Category: Trade Security

There are several developments to keep an eye on in terms of future market potential, from the increase in unlikely trading partners to the continued development of individual countries seeking to present a more appealing market. The one impediment, however, that has the potential to diminish this optimistic outlook is the continued decline of Venezuela’s economy. Nonetheless, the economic impact by the increased trade will be positive for U.S. businesses that are interested in expanding their goods and/or services to the region. 

1. MORE TRADE FROM THE PACIFIC:

President Trump’s decision to withdraw from the Trans-Pacific Partnership in January 2017, gave many nations the impression that the United States fully intends to reassess traditional economic alliances and agreements. Renegotiation of international trade agreements has been one of President Trump’s priorities as he sets out to recast America’s role in the global economy and seek out arrangements more agreeable to the American people.[i] As the U.S. is reexamining such agreements, however, it will continue to leave an opening in the global trade arena for others to take hold of influence and leadership. These changes have left many with the perceived idea that the United States has become a “patsy on economic trade,“ and has alarmed many of America’s trading partners. This rhetoric, plus the proposal for increased tariffs, have also left many in the global community doubting the United States’ presence as an international trading partner. This apparent shift in trade policy has formed a professed void for a strong leader in international trade, resulting in an increased interest between Latin America and the Pacific region in developing more substantial trade relations.

An example of this increased interest comes from two unlikely countries-Australia and New Zealand. Australia’s Foreign Minister Julie Bishop visited Colombia, Argentina, Panama, and Cuba in 2017. The Australian media described her trip as “historic,” noting the rarity of Australia’s foreign ministers going to Latin America.[ii] During an annual Australia-Latin America Business Council dinner shortly after her visit, Ms. Bishop discussed the many opportunities for Australia in terms of trade, stressing that, as “Australia has been an enormous beneficiary of the global trading system,” and should continue to expand on those advantages.[iii]

Additionally, New Zealand has been exploring the possibility of more trade with the aforementioned countries as part of a free trade agreement with the Pacific Alliance.[iv] The Pacific Alliance is a regional trading group comprised of Mexico, Colombia, Chile, and Peru with the purpose of developing trade between alliance members and Asia. As New Zealand’s Ministry of Affairs explained, the Pacific Alliance bloc alone represents the sixth-largest economy in the world. New Zealand’s goal is to reach a free trade agreement between them and the Pacific Alliance in order to expand New Zealand’s goods into a developing market-Latin America. The fact that Australia and New Zealand are looking towards Latin America as available trading partners serves as an indication of how the Asia-Pacific rim, beyond China and Japan, are capitalizing on creating new economic alliances.

2. ARGENTINA’S ECONOMY WILL BE THE “IT” ECONOMY IN LATIN AMERICA FOR 2018:

Another South American country whose economy has continued to improve in recent years is Argentina, a country worth keeping an eye on as their growth continues. Attracting foreign investment to invigorate the economy was a part of Argentine President Mauricio Macri’s agenda when he was elected in 2015. Part of Macri’s plan was the overhaul of the country’s complex and burdensome tax code, which was completed in December 2017. The revised tax code and Macri’s business-friendly reforms in 2016 have created a more amenable environment for foreign investors who have begun looking at Argentina for future business opportunities.

Cesar Litvin, CEO of Lisicki, Litvin & Asociados, a tax advisory service in Buenos Aires, explains that prior to reforming Argentina’s tax code,“[the] foreign investment [in Argentina] … has [been] shied away …with one of the heaviest tax burdens in Latin America.”[v] Argentina is expected to bring in billions from projects and foreign investment as a result of these changes in diplomacy. Unlikely trading partners have already started developing plans for various investment opportunities, such as Japan, who has not held a bilateral meeting with Argentina in decades. The two countries reunited at a meeting after Macri’s changes took hold. Argentina’s head of Investment and Trade Promotion Agency, Juan Procaccini, said in an interview last year that “strong Japanese companies [were] looking to invest in Argentina for probably the first time ever.”[vi] One can expect that Argentina intends to build upon these advances and become an active participant in international trade issues as the 21^st largest economy in the world.

