The Week Ahead in the European Parliament – November 17, 2017

Summary

This past week was a plenary week in the European Parliament, during which many significant initiatives were adopted by the Parliament.

Last Tuesday, MEPs approved new EU-wide rules for shopping online, in an attempt to protect consumers against fraud and to stop rogue traders in a more efficient manner. Through the revised Consumer Protection Cooperation (CPC) regulation, national enforcement authorities will gain increased capabilities to detect and stop breaches of consumer protection laws online. The coordination between EU Member States will also be improved. See the text adopted here.

On the same day, MEPs debated the “Paradise Papers”, the latest leak of documents that show how individuals seek to minimise their tax liabilities. In a statement, MEPs called on EU Member States to crack down on tax avoidance. For further information, see here.

Last Wednesday, after a fierce debate in the plenary, MEPs adopted a resolution wherein they called on the Council to trigger Article 7 of the Treaty on the European Union against Poland. In the resolution, MEPs states that basic European values are at risk in Poland. The triggering of Article 7 could result in the suspension of Poland’s voting rights in the Council of the EU, but would most likely be vetoed by Hungary. See the resolution here.

Next week will be very busy in the European Parliament, as it is a committee week.

On Tuesday, the Committee on the Internal Market and Consumer Protection (“IMCO”), jointly with the Committee on Legal Affairs (“JURI”), will vote on a draft report on new consumer protection rules that will protect buyers when digital goods purchased online, such as games, films or music, are defective and fail to work. The safeguards include guarantee periods and refunds. See the Commission’s proposal here.

On the same day, the Committee on Legal Affairs (“JURI”) will vote on a draft report and on whether to enter into interinstitutional negotiations on a regulation concerning copyright and related rights applicable to online transmissions of broadcasting organisations and retransmissions of television and radio programmes. The regulation would facilitate the distribution of online TV and radio contents across the EU. See the draft report here, and the Commission’s legislative proposal here.

On Thursday, the Committee on International Trade (“INTA”) will vote on a draft report on setting up an EU regime for the control of exports, transfer, brokering, technical assistance and transit of dual-use items. The draft report strengthens export control on these items, which can include cyber-surveillance technologies, chemicals, explosive-resistant armour, radio equipment and lasers, among others. See the draft report here. Continue Reading

China to Broaden Market Access for Foreign Investors in Financial Services

In the wake of the Chinese Communist Party’s 19th Party Congress, and US President Donald Trump’s visit to China, the Ministry of Finance has announced a high-level roadmap for broadening market access for foreign investors in the financial services industry. This policy development, long under discussion, is part of an effort by the Chinese leadership to bolster deteriorating foreign investor sentiment in the country. Some observers have suggested that the timing of the announcement—immediately after Mr. Trump’s visit—suggests that it is meant to be a kind of gift from Chinese President Xi Jinping to Mr. Trump. Others have surmised that its timing may have been chosen to emphasize that China is committed to opening its markets, but on its own timeline.

Announced on November 10 by Vice Minister of Finance Zhu Guangyao, the roadmap (which was conveyed in oral form, not in the form of a written document) suggests that the Chinese government may fulfill some longstanding requests of foreign investors interested in the industry. According to Mr. Zhu:

  • The current 49% cap on foreign investment in securities companies, securities fund management companies, and futures companies will be raised to 51%; three years after this change, the cap will be lifted altogether, allowing 100% foreign ownership.
  • The current restriction that foreign commercial banks may only own up to 20% of a domestic Chinese bank or financial asset management company (or 25% if there are multiple foreign investors) will be eliminated, allowing for 100% foreign ownership.
  • In three years (the starting point is unclear), foreign investors will be allowed to own up to 51% of life insurance companies (currently, the cap is set at no more than 50%); this cap will be eliminated, allowing for 100% foreign ownership, after five years.

The government’s intent to liberalize market access in the financial services sector does not come as a surprise. Since the beginning of 2017, the State Council has issued multiple notices recommending such changes. The newly announced roadmap appears to be a natural next step in the evolution of this policy.

It is important for foreign investors to keep in mind that this roadmap was a high-level oral announcement, with detailed implementing rules yet to be issued. The timing of and substantive details contained in those implementing rules remain unclear at this time.

For instance, it is possible that China could attempt to use the anticipation surrounding these prospective changes as leverage for negotiating concessions from the U.S., thereby introducing a certain degree of uncertainty. During Mr. Trump’s visit to Beijing, Chinese officials sought lesser scrutiny for Chinese investments in the U.S. (particularly in the high-tech sector), asked for the granting of a financial license for the China International Capital Corporation (“CICC”), and urged “prudence” in the use of trade remedies. With a number of different agencies involved in regulating financial services, internal political factors could also cause delays. Just before the announcement of the new roadmap, a spokesperson for the Ministry of Foreign Affairs said that the easing of market entry barriers would take place “in accordance with China’s own timetable and roadmap.”

