • President Obama’s proposals (2010). Dr. Malawer, J.D. Ph.D. (2014)

  47. 6. CONSTITUTION & TRADE. Dr. Malawer, J.D. Ph.D. (2014)

  48. CONSTITUTIONAL ASPECTS OF TRADE AGREEMENTS. • The Congress has exclusive authority to regulate foreign commerce. • The President has authority to negotiate international agreements. • President has no inherent authority to affect tariff or other domestic laws. • Since 1934 Congress has delegated authority to the President to negotiate trade agreements. • President has authority to negotiate trade agreements without delegated authority if doesn’t impact on tariffs and domestic law. • Newer Legal Issue – Does the inherent “Foreign Affairs” power of the President now include “Global Trade” especially as to newer trade issues (non-tariff issues). • National Intelligence Council – Trade & investment are the future strategic and geopolitical issues for the U.S. (2008, 2010, 2012). Dr. Malawer, J.D. Ph.D. (2014)

  49. Three Judicial Doctrines & Foreign Affairs: Federalism, Separation of Powers & Judicial Review. President FEDERAL Courts Delegation of Authority. • Judicial Review. • Political question. • Ripeness. Congress Preemption. Delegation under 1934 RTAA. “Fast Track "of 1970s supplements delegation. STATES Exclusive congressional authority in foreign trade & shared authority in foreign policy. But what happens when trade becomes more important as a foreign policy issue? Dr. Malawer, J.D. Ph.D. (2014)

  50. International Agreements & U.S. Law: Treaties & Executive Agreements – Process. Both Supreme Law of the Land [Article 6 – Supremacy Clause & Precedent.] President. Formal Treaty. [Article 2 -- Exec. Auth.] [House not involved.] Senate. President. Executive Agreement. Statute & Agreement. Problem of Conflict -- “Last in time prevails.” ]Not in Constitution.] [Both houses involved.] Congress Dr. Malawer, J.D. Ph.D. (2014)

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