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Global Policy Watch

Key Public Policy Developments Around the World From Covington & Burling LLP

Evaluating Foreign Investment Restraints in China

Posted in Asia, China, International Strategy, Trade Agreements

As we have written previously, China is engaging in simultaneous bilateral investment treaty (BIT) negotiations with the United States and the European Union. Indications are that the Chinese government is taking these negotiations very seriously. This presents the most significant opportunity for foreign investors in China to influence market access restrictions and other restraints on foreign investment in the country since China’s accession to the World Trade Organization (WTO) in 2001.

At the request of European trade negotiators, we searched hundreds of thousands of measures issued by 39 central government agencies and five representative provincial-level governments in order to identify provisions that frame or limit market access and business activities of foreign-owned companies in China. In the process, we identified over 800 restraining provisions, which we analyzed and grouped into a number of different types and categories. The results provide a useful taxonomy for future discussion both within the BIT negotiation context and beyond.

Beyond published measures, the Covington team reviewed key trade publications and conducted interviews with industry groups to identify and catalogue administrative practices that may also have a restraining effect on foreign investment. As foreign business leaders in China are well aware, many of the biggest obstacles to foreign participation in the Chinese economy are imposed unofficially by government officials exercising legal or extralegal discretion.

A public version of the report prepared for the EU’s Directorate General for Trade is available on the EU DG Trade website. While it does not include the full database of restraining measures, the public version presents detailed descriptions of the types of restraints identified and provides supporting examples and observations.

Material for this post was supplied by Ashwin Kaja of Covington & Burling LLP.

Political Uncertainty in Britain

Posted in EU Law and Regulatory, International Strategy

The next General Election in the UK is scheduled for 7 May 2015, and the outcome is far from certain.  Where the power lies will influence the business environment for long after May 2015, particularly if no one party secures an outright majority in Parliament or if the result leads to a referendum on whether the UK should leave the EU.

The opposition Labour party has a slim lead, in the latest polls (Labour were 0.10 points clear in September 2012).  However, their leader, Ed Miliband is not popular and struggles to connect with voters (his personal ratings recently hit a 33-month low).  David Cameron also suffers from low personal ratings (when asked which main party leader they trusted the most, 40% of the respondents said “none of the above”, 22% said Cameron and 16% Miliband).  Although Cameron leads Miliband on economic trust, voters consistently rate the NHS as a key consideration in deciding how to vote, favouring the Labour party, which is considered stronger on this issue.

There is increasing sentiment that the next General Election will result in a hung Parliament, with no party having an overall majority in the House of Commons.  In this scenario, the largest party cannot pass laws without the support of MPs from other parties.  That support may come in the form of a formal coalition, like the Con-Lib Dem coalition which has governed since the 2010 election, or the governing party may have to negotiate with other parties to get specific laws passed on an ad-hoc basis.  It presently seems unlikely that the Liberal Democrats will retain the keys to power, mainly due to their unpopularity but also due to the rise of the UK Independence Party.

UKIP campaigns on lowering immigration and Britain’s exit from the EU.  They recently secured their first elected MP, and are polling in the high teens.  On account of the UK’s first-past-the-post voting system, these ratings might translate into a relatively low number of MPs after the next election (a figure around 30 seats could be realistic), but this result could put UKIP into coalition government if neither the Conservatives nor Labour secure an outright majority.  UKIP’s support reached an all-time high after the recent demand from the EU that the UK pay a surcharge of €2.1 billion into the EU Treasury, handing UKIP further political capital.

The rise of UKIP gives, or perhaps reflects, increasing attention to the UK’s relationship with the EU.  Should the balance of power rest with UKIP after the General Election, then a formal or informal deal with them is likely to force an in/out referendum (Cameron has in any event promised a referendum by 2017).  Having said this, support for the UK staying within the EU was recently at a 23-year high (56% of Britons would vote to stay in the EU) and a British exit remains unlikely.

With all of this, it should be remembered that polls are snapshots, not predictions.  But, as matters presently stand, the next General Election looks too close to call, and that another coalition, with attendant business uncertainty, cannot be ruled out.