The substantive details can also affect the practical benefits of this potential policy change. As government agencies begin to formulate implementation rules, foreign investors are advised to carefully monitor accompanying details such as registered capital requirements, permitted business scopes, application quotas, geographic applicability (e.g., nationwide vs. in free trade zones), anti-trust treatment, rules related to foreign investment in state-owned enterprises, and provisions on the remittance of profits overseas.

Despite uncertainties, the promise of visible progress towards the opening of the financial services sector to greater foreign investment is a significant, positive development for a foreign business community in China that is seeking greater recognition of its contributions to the country’s development and a renewed commitment to continuing China’s long and gradual process of opening its markets.

Eunice Li of Covington & Burling LLP contributed to the research and preparation of this article.

House of Representatives Seeks to Strengthen Subpoena Enforcement Dramatically

In late October, the House of Representatives quietly approved a bill that would dramatically strengthen Congress’s procedures for enforcing congressional subpoenas.  In adopting the bill, the bipartisan leadership of the House Judiciary Committee highlighted the challenges that Congress faces in obtaining materials from executive branch agencies.  Significant portions of the bill, however, apply to all congressional subpoenas, including subpoenas issued to private sector individuals and entities.

After passing the House, the legislation is currently pending in the Senate Judiciary Committee.  The staff of the Senate Judiciary has indicated an interest in enhancing Congress’s subpoena enforcement procedures.  In 2015 and 2016, the Senate engaged in a lengthy legal battle to enforce a subpoena against Backpage, an online forum accused of contributing to sex trafficking, and its CEO Carl Ferrer.  We therefore believe that legislation to strengthen congressional subpoena enforcement is likely, but it is not yet clear whether the Senate will support the House bill or propose its own alternative.

The key provisions of the bill, H.R. 4010, the Congressional Subpoena Compliance and Enforcement Act, include the following:

  • The bill would establish special rules applicable only to civil litigation brought by Congress to enforce a subpoena. Courts would be required to “expedite to the greatest possible extent” the resolution of such cases.  Congress would be permitted to request a hearing before a three-judge panel of the district court, rather than proceeding through the usual district court process.  In such instances, the legislation would eliminate intermediate appeals – any appeal would go directly to the Supreme Court.
  • The legislation would authorize “monetary penalties” against the head of a government agency found by a court to have willfully failed to comply with any part of a congressional subpoena. Importantly, the legislation would prohibit the use of any government funds to pay the penalty, presumably leaving the government official personally on the hook.
  • In a change that has significant implications for companies and individuals that receive congressional subpoenas, the legislation would provide that privileges against responding to a subpoena may be waived if a recipient does not specifically assert the privilege in a detailed privilege log provided to Congress.
  • The legislation also prescribes – with extreme precision – the information that a subpoena recipient must include in a privilege log. The bill would require, for each record withheld, the following:
    • “An express assertion and description of the legal basis asserted for withholding the record.”
    • The type and general subject matter of the record, and the date, author, addressee, and custodian of the record.
    • “The relationship of the author and addressee to each other.”
    • “Any other descriptive information that may be produced or disclosed regarding the record that will enable the congressional committee or subcommittee issuing the subpoena to assess the legal basis asserted for withholding the record.”
  • The legislation would require that subpoena respondents submit electronic information to Congress in the native electronic format.
  • Finally, the legislation reiterates Congress’s longstanding position that it is not bound by common law privileges, including the attorney-client privilege. The bill states that the legislation may not be interpreted “to establish Congress’ acceptance of any asserted privilege or other legal basis for noncompliance with a congressional subpoena.”

Recent disputes between Congress and subpoena recipients – including the Fast and Furious investigation in the Obama Administration and the Senate’s investigation of Backpage – would likely have evolved very differently under the procedures proposed in this legislation.  Indeed, the privilege log requirement may be a direct reaction to issues Congress confronted with Backpage.

Although the legislation was sponsored entirely by Republican Members of Congress, it passed the Judiciary Committee unanimously, and it passed the House under suspension of the rules, which requires a two-thirds supermajority.  Although congressional subpoenas are often the subject of partisan conflict, the wide support for this legislation likely reflects the parties’ shared institutional interests in seeing subpoenas enforced.

Russia and Iran Sanctions: Recent Developments

During the past two weeks, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and the U.S. Department of State have taken a number of steps toward implementing aspects of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), a major piece of sanctions legislation passed by the U.S. Congress in July and signed by President Trump in early August. These steps are in addition to those described in our client alert last month.

