International Strategy

June 18, 2024, Covington Alert

On June 12, 2024, the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) and the U.S. Commerce Department, Bureau of Industry and Security (“BIS”) issued additional measures to counter Russia’s continued aggression in Ukraine. The measures, announced in advance of the G7 summit in Italy last week, are intended to “continue to drive up costs for the Russian war machine.”

The actions taken by OFAC and BIS include new prohibitions on providing certain information technology- and software-related services to persons located in Russia, establishing additional sanctions designed to target the Russian financial infrastructure, strengthening secondary sanctions that can be applied to non-U.S. persons (including in particular non-U.S. financial institutions), and expanding export controls restrictions on items destined for Russia and Belarus (including with respect to certain types of software). Along with the new rules, OFAC designated for property-blocking sanctions more than 300 individuals and entities (including parties identified for sanctions by the U.S. State Department), while BIS used its authority to make additions to the Entity List, issue Temporary Denial Orders, and notify U.S. distributors of additional restrictions on shipments to parties known to be supplying items to Russia. Significantly, BIS altered its Entity List rules to permit certain address-only designations to the Entity List and, among other designations, added to the Entity List eight addresses in Hong Kong with a high diversion risk. Exports, reexports, or transfers of certain items subject to the Export Administration Regulations (“EAR”) to purchasers, intermediate or ultimate consignees, and end ­users who use those addresses generally will require authorization from BIS.

Separately, on June 13, 2024, the UK Government imposed a new round of asset-freezing sanctions on a number of notable Russian entities. The European Union is also considering a 14th package of sanctions measures relating to Russia, although as of this writing the EU has not yet enacted the new package.

New U.S. Sanctions

Prohibition on Certain Information Technology and Software Services

As part of the joint actions, OFAC issued a determination pursuant to the authority of Executive Order 14071 (the “IT and Software Services Determination”) that prohibits the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a U.S. person, wherever located, of (i) information technology (“IT”) consultancy and design services, and (ii) IT support services and cloud-based services for enterprise management software and design and manufacturing software (collectively, “Covered Software”) to any person located in the Russian Federation, unless licensed or otherwise authorized by OFAC. The IT and Software Services Determination is effective beginning at 12:01 eastern daylight time on September 12, 2024. “U.S. persons” include U.S. legal entities and their non-U.S. branches; U.S. citizens and lawful permanent residents, no matter where located or employed; and persons present in the United States.Continue Reading U.S. Government Issues New U.S. Sanctions and Export Controls Targeting Russia and Belarus for Continued Aggression Against Ukraine; Update on European Sanctions Developments

As the energy transition gathers pace, the need for access to the essential raw materials which underpin it, is also accelerating:

  • An electric car needs six times more rare earth minerals than a conventional vehicle;
  • An onshore wind plant needs nine times more materials than a comparable gas facility;
  • Between 2017 and 2022, the energy sector drove a tripling of global demand for lithium, whilst demand for cobalt and nickel rose by 70% and 40%[1] respectively;
  • Between three to 6.5 billion tonnes of transitional minerals will be needed over the next three decades if the world is to meet its climate goals[2].

The current and future global demand for transitional metals and minerals offers a potentially huge economic opportunity[3]. This is particularly the case for Africa, where more than 50% of the world’s cobalt and manganese, 92% of its platinum and significant quantities of lithium and copper are to be found. Almost all of the continent’s current output is presently shipped as ore for processing in third countries, meaning the potential economic benefit of this enormous mineral wealth has not filtered through to the real economics in its African source countries[4].  Africa exports roughly 75% of its crude oil, which is refined elsewhere and re-imported as (more expensive) petroleum products; and exports 45% of its natural gas, whilst 600 million Africans have no access to electricity (approximately 53% of the continent’s population)[5].

A number of African governments have expressed their determination to avoid repeating the ‘resource curse’ mistakes of the past, by using the continent’s natural resources to drive domestic economic growth, while creating meaningful domestic job opportunities, rather than exporting them and the consequent economic growth elsewhere.  This approach has led a number of African countries to impose export restrictions on raw minerals; promote domestic processing; and demand that agreements with third countries promote technology transfers and improve domestic processing capacities and workforce skills.