The Missing Link in President Obama’s Africa Leaders Summit: Addressing the African, EU, U.S. Conundrum

Posted in Africa, EU Law and Regulatory, International Strategy

The African Leaders Summit, held in Washington in early August, marked a welcome and important turning point as trade and investment became a top priority in U.S.-African relations. At the same time, this development has placed the U.S. and the EU on a collision course as it concerns trade with Africa.

From patronage to partnership

The transition in U.S.-Africa relations began with the passage of the African Growth and Opportunity Act (AGOA) in 2000.  AGOA, which reduced U.S. tariffs to zero on 6,400 products for 40 countries in Sub-Saharan Africa, was important for introducing trade, light manufacturing and private sector-led investment as a stimulus for economic development. No longer would the U.S. rely solely on traditional development assistance in its partnership with African nations.

While the administration of George W. Bush did dramatically ramp up the U.S. aid relationship with Africa by funding the President’s Emergency Program for AIDS Relief, first at $15 billion and subsequently increased to $48 billion, it was a legitimate and important response to a dire health crisis on the continent. The reality is that this type of aid response is not likely to occur again, even with the Ebola crisis posing such a threat in West Africa.

In addition to extending the life of AGOA from 2008 to 2015, the Bush Administration took other steps to move away from traditional development assistance as the primary U.S. connection to Africa, principally through the creation of the Millennium Challenge Corporation. Not only was the MCC a vehicle for making large scale investments, via grants, in African nations, it did so according to a rigorous set of governance criteria. The ease of doing business and the role of the private sector became important indicators for determining the allocation of MCC grants.

Obama and the private sector

When Barack Obama became president in January 2009, the transition in U.S.-African relations was well underway.  The financial crisis of 2008-2009 helped to ensure that the days of robust aid budgets were a relic of another era.  Equally important, however, were the dramatic improvements in governance and economic growth taking hold across the continent.  Foreign direct investment and the role of Africa’s private sector increasingly were becoming the engines of long-term sustainable growth, job creation and the key to integration into the global economy. In fact, in 2007, foreign direct investment exceeded official development assistance (ODA) for the first time, according to the African Economic Outlook. Combined with remittances and portfolio investments, private sector flows today are nearly three times greater than ODA.[1]

The Obama Africa policy, although belated in its roll out, has accelerated the transition in U.S.-African relations initiated by the passage of AGOA.

In 2009 at the L’Aquila G-8 meeting, Obama launched Feed the Future to address the global food crisis, especially in Africa, with a $3.7 billion commitment. Three years later, the Administration brought the private sector into the program through the New Alliance for Food Security and Nutrition.  At the August summit, it was announced that more than $10 billion will be invested by private sector companies in agricultural activities, and more than half of this investment is coming from African-based companies.

Power Africa, whose goal is to bring a reliable source of electricity to more than 60 million homes and businesses, is a second signature Obama initiative in Africa.  The private sector features prominently in this as well.  According to USAID, there has been a ratio of nearly 4 to 1 in the leveraging of funds, as there has been more than $26 billion in private sector financing compared with $7 billion from the U.S. government.

Even with the Young Africa Leaders Initiative, which attracted more than 50,000 applications for 500 fellowship opportunities in leadership training at U.S. universities, the private sector has been an important partner to the U.S. government.

Trade Africa is another administration program designed to deepen commercial ties between the U.S. and Africa.  While it has not yet been successful in negotiating a trade and investment agreement with the East African Community, the program will restructure the three regional trade hubs into trade and investment hubs.  In addition to helping African companies access the U.S. market under AGOA, the hubs will now assist American companies to capture opportunities in African markets. In addition, the Commerce Department will double its presence in Africa.

In short, the Obama administration has done more than any other administration to advance U.S. commercial objectives on the continent, although there is still much to do. The reality, however, is that American companies are slowly waking up to the African opportunity.

