The Trump Administration – International Trade and Economic Policy

Actors, Actions, Options and Implications for Industry

Jeff Bialos Mark Herlach Partner Partner

February 16, 2017

© 2017 Eversheds Sutherland (US) LLP All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Eversheds Sutherland (US) LLP and the recipient. Eversheds Sutherland (US) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit www.eversheds-sutherland.com. Topics Covered

Policy Framework Trump Administration Players Trade Agreements Tariffs and Taxes Unfair Trade Remedies Domestic Content – Buy America, Hire America CFIUS Review of Foreign Investments Economic Sanctions and Export Controls Industry Focus – Energy and Defense and Aerospace

Eversheds Sutherland Policy Framework: Trump Administration “America First” Policy

─ “Pro Trade” Philosophy – Fairer, Reciprocal Trade More Beneficial to U.S. Manufacturing and Workers ─ Tariffs as Negotiating Tools to Achieve Better Deals and Punish Trade Rule Offenders ─ Robust Response to Unfair Trade Practices ─ “Buy America, Hire America”

I … understand that at the end of the day, each of our trading partners want access to our market. The United States should provide that access to nations who agree to play by our standards of fair trade. We should not put up with malicious trading activities, state owned enterprises, or subsidized production.

--Wilbur Ross, Secretary of Commerce Nominee

Eversheds Sutherland 2 The Players - More Actors Than Usual

─ President ─ Commerce – Secretary Wilbur Ross ─ USTR – Ambassador Robert Lighthizer ─ National Trade Council – Peter Navarro • Deputies for Buy America, Hire America and Defense Industrial Base ─ NEC/NSC – Gary Cohn, Keith Kellogg (acting), Ken Juster ─ White House Special Advisors ─ Treasury and State Departments ─ Council of Economic Advisors

Eversheds Sutherland 3 Trade Agreements -- Options for Withdrawal or Renegotiation

─ General Principles: Negotiate Better, Fairer Bilateral Agreements That “Bring Jobs and Industry Back to American Shores” • Bilateral agreements – easier and quicker? ─ Specific Agreements • TPP withdrawal – next steps?

• Possible bilateral agreements with key Asian countries • Transatlantic Trade and Investment Partnership - “Dead” • UK-U.S. Bilateral Agreement Post-Brexit

• Parameters and timing unclear

• Potential for pre-exit discussions ─ NAFTA – What Happens Next?

Eversheds Sutherland 4 NAFTA – Renegotiation or Withdrawal?

─ Renegotiation: Issues on the Table • Procurement Code and Buy America Exemptions • Rules of Origin • Canadian Softwood Lumber ─ Withdrawal • President has legal authority to withdraw U.S. without Congressional approval – must give six months notice ─ Possible Outcomes • Separate bilateral agreements - e.g., U.S.-Canada only • TPP negotiated provisions a potential basis for “new” NAFTA • Disciplines eliminated or expanded?

Eversheds Sutherland 5 Tariffs: Options and Strategy

─ General Tariff Increases – 10%, 20%, 35%? • Congress has the power to impose but has delegated some authority to the President via statute • Fast track authority (tariff reductions in international trade negotiations), Trading with the Enemy Act, Trade Expansion Act of 1962 (national security- based import relief), Tariff Act of 1974 balance of payments) • International Agreements Limit the President’s Authority • WTO (Most Favored Nation) and NAFTA ─ Tariffs After NAFTA Withdrawal • Can adjust tariff rates to non-NAFTA rates subject to limitations ─ Tariffs Targeted at U.S. Firms That Manufacture Offshore and Import into the United States • IEEPA as possible fallback authority? ─ Use of Tax Code to Address Trade Issues

Eversheds Sutherland 6 Border Adjustment Tax

─ Proposal in House Republican Blueprint for Tax Reform • No tax deduction for imported goods • U.S. exports exempt from tax • Companies pay income tax where goods are sold • Exchange rate adjustment – no consensus among economists ─ Key Elements Remain Uncertain ─ Potentially Inconsistent with WTO Rules ─ Discriminatory Effects a Particular Concern ─ U.S. Industry is Split • Major exporters favor • Major importers oppose ─ Significant Potential for Retaliation