3. MORE CHAOS IN VENEZUELA:

The commercial optimism of the Pacific Alliance countries is in stark contrast to Venezuela, whose economy is expected to diminish further compared to its neighbor, Colombia, who has also become an attractive country for foreign investment.[vii] The political instability within Venezuela will most likely continue to go unresolved based on the Maduro Government’s unwillingness to negotiate with those in opposition to his attempts at circumventing the Venezuelan Constitution following his loss of the majority in the 2016 National Assembly election.[viii] Additionally, the Maduro government has been accused of election fraud on several occasions, most recently in July 2017 and October 2017.[ix]

The Trump Administration, in August 2017, issued Executive Order 13808, providing sanctions against Petroleros de Venezuela, SA (PdVSA), Venezuela’s government-controlled petroleum company, in response to the political crisis.[x] The impact of this instability has thus far increased migration from Venezuela to other countries in Latin America. It can be expected that the increase in migration from Venezuela to neighboring countries will continue should the volatility persist. How these surrounding countries handle increases in population will depend on several factors, one of which is the strength of their economy. Those countries with stable and healthy economic platforms are more readily able to absorb migration in high volumes. On the other hand, anemic or unstable economies will continue to digress when the economic maladies are magnified.

CONCLUSION:

2018 has the potential to be a great year for Latin America in terms of trade. Australia and New Zealand’s increased desire to promote their products in South America indicates that countries in the Asia-Pacific region are looking at opportunities in South America in a new light. Argentina’s continued economic reforms by President Macri also signal not only to South America but the rest of the world, that Argentina’s intends to become a proactive participant in the global economy. A stronger Latin America will also have a bearing on the United States, who could benefit as well, whether it is from increased tourism to more opportunities to expand goods and services provided in Latin America.

A significant obstacle to this outlook is the continued digression of the situation in Venezuela. The pending exodus of Venezuelans into the rest of Latin America will serve as a stress test to neighboring economies, especially those who directly share a border with Venezuela. 

For those that are interested in expanding into Latin America, this is a good time to bolster plans for providing goods and/or services in new markets. Part of that planning should include becoming familiar with not only the political and economic landscape but also the legal and tax implications associated with foreign ventures.

The Law and Public Policy office of PobleteTamargo is dedicated to providing political intelligence not only to individuals but companies that are looking to invest in the Latin America region and other parts of the globe. Our attorneys have experience in developing policy on the governmental level. To learn more about our firm, office locations and specialties visit www.pobletetamargo.com 

^[i] “Presidential Memorandum Regarding Withdrawal of the United States from the Trans-Pacific Partnership Negotiations and Agreement.” The White House, The United States Government, 23 Jan. 2017, www.whitehouse.gov/presidential-actions/presidential-memorandum-regarding-withdrawal-united-states-trans-pacific-partnership-negotiations-agreement/.

^[ii] News, SBS. “Bishop Leaves for Historic Americas Visit.” SBS News, SBS News, 24 June 2017, www.sbs.com.au/news/bishop-leaves-for-historic-americas-visit.

^[iii] “Australia-Latin America Business Council Annual Dinner.” Department of Foreign Affairs and Trade, Minister of Foreign Affairs, 4 Dec. 2017, https://foreignminister.gov.au/speeches/Pages/2017/jb_sp_171130.aspx. 

^[iv] New Zealand Ministry of Foreign Affairs and Trade. “New Zealand-Pacific Alliance FTA.” New Zealand Ministry of Foreign Affairs and Trade, www.mfat.govt.nz/en/trade/free-trade-agreements/agreements-under-negotiation/pacificalliance/.

^[v] Devereux, Charlie. “Congress Passes Overhaul of Argentina’s Inefficient Tax System.” Bloomberg Quint, 26 Dec. 2017, 7:47 PM, www.bloombergquint.com/business/2017/12/27/congress-passes-overhaul-of-argentina-s-inefficient-tax-system.

^[vi] Cohen;, Luc. “Argentina Expects $14 Billion in Investment on ‘Fruits’ of Reforms.” Reuters, Thomson Reuters, 11 Apr. 2017, www.reuters.com/article/us-argentina-investment/argentina-expects-14-billion-in-investment-on-fruits-of-reforms-idUSKBN17D2SU.