The August Summit

More than any other issue, Obama used the August summit to focus on promoting trade and investment in Africa.  On August 5, more than 300 CEOs from the U.S. and Africa participated in a day long business forum hosted by Commerce Secretary Penny Pritzker and former New York Mayor, Michael Bloomberg.  Not only did Obama participate in the forum but $33 billion worth of investments were announced.

Equally as important, trade and investment was one of three sessions of the official summit on August 6, along with peace and regional security and governing for the next generation.

Throughout the summit, the renewal of AGOA was a constant topic of conversation, with African leaders stressing the importance of the legislation. The Administration also conveyed its commitment to work with Congress for a “long term” extension of AGOA as well as an expansion of AGOA’s product coverage, an improvement in the rules of origin and an updating of the eligibility criteria. During the summit week, there were countless side events that focused on the upside of investing in Africa.

The African, EU, U.S. Conundrum

In the wake of the African Leaders Summit there was a sense among many participants that a new era in U.S.-African relations was genuinely possible. Nevertheless,  the EU trade policy toward Africa could be a major obstacle to this new era achieving its full potential, given that AGOA and the Economic Partnership Agreements of the EU are working at cross purposes.

AGOA, for example, is a non-reciprocal preference program that is using trade to promote economic development. The EPAs, in contrast, are free trade agreements that African countries are required to sign by October 1 or face the loss of preferential access to the EU.  Where the U.S. is trying to gain market access in Africa through a number of mutually beneficial initiatives and AGOA, the EU is essentially trying to dominate the market through preferential access and most favored nation agreements.  The two approaches could not be more divergent.

Moreover, while the EPAs guarantee EU companies access to those African countries that sign on, they have serious negative consequences for the continent.  For example, what the EU refers to as the “SADC EPA Group” is, in reality, the five members of the Southern African Customs Union (South Africa, Botswana, Namibia, Lesotho and Swaziland) plus Angola and Mozambique. Not only is the nomenclature misleading, the EU has succeeded in dividing SADC, which has a history of collective decision-making that dates to 1980.

The division of SADC has regional implications as the SACU plus two group has no idea of the terms on which the other eight SADC members will initial EPAs, or whether they will do so at all. For SADC, which is working to harmonize its tariffs with the East African Community and the Common Market of East and Central Africa through Tripartite Cooperation, the EPAs are a significant hurdle not only to  the vital goal of regional economic integration, but the development agenda more broadly. After all, the COMESA-SADC-EACTripartite Cooperation, expected to be launched in 2015, could benefit half of the African Union’s member countries overall, with a combined population of 600 million people and an integrated domestic product of almost $1 trillion[2].

Figure 1: Dividing the region: Members of “SADC EPA Group” and SADC

Countries

The EU’s “SADC EPA Group”

SADC

Botswana

X

X

Lesotho

X

X

South Africa

X

X

Namibia

X

X

Swaziland

X

X

Angola

X

X

Mozambique

X

X

Democratic Republic of Congo

 

X

Madagascar

 

X

Malawi

 

X

Mauritius

 

X

Seychelles

 

X

Tanzania

 

X

Zambia

 

X

Zimbabwe

 

X

The EPAs are also likely to complicate the prospect for AGOA’s renewal.  Some members of Congress are already questioning why the U.S. should extend non-reciprocal benefits to African countries who are simultaneously agreeing to free trade agreements with the EU. There is no question that the EPAs represent a challenge to AGOA, which has led to the creation directly and indirectly of more than 1 million jobs across the continent.

What Next?

Over the next two years the Obama Administration will work to deepen its legacy in Africa through its private sector-led initiatives. Extending AGOA in a timely manner, well before its expiration date of September 30, 2015, will be critical to this.  

The EU will continue to move forward to extend its free market arrangements throughout Africa.  This may be good for EU companies but it will undermine efforts by U.S. companies to establish a presence in Africa.  It also works against efforts by African companies and traders to increase regional trade and investment.