Eversheds Sutherland 7

Unfair Trade Practice Remedies

─ Obama Administration Had Stepped Up Actions Against Unfair Trade Practices • Levied AD/CVD Penalties at Highest Rate in 14 Years; 370 Orders Enforced • Aggressively Pursuing and Winning WTO Cases • 25 WTO challenges, 16 against China; U.S. won all decided cases • Diplomatic engagement on labor rights, environment and IP under FTAs • Global Forum on Steel Excess Capacity ─ Trump Administration Likely to Bolster Trade Enforcement • Self-initiated AD/CVD cases in select industries • New WTO actions on subsidies and currency manipulation • Possible return to Reagan-era approach

Eversheds Sutherland 8 Domestic Content – Buy America

─ U.S. Government Procurement Subject to Buy America and Other U.S. Domestic Content Laws • Waivers based on non-availability of domestic supply, reciprocal international agreement, offshore purchasing and other criteria • Applicable agreements include WTO Procurement Agreement, NAFTA, certain FTAs, and defense procurement MOUs • Significant spending under waivers across USG ─ Possible Elements of “Buy America, Hire America” • American steel in pipelines – domestic content rules for private customers? • Eliminate procurement chapter of NAFTA or terminate defense MOUs? • Fate of Defense Reciprocal Procurement MOUs? ─ Possibility of Omnibus Domestic Content Law ─ Implications for Global Supply Chains and Foreign Firms Considering Participation in U.S. Markets “It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components … We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.” – Peter Navarro, National Trade Council

Eversheds Sutherland 9 CFIUS Review of Foreign Acquisitions - Historically, Most Transactions Approved

Presidential Mitigation Year Notifications Investigations Withdrawals* Decision Agreements 2006 113 7 19 2 15 14 (12 2007 147 6 15 0 transactions) 2008 155 23 23 0 2 2009 65 25 7 0 5 2010 93 35 12 0 8* 2011 111 40 6 0 8* 2012 114 45 22 1 8* 2013 97 48 8 0 11 2014 147 51 12 0 9

• Growth in Number of Reviews by U.S. Committee on Foreign Investment in the United States (CFIUS)

Eversheds Sutherland 10 Chinese Firms Are Now Leading U.S. Investors, But Face CFIUS Hurdle

─ China Becoming a Sizable Investor in the United States Over Recent Years ($20.8 billion in FDI in 2015), Reflecting 283% Growth in 2010-2015 • 68 Chinese acquisitions reviewed by CFIUS (2012-2014) – most for any Country (UK was Second (45), Canada Third (30) and Japan Fourth (37))

2008 2009 2010 2011 2012 2013 2014 Totals Chinese Acquisitions of Critical 2 4 6 8 10 5 7 42 Technology Firms

All Acquisitions of Critical 165 98 79 114 111 94 115 672 Technology Firms

Chinese CFIUS 3 4 6 10 23 21 24 91 Cases All CFIUS Cases 155 65 93 111 114 97 147 685

• Most Chinese CFIUS Cases Approved in Recent Years Despite Opposition From Disappointed Bidders and, in Some Cases, Political Controversy • Cases Withdrawn/Disapproved Largely Involve Sensitive Sectors or Proximity to Military Installations

Eversheds Sutherland 11

CFIUS Consideration of China Cases: Observations on a Watershed Year (2016)

─ Changing U.S.-China Relationship and Increased Number and Size of Deals Has Brought More Scrutiny of Chinese Cases • Purchase of Swiss company Sygenta (with US seed and pesticide business) for $43 billion by ChemChina, a state-owned enterprise (CFIUS approved) • Acquisition of Ingram Micro Inc., a computer hardware distributor, for $6 billion by Tianjin Tianhai Investment Co., a Chinese shipping company (CFIUS approved) ─ High Profile Withdrawals of Chinese Investments Under CFIUS Review Announced in Early 2016 (Semiconductor and Storage Technologies) • GO Scale Capital proposed 80% buy of Philips’ Lumileds division, which holds advanced technology for semiconductor materials used in LED lighting • Fairchild Semiconductor declined a takeover bid from China Resources Microelectronics and Hua Capital due to concern over potential CFIUS risk ─ U.S.-China Economic and Security Review Commission Recommends That U.S. Bar Chinese State-Owned Firms From Making U.S. Acquisitions • “There is an inherently high risk that whenever an SOE acquires or gains effective control of a U.S. company, it will use the technology, intelligence, and market power it gains in the service of the Chinese state to the detriment of U.S. national security.” What Approach Will the Trump Administration Take?