^[vii] Laya, Patricia, and Catarina Saraiva. “IMF Says Venezuela’s Inflation Rate May Rise Beyond 2,300% in 2018.” Bloomberg.com, Bloomberg, 10 Oct. 2017, www.bloomberg.com/news/articles/2017-10-10/imf-sees-venezuelan-inflation-rate-rising-beyond-2-300-in-2018.

^[viii] Felter, Claire, and Rocio Cara Labrador. “Venezuela Is in the Midst of an Unprecedented Crisis.” Council on Foreign Relations, Council on Foreign Relations, 12 Dec. 2017, www.cfr.org/backgrounder/venezuela-crisis.

^[ix] McCleary, Kelly. “Venezuelan Opposition Denounces Results of First Major Vote since Violent Election.” CNN, Cable News Network, 16 Oct. 2017, www.cnn.com/2017/10/15/americas/venezuela-governorships-election/index.html.

^[x] “Presidential Executive Order on Imposing Sanctions with Respect to the Situation in Venezuela.” The White House, The United States Government, 25 Aug. 2017, www.whitehouse.gov/presidential-actions/presidential-executive-order-imposing-sanctions-respect-situation-venezuela/.

The new regulations implement the changes to the Cuba sanctions program that were announced in June 2017 as part of President Trump’s National Security Presidential Memorandum on Cuba.[ii]

The OFAC regulations that went into effect on November 9, 2017, among other things, prohibits persons subject to U.S. law from doing business with certain entities and sectors of the Cuban government. This prohibition includes companies listed in the new U.S. State Department Cuba Restricted and Sub-entities list.[iii] If you, or your company, engage in any transactions in Cuba, these new prohibitions likely apply to you.

In accordance with President Trump’s new Cuba policy, one of the changes includes the State Department’s List of Restricted Entities and Sub-entities Associated with Cuba (“Cuba Restricted List”). The Cuba Restricted List is intended to assist the CACR by listing certain government agencies that persons subject to U.S. law are prohibited from conducting business transactions, without prior U.S. government authorization or not at all.

This prohibition extends to and includes hotels, marinas, and other entities that are connected with those Cuban government agencies included on the list. The Cuba Restricted List puts persons subject to U.S. law on notice to avoid the aforementioned Cuban government agencies and their holdings. According to U.S. government officials the list will be revised periodically, with updates published in the Federal Register.

One of the less obvious questions for U.S. businesses involves the issue of dealing with subsidiaries of prohibited entities. This question tends to be very tricky to answer, since there is no general rule of thumb. In fact, the State Department included the following question in the updated Frequently Asked Questions release pertaining to the Cuba Restriction List:

Q. The entity with which I want to transact is not on the Cuba Restricted List, but its parent company is. Can I engage in a direct financial transaction with the sub-entity?

A. Yes. Entities or sub-entities that are owned or controlled by another entity or sub-entity on the Cuba Restricted List are not treated as restricted unless also specified by name on the list.[iv]

Based on this question, and other possible questions, it is important for persons subject to U.S. law, including subsidiaries of foreign companies with offices located in the United States, to seek counsel when planning to do business in Cuba, even if those “sub-entity” companies are not currently on the restricted list. Failure to conduct due diligence can be very costly, both legally and monetarily as well as from a public relations standpoint.

Although the regulations prohibit persons subject to U.S. law from doing business with certain entities, the CACR regulations allow for certain transactions in Cuba, such as those with small Cuban shops and homes including Casa Particulares (“private” residence), Paladares (“private” restaurants) and Cuentapropistas (“privately” owned stores run by self-employed Cubans). In this area, the Trump administration has essentially continued the Obama administration’s policy of closer contact with the people of Cuba while placing more stringent restrictions on support directed towards the government of Cuba.

Regardless of the amendments, or those to come, keep in mind that Cuba remains a nation with a central, command economy. The Cuban government owns an overwhelming percentage of the nation’s businesses or has significant connections to even those deemed “private”. Cuba’s legal definition of a private sector is not the same as in the United States or other free market nations.

Also consider that a majority of the property in Cuba is held “in commons” by the state and for public purposes. Very few individuals have “private property” or small businesses. The few individuals that do own private property have been granted ownership rights based on having good standing with the Communist Party or have met other sets of circumstances outlined under Cuban law.