Specifically, as called for by CAATSA, OFAC on October 31 issued a revised Russia sectoral sanctions Directive 4 that expands the restrictions on U.S. person support for certain unconventional oil projects to reach new such projects being undertaken anywhere in the world where a sectorally sanctioned Russian energy company has a majority voting or 33 percent or greater ownership interest in the project. OFAC also issued related guidance on this expanded sanction. In addition, OFAC issued guidance on the application of secondary sanctions to foreign financial institutions and on the implementation of other measures in CAATSA.

Also with respect to CAATSA, the U.S. Department of State has issued guidance on the imposition of secondary sanctions relating to Russia’s energy export pipelines, investments in special Russian crude oil projects, and a CAATSA provision that requires the President to sanction persons who knowingly engage in significant transactions with parties affiliated with Russia’s defense and intelligence sectors.

With respect to Iran, OFAC issued amended regulations on October 31 implementing CAATSA’s requirement to impose terrorism-related sanctions with respect to officials, agents, or affiliates of Iran’s Islamic Revolutionary Guard Corps (“IRGC”).

Primary Sectoral Sanctions Targeting Russia’s Energy Sector

Since September 12, 2014, OFAC Directive 4 has prohibited U.S. persons from providing goods, services (except for financial services), or technology in support of exploration or production from deepwater, Arctic offshore, or shale projects that have the potential to produce oil in Russia or its territorial waters and that involve a sectorally sanctioned Russian energy company or an entity owned 50 percent or more, directly or indirectly, individually or in the aggregate, by one or more such companies. “U.S. persons” are legal entities organized under U.S. law and their non-U.S. branches; individual U.S. citizens and lawful permanent residents (“green-card” holders), wherever located or employed; and any persons when physically present in the United States.

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Grassley Legislation Would (Re)Impose FARA Obligations on Private Sector Entities

With the Foreign Agents Registration Act in the news and public awareness of this formerly obscure statute at an all-time high, Senator Charles Grassley (R-Iowa) introduced legislation last week to revise the statute significantly, including reversing a decision Congress made in 1995 to remove most private sector reporting from FARA and place it instead under the companion Lobbying Disclosure Act.

The proposed change to private sector reporting has significant implications for anyone engaged in the U.S. political system on behalf of entities based abroad, including U.S. subsidiaries of foreign headquartered businesses, U.S. companies with foreign subsidiaries or affiliates operating outside the United States, foreign individuals who travel to the United States to engage the U.S. political system on matters affecting their businesses, and U.S.-based lobbying, law, public relations, and consulting firms that provide services to individuals and companies abroad.

In a new client alert, Covington provides a summary of FARA’s key registration and reporting requirements for private entities and reviews the implications of Sen. Grassley’s legislation.

The Congressional Agenda for November

After months of talk, speculation and behind-the-scenes negotiations, the Republican tax reform proposal is expected to be released to the public this week. It is likely to remain at the forefront of legislative business during this November work period. The stakes surrounding it are very high; failure to pass the bill could have many effects, not the least of which is putting at risk the Republican majorities in both houses of Congress in the 2018 elections.

Last week, the GOP took a crucial procedural step forward when the House of Representatives passed the Senate Fiscal Year 2018 budget resolution by a vote of 216-212. Final approval of the budget blueprint by both chambers allows the Republican conference to begin in earnest the legislative process for a tax reform measure that reportedly could cut taxes by as much as $1.5 trillion over the next decade, and for eventual passage of a tax-reform bill without any Democratic support.

Republican congressional leaders and the President are not wasting any time or momentum after passage of the budget resolution and have established an ambitious timeline for consideration of the tax legislation. House Ways and Means Committee Chairman Kevin Brady (R-TX) is expected to unveil the tax bill on November 1. The Ways and Means Committee plans to mark the bill up during the week of November 6. House leaders plan to bring the bill to the floor during the week of November 13, prior to the scheduled Thanksgiving holiday recess. The Senate Finance Committee plans to release its version of the bill during the week of November 13, likely following House passage of its bill. The Senate Finance Committee reportedly plans to hold its markup during the week of November 27, after which the full Senate would take up its tax reform measure in early December. Assuming both chambers succeed in passing their respective versions of the bill, they would proceed to conference to reconcile the two bills, and a final package negotiated by both chambers could be approved before the end of the year.

Actually legislating reforms to the complicated tax code may take longer than this accelerated timeline, and the narrow 216-212 House budget resolution vote is a sign of how difficult the negotiations may be within the Republican conference. The GOP lost 20 Republican votes on final passage of the Senate budget resolution, many of the members from high-tax states who have expressed concerns the tax reform plan will eliminate or severely circumscribe the current deduction for state and local taxes, resulting in higher overall taxes for their constituents. They argue that their states are already donor states (sending more in taxes to the federal government than they receive back) and their constituents should not bear this added burden. Another dispute over the yet-to-be-released tax bill involves contributions to retirement savings accounts. Republican margins in both chambers are extremely narrow and leaders will have their hands full in the coming weeks trying to balance the interests of each member and his or her constituency, while trying to stick to their goal of major tax reform before the end of the year.

