International Trade and Export Controls & Enforcement: New Legislation, New Challenges

October 1, 2009

Speakers:
John Herrmann, Special Counsel, International Trade and Customs & Government Relations and Public Policy Practices, Kelley Drye & Warren LLP
Darryl W. Jackson, Partner, International Trade and Customs Practice, Kelley Drye & Warren LLP; Former Assistant Secretary of Commerce for Export Enforcement, Bureau of Industry and Security, U.S. Department of Commerce

Moderator:
Daniel Rosenblum, Vice President, Corporate & Policy, Japan Society

Two distinguished specialists in trade policy shared their insights on international trade and export controls and the challenges facing businesses and governments in today's trade environment.

U.S. export control laws have multiple, complex goals, said Darryl Jackson of Kelley Drye & Warren: to protect America's national security, its economic interests, and its leadership in technological development, and to advance secure, legitimate global trade. An array of federal agencies oversees enforcement and regulation: the Department of Commerce, the State Department, the FBI and the departments of Homeland Security, Defense, Treasury and Justice.

Secretary Gary Locke, a former governor of Washington State who as governor took great interest in international trade and led trade delegations to China, heads up the Commerce Department. At Commerce, day-to-day responsibility for export controls resides in the Bureau of Industry and Security, where Mr. Jackson served as Assistant Secretary for Export Enforcement during the George W. Bush administration. The bureau's mandate includes dual-use cases, in which commodities, software and technologies that have legitimate civilian uses are diverted to unauthorized military end uses.

"It’s fair to say that the terrain for export enforcement has shifted dramatically over the course of the past several years," Mr. Jackson said. "Export controls violations, which can fall into two types, criminal violations and administrative violations, are really treated as national security matters that they are now."

In 2007, the Department of Justice launched an initiative to coordinate more closely the work of the various federal agencies that develop and prosecute criminal cases. In the initiative's first year, 145 defendants nationwide were charged, some 40 percent involving Iran or China, he said.

Also in 2007, Congress passed the IEEPA Enhancement Act, which dramatically raised the penalties for administrative violations to $250,000 per violation (or twice the value of the transaction) as compared with just $11,000 per violation as of mid-2006.

As the FBI and others put more emphasis on pursuing criminal suspects, it's inevitable that not all of those cases will result in a criminal prosecution, Mr. Jackson noted. Yet the standard of proof for an administrative case may very well be met. The BIS special agents who investigate administrative cases view their mission as "keeping the most sensitive goods out of the most dangerous hands": goods with nuclear uses, chemical and biological weapons uses, missile technology uses and goods that are controlled for reasons of national security.

One prominent example is the Mayrow General Trading case, in which electronic components capable of use in IEDs against coalition troops in Iraq and Afghanistan were unlawfully exported to a firm based in the United Arab Emirates; a federal criminal indictment is pending in Miami. Another, the MTS case, involved parallel criminal and civil proceedings against an Eden Prairie, Minnesota maker of sensors and other sensitive items that have nuclear end uses; the case resulted in a corporate criminal conviction as well as an administrative penalty of $400,000.

Going forward, areas of concern include not only nuclear weapons but also biological and chemical weapons, he said. Indeed, the World at Risk report published at the end of the Bush administration predicted that the next significant attack is more likely to be biological or chemical than nuclear in nature.

Iran and China "are certainly near the top" of lists of countries that the administration has to be vigilant about, as are Pakistan, Syria, North Korea and Cuba, Mr. Jackson said. "China is a very important trading partner of the United States... But it also has a rapidly developing military modernization that has been a concern to our Department of Defense and our nation for quite some time." In the case of dual-use goods, "we don't want something going there for civilian purposes that then ends up in its military."

Illicit transshipments are another big concern, Mr. Jackson continued. A famous example involved a bulk order for high-intensity electrical switches, called triggered spark gaps, to be shipped to a hospital in South Africa. The devices are commonly found in lithotripter machines that break up kidney stones, but can also be used to detonate nuclear bombs. They are very sturdy and last for five or six years, so when an order for 200 turned up, the BIS investigated. The bureau discovered that a South African businessman had arranged to ship the devices into Pakistan; "the businessman is now in jail, and the investigation I'm sure continues if there is anyone who has not been apprehended."

Malaysia, which is heavily involved in trading and has not historically had much in the way of export control laws and enforcement mechanisms, is a particular trouble spot for transshipments. Also problematic are UAE, Hong Kong and Singapore, though conditions are improving in these countries.