If there was any short coming of the African Leaders Summit it was the silence of the U.S. and its African partners on this issue. The distinguished Oxford economist, Paul Collier, in his 2007 book, The Bottom Billion, argues that Africa needs “one simple scheme” for trade with the global economy, with generous rules of origin, pan-African coverage and a long-term phase out in order to ensure that poverty is reduced and African producers enter new export markets.[3] As the U.S. and EU work to create the world’s largest free trade area through the Transatlantic Trade and Investment Partnership, both sides would be well served to also harmonize their trade relationship with Africa. There would be no down side, especially as it concerns Africa’s continued growth and development.


[1] African Economic Outlook, 2013, p. 46.

[2] Mail and Guardian Africa, “1 Trillion ‘Grand’ Africa Tripartite Free Trade Area Expected to Beat 2016 Schedule”, August 17, 2014: http://mgafrica.com/article/2014-08-17-africa-economy-africas-grand-fta-negotiation-progressing-well-sadc-officials

[3] Paul Collier, The Bottom Billion: Why the Poorest Countries are failing and What Can be Done about it (Oxford: Oxford University Press, 2007) p. 168-170.

 

[This article first appeared in: GREAT Insights Volume 3, Issue 9 - October/November 2014]

The EU Enigma: To Regulate or Not

Posted in EU Law and Regulatory, International Strategy

“Do less, but better” could well be the mantra of the new president of the European Commission, Jean-Claude Juncker, the former Prime Minister of Luxembourg. But it is in fact a term coined by another former prime minister of Luxembourg, Jacques Santer when he became president of that institution twenty years ago. The time lag, apart from the sense of history repeating itself, suggests that the EU is still struggling with the thorny issue of whether or not to regulate.

The new Juncker Commission, which was approved 22 October and is due to formally to take office on 1 November, does appear to be tackling this dilemma head-on. This is illustrated in part by the appointment of the first ever (and first in the pecking order) Vice-President in charge of better regulation, the former Dutch Foreign Minister, Frans Timmermans.

His role cannot be over-stated: in effect any proposed regulation being proposed by a Commissioner colleague has to cross the desk of the Vice President for his approval before it can be discussed and approved by the Commission as a whole. The advocacy repercussions are significant and are only starting to be appreciated by all those who seek to inform and steer public policy making at the EU level.

New EU Commission Confirmed

Posted in EU Law and Regulatory, International Strategy

The new European Commission presided by Jean Claude Juncker was confirmed by the European Parliament on October 22 with 423  votes (on 751) and will start functioning as foreseen, from November 1.

Juncker presented his new team on September 10, “ in common accord” with the Council of Ministers, representing the Member States, but the whole Commission still needed to be subjected, as a body, to a vote of consent by the European Parliament.

This vote is by no means a formality: as soon as it received – in the 1992 Maastricht Treaty – the power to confirm the appointment of the Commission, the Parliament reinforced considerably its influence over the EU’s executive. José Manuel Barroso, in each of the two Commission he assembled, had to replace one commissioner at the last minute in order to pass the confirmation vote.

Juncker did not escape having to do the same. The fact that he had been “elected” by the Parliament did not help: in order to receive the green light for his Commission, he had to replace one candidate commissioner – the Slovenian Alenka Bratusek, and (slightly) reshuffle some portfolios. 

The vote in the Parliament is preceded by a hearing of each candidate organized by the Committee – or Committees – he or she will have to deal with. The “two tier” structure of Juncker’s team and the clusters of Commissioners he proposed made this process more complicated than before, partly also because this structure no longer corresponds to the Committee’s structure in the Parliament.

But the hearings were less about substance than politics: indeed, most candidate Commissioners don’t know much about their portfolios, having to rely on Juncker’s cabinet and various others in their interviews. Going too far in exposing personal views would indeed be odd – or dangerous – since all positions taken in the Commission are supposed to be collective.  

The hearings were really more about personalities, their country of origin and their political affiliations. During the process, a few fragile candidates were identified, on which pressure could easily be applied. Tracking them was made easier by Juncker’s provocative selection method of appointing commissioners with special interest in the issues they would have to deal with.

Who were at risk?