Beyond the push for tax reform in November, Republican leaders are staring down a major fiscal deadline set for Friday, December 8: the expiration of continuing appropriations keeping the government running in FY 2018. The strategy for avoiding a government shutdown has not been shared publicly, but the passage of the FY 2018 budget resolution by both chambers sets the stage for negotiations over discretionary spending levels and the limits established by the 2011 Budget Control Act (BCA). Even though the FY 2018 budget resolution adheres to the spending caps mandated by the BCA, it includes a provision that allows the House and Senate Budget Committees to adjust those caps in the event separate legislation is passed to revise the BCA limits for defense and non-defense discretionary spending. Democrats are expected to wield significant influence in these fiscal discussions, because any eventual legislation adjusting spending caps and authorizing spending will likely need Democratic support.

Democrats have also indicated they intend to exert their influence over spending negotiations to secure a resolution of the ongoing debate over the Deferred Action for Childhood Arrivals (DACA) program. The DACA program, established by President Obama, allowed persons who were brought to the country illegally by their parents when they were children to remain in the country and work, serve in the armed forces, or attend school. The Trump Administration announced in September that it will end the program in March 2018 because it lacked congressional authorization. The delay in terminating the program is designed to give Congress a chance to enact legislation to authorize a similar program. Speaker of the House Paul Ryan has formed a Republican working group in the House to develop a proposal on the issue, and Senate Republicans have also reportedly established a working group to draft their approach. Speaker Ryan reportedly told some members of the House Republican Conference that a DACA fix will be included in the appropriations bill the House will consider before December 8; Democrats have indicated they will withhold their support for any appropriations bill that does not include protection for DACA beneficiaries. While public support for DACA beneficiaries is widespread, there are sharp differences over whether and how to authorize the program by law and whether to include border security and various enhanced immigration enforcement authorities in a DACA legislative package without alienating support from either party.

In reportedly telling some of his members that DACA will be addressed in the appropriations bill, Speaker Ryan also is reported to have told his members that the issue of restoring cost-sharing subsidy payments under the Affordable Care Act (ACA) will not be addressed in that vehicle. The President decided in October to end the cost-sharing reduction payments that helped to subsidize the health-insurance policies available under the ACA. Congressional Republicans are trying to determine a path forward on the issue. Senate Health, Education, Labor and Pensions Committee Chairman Lamar Alexander (R-TN) and Ranking Member Patty Murray (D-WA) have introduced a bipartisan bill to restore the payments for two years. Senate Finance Committee Chairman Orrin Hatch (R-UT) and Ways & Means Chairman Brady have proposed their own approach, which is more conservative. Resolution is a salient issue for the future of President Obama’s signature domestic achievement, especially during the upcoming ACA open-enrollment period. Because of the focus on tax reform, however, it is dubious any resolution of the issue will be achievable in November. Along with these ACA-related issues, Congress will need to renew the Children’s Health Insurance Program (CHIP), which expired at the end of September. While the program continues to function, many states are now running out of money for it, so renewal of the program is priority. The House plans to consider its version of a bill to renew CHIP this week, although in the face of Democratic opposition to some of its offset provisions used to pay for the renewal, that bill is unlikely to garner sufficient support to pass the Senate. Further talks will be needed to resolve the issue, even as states run out of funding for the program.

Compounding the challenges presented by these fiscal debates is disaster relief. The White House has indicated that Congress should expect a request in November for a third round of disaster aid for communities affected by Hurricanes Harvey, Irma and Maria and western wildfires. White House Budget Director Mick Mulvaney recently indicated that damage assessments are ongoing and additional disaster-relief requests will follow their completion. He also proposed that Congress consider reducing spending elsewhere in order to offset the unbudgeted amounts that will be necessary for disaster aid. Whether that offset suggestion becomes an administration demand is unclear, but if so it is likely to be highly controversial.

Behind the scenes, leaders of the Armed Services Committees are optimistic of concluding conference committee negotiations on the FY 2018 National Defense Authorization Act. The annual authorization bill sets Department of Defense policy and authorizes Pentagon spending levels for the year ahead. In July, the House passed a $696 billion bill while the Senate passed a $700 billion package in mid-September. Aside from their marginally different topline allocations, the House and Senate bills diverge slightly on policy and when passed by their respective chambers both exceed some of the budget and capability levels requested by President Trump. Despite these differences, House Armed Services Committee Chairman Mac Thornberry (R-TX) has expressed optimism that the differences will be resolved in short order. His Senate counterpart, Chairman John McCain (R-AZ), has expressed his view that a conference report could be finished in “days.” A resulting conference report must be passed by both chambers before being sent to the President for signature.

