The Effect On International Trade In An Economic Downturn

Monday, May 4, 2009 - 01:00

Editor: As Chairman of the International Trade and Customs practice group of Kelley Drye & Warren, how are the current economic conditions affecting your practice area and your clients involved in international trade?

Hartquist: We are very busy, and I expect that during the course of 2009 we'll become even busier. One of the things that happens during an economic downturn is that as competition for diminished sales increases, concern about fair play in the marketplace also intensifies. So many of our clients are asking us to look into dumping and subsidization situations to determine whether actions should be taken to deal with these kinds of unfair trade practices.

Editor: Are you finding concrete evidence that this is the case?

Hartquist: Yes, it's very widespread in affecting both our traditional and new clients.

Editor: What effect will the economic stimulus legislation have on your clients?

Hartquist: We think a significant effect, in part because many of our clients are in basic industries, such as steel and the copper and brass industry. We worked very hard on the so-called "Buy America" provisions in the recent legislation passed by Congress. Potentially, we think there's going to be a considerable amount of business to be generated for American manufacturers under this legislation, given the wide array of projects, and numerous federal and state agencies involved along with local governments. Infrastructure work will involve a large portion of our manufacturing capacity.

Editor: Since your practice area includes the interpretation of the Foreign Corrupt Practices Act for your clients, what enforcement actions on the part of the Justice Department or the SEC are taking place today in the light of the slackening of world trade?

Hartquist: We think enforcement by the agencies - Justice and the SEC - promises to be as robust in 2009 as it was in 2008, if not more so. I understand there are something like 100 open investigations going on right now. We also think there is likely to be more criminal enforcement, along with civil enforcement. There will probably be large financial penalties, and perhaps more prosecutions of individuals as well as corporate entities in 2009 and beyond.

Editor: What enforcement actions are taking place across the globe, especially with the OECD countries that have signed on to anti-corruption? Has the prosecution of officers at Siemens finally been put to rest?

Hartquist: There's certainly growing enforcement activity around the world. More countries are developing their own domestic laws modeled on the UN Convention. The Siemens case is a great example, and it really underscores the aggressive action in this area that you're seeing now. The German and U.S. actions in the Siemens case probably set a significant precedent in terms of the sharing of information by U.S. and foreign agencies in the corruption area. We think there are going to be more aggressively prosecuted cases in this area by the respective enforcement authorities. The Siemens case has probably been finally put to rest, but it has gotten the attention of corporations around the world in terms of the FCPA and compliance with the law.

Editor: The adoption of the UN Convention Against Corruption (UNCAC) in 2003 further expanded the UN's reach against corruption, the Convention having been ratified by some 120 countries including China, Russia, India and Indonesia. That Convention expanded enforcement beyond foreign bribery to extortion and embezzlement and includes the private as well as the public sector. What success has this agreement had in curtailing corruption in the BRIC countries?

Hartquist: I think the answer is similar to that of the last question: you're seeing better compliance now, we believe, because of the concern about prosecution, and enhanced enforcement activities by many countries. We think this is a trend that is going to continue and probably accelerate in the future.

Editor: What role is played by Sarbanes-Oxley in reinforcing the principles of the FCPA?

Hartquist: The disclosure provisions of Sarbanes-Oxley are probably giving a substantial incentive to corporations - particularly to their general counsel - to make sure they've done their internal homework. The disclosure provisions, for example, require companies to make public any investigations they are undergoing. The simple publicity that they're being investigated for foreign corrupt practices is something that can be very damaging to a company. While there's no direct relationship between the two laws, there is an interplay, which doubtless encourages better compliance, both because of concern about publicity as well as possible penalties that may have to be paid.

Editor: China's imports to the U.S. have slowed in the last few months, and China has taken major steps to bolster its economy. Do you expect the market for imports from China to improve faster than from other parts of the world once the credit markets loosen up?

