What We Learned in 2017 and What It Means for Business

This guest article has been provided by the Baker Donelson Trade Team.

by: Andrew Bisbas & Doreen M. Edelman

During his campaign, candidate Trump promised to renegotiate, and if unsuccessful, to withdraw from North American Free Trade Agreement (NAFTA); to withdraw from the proposed Trans-Pacific Partnership Agreement (TPP); to get tough with China; to impose a 35 percent duty on U.S. companies relocating their manufacturing facilities abroad; and to "use every tool under American and international law to end [foreign trade] abuses immediately." In addition, the President-elect promised to reconsider the lifting of sanctions against Iran and Cuba, in addition to suggesting a change of policy toward Russia.

By May, it was clear that President Trump's repeated challenges to the status quo would not translate into actual changes to existing law. While President Trump took some formal action with respect to foreign relations and trade policy, his specific actions were not entirely consistent with the claims he made as a candidate. For example, fiery campaign rhetoric aimed at China, including threats to formally designating the country as a currency manipulator, gave way to a more measured approach to addressing the trade imbalance between the U.S. and China. President Trump has since met and even praised Chinese President Xi Jinping. Meanwhile, the new Administration prioritized enforcement of existing trade law such as U.S. antidumping and countervailing measures in an effort to level the playing field with China. This is clearly a trend for 2018.

On the other hand, just days into his presidency, President Trump did make good on his promise to withdraw the United States from the proposed TPP trade deal. The President's willingness to back out of the TPP, which U.S. diplomats under the previous Administration had been busy negotiating with 11 countries for years, made clear that the President was not afraid to do a complete 180 on established American trade policy.

TPP Breakdown

Withdrawal from the TPP preserved the status quo. So, while U.S. businesses did not have to reassess their legal responsibilities or restructure their supply chains in response, the President's swift about-face with respect to the TPP placed businesses on high alert for potential changes to other international agreements going forward, most notably the NAFTA (see below). Moreover, had the United States moved forward with the TPP, it would have been the largest international trade agreement in history. Withdrawal confirms that the Trump Administration will continue to shift its negotiation priorities from large regional trade agreements to smaller bilateral trade agreements. For example, the President has already voiced support for a U.S.-U.K. trade agreement in light of Brexit.

As the 100-day milestone passed, the question became how should businesses prepare for the future? In particular, we recommended businesses assess the sourcing of their products and component parts; consider operational and tax implications for foreign-owned companies; consider their need for foreign workers amidst the rhetoric for heightened scrutiny on immigration; and be ready for stronger enforcement of U.S. export and Office of Foreign Assets Control's sanction requirements. With the possibility of long-established trade policies changing, businesses must preemptively plan for coping with proposed changes and even identifying new opportunities that arise from such changes.

Iran and Cuba

This preemptive approach is especially important with respect to trade sanctions regulations. For example, the President's rhetoric towards increased trade with Cuba has consistently been negative, branding the Obama-era efforts to loosen sanctions on the island nation as a "completely one-sided deal" that is bad for the U.S. During his second 100 days in office, President Trump announced that he would be "canceling" these Obama-era changes. But while the actual regulatory changes released this past November did in fact impose some new restrictions on doing business with Cuba (most notably the prohibition against any direct transactions with entities on the State Department's new Cuba Restricted List), they did not cancel most of the Obama-era allowances: cruises and flights to Cuba are still permitted, individuals can still travel to Cuba under any of 12 approved categories of travel without obtaining a specific license, and U.S. companies can still do business with Cuban private-sector entrepreneurs. Bottom line: businesses can rely on Obama-era changes.

With respect to Iran, the story is similar: the President's strong rhetoric does not line up squarely with the actual extent to which he has changed existing regulations. Despite branding the Joint Comprehensive Plan of Action (JCPOA) as another 'bad deal,' the U.S. is still participating in it and most of the sanctions in place during the Obama era remain unchanged. In 2018, there are additional deadlines to consider, as well as the current protests against the government in Iran. Many experts see a further opening of Iran in the future.

The significant legal developments with respect to Cuba and Iran (or lack thereof, depending on who you ask) underscore the importance of (1) acknowledging that this Administration is not afraid of drastically altering the status quo; (2) preemptively devising a business plan to cope with potential changes should they materialize; and (3) (perhaps most importantly) closely monitoring actual legislative and regulatory developments to ensure that changes to your business model are implemented based on the need to consider and address real legal changes, not on a knee-jerk reaction to a slightly unorthodox Administration's colorful rhetoric.

NAFTA Negotiations

The sixth round of NAFTA talks will kick off on January 23 in Montreal. As with other issues, the Administration's stance on NAFTA has evolved considerably over President Trump's first year in office. Threats to completely scrap NAFTA, which has slashed or eliminated duties on most products and components moving between the U.S., Canada, and Mexico, gave way to "renegotiation and modernization," efforts that started back in August. Despite hopes that negotiations would be completed by the end of 2017, the renegotiations have already exceeded the original timeline and are likely to stretch well into 2018, if not longer, due to the sheer size of the Agreement and the many competing interests at play.

At this juncture, in light of consistent push-back from various sectors of the U.S. economy, from U.S. pork producers to the international automotive industry, it is becoming increasingly unlikely that the United States will completely pull out of the NAFTA as President Trump initially claimed he would do. What is more likely is that renegotiations will proceed, albeit slowly, and an updated agreement between the three countries will ultimately be reached to modernize NAFTA in order to better account for today's international trade environment (that involves new phenomena that did not exist when the Agreement originally went into effect in 1994, such as Internet commerce).

Due to all the competing interests at play, a renegotiated NAFTA will mean different things for different U.S. businesses depending on their particular industry and unique supply chain. The details regarding changes to the particular NAFTA chapters that govern your company's business will determine whether the renegotiated Agreement will require you to tweak your procedures and business model to account for changes in duty rates, import/export procedures, and phytosanitary requirements. As the renegotiations continue, preemptively setting up a "Plan B" for sourcing those products and components that currently cross Mexican and Canadian borders duty-free under the NAFTA will go a long way towards mitigating any damage done to your bottom line as a result of changes to rules of origin requirements. On a more optimistic note, changes to the NAFTA and a reassessment of your business's unique supply chain could unearth opportunities to streamline your operations, cut costs, and look at new market opportunities existing through Canadian and Mexican trade agreements.

If you have questions about the content of this article, please contact Andrew BisbasDoreen Edelman, or any member of Baker Donelson's Trade Team.

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