Pierre Moscovici, the ex- French Finance Minister, in charge of monitoring the national budgets, which his country will fail the test this year.

Miguel Cañete, the Spanish candidate for energy and climate, who has family ties to the oil industry

Jonathan Hill, who with the Financial Services portfolio, will oversee the City of London, even if he is British and an ex-lobbyist.

Tibor Navracsics, from Orban’s Fidesz party who was supposed to be in charge of “education, culture and…citizenship” .

And, last but not least, the Slovenian ex-prime Minister, Alenka Bratusek, who Juncker put in charge of the “Energy Union” as a Vice President, even if she had appointed herself as a candidate contrary to the wishes of her country’s new government.

There were some other unpleasant surprises: Cecilia Malmström, the future Trade Commissioner, gave two contradictory answers to a question about ISDS and Oettinger, the German candidate, showed no interest- nor competence – for the “digital agenda” he is supposed to deal with.

Those who got the best marks were:  Frans Timmermans, the Dutch Foreign Minister and well-known figure in Brussels, who will be Juncker’s number 2; Margrethe Vestager, selected for the powerful competition portfolio; and the three other “thematic” Vice presidents – ex prime Ministers: Ansip, from Estonia who impressed with his IT skills, Dombrovskis, who is expected to  share the Latvian “model” of economic recovery from the financial crisis, and Jyrki Katainen, in charge of reviving the EU economy, even if he is supposed to be a pillar of austerity policies.

Federica Mogherini did well, as she has done in all her recent appearances in Brussels – demonstrating that she is not at all “unexperienced “ for the High representative job.

But the Parliament’s attention concentrated essentially on the five potential weaknesses mentioned above.

Fortunately, party politics came to the rescue of Moscovici, a socialist – who was mainly attacked by the Christian Democrat EPP and Cañete, from Partido Popular, member of the EPP group, who was essentially criticized by the socialists. The two neutralized each other; their groups made a deal – and both were saved. To quiet those who doubted Cañete’s credentials on climate change, a new responsibility for “sustainable development was given to Timmermans!

Jonathan Hill did not belong to one of the major groups as, 5 years ago, David Cameron removed the British Conservatives from the EPP and created a “conservative” group, the ECR. His presentation was considered too weak and he was made to come to a second hearing; by then, those who still resisted his charm had to accept that it would be silly to veto the British “Lord of the Lords” nine months before the British elections. Hill then passed.

The Hungarian Tibor Navracsics made a good impression in his hearing and could use his EPP affiliation, but still, having given him a portfolio with “citizenship” was seen as a provocation. So a compromise was devised: he would be accepted, but the responsibility for “citizenship” would go to the Greek Avramopoulos, in charge of home affairs.

What helped save the four was the feeling that the Parliament would be satisfied with just one scapegoat, and the Slovene Alenka Bratusek was the ideal victim: her hearing was a disaster and she was not supported by her government, so it would be easy to replace her.

But by who?  The sense of power generated by the hearings was such in the Parliament’s political groups that the EPP and the S&D thought they could make the decision themselves – which was over-extending the limits of their institutional powers: the fellow Slovenian MEP they proposed was rejected by the new Slovenian prime minister. He sent instead his Deputy Prime Minister, Violeta Bulk, a strong business woman, whose only weakness was that she has only been in politics for a few months.

For this reason, she missed the Vice presidency for the Energy Union: Juncker gave that position to the Slovak Maros Sefcovic (who was already Vice president in the Barroso Commission) and she was given his transport portfolio (losing the “space” dimension which went to the Polish Bienkowska, in charge of the internal market).

One can argue that these hearings don’t have much sense, as long as they centre on the nationality of the candidates and their personal views on issues under community competence: Commissioners must swear that they will not defend national interests and, as mentioned above, they are not supposed to present personal views but only those agreed in the “College”.

However, what makes this open process of confirmation useful is that it is public and broadly reported in the media (at least those reporting on the Brussels bubble!), which makes the commissioners look more political – and less bureaucratic.  