Hartquist: The answer to that is a multi-part response. Because demand has diminished so substantially, not only in the U.S. but in the European Union and around the world, trade generally has slowed down, and trade with China has also fallen off. But what has happened is substantially increased price competition in these diminished markets. In a number of product areas we're seeing that in terms of import penetration as opposed to total volume of imports, China's imports into the U.S. are up substantially. They're taking a greater share of a smaller pie. As to your question regarding whether imports from China will increase once the credit markets loosen up - that probably will play a role as companies and individuals are more able to make purchases. We expect China to be very aggressive and to be very price competitive. We've done four reports on the vast array of subsidies that are available from all levels of the Chinese government. It's mind-boggling - I've never seen anything like it in my career working in this area. At the national level, the provincial level and at the local level, there are huge subsidies that are available to Chinese producers. This gives them a substantial leg up in terms of competing not only in their own market against imports into China, but also in foreign markets like the United States.

Editor: Does this present a dumping problem?

Hartquist: Actually the fix that would be used for subsidies is a so-called countervailing duty case. But the manifestation of this sort of thing typically involves both dumping and countervailing duties. I think you're going to see an increase in the level of cases filed against the Chinese in both areas. We think they may be violating U.S laws as well as their WTO obligations.

Editor: Do you expect the international trade policies under the Obama administration to differ markedly from the policies of the Bush administration?

Hartquist: I do, in a number of areas. First of all, it's very clear that with respect to the negotiation of free trade agreements with countries or regions - for example, such as the agreements that we have with Panama and Columbia, as well as others that are pending - this Congress and this administration are going to insist on provisions that have not been contained in prior agreements, particularly relating to labor and environmental issues. In the future, you're going to see such provisions negotiated up front in any new agreements. There may be efforts to amend agreements already negotiated to include these provisions as well.

Editor: And NAFTA came in as a whipping boy, even during the campaign.

Hartquist: It certainly did. And whether NAFTA can be renegotiated is a major question. Trying to unravel something like that and tie it up again is a very difficult process.

Another area in which I think you're going to see some differences is stronger enforcement of the trade laws, such as the anti-dumping and the countervailing duty laws, coming from the House Ways and Means trade subcommittee. Just the other day I had a meeting with Congressman Sandy Levin, who chairs that subcommittee. He has a bill pending that he has indicated the committee is likely to act on sometime in the fairly near future - no date specified - including some important provisions that we would support to improve enforcement of trade laws.

The third area of change might be the Doha Round of WTO trade negotiations. I expect to see a renewed effort to try to achieve a Doha Round agreement. I don't think that's going to happen for months, not until the Obama team decides how they want to approach this.

Editor: In which areas of your practice do you anticipate the greatest growth?

Hartquist: Our traditional areas of practice - the antidumping and countervailing duty laws - will produce new trade cases, in part because of the economy and in part because of the aggressiveness of foreign producers. I think we're going to see more trade disputes in that area. Export control compliance work has increased substantially for us over the last several years, and we have every reason to think that is going to grow.

A newer area that is beginning to receive attention is the relationship between trade and the environment. Climate control legislation is being debated in the House and the Senate now, with the likelihood that some kind of legislation will be enacted. There are a number of trade issues that arise in this regard. The WTO could become involved as well, in terms of what is legal under WTO rules with respect to legislation such as the "cap and trade" climate control bills. Chairman Charles Rangel said in the last few days that the Ways and Means Committee, because of its trade jurisdiction, is going to want to be a player on any environmental legislation along these lines. That's certainly a clear signal as to what the committee thinks about the trade issues that go along with the environmental issues. This is a new era. These issues in the past have not been considered to have significant trade effects. I was amused by a comment by a senior Chinese official, who said that China shouldn't be criticized for its failure to enforce environmental laws. Rather, the burden should be on the countries that buy Chinese products, because they are the ones responsible for encouraging China to produce these products, and therefore to produce the pollution. Aside from the humor of that reasoning, his comment does illustrate the very significant trade impact of these kinds of laws and international agreements. As the world grows smaller and we become more concerned with the impact of the environment on our lives and health, we may need new tools to accommodate disagreements among countries as to how to handle these issues.

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