Sustainable use of transition minerals

A resolution to promote equitable benefit-sharing from extraction was recently presented at the UN environmental assembly in Nairobi calling for the sustainable use of transitional minerals[6].  The Resolution, which was supported by a group of mainly African countries including the DRC, Senegal, Burkina Faso, Cameroon and Chad, was described as being ‘crucial for African countries, the environment and the future of [African nations’] populations.”

A number of African countries have already taken steps to protect their natural resources and move up the processing value chain[7].Continue Reading African Raw Material Export Bans: Protectionism or Self-Determination?

On April 27, 2023, US National Security Advisor Jake Sullivan delivered a lecture at the Brookings Institution on American economic policy in which he promoted a ‘new Washington consensus’. His speech resonated loudly within EU member states and its institutions. What he said fits very well in the current debate in Brussels on economic and trade policy – a debate which divides policy makers even inside the European Commission in Brussels.

The need for a ‘new’ consensus

Jake Sullivan’s presentation, indeed, reinforces the views of those in Europe who feel there is a need for some distance from globalization, free trade and an economic system based solely on liberalism, competition rules and the law of the market. This system was often presented as ‘the Washington consensus’; this term was first coined by a British economist in 1989 to describe a world of free markets, with the United States as guarantor and relying mainly on the World Bank and the IMF. This ‘consensus’ developed in Washington during the Clinton administration and extended to the other side of the Atlantic – until the turn of the new century.

But now, times have changed: the US is no longer hegemonic; the world has fractured; western values are openly challenged by China and others in the ‘global south’ – and the Trump administration renounced major multinational treaties like TTIP and the TPP. Sullivan describes superbly the reasons why a ‘new’ consensus is needed: ‘a financial crisis that shook the middle class, a pandemic which exposed the fragility of our supply chains, a changing climate that threatens lives and livelihoods, the invasion of Ukraine by Russia which underscores the risks of overdependence’ – and, on top of that, a China which continues to subsidize the growth of its industry and ‘becoming a leader in critical technologies which will define the future’.

This diagnosis, and what Sullivan suggests, match perfectly the thinking by those in Europe who promote an EU ‘industrial policy’ – a novelty for the European Union. Clearly, liberalism and free trade retain strong supporters in European countries and in the EU Commission. Recently the EU ratified an agreement with Chile, concluded a treaty with New Zealand, and persists in completing the ratification of agreements with the Mercosur and Mexico. But even the Commission has to admit that the time of TTIP and other comprehensive trade agreements has passed and that those who want to relax state aid rules and encourage subsidies to the industry are dominating the scene.Continue Reading Europe and the ‘new Washington consensus’

On March 21, 2023, the Department of Commerce (“Commerce”) published a Notice of Proposed Rulemaking (the “Commerce Proposed Rule”) to implement certain provisions of the CHIPS and Science Act of 2022 (“CHIPS Act”) that place restrictions on certain activities of businesses receiving federal funding pursuant to the CHIPS Act (“Commerce…

Continue Reading National Security Update – Departments of Commerce and Treasury Release Notice of Proposed Rulemaking Regarding CHIPS “Guardrails”

In 2022, the European Union announced the creation of Digital Partnerships with three Asian countries: Japan, South Korea and Singapore. This is in line with the EU’s Digital Compass strategy which seeks to make the European Union the most connected continent by 2030. The European Commission is expanding its connections between Europe and the rest of the world to address the digital divide and further develop a sustainable digital economy with trusted partners.

Below we set out the key points from the Digital Partnerships that the European Commission has announced with Japan, South Korea and Singapore, respectively.

EU-Japan Digital Partnership

During the EU-Japan Summit organised on May 12, 2022, the European Union and Japan concluded the EU-Japan Digital Partnership, the first digital cooperation initiative to advance economic growth and provide a safe and inclusive space to solve digital issues. This effort furthers the “Data Free Flow with Trust” agenda, aimed at facilitating safe and secure cross-border data flows.

The EU-Japan Partnership will also focus on the following areas:

  • 5G/6G technologies;
  • Ethical considerations for Artificial Intelligence (“AI”);
  • Global supply chains in the semiconductor industry;
  • Green data infrastructures and data innovation;
  • Development of digital skills for private and public sectors; and
  • Facilitation of digital trade and application of global interoperable standards.

As part of the common vision, the Digital Partnership identified a number of key action items, as follows:

  • Collaborating on the development of innovative technologies through research;
  • Implementing concrete pilot projects in cutting-edge areas such as AI and digital identity;
  • Establishing mechanisms for international collaboration and common approaches to digital transformation; and
  • Developing common principles and rules through regulatory cooperation on key technology enablers for digital trade.