If you are going to engage in U.S.-authorized transactions in Cuba, chances are you will directly or indirectly be doing business with the Cuban government. One of the challenges for foreign companies doing business in Cuba is making sure that the entities or individuals are not on one of several U.S. government watch lists.

With these new changes to the CACR, it is important to consider the following, if you are planning to engage in Cuba-related transactions:

• The embargo against Cuba is still in effect;
• U.S. embargo restrictions apply to U.S. persons, no matter where they are located, anywhere in the world;
• Non-U.S. companies engaging in transactions in Cuba should take steps to ensure that properties that are the subject of the foreign investments or other business activities are not subject of a certified or other claim held by American citizens. There are exceptions to the unlawful “trafficking” sanctions. Consult an attorney.
• Implement a system to ensure that you are in compliance with U.S. economic sanctions and export controls toward Cuba.

For more information on the types of services we provide, visit our page on Trade Security matters.

The improvements of technology in the form of video conferencing, e-commerce and other various methods of communication have significantly lowered the costs of doing business abroad. The benefit of these developments have allowed small to mid-size companies to consider expansion into international markets. The expansion into global commerce was considered something typically reserved for large companies that could afford the cost of international communication. Since technology has lowered these costs, it has become even more important for organizations to familiarize themselves with regional trends and geopolitics. Businesses must become familiar with international affairs, beyond what is reported in the news, in order to achieve an advantage over other companies that are doing business abroad.  

Questions of international relations and geopolitics were once reserved for presidents, prime ministers, and politicians. Now more than ever, small corporations that have an interest in expanding their business to the international market must ask themselves where they stand. The Harvard Business Review published an article by John Chipman in their September issue titled, “Why Your Company Needs A Foreign Policy”. Mr. Chipman, director-general and chief executive of the International Institute for Strategic Studies, challenges executives to assess the current geopolitical climate in their analysis of the prospective market. He explains that CEOs need to develop a policy perspective due to the fact that international trade is an essential part of a nation’s economy.

His challenges not only apply to the leaders of large multinational organizations, but also the small companies who expand business ventures outside of the US. This policy needs to be unique and based on the company’s overall vision and values. When developing an international policy, businesses should focus on the following four factors:

Understanding The Political Climate

Understanding the political climate means more than merely assessing a nation’s attitude towards their government leaders. It also requires taking a look at this from a broader and more specific perspective. A great example of this is found in Latin America. The elections of Lula da Silva in Brazil, Rafael Correa in Ecuador, and Cristina Fernández de Kirchner in Argentina among others in the early 2000’s signified the shift in political ideology in Latin America. These policy changes in most cases made it more difficult for businesses to be established in those regions. The recent election of Mauricio Macri in Argentina in 2015 along with the development of the Pacific Alliance by Chile, Mexico, Peru and Colombia signals a shift by Latin American nations from socialist economies to market economies. These countries are now looking to trade and investment as an important economic policy tool to help their country grow.

This study needs to go deeper than just an overview of the nation. The state and local levels must be examined as well. This analysis would be similar to a corporation looking to expand in the United States. Their focus would be to assess potential states as candidates for setting up a factory or an office. Part of that assessment would be a review of the aforementioned state’s economic statistics and the current economic policy. A recent example of this type of analysis would be comparing the level of support for the EU in England, Scotland, Wales, and Northern Ireland during the Brexit vote. The support for the EU was so strong in Scotland that Scots seriously considered supporting a move of separating from the UK after the Brexit vote. However, talk of leaving the UK was put aside when the EU did not meet with a Scottish delegation in hopes of preventing potential problems that could arise from other EU countries that had previous thoughts of creating their own state such as the province of Catalonia in Spain^[3].

The Relationship Between the US and The Nation You Will Do Business In

Corporations need to understand the relationship from both the U.S. perspective and the other country’s perspective. The analysis from the latter’s perspective should have been addressed in the first factor. Recently, with the U.S. taking a more passive approach to pending crises, countries have begun to question the once proactive policies of the United States. This concern regarding the U.S. may be transferred to American corporations as their level of involvement is assessed. Also, businesses need to be aware of any free trade agreements or tax treaties that U.S. and the other nations may be a signatory of. Tariffs and tax rates can either be an obstacle or an incentive when entering a new market.