Also during this work period, both chambers are expected to continue discussions related to the expiring surveillance authority of Section 702 of the Foreign Intelligence Surveillance Act. The authority, which expires at the end of the year, is considered by the intelligence community to be a pillar of U.S. counter-terrorism efforts. The program is, however, controversial with privacy and civil liberties advocates, and the debate surrounding the surveillance reauthorization divides Members in both parties. Some Republicans have joined calls from the Trump Administration to make a reauthorization permanent, while others, including privacy hawks, liberal Democrats and conservative Republicans alike, want to incorporate additional civil liberties protections before renewing the program. Senators Rand Paul (R-KY) and Ron Wyden (D-OR) and a bipartisan group of House lawmakers have introduced legislation, the Uniting and Strengthening America by Reforming and Improving the Government’s High-Tech Surveillance (USA RIGHTS) Act, that would add privacy protections under Section 702, to better prevent communications made by American citizens from being swept up under the program and maintains the sunset clause, with a requirement for congressional reauthorization every four years. The House Judiciary Committee released a bipartisan bill in early October, the USA Liberty Act, which would reauthorize the program for six years while attempting to strengthen civil liberty protections with new reporting requirements for intelligence officials. And just last week the Senate Intelligence Committee quietly advanced its own measure 12-3 during a closed markup. This Intelligence Committee proposal would extend Section 702 authority through 2025. Although final action is not expected until December, this month will be important in trying to reach enough of a consensus to find a path forward among the competing perspectives on the issue.

Related to national security issues, the Senate is likely to consider whether to impose new sanctions against North Korea and Iran. The Senate is expected to take up the Otto Warmbier North Korea Nuclear Sanctions Act (H.R. 3898), passed by the House last week by a vote of 415-2. The legislation would direct the U.S. Treasury Department to ban U.S. financial institutions from engaging in transactions that benefit people or entities associated with the North Korean government and authorizes the U.S. government to suspend financial assistance to any foreign governments that knowingly fail to prevent financial transactions that benefit the North Korean regime. Also last week, the House passed several sanctions bills in response to Iran’s ballistic missile program, which the Senate may also take up during this work period. This legislative response comes just two weeks after President Trump refused to certify that Iran is meeting the terms of the multilateral agreement negotiated to curb its nuclear program, and instructed Congress to strengthen the law that governs U.S. participation in the deal. This action by the President initiated a 60-day clock for Congress to re-impose sanctions on Iran’s nuclear program that were lifted under the international nuclear agreement, but congressional leaders are first focusing on imposing non-nuclear penalties. The House-passed legislation would expand upon a sanctions package signed into law in July and would require the Administration to create an implementation plan. This bill also would impose additional sanctions on individuals or entities that help Iran develop ballistic missiles and other conventional weapons. Another portion of the sanctions package would require the President to report to Congress on the Iranian and international supply chain for Iran’s ballistic missile program and to impose sanctions on the individuals and entities that support it, both inside and outside Tehran. Other measures target Hezbollah, the Lebanese Shiite terrorist organization, Iran’s proxy army in the Syria, and entities that support it the terrorist organization.

In addition to these matters, the Senate is starting the month by spending a week on confirming four circuit court nominees. With the Democrats having eliminated the filibuster for nominations during President Obama’s term, they have no prospect of preventing these nominees from being confirmed. The Senate is expected to continue its consideration of other judicial and executive nominees throughout the month during periods in between floor consideration of legislation.

China’s 19th Party Congress: Affirming Xi’s Leadership and Policies

As most expected, China’s recently-concluded 19th Party Congress appears to have consolidated Xi Jinping’s leadership role within the Chinese Communist Party (CCP) and affirmed his policy agenda of the past five years—since he took over the Party in 2012 and as China’s President in 2013. It was a given that Xi would continue into his second five-year term as CCP General Secretary. Beyond this, however, the Congress voted unanimously to amend the Party constitution to include a reference to “Xi Jinping Thought on Socialism with Chinese Characteristics in a New Era,” on which Xi expounded in his three-and-a-half-hour opening report to the Congress. This essentially elevated him to the ranks of Mao Zedong and Deng Xiaoping, surpassing his immediate predecessors. The fact that the line-up of the seven-member CCP Politburo Standing Committee did not include a designated heir-apparent, moreover, can be seen as further underscoring his position, since it concentrates power in Xi and opens up the possibility that he may continue to lead the CCP for a third term after the 20th Party Congress in 2022. If so, this would represent a major departure from recent norms that had limited the CCP General Secretary to two five-year terms and to serving only under the age of 70.