All the above will reflect the highest standards of data protection and follow the objectives set out by the EU-Japan mutual adequacy arrangement. The implementation of the EU-Japan Digital Partnership will start in 2023 and the countries will review their targets and progress on an annual basis.

EU-South Korea Digital Partnership

On November 28, 2022, the European Union and the Republic of Korea launched a new Digital Partnership to boost the cooperation between the two countries in the digital field. This collaboration will mainly focus on:

  • Semiconductors;
  • Next generation mobile networks;
  • Quantum technology;
  • High Performing Computing (“HPC”);
  • Cybersecurity;
  • AI;
  • Digital platforms and standardization; and
  • Data and digital skills.

The key action items from the EU-Korea Digital Partnership include:

  • Engaging in collaborative research activities, facilitating access to, and participation in, international standardisation relating to emerging technologies in the digital sector.
  • The sharing of information on: (i) cybersecurity threats and other aspects of cybersecurity, (ii) data-related laws and systems, which build on the existing adequacy decision that the European Commission granted to Korea (and ensuring data free flow of data between Korea and the EU) and working towards identifying commonalities between their existing regulatory approaches, (iii) views on a 6G roadmap and future 6G spectrum needs, (iv) the laws and systems aimed at the development and global use of trustworthy and human-centric AI (e.g., definitions, use cases, high risk AI applications, and response measures) and coordinating positions on AI governance, (v) platform policies, and (vi) approaches to protectionist measures in the digital space.
  • The Digital Partnership will also establish a Korea-EU forum for semiconductor researchers to (i) discuss and share information on the latest technologies and trends, (ii) identify gaps and potential disruptions to the global supply chain, and (iii) explore potential opportunities for international standardisation of trusted chips and chip security.

EU-Singapore Digital Partnership

The European Union and Singapore announced on December 15, 2022 a new partnership that will focus on the digital sector and its issues. The EU-Singapore Digital Partnership will be formally signed and launched in 2023 and aims at reinforcing existing relationships between the European Union and Singapore in the digital realm to achieve sustainable economic growth. The range of digital issues the collaboration will focus on are:

  • Trade facilitation;
  • Trusted data flows and data innovation;
  • Digital trust and standards;
  • Digital skills for workers;
  • Digital transformation of businesses and public services; and
  • Emerging technologies (e.g. 5G/6G, AI and digital identities).

In contrast to the other partnerships, the EU-Singapore Digital Partnership is the first one to agree on the development and application of Digital Trade Principles (“Principles”). These Principles are designed to provide a common framework for digital strategies, which will in turn be used contribute to the ongoing OECD discussions on establishing rules regarding electronic commerce.

What are the next steps?

In announcing these Digital Partnerships, EU Commissioner, Thierry Breton mentioned that these Digital Partnerships are likely to:

  • impact recent EU proposals, such as the EU Chips Act or AI Act; and
  • help achieve interoperability between the EU and Asia, as the EU Commission and ASEAN countries continue to cooperate in the digital space.

As mentioned above, all three Digital Partnerships will be formally launched in 2023. We expect that the Digital Partnerships will be used as a strategic pathfinder for closer region-to-region digital connectivity and to develop enhanced cooperation with other ASEAN countries such as Thailand, Malaysia, among others.

If you would like to learn more about these Digital Partnerships, or how Covington could help you participate in related policy initiatives, please do not hesitate to contact us.Continue Reading EU Digital Partnerships with Asia: A New Path Towards Enhanced Digital Collaboration and Opportunities

Last week Finance Ministers, Central Bank Governors and Development Ministers from around the world descended on Washington for the annual meetings of the International Monetary Fund (IMF) and the World Bank.  What did they say, what did they do and what does it mean for international businesses?

Volatility was the…

Continue Reading World’s Economic Leaders Meet in Washington: Drawing the Implications for International Business Executives

There have been several recent developments in international efforts to combat trade in goods made with forced labor, with important implications for responsible sourcing and global trade compliance programs.

On September 14, 2022, the European Commission (“Commission”) published a proposal to ban products made with forced labor from the EU market. The proposal notably goes beyond banning the importation of such products and would also create a ban on the export of products produced with forced labor and require their withdrawal from the EU market.