Be Familiar With Sanctions and Anti-Corruption Laws

The BNP Paribas settlement with U.S. Department of Treasury in the amount of $8.9 billion for violating sanction laws when their clients dealt with Iran, Cuba, and North Korea is an example of the impact of sanctions law^[4]. As Mr. Chipman noted in his article, there is a “proliferation of sanction laws.”

Companies should also be aware of anti-corruption laws. Developing countries such as Brazil are beginning to place teeth in their anti-corruption laws. The impeachment of Brazil’s President, Dilma Rousseff can be seen as a reflection of this anti-corruption stance. A major reason why countries such as Brazil and others are putting teeth into their anti-corruption laws is because they recognize that investors are not going to invest their capital in countries that are corrupt and have greater risks of losing capital.

Develop Both Business and Political Relationships

Mr. Chipman described this last element, as the development of relationships as one where there is depth “between the government, the oligarchs, and civil society that needs to be appreciated.” When developing these relationships, a company needs to conduct their due diligence to make sure that the individuals or company are not in included on any of the OFAC or Bureau of Industry and Security lists that prohibit U.S. companies or individuals from doing business with them. 

PobleteTamargo can guide your company through this process. This guidance will include providing you with the following: asking you the questions necessary to develop your policy vision that will fit into your overall corporate vision; providing you with political intelligence based on our experience in handling international affairs and relationships with members of the foreign policy establishment; and, advice and counsel regarding sanctions law.

In addition to creating flexibility for certain travel and financial transactions, the CACR amendments announced by the Obama administration on January 16 also allow Americans to send unlimited amounts of money to individual Cubans, not tied to the government, in support of private businesses and independent non-governmental organizations. And in a rather somewhat historic move, the U.S. is also allowing persons subject to U.S. jurisdiction to engage in certain micro-finance activities, entrepreneurial training, and development projects in Cuba. 

This carve-out or exception to U.S.-Cuba sanctions allow persons and companies subject to U.S. law to export items to Cuba including building materials, equipment, tools, and supplies for use by Cuban “private sector,” and not any entity owned or operated by the Cuban government. Cuba’s “private sector” remains a very small percent of the overall Cuban economy, subject to significant regulation and monitoring by the state. It will present special compliance challenges for Americans, and other persons subject to U.S. law. 

Under Cuban Law and Decrees, “Self-Employment” is Akin to License, A Slight Exception to the Cuban Communist’s Party’s Official Role in the Economy 

Earlier efforts by the Communist Party, the only legal political party in Cuba, to create “self-employment” (Decree Law 14, July 1978), failed for political, ideological, and economic reasons.  However, there has been pressure to change this for many years because the centrally planned system has been failing for decades and is in desperate need of funds to support government-run social and other programs. 

“Self-employment” in Cuba, if it can be called that, has been legal since the early 1990s when on Decree Law 141 went into effect on September 9, 1993. Decree Law 141 lists, among other things, more than 100 occupations that would qualify for the new license for a person in Cuba do business on their own. These are the people that the United States wishes to assist with the recent regulatory changes to the CACR.

Self-employment in Cuba, known as  “trabajadores por cuenta propia”  (“TCP”) or “cuentapropistas” should not, for compliance purposes, be viewed in the same was as self-employment is categorized in the United States. The Communist Party decides what “jobs” will qualify for the TCP special exception to the Cuban Socialist Constitution and they add occupations to the list as needs warrant. 

Ultimately, and as a matter of law, Cuban workers, even TCPs, work for the benefit of the state and it remains to be seen if this opening in the Cuban economy will continue or if, as it has happened in the past, will be shut down by the government on a haphazard basis or when it suits them for political reasons to do so.

Compared to the overall as well as potential labor pool, the number of TCPs is minuscule. Cuba’s workforce of approximately 4 million people, works overwhelmingly for the state. According to recent data from Cuba as well as U.S. sources, about 93% of the Cuban work force is employed by the government. As of 2014, there are roughly just 450,000 TCPs. These TCPs are mainly home-run family restaurants and persons operating taxi or car services for tourists. The data is hard to come by. Because of the fees and regulations imposed by the state on TCPs, many potential and official TCPs prefer to operate in Cuba’s thriving black market or underground economy. 