Economic espionage by both terrorist organizations and foreign countries represents an important area of focus, he said. Another is so-called deemed exports, meaning items that are shared with a foreign national inside the U.S. in circumstances where a license would be required to send the item out of the U.S. This is a concern for research centers, universities and the like where students or others may have access to certain controlled technology.

President Obama has identified export controls reform as a priority, he said. The Export Administration Act, which supports the dual-use regulations, lapsed many years ago and has been renewed every year since on an emergency basis, but there are some signs that Congress may be willing to take more permanent action. The key here would be to establish a budget that gives the Office of Export Enforcement at BIS a greater international presence and the ability to keep up with new technological developments.

On the company side, an effective compliance program requires "resources that you commit--money, people--and it requires vigor," Mr. Jackson concluded.

"These programs cost money, but they do have a return on investment. They do pay dividends. They do protect the business reputations that companies have. They do help you prevent and detect violations. They lead to voluntary self-disclosures by companies, which are important in terms of mitigating the penalties that we discussed."

"So, with that, do not reduce your compliance efforts now in this economy. I know there is that temptation. It protects your company, our nation and the economy. And it’s especially important given the dynamics that we face today in terms of the threats we discussed, and the increased enforcement activity."

John Herrmann, also an attorney at Kelley Drye, began by noting some of the key trade officials in the Obama administration, including, at the State Department, Bob Hormats as Under Secretary for Economic, Energy and Agricultural Affairs, and at Agriculture, James Miller, Under Secretary for Farm and Foreign Agricultural Services at the USDA, who "could be playing a key role in the agricultural negotiations in the Doha round." The U.S. Trade Representative is Ambassador Ron Kirk, an attorney and former mayor of Dallas; "he didn’t bring a lot of prior trade experience to his position, but I think has hit the ground running."

At the Pittsburgh G-20 summit in September, "perhaps the key message to come out of" the talks on trade and investment policy "was a rejection of protectionism," as the leaders of the G-20 renewed their pledge not to raise new barriers to trade and investment, Mr. Herrmann said. Still, there are no real penalties for failing to live up to this, and a World Bank study "found that 17 of the G-20 members had in fact implemented some sort of increased barrier to trade" in the time between the first G-20 leaders' summit, in November 2008, and the second in April of this year.

Not long before the Pittsburgh summit began, President Obama announced tariffs on Chinese-made tires, "perhaps the one issue that dominated at least the perception of the United States at the G-20," Mr. Herrmann continued. The tariffs, which are less severe than the remedy recommended by the International Trade Commission, are set at 35 percent in year one and scale down to 25 percent in their third and final year. In response, the Chinese announced anti-dumping and subsidy investigations on American poultry, and threatened to take action against U.S. autos. "All in all, I think it was a fairly restrained response, but any time you’ve got a series of tit-for-tat measures going back and forth between our second-largest trading partner, you worry about things perhaps getting out of hand," he said.

The G-20 leaders agreed on a framework to reduce trade imbalances through increased savings on the part of the U.S., the UK and other consuming nations and increased domestic consumption on the part of China, Japan and Germany, among others. "There will be a peer review aspect of this as countries going forward will hopefully be more transparent and disclose their economic policies, which will be subject to review by the IMF," he said.

To implement policy requires agreements, and here, Mr. Herrmann indicated, the prospects for forward motion are not encouraging. "You have seen I think growing skepticism from U.S. industry that there will be progress in the Doha round any time soon, based in large part on the lack of concessions by leading developing countries" such as China, India and Brazil. Free trade agreements with South Korea, Panama and Colombia have been signed, but in each case, congressional approval would require resolution of "delicate issues": U.S. automakers want greater market access in South Korea, and there are concerns about tax havens in Panama and violence against labor leaders in Colombia.

In the negotiations stage is the Trans-Pacific Partnership among New Zealand, Chile, Singapore and Brunei, which the U.S. is considering joining onto along with Peru, Australia and Vietnam, he said. This is "probably the one agreement where there is some hope for progress in the near term." Beyond this, "there have always been talks about pursuing FTA negotiations with Japan or the European Union. Those of course would be a major undertaking." The U.S. has held bilateral investment treaty talks with China and India, and the Obama administration currently is reviewing the model bilateral investment treaty.