Does this mean that the new Commission will really be more political? Probably: it is what Juncker wants. One of his first decisions was that the members of his team would no longer have their individual spokespersons: they are encouraged to meet the press in person and interact with the citizens.   

The new Commission to come is already preparing for its first policy challenge: presenting a united front to deal convincingly with the hot current policy issues, which will already be on the agenda of the December European Council,  the first one to be presided by the ex-Polish prime Minister, Donald Tusk. Among them the 300 billion package announced by Juncker to revive the EU economy. The new president promised it would be ready by Christmas.

 

European Tax Investigations

Posted in EU Law and Regulatory, International Strategy, Tax Reform

In June, the European Commission (“EC”) announced the opening of three investigations into tax rulings in Ireland, Luxembourg and the Netherlands and, in particular, into tax rulings applied by Ireland to Apple, by Luxembourg to Fiat Finance and, last, by the Netherlands to Starbucks. In October 2014, the EC announced the opening of a fourth investigation into the application of tax rulings of Luxembourg to Amazon. Most recently, the EC ordered Spain to recover money from companies that benefited from rules that encouraged merger activity outside of the country.

We understand that the EC also has requested that Luxembourg produce all tax rulings that were issued in 2010, 2011, and 2012.  Luxembourg has not complied with this request, and the matter will be heard by the EU Court of Justice.  Companies with tax rulings that do not withstand challenge can be responsible for up to ten years of tax liabilities.  In essence, the EC is investigating whether certain tax practices of Member States have conferred prohibited selective advantages on multinational companies via tax reductions.

The four investigations relate to tax rulings which validate transfer pricing agreements, also referred to as advance pricing agreements (APAs). Transfer pricing relates to the prices charged for commercial transactions between parts of the same corporate group (intra-group commercial transactions) e.g., the prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group.  APAs are agreements that determine an appropriate set of criteria, or methodology, for the determination of the transfer pricing for intra-group commercial transactions. Since the prices set for these intra-group transactions will be accepted by the taxing authority that enters into the APA, APAs affect indirectly the allocation of taxable profits to that taxing jurisdiction and the tax paid by the corporate group in that jurisdiction.

The four investigations concern the calculation methods of certain APAs as negotiated between Member States and the various affected companies as set out in the tax rulings.  In particular, the investigations concern the compatibility of these calculation methods with internationally agreed standards as well as with the arm’s length principle.

The risk for the companies involved is that, in case the aid is considered to be incompatible, the Member State is required to claim the financial advantage back from the benefited company.  In addition to the companies already under investigation, other companies may well become the target of additional investigations.  As a result, any company with an APA from an EU member state should determine ― and assess ― the State aid risk.  They should then consider whether any changes to the company’s trading structure may be merited.

Ebola Spurs Global Cooperation to Prevent, Detect and Respond to Future Health Crises

Posted in Health Issues

Well before Ron Klain was named as the U.S. Ebola czar, the USG was urging the international community to confront the fact that the world is not ready for a deadly pandemic of any sort, much less one as daunting as Ebola.  Aware that Ebola alone could kill over 1 million people if international efforts fail, President Obama — joined by Secretary of State Kerry, Health and Human Services Secretary Burwell, Secretary of Defense Hagel, and his National Security Advisor Susan Rice — met on September 26 to discuss global health security with Ministers and experts from 44 nations, the World Bank, the UN World Health Organization (WHO), the UN Food and Agriculture Organization (FAO) and the World Organization for Animal Health (OIE). 

President Obama challenged participants that, “… it is unacceptable if, because of lack of preparedness and planning and global coordination, people are dying when they don’t have to.”  In his call to action, President Obama referenced not only Ebola, but many other deadly biologic threats from superbugs to terrorists seeking to use biological weapons.  He warned that, “in a world as interconnected as ours, outbreaks anywhere…have the potential to impact everybody, every nation.” [i] Political, financial, legal and regulatory changes to accelerate and facilitate private investment and international cooperation are now under discussion.        