Meanwhile, enforcement by U.S. Customs and Border Protection (“CBP”) of the U.S. forced labor import prohibition has continued to intensify, including under the Uyghur Forced Labor Prevention Act (“UFLPA”). In early August 2022, CBP clarified the process for updating the UFLPA Entity List. In addition, CBP recently announced that it intends to integrate forced labor compliance requirements into the Customs Trade Partnership Against Terrorism (“CTPAT”) “trusted trader” program.

We discuss these developments and their implications below.

EU Forced Labor Product Ban

The European Commission has proposed a Regulation prohibiting products made with forced labor from being imported to, exported from, or sold in the EU, following an announcement by Commission President Ursula von der Leyen during her State of the Union address in September 2021.

The Commission’s proposal is the first step in the EU’s formal legislative process. The Regulation will now have to be agreed by the European Parliament and Council to become law, following which there will be an agreed delay—the Commission has proposed two years—before it applies in EU Member States. As it usually takes at least 12 months, and often closer to 18 months, for the European Parliament and Council to agree on a legislative text after a proposal by the Commission is published, it is unlikely that the Regulation will be adopted before the end of 2023, and it is therefore unlikely to become applicable earlier than late 2025.Continue Reading Breaking Developments in Forced Labor Trade Enforcement—the EU’s Proposed Forced Labor Product Ban and Recent Developments in U.S. Customs Enforcement

Presidential Action Triggered by Crisis in the U.S. Solar Industry

In recent months, the U.S. solar industry has been in the midst of an existential crisis, triggered by the threatened imposition of retroactive and future tariffs on a significant portion of U.S. imports. That crisis began on April 1, 2022, when the Department of Commerce (“Commerce”) initiated an inquiry to determine whether solar cells and modules from Cambodia, Malaysia, Thailand, and Vietnam are circumventing antidumping (“AD”) and countervailing duty (“CVD”) orders on solar cells from China. Solar cells from these countries generally accounted for approximately 80% of U.S. solar module imports in 2020.[1] If Commerce finds circumvention, solar cells and modules from the four target countries could not only be subject to combined AD/CVD tariffs approaching 250%, but Commerce’s regulations also allow for the agency to apply these tariffs retroactively to merchandise entering on or after April 1, 2022 (and potentially as far back as November 4, 2021). This threat of AD/CVD tariffs triggered a steep decrease in imports of solar cells and modules from Southeast Asia, and caused parts of the U.S. solar industry to come to a stand-still, furthering domestic reliance on coal.[2] Given this paralysis in the solar industry, lawmakers and others urged the President to provide relief from potential AD/CVD tariffs.[3]

The President’s Response

On June 6, 2022, President Biden issued a declaration of emergency (the “Declaration”)[4] pursuant to section 318(a) of the Tariff Act of 1930, as amended (19 U.S.C. § 1318), and issued a determination pursuant to section 303 of the Defense Production Act of 1950, as amended (50 U.S.C. § 4533) (“the DPA Determination”)[5]. The Declaration finds that an emergency exists “with respect to the threats to the availability of sufficient electricity generation capacity” and authorizes Commerce to issue a moratorium on tariffs on solar cells and modules from Cambodia, Malaysia, Thailand, and Vietnam for up to a 24-month period, while the DPA Determination aims to “expand the domestic production capability” for solar cells during this 24-month period. The Declaration itself does not prevent the imposition of tariffs on imported solar cells and modules from the Southeast Asian countries, rather it authorizes the Secretary of Commerce to “take appropriate action” to permit the duty-free importation of solar cells and modules for 24 months after the Declaration’s issue date.[6]Continue Reading President Acts to Prevent Import Tariffs on Solar Cells and Modules from Southeast Asia

International Trade, Public Policy (U.S.), Technology

On March 23, 2022, the Office of the U.S. Trade Representative (“USTR”) announced its decision to reinstate through December 31, 2022, 352 previously granted exclusions from tariffs imposed on Chinese imports under Section 301 of the Trade Act of 1974 (“Section 301 Tariffs”). The reinstated exclusions are a subset of a limited group of 549 exclusions that were previously extended and thus were eligible for possible reinstatement, and it remains unclear if and when a broader exclusion process might be forthcoming.