Enhancing One-Party Rule

In his much-noted opening speech to the Party Congress on October 18, Xi set broad policy goals that primarily build on his policy agenda of the past five years. Above all, Xi emphasized the need to strengthen even further communist one-party rule in China, including control of the Internet and social media, essentially sidelining the prospect of political liberalization for the foreseeable future. This suggests that the recently-passed laws governing cybersecurity, national security, and the supervision of foreign NGOs are likely to be applied vigorously, and perhaps even expanded. In his report, Xi called for the Party to strive for the “great success of socialism with Chinese characteristics,” essentially touting and contrasting China’s model from that of a Western “liberal democracy,” and offering an alternative that some developing countries may find more appealing. At the same time, Xi recognized in his report the importance of increasing discipline within the Party at all levels, especially by expanding the anti-corruption campaign and addressing the critical and widespread issues of poverty, inequality, and the environment in order to maintain popular support.

Strengthening the State’s Role in the Economy

On the economic front, Xi continued to emphasize the Party and the state’s leading role by calling for further measures to support, consolidate, and make more efficient China’s debt-laden state-owned enterprises, as opposed to leaving them to market forces. He focused on government industrial policies and financing for research and development to promote technological advances and innovation, much as was laid out in the government’s “Made in China 2025” report. Xi also called for increased government supervision of the financial sector to avoid the financial crises that China had experienced in the past, e.g., during the 2015 stock market crash that saw the loss of up to $3 trillion in market value. Xi did talk about giving the market more of a role in resource distribution and in setting “market-oriented” (as opposed to market-determined) interest rates and foreign exchange policies. The key point here is that under Xi’s model, China’s economic policies will continue to be led by the state while guided, but not ruled, by market forces.

Expanding Foreign Investments via Free Trade Zones 

With respect to foreign trade and investment policies, Xi underscored China’s commitment to further opening in both directions, arguing that “opening brings progress, while closing will necessarily lead to backwardness.” He indicated that China has welcomed foreign investment by offering to implement “pre-establishment national treatment” as well as adopting a “negative list” approach that is intended to expand market access for foreign investors. He also spoke of protecting the legal rights of foreign investors. In this context, he proposed to continue China’s longstanding practice of creating more experimental free trade zones and free trade ports to attract selected foreign investment into confined geographic areas, such as the country’s recently established free trade zones.

China’s “Coming Out” on the Global Stage 

Xi boldly announced in his report that China aims to become recognized as a global power in all respects by 2050, in essence achieving the “China dream” of returning to its historic greatness. He declared that “it is time for us to take center stage in the world and to make a greater contribution to humankind.” Apart from creating a modern economy and society domestically, Xi touted China’s Belt and Road Initiative as key to expanding the country’s economic and political influence, as well as its soft power, in the region and around the world. Xi also set forth the goal of modernizing the Chinese military in stages, and creating a world-class military force by 2050, to defend China’s national interests. With respect to Taiwan, Xi spoke forcefully against any attempt to “split the motherland,” and asserted China’s “firm will, sufficient faith, and adequate capacity to defeat any movement toward ‘Taiwanese independence’ in any form.” At the same time, however, Xi repeated that China must continue to insist on the goals of achieving “peaceful reunification” within the “one country, two systems” framework, as currently applied to Hong Kong.

Prospects for the Next Five Years 

What the above suggests is that there will not be any major changes in the general direction of China’s policy agenda ahead. Indeed, Xi has sought and obtained affirmation of his policies of the past five years by casting them into a new ideological model of “socialism with Chinese characteristics in a new era.” This model notes the importance of a strong legal system and market forces, but essentially underscores the primacy and leading role of the Party and the state. In this model, the Party/state rules by law and uses the market, but it is not subject to either. The prospect for significant political liberalization and market reforms thus appears dim.

On the foreign policy front, China is likely to be more assertive politically and economically on the world stage, but it will likely be relatively cautious in terms of wielding its growing military power. Xi’s top priority at this stage will be to develop a “moderately prosperous” economy and to maintain a stable society—both immense challenges for a developing, middle-income country of 1.4 billion people, with half of its quickly ageing population still living in rural areas. To achieve the ambitious goals set forth in his report, and to assure the survival of the Party, China first needs to be able to sustain its economic growth and modernization efforts. This will require a stable regional and international environment that does not disrupt its critical trade and investment ties abroad.