Finally, Cuban TCPs, unlike workers in the United States and other nations, do not enjoy or possess legal rights to things such as private property or, ironically, strong labor rights.  Americans considering engaging in these new transactions in Cuba should also understand that dispute resolution mechanisms, due process of law, and other well established concepts in business and law are not widely available or simply not well-known in Cuba’s nascent “official” business culture. 

The Cuban government’s claims that there are changes coming in these and other related areas, but even if that were true, I have talked with lawyers on the island who say these proposed reformas are, at this juncture, more aspirational than reality. In fact the State Department says on its website that “[w]e cannot predict what the Cuban government will or will not allow, but we sincerely hope that it makes this and other new opportunities available to Cuba’s nascent private sector.”

Special Considerations for Americans and Other Persons Subject to U.S. Law

The new U.S. import rules are are authorized pursuant to what is known as a “general license,” (no special forms or application is needed); however, these transactions are still subject to many provisos, exceptions, and record-keeping requirements. Express prohibitions remain in place that ban persons subject to U.S. law from engaging in transactions in a wide array of situations that include, but are not limited to, transactions with Cuban government agencies, high-ranking Cuban officials and family members, human rights abusers, and individuals trafficking in properties that are subject to a U.S. certified claim. 

The “Section 515.582 List” published today include goods and services produced or provided by independent Cuban entrepreneurs — TCPs — that are imported into the United States directly from Cuba, except for goods specified in several sections/chapters of the Harmonized Tariff Schedule of the United States (HTS). 

According to the U.S. government, persons subject to U.S. jurisdiction engaging in import transactions involving goods produced by an independent Cuban TCPs pursuant to 31 C.F.R. § 515.582 must obtain documentary evidence that demonstrates the entrepreneur’s independent status, such as a copy of a license to be self-employed issued by the Cuban government or, in the case of an entity, evidence that demonstrates that the entrepreneur is a private entity that is not owned or controlled by the Cuban government. On this point of documentary evidence, the State Department says:

The Cuban government issues licenses to private individuals for self-employment or to operate small private businesses. Evidence that the entrepreneur holds this license, such as a copy of the license, is one way that a person subject to U.S. jurisdiction can show that the entrepreneur that provided the goods/services intended for importation holds independent status. However, third party verification by an independent organization may also suffice in the future. 

In other words, what constitutes “documentary evidence” is a work in progress.  

Finally, U.S. persons subject to the CACR should also be aware that there are express prohibitions in U.S. law that ban what is known as “trafficking” in Cuban properties that are subject to claims under U.S. law. 

During the early years of the Cuban Revolution, the Cuban government confiscated properties, businesses, or refused to honor debts and its other financial obligations of held by hundreds of thousands of American citizens and Cuban nationals.  Although legally-required to do under Cuban as well as well-established international law norms,  the Cuban government never paid compensation for any of these unlawful confiscations. The current value, for example, of U.S. Certified claims alone is close to $8 billion. Without U.S. government approval, rare in these cases, persons subject to U.S. law are prohibited from engaging in transactions in Cuba if a property that is subject of a claim is part of a transaction.

While some of these policy changes are historic, I’m sticking with what I told the Wall Street Journal February 2 and caution that there still remains a great deal of ‘irrational exuberance’ about what these changes will mean for Americans, and to a certain extent, Cuban TCPs. If you plan to engage in transactions with TCPs, you should strongly consider retaining counsel familiar with U.S. laws, regulations, and policy , as well as some knowledge Cuban laws and realities on the ground in Cuba. 

It will be interesting to see in the weeks and months ahead how the United States government deals with questions of potential trafficking in properties in Cuba, as well as the other potential legal minefields that certainly lay ahead. We will be publishing updates and additional analysis on this matter in the near future. The “Section 515.582 List” can be accessed at the State Department website.

In the meantime, if you would like more information about this or other trade security issues related to Cuba or other countries or programs, please give us a call. 

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