Background

The Section 301 Tariffs are based on the U.S. Administration’s determination in March 2018 that China’s technology transfer and intellectual property (“IP”) policies are harming U.S. companies. Between July 2018 and September 2019, the United States imposed four escalating tranches of tariffs on imports from China. U.S. tariffs on over $360 billion in Chinese imports remain in place despite the “Phase One” agreement that the parties reached in January 2020.

For each of the four tranches or “Lists,” USTR established a process for requesting product-specific exclusions from the Section 301 Tariffs. In total, USTR granted over 2,200 exclusions. USTR also opened a process for submitting comments on whether to extend the duration of particular exclusions. Based on that process, USTR extended 549 exclusions spanning products covered by Lists 1 – 4, but most of these exclusions expired by December 31, 2020, with the remainder expiring on March 25 and April 18, 2021.

On October 8, 2021, days after USTR Katherine Tai announced that her office would open a “targeted” tariff exclusion process, USTR published a Federal Register notice inviting public comment on whether and how long USTR should reinstate 549 product exclusions that were granted and subsequently extended. USTR published on its website a list of all 549 exclusions. The notice indicated that USTR would focus on evaluating whether, despite imposition of the Section 301 Tariffs, “the particular product remains available only from China.” Additionally, USTR would consider whether reinstating an exclusion would “impact or result in severe economic harm to the commenter or other U.S. interests,” or affect the goal of obtaining the elimination of China’s problematic IP policies.

Reinstated Section 301 Tariff Exclusions

On March 23, 2022, USTR announced its decision to reinstate 352 product exclusions among those identified in its October 8, 2021 notice. USTR stated that its determination was based on public comments received as well as input from advisory committees and other U.S. agencies.

All reinstated exclusions are retroactive to import entries made on or after October 12, 2021, that are unliquidated or that are liquidated but remain protestable. The reinstated exclusions expire on December 31, 2022, though the notice provides that USTR “may consider further extensions as appropriate.”
Continue Reading USTR Reinstates Limited Exclusions from Tariffs on Chinese Imports

On March 11, 2022, President Biden announced that the United States, acting in coordination with the European Union (“EU”) and leaders of major economies belonging to the Group of Seven (“G7”), would begin taking steps to revoke most-favored-nation (or “MFN”) trade status for Russia. MFN trade status—known as Permanent Normal Trade Relations (“PNTR”) status in the United States—is a term used to describe the nondiscriminatory treatment granted among most of the world’s trading partners. Days after the President’s address, on March 16, the House passed to formally revoke PNTR for Russia, and also stripping Belarus of MFN treatment. The bill now moves to the Senate, where timing for its consideration is uncertain.

MFN status is a fundamental principle in the international trading system established under the World Trade Organization (“WTO”), and as a general rule, WTO Members are required to accord MFN status to all other WTO Members. Having acceded to the WTO in 2012, Russia is generally entitled to MFN treatment by other WTO Members. In response to Russia’s invasion of Ukraine, however, several other WTO Members have joined the United States, the EU, and the G7 in stating an intent to revoke MFN treatment for Russia, invoking an “essential security” exception that permits WTO-inconsistent measures where a Member considers such measures to be “necessary for the protection of its essential security interests.” Statements issued by the White House and G7 Leaders emphasized the coordinated nature of the initiative across economies, and the intent to continue to pursue additional collective action to deny Russia the benefits of WTO membership.

While certain G7 countries, such as Canada, have already withdrawn Russia’s trade benefits by means of executive action, revocation of Russia’s PNTR status in the United States will require congressional action. While the House has passed a bill to do so, specific timing for consideration of that legislation in the Senate is still unknown. A revocation of Russia’s MFN status will increase tariff rates applicable to certain U.S. imports from Russia, and may also provoke Russia to take responsive, retaliatory actions against international firms. This alert provides background on Russia’s current trade status, analyzes congressional action to date on the issue, and describes the potential international trade implications for U.S. firms of a change in Russia’s trade status.

Background on Russia’s Trade Status

Under the principle of MFN treatment, WTO Members are required to treat imports of goods and services from any WTO Member as favorably as they treat the imports of like goods and services from any other WTO Member. In practice, this means that MFN treatment is the basic “non-discriminatory” treatment to which all WTO Members are generally entitled. Russia has been accorded MFN treatment by most major economies since it became a WTO Member in August 2012.
Continue Reading Revocation of Russia’s Most-Favored-Nation Trade Status: What Companies Need to Know