The President and Cabinet members cited humanitarian, economic and security threats posed by global health disasters, which could easily dwarf the costs of terrorism. [ii] “Never has it been clearer that the world’s health security depends on paying attention to our weakest links,” HHS Secretary Sylvia Burwell said. [iii] Even the United States is unprepared.  The Inspector General of the Department of Homeland Security (DHS) has reported that DHS does not have adequate supplies of ready to use equipment and drugs or effective procedures in place to undertake critical operations during a pandemic.[iv]  Yet, the US is helping to lead the way forward globally.    

“Together, our countries have made over 100 commitments both to strengthen our own security and to work with each other to strengthen the security of all countries’ public health systems,” the President said.  These commitments address 11 “Lines of Action” [v] which focus on making progress within five years to combat anti-microbial resistance, improve biosecurity, prevent animal-to-human disease transmission, ensure effective immunization systems, accelerate detection, diagnosis and information-sharing regarding public health threats and to develop work force competencies and emergency facilities, procedures and relevant policy and legal structures. Going forward, 10 countries have agreed to serve on the GHSA Steering Group.  Chaired by Finland in 2015, it includes Canada, Chile, Finland, India, Indonesia, Italy, Kenya, the Kingdom of Saudi Arabia, the Republic of Korea, the United States and international organizations.

The private sector can and must play a key role in developing, producing and supplying medicines, medical devices and technologies, health information systems, protective gear, disinfectants, management systems, waste disposal technologies, etc.  As these efforts ramp up over the next 5 years, substantial new resources and incentives (public, philanthropic and private) will flow into these activities — and efforts to strengthen health systems –  worldwide.  Laws, regulations and procedures will change to enable more effective action and investment and the private sector will want to engage vigorously in the process.

 

High Stakes in Brazil’s Election

Posted in International Strategy, South and Central America

The second round of the Brazilian Presidential election coming on October 26 will be decided between incumbent Dilma Rousseff from the left leaning PT (Workers Party) and the challenger Aécio Neves from the centrist PSDB (Brazilian Social Democracy Party).  The stakes are huge for the country and for companies doing business in Brazil. 

Not so long ago, Brazil was held up as a paragon for the developing world.  Its economy was booming.  Those days are over.  The IMF recently stated on its World Economic Outlook published in October of this year that lower potential growth in emerging market economies is a dominating factor and that “Uncertain prospects and low investment are also weighing on growth in Brazil.”  The IMF has also cut its growth forecast for Brazil for 2014 by a percentage point to 0.3%.  And, according to the Brazilian Central Bank, inflation for the last twelve months is around 6.7%.

Mr. Neves, a former state governor, has the support of the private sector, and has been an avid advocate for the improvement of the relationship with the United States and the EU.  He has vowed to cut government spending, control inflation and jumpstart growth.  Whether he will be able to do that remains to be seen.  But before he gets there, he will have to prevail in the election.

Recent polls show the two candidates running neck and neck.  By getting to this point, Neves has shown a vote garnering strength that has surprised many.  In the first round, it appeared likely that Neves would lose out to Marina Silva, the candidate of the Brazilian Socialist Party.  Last week, Ms. Silva announced her support for Mr. Neves causing a blow for Dilma Rousseff. 

As this election campaign goes down to the wire, it is likely to become increasingly hard fought.  The result is very much in doubt, and is likely to remain that way until October 26.

Prospects and Challenges for Africa

Posted in Africa, Health Issues, International Strategy

The October 2014 Africa’s Pulse released by The World Bank confirms that economic growth in Sub-Saharan Africa continues to be strong.  The average growth in the region is projected to increase to 5.2 percent during 2015-16 (up from 4.6 percent in 2014) and to 5.3 percent in 2017.  Some markets and industries are looking to be more promising than others but certain regional challenges continue to present unknown variables.

The Markets. Although growth in the region generally remains favorable, the differing fortunes of the region’s largest economies has moderated that growth.  Economic activity in Nigeria remains robust with the growth strengthening from 6.2 percent in the first quarter to 6.5 percent in the second quarter.  Low-income countries — including Cote d’Ivoire, Ethiopia, Mozambique, and Tanzania — also enjoyed healthy economic growth.  In contrast, the economies of South Africa, Angola, and Ghana each experienced far more modest expansion. 