Eversheds Sutherland 12 Key Economic Sanctions – What’s Next?

─ Sanctions Remain Largely Unchanged to Date ─ Cuba • Obama Administration liberalized trade using Executive authority • Fate of Executive Orders unclear • Further liberalization unlikely under President Trump ─ Russia • Targeted sanctions were a response to Russian activities in Crimea and Ukraine • Strong opposition to easing of Ukraine/Russian-related sanctions • Extent of possible U.S.-Russian rapprochement remains unclear ─ Iran • Parties moving forward under JCPOA • U.S. options to act unilaterally subject to constraints • New ballistic missile-related sanctions imposed on February 3

Eversheds Sutherland 13 Export Controls

─ Obama Administration Initiated Major Reforms in 2009 ─ Reforms Will Not Be Rolled Back • Intended to enhance national security • Movement of items from USML to CCL • Efforts to simplify process ─ Will Effort Continue Under President Trump? • Export control reform consistent with the Administration focus on reducing regulation and promoting exports • Enhances ability to cooperate with close allies • U.S. industry generally supportive

Eversheds Sutherland 14 Implications for the Energy Sector

─ Border Adjustment Tax • Impact on movements of oil and natural gas • Beneficial to LNG exporters ─ NAFTA Renegotiation or Withdrawal • Significant movement of energy and related commodities among NAFTA countries likely affected • Withdrawal problematic given significant cross-border activity ─ Russian Sanctions • Directive 4 deals with exploration or production for deepwater, Arctic offshore, or shale projects • U.S. energy companies could benefit from sanctions relief

Eversheds Sutherland 15 Implications for the Defense and Aerospace Sector

─ National Trade Commission Has Defense Industrial Base Focus • “The mission of the National Trade Council will be to coordinate with other agencies to assess U.S. manufacturing capabilities and the defense industrial base, and help match unemployed American workers with new opportunities in the skilled manufacturing sector. The National Trade Council will also lead the Buy America, Hire America program to ensure the President-elect’s promise is fulfilled in government procurement and projects ranging from infrastructure to national defense.”

Policy Implications for: • Strategies and Programs • Global Sourcing of Subsystems and Components by U.S. Defense and Aerospace Firms • Location of Manufacturing by Foreign Defense Firms Seeking U.S. Market Access • Reciprocal Procurement MOUs with Allies

Trade-Offs Between Best Value Procurement and Domestic Manufacturing

Eversheds Sutherland 16 Questions?

Eversheds Sutherland 17 About the Presenters

─ Jeff Bialos Jeff draws on his public service as Deputy Under Secretary of Defense for Industrial Affairs, Special Advisor to the Under Secretary of State for Economic Business and Agricultural Affairs, and Deputy Assistant Secretary of Commerce for Import Administration. He regularly advises clients on international law, trade and investment, defense, and national security matters, including anti-bribery, antitrust, export controls, industrial security, procurement, and sanctions.

─ Mark Herlach Drawing on his long experience in Asia, Europe, and the Americas, Mark guides clients on a full range of international matters, including cross-border transactions, foreign investment, government policy, and global trade and compliance matters. Mark acts for clients in such areas as anti-bribery, antidumping and countervailing duty investigations, antitrust, customs, export controls, sanctions, and international law.

Eversheds Sutherland 18 Contacts:

Jeff Bialos Partner Washington D.C. 202.383.0363 [email protected]

Mark Herlach

Partner Washington D.C. 202.383.0172 [email protected]