The fundamental question, then, is whether Xi’s model will continue to work as its people and companies become more engaged and exposed to the international norms and values of the modern world. Will the Chinese people continue to accept one-party rule indefinitely, especially if and when the country’s economic growth begins to slow in the years ahead? Will China be able to revive its ailing state-owned enterprise sector simply through subsidies and consolidation, without significant market reforms? Will China be able to continue to pursue its “industrial policies” and create “national champions,” hence benefitting from but not complying with existing global trade and investment rules? Will China be able to foster indigenous innovation if other countries begin to take measures to limit its ability to access and acquire advanced technologies? Finally, how will the United States and the advanced “Western” nations respond to the political, economic, and ideological challenges posed by a rising China in this new era?

The Week Ahead in the European Parliament – October 27, 2017

Summary

Next week is a constituency week for Members of the European Parliament (“MEPs”). MEPs will go back to their home countries to handle national issues, or convene in their parliamentary delegations to work on matters related to non-EU Member States.

This past week was however important, as many significant initiatives were adopted by the Parliament.

On Tuesday, MEPs adopted amendments on the proposal for a Regulation on CE marked fertilizing products. The proposal for a Regulation seeks to repeal the existing Fertilizers Regulation.  It introduces revised EU market access rules to incentivize the large-scale production of fertilizers in the EU from domestic organic or secondary raw materials, with a view to reducing the EU’s dependence on imported substances, such as phosphate. The proposal also provides measures to address the issue of soil and food contamination. It also introduces harmonized cadmium limits for phosphate fertilizers to protect human health and reduce environmental risks. The amendments were proposed by the Committee on the Internal Market and Consumer Protection (“IMCO”). The Council has yet to adopt its position on these proposals.  See the proposal for a Regulation here, and the text adopted by the European Parliament here.

Also on Tuesday, the plenary adopted a non-binding resolution in favor of phasing out the herbicide glyphosate in Europe by the end of 2022, with immediate restrictions where biological alternatives are available in farming and for household uses of the substance. The European Parliament therefore opposes the European Commission’s proposal to renew the license for 10 years. While the resolution is not binding, it puts pressure on the Commission not to renew the license. MEPs stated that a five-year phase-out of the herbicide is sufficient. See the text adopted here.

On the same day, MEPs approved an update to the EU-Morocco Euro-Mediterranean Aviation Agreement, an open skies agreement between the bloc and Morocco that has been in place provisionally since 2006. As Bulgaria, Croatia and Romania became EU Member States after 2006, the Agreement had to be amended to include these countries in its geographical scope. Tuesday’s vote in the plenary concluded this process. See the text adopted here.

On Thursday, the European Parliament approved its negotiation position on the e-Privacy Regulation, with 318 votes in favor, 280 against and 20 abstentions. The approved text, among others, protects encrypted communications and prohibits websites from refusing to provide free services to users who do not accept cookies. The text supports robust restrictions on how governments and businesses can access and monitor digital communications. See the draft ePrivacy Regulation here.

Meetings and Agenda

  • No official meetings in the European Parliament are planned before November 6, 2017.

Brexit Negotiations in October: Softened Stances, but no “Sufficient Progress”

The third round of the Brexit negotiations, at the end of August, was not very productive. This was despite the British side’s publication of an impressive number of position papers over the course of the summer. These covered various technical questions but also the sensitive issue of the participation in the customs union and how to avoid reestablishing a border between Northern Ireland and the Republic of Ireland.

The documents were not well received by the EU side, not only because a number of them anticipated negotiations on the future relationship, but mainly because they brought no realistic solutions. Rather, they confirmed the EU’s view that there was no real leadership on Brexit in London and that the negotiators were constrained by an official position that had become unrealistic: that the UK could, with no harm, leave the customs union and the internal market as soon as by the end of the two years foreseen by Article 50 of the EU Treaty.

In view of the impasse, the EU therefore asked for a postponement of the fourth round of talks scheduled for the week of 18 September. The talks were indeed postponed for a week.

A Softening in the UK’s Position

In the interim, in an attempt to break the deadlock, Prime minister Theresa May, in a speech in Florence on September 22, presented a revised UK position aimed at relaunching the negotiations on a better footing.

The most important novelty in the Prime Minister’s “Florence speech” related to the transition period, aimed at bridging the gap between the UK withdrawal in March 2019 and the beginning of a new trade relationship. Theresa May suggested in her speech that this period should last “around two years,” in order for the UK and the EU to be able to “implement smoothly” the new arrangements concluded. Importantly, she accepted that, during that period, market access “should continue on current terms” and that the framework would be “the current structure of EU rules and regulations”. This means that, contrary to the UK’s former position, during that period it would remain in the EU internal market and customs union, and would respect the principle of free movement of people as well as the jurisdiction of the Court of Justice of the EU (“CJEU”).