Enforcement is "perhaps the most notable portion of the new administration's agenda to date," he said. The U.S. Trade Representative, for example, recently put out a request for comments on issues regarding product standards and inspection. "If any of you are experiencing barriers to market entry due to standards or sanitary issues, now would be a good time to bring those issues forward."

Among many trade disputes currently pending are cases involving Mexican trucks, Canadian soft wood lumber and American beef. In May, the EU agreed to raise quotas on U.S. beef not treated with hormones; "it will be interesting to see if that agreement holds," Mr. Herrmann commented. The stimulus bill's Buy American provisions carve out bids from countries that are signatories to the Agreement on Government Procurement (GPA), but that leaves China, for example, as a country that will be shut out from stimulus spending. It's expected that we'll see more anti-dumping, countervailing duty and Section 301 cases as time goes on.

On the legislative front, a number of enforcement bills may move forward as tradeoffs for putting through a free trade agreement, Mr. Herrmann said. The Rangel-Levin bill would increase the focus on non-tariff barriers, product safety and trade remedies; boost intellectual property protection; and bar the Customs and Border Protection Agency from excusing fines. A bill sponsored by Representatives Davis and Brown-Waite would codify the Commerce Department's application of countervailing duty laws in the context of nonmarket economies, particularly China. Two Pennsylvania representatives, Altmire and Murphy, have brought up a bill to allow Congress to implement a Section 421 safeguard remedy if the president declines to do so.

Fast-track trade negotiating authority is "probably not going anywhere very quickly, unfortunately," he added; similarly with legislation on currency manipulation, which has become less of an issue given the global financial crisis.

"You have got a new administration that came in facing many, many challenges, and frankly I think its priorities are elsewhere at this point," Mr. Herrmann concluded. "The fact that you’ve also got a slow U.S. and global economy certainly does not make members of Congress particularly enthusiastic about voting for new trade agreements." However, it's hoped that "you will see some progress on the pending agreements involving Panama, Korea and Colombia, and a more liberalizing agenda from the administration in the months to come."

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Questions from the audience followed.

You hook up enough PS-3s, and you can have some very decent high-powered super computers. How do you figure out what's going to be categorized as potentially a dual-use technology?

In-house export specialists are an important resource, and there's a lot of information available on various websites, but with close questions "there does come a time when you may have to reach out to the government" to get a determination or ruling on whether the item is controlled, Mr. Jackson said.

Is there any single place or ombudsman to take your questions to, to confirm whether or not you need a license?

Unfortunately not, though "I think everyone acknowledges that it will be helpful to industry if that happens," said Mr. Jackson.

Do you anticipate a spillover from the China tires case? A Democratic Congress, a Democratic administration, a bad economy--are legislators going to pursue cases with other Pacific Rim countries?

"Particularly last fall and over the winter and this spring, I think public officials were very, very cautious about throwing fuel on the fire and being seen to cause a surge towards protectionism," replied Mr. Herrmann. "The one area where you may see development is on the private-sector side"; there've been Section 421 cases filed recently, for example, on paper products and on pipe.

As a practitioner, do you generally see clients come to you for preventive clearance, or do they tend to come after a dispute has occurred?

"Compliance really is the first line of effort from the government and from the industry side," Mr. Jackson replied. "We would have a presumption on the enforcement side that if people know what the law is, they comply with the law. But they can't comply with a law that they don't know about." Thus the government tries "first of all to raise awareness that the laws are there."
"The smart companies are interested in compliance and putting compliance programs in place: auditing, monitoring them, modifying them so that they respond to the changing business circumstances and business model changes and the rest. Those are the best clients."

Mr. Jackson asked:

John, you mentioned that due to the lagging economy, there's going to be less interest in the FTAs. Is that the right approach in a lagging economy, not to promote more free trade?

"I would certainly say no," Mr. Herrmann responded. "You saw in the front end of the slowdown in U.S. growth last summer and fall that exports were the one area where the U.S. was still making significant strides in terms of growth. I think you have seen President Obama, Secretary Locke and Ambassador Kirk talk about the importance of increasing U.S. exports in order to stimulate further growth in the U.S., but unfortunately there is not much appetite in the Congress for taking some of those measures right now given the political difficulties associated with supporting free trade agreements.

"Hopefully that will change. I think there is a strong track record certainly within the last few years that exports can be a stimulant of growth, and not a drag on the U.S. economy, but we just need to public perception to catch up with some of the facts there."

--Katherine Hyde