The Industries. The primary drivers of growth are significant public infrastructure investment (e.g., power, ports, and transportation), “a rebound in agriculture,” and the services sector (e.g., telecommunications, financial services, and tourism).  Importantly, the services sector has been “the big gainer” in the region’s economic transformation and presents “an important path” for economic diversification and accelerating poverty reduction.  However, weak global growth (and related factors) has resulted in a decrease in foreign direct investment, which is an important financing source for all of these industries.

Regional Challenges. The Ebola outbreak has ravaged economic activities in Guinea, Liberia, and Sierra Leone.  Initial estimates are that the combined output loss to the countries could total $359 million, which would translate to a 3 percent drop in the GDP growth of Sierra Leone and a halving of the GDP growth of both Guinea and Liberia.  This crisis must be addressed and the private sector should play a critical role.  Provided rapid control of further contagion, regional spillover is projected to be modest and limited to Ghana and Nigeria, which already has contained the outbreak.  However, a slower containment presents a far more dire scenario for the countries and the region.  Regional disruptions also may result from further intensification of the conflict in South Sudan and/or the Boko Haram insurgency in Nigeria.

Tackling Trade Barriers

Posted in International Strategy, Trade Agreements

Advances in our rules-based global trading system have been slow in recent years as efforts to establish new rules and assure compliance with existing rules have struggled.  Last week, I participated in a panel discussion of the Information Technology & Innovation Foundation’s (ITIF) new report, entitled “The Global Mercantalist Index: A New Approach to Ranking Nations’ Trade Policies”. The report catalogues a troubling increase in favoritism of domestic companies at the expense of foreign companies and in turn the global trading system.  It also further documents a trend highlighted last year by ITIF in its report “Localization Barriers to Trade: Threat to the Global Innovation Economy” and by the Peterson Institute for International Economics in its study entitled “Local Content Requirements: A Global Problem”.

Unfortunately, this growing trend is not offset by great advances in trade-liberalization.  Recent efforts to craft new trade rules at the World Trade Organization (WTO) have stalled, and many wonder whether the WTO will still be able to secure implementation of a December 2013 “Bali trade package” – a small undertaking compared to earlier efforts to revise more comprehensively our global trade rules as part of the Doha Development Agenda. 

Within this context, the ITIF’s reports calls for the creation of an annual “Global Mercantalist Index” that would rank countries based on a range of policies – such as forced technology transfer as a condition of market access, intellectual property (IP) theft, and restrictions on cross-border data flows – that threaten today’s global trading system.

Such a ranking could provide a useful snapshot of protectionist trends across a number of countries.  In that regard, this survey complements a variety of other important efforts to identify or quantify existing and emerging challenges, including, for example, the recently released U.S. International Trade Commission (USITC) study on digital trade barriers, the U.S. Chamber’s annual Global IP Index, and the Organization for Economic Cooperation and Development’s (OECD) Services Trade Restrictiveness Index. 

The report also provides a platform for discussing not just enforcement of existing trade rules but also what new trade rules and enforcement tools might be necessary to maintain fairness in the global trading system.  Not all localization barriers may be inconsistent with existing WTO rules.  However, existing rules offer a roadmap for negotiators.  As the U.S. pursues an ambitious trade agenda- including Trans-Pacific and Trans-Atlantic trade deals and an ambitious investment treaty with China – the ITIF and other recent reports provide important fodder for establishing new rules to promote fair and non-discriminatory treatment of foreign companies.  

The Bali trade package would have represented the first update to our global trading rules in 20 years.  As we face another WTO impasse, we should press forward with bilateral, regional and plurilateral trade agreements that can address the increasing web of trade barriers.  Meanwhile, the U.S. and its trading partners must vigorously enforce current trade rules that, as the reports highlighted above suggest, some of our trading partners may be flouting.