A few days after the Florence speech, on 26 September, the president of the European Council Donald Tusk travelled to London to discuss the way ahead. After his talks, he said that he felt “cautiously optimistic about the constructive and more realistic tone of the prime minister’s speech in Florence and of our discussion”, adding that the speech indicated that “this philosophy of having a cake and eating it is finally coming to an end”.

Nevertheless, the fourth round of negotiations, held in the last week of September, saw little concrete progress on the “separation” issues currently under discussion – citizens’ rights, the Irish Border, and the UK’s financial settlement (the “exit bill”).

All attention then turned to the Conservative Party Conference, which took place in London on October 1 to 4. Discussions at Conference in London confirmed that the Cabinet remains divided on Brexit. Notably, the Foreign Secretary, Boris Johnson, in a newspaper column, expressed positions much harder than those outlined by the Prime Minister. However, amid speculation that he was about to mount a leadership challenge on the Prime Minister – an attempt that was seen as having failed – the Foreign Secretary rowed his comments back somewhat towards the Prime Minister’s softened line.

There was minimal progress during the fifth round of negotiations, which took place on October 9 to 12.

Changing Views on a “No Deal” Brexit

At the start of the negotiation process, the view in Brussels had been that there as a significant risk that the UK would “crash out” of the EU without a deal – either by choice, or simply because the negotiations would not succeed in the time available, and given the divergent positions either side of the English Channel. (For further analysis on this scenario, also known as the “cliff edge” scenario, see Sir Michael Leigh’s blog post, here.) This view was reinforced by the Prime Minister’s statement, in her Lancaster House speech of January 17, 2017, that “no deal is better than a bad deal” for the UK.

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Brexit: limiting the damage

It is one of the ironies of history that the EU as it is today, starting with the single market, was largely made in Britain, the achievement, above all, of former prime minister Margaret Thatcher and her right-hand man in Brussels, the then Commissioner (Lord) Arthur Cockfield. The single market has long been viewed by observers in countries with less of a free market tradition as a typically British liberal invention. And yet it is this market, as well as the EU itself, that another Conservative government is now seeking to leave.

Britain has also left its stamp on key EU initiatives from regional policy to development assistance and fisheries. The EU’s interest in a common foreign and security policy originally stemmed from Britain. The EU’s comparatively transparent and accountable administrative rules date from the reforms introduced by former British Labour Party leader Neil Kinnock when he was Vice-President of the European Commission from 1999 to 2004. Thus, representatives of Britain’s two major parties have helped to make the EU what it is today.

If British prime ministers had explained to public opinion earlier the extent of their country’s influence on the EU, something that other Europeans never doubted, the referendum of 23 June 2016 might never have occurred.

A “Smooth and Sensible” Brexit

Be that as it may, Europeans on both sides of the English Channel are now grappling with the consequences of that vote. If reason and economic interest prevail, a “smooth and sensible” Brexit, as evoked by the British prime minister in Florence in September, might yet emerge.

This would involve a broad agreement, in 2017, on the principal aspects of the divorce settlement. This concerns mainly Britain’s financial commitments to the EU, the residence, professional and health rights of citizens living on both sides of the Channel after Brexit, and the need to maintain the Common Travel Area between Britain and Ireland and to avoid a hard border across the island of Ireland after Brexit. While Brussels, London and Dublin have affirmed their intention of achieving these goals, there are many practical and political issues to resolve.

If sufficient confidence and trust between EU and UK negotiators is established, it should also be possible to agree to the general terms of a future political and economic agreement between London and Brussels by the end of the year and to broach the question of transitional arrangements to smooth the way for government and business. The British government wishes to ensure that business need adjust to Brexit only once, hence the need for a smooth transition to a well-defined future relationship.

If good progress is made next year, the separation agreement and transitional arrangements could be drawn up by October 2018, allowing enough time for approval by EU and British institutions ahead of Britain’s exit from the EU at midnight between 29 and 30 October 2019. Little, except Britain’s lost vote in EU institutions, would then change for the next two to three years, as the UK continued to make payments to the EU budget, respect judgements of the European Court of Justice and accept the free movement of labour.

The breathing space would be used to negotiate, sign and ratify a two-part long-term agreement. The first part would cover trade and economic issues; it could take effect provisionally relatively quickly after agreement had been reached. The second part, though, would be a wide-ranging political agreement, involving security and even aspects of defence. Both sides have an interest in cooperation on armaments production and unconventional forms of conflict, as well as police and judicial affairs. This would involve the member states’ legal responsibilities and require ratification by all twenty-eight countries concerned. It might not come into effect before the mid-late 2020s.

This relatively benign sequence of events assumes that the British government is unified behind its negotiator, David Davies, and that the political situation in Britain and the EU remains generally stable. It also assumes that the EU can move beyond its rigid two-stage sequencing of the negotiations.

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