In late 2020, Mexico’s central bank (Banxico) and the National Banking and Securities Commission (CNBV) issued draft fintech regulations (Provisions Applicable to Electronic Payment Fund Institutions) that would force firms to only choose cloud providers based in Mexico. Article 50 would impose a local data storage requirement. Article 49 would establish a regulatory approval model with a high degree of discretion and lack of transparency for determining what cloud computing services payments and financial firms could use.

It is clearly a barrier to trade that protects Mexican cloud providers and incumbent banks and payment networks from foreign competition as it would preclude U.S. fintech, payment, and financial firms from using existing U.S. cloud services to serve customers in Mexico. Meanwhile, it would create a clear gap in reciprocity in that Mexican cloud firms and fintech, payment, and financial firms would be free to use whatever cloud provider they wanted in accessing the U.S. market.

Mexico’s draft regulation is troubling as officials justified it on the basis of broad, vague, and highly unlikely national security grounds. Just as troubling is the fact that Trump administration trade officials reportedly did not push back on Mexico’s use of this rationale, in part due to its own misuse of national security concerns to enact tariffs on foreign automotive and steel imports. Mexican officials reportedly looked to Russia as their model. Russia enacted payment data localization as part of an initiative to replace foreign payment firms with a state-supported payments system (known as MIR) after being targeted by financial sanctions for invading Ukraine and annexing Crimea. After these sanctions, Mastercard and Visa refused to process payments from the region, so Russia used the crisis to standup its own payments network.

Russia is a world leader in digital protectionism and authoritarianism. Forced data localization and access to data are key tools in its toolkit. Russia not only requires payment data localization, but local data processing, which essentially precludes foreign firms from using data as part of global data analytics systems. The use of data analytics is at the heart of modern digital services trade and competition, yet U.S. payments firms face these barriers in China, India, Indonesia, Vietnam, and elsewhere as countries behind the border regulations to block them.

Forcing firms to store data locally does not make it more secure and private than data stored in the cloud. This is the false promise of data nationalism. Nor does Mexico face any real threat of international financial sanctions that would somehow cut its payment system off from the global financial system. National security is among the most troubling motivations that policymakers are reverting to try and justify arbitrary and discriminatory digital restrictions as it is self-judging and can be applied to nearly any digital issue.

Mexico’s data localization proposal breaches both the spirit and the letter of USMCA’s new digitally upgraded financial services (chapter 17) and digital trade (chapter 19) commitments. While it does not apply to financial services, provisions in the digital trade chapter highlight each party’s recognition that data localization is a barrier to modern trade. For example, article 19.12 on the location of computing facilities states that “No Party shall require a covered person to use or locate computing facilities in that Party’s territory as a condition for conducting business in that territory.”

The USMCA’s financial services chapter is the gold standard for supporting the free flow of financial data, while ensuring financial regulators have access to data for oversight purposes (as countries like India cite concerns over access as a misguided motivation to enact data localization). The financial services chapter prohibits rules forcing firms to use or locate local computing facilities as a condition of market access (article 17.18). Should a firm face an issue providing data to regulators, they would have a reasonable opportunity to address the issue and shift data to a jurisdiction where access is assured (article 17.18). Mexico could defend its data localization requirement as a prudential measure, but there is a clear lack of evidence that there is a problem that data localization solves (article 17.11).

The United States should use USMCA commitments on financial services cooperation and transparency to pressure Mexico that this data localization idea is a bad one and will have consequences. Several members of the U.S.-Mexico Interparliamentary Group (Rep. Hurd, Rep. Gonzalez, Rep Cuellar, and Rep. McCaul) already sent a letter to former USTR Lighthizer and Treasury Secretary Mnuchin about this data localization proposal. Such awareness and pressure is needed to ensure the United States uses these new tools. USTR Katherine Tai is using the USMCA’s novel Rapid Response Labor Mechanism to ask Mexico to review labor rights at an automotive factor. USTR should do the same and call a meeting of USMCA’s Committee on Financial Services (which is responsible for implementation and any issues), request further information about the measure, and ensure Mexico provides substantive written response to concerns raised about draft financial service regulations.

Just as raising a tariff can tip the scales of profitability for a traditional manufacturing firm engaged in trade, so too can digital restrictions preclude U.S. fintech or financial service firms, especially small ones, from leveraging cloud services to engage in digital trade in multiple markets. The cost and complexity of setting up duplicative data centers is costly, especially for startups and SMEs that may only serve their home market and one or two foreign ones.

For the USMCA’s new digital rules to be valuable, they need to be enforced. U.S. firms and workers benefit from the movement of data as part of digital trade. While it’s hard to specify the exact impact of this one provision, it’s also a matter of recognizing the cumulative impact if more countries enact similar restrictions on U.S. cloud and digital service providers.

If the Biden administration wants to support the innovation and growth in the burgeoning fintech and payment services sector, it needs to send a clear message that countries cannot use regulatory policies disguised as barriers to protect local firms. The United States pushed for ambitious digital trade rules to prevent exactly these types of barriers. Failing to defend them weakens USTR’s efforts to push back against digital protectionism elsewhere around the world.

Nigel Cory is an associate director covering trade policy at the Information Technology and Innovation Foundation. He focuses on cross-border data flows, data governance, intellectual property, and how they each relate to digital trade and the broader digital economy. Cory has provided in-person testimony and written submissions and has published reports and op-eds relating to these issues in the United States, the European Union, Australia, China, India, and New Zealand, among other countries and regions, and he has completed research projects for international bodies such as the Asia Pacific Economic Cooperation and the World Trade Organization.  

To read the full commentary from the Information Technology and Innovation Foundation, please click here.

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The latest development in the effort to change global corporate tax rules came in June in London. It occurred in separate sessions where Treasury Secretary Janet Yellen and later President Joseph R. Biden Jr. joined with other Group of 7 (G7) leaders to establish an “historic” deal to redesign the world tax system. Their next task is to present the deal to the full complement of G20 countries in Venice in July. After that session the deal goes before the 135 countries that have participated from a distance in the tax talks sponsored by the Organization for Economic Cooperation and Development (OECD). There the deal may encounter rough patches with several dozen small countries heavily invested in the status quo.   

The OECD’s “Inclusive Framework” project rests on two goals. The first (called “Pillar One”) calls for big corporations, especially the digital giants, to pay some form of tax to the countries where they market or sell their goods and services. “Pillar Two” would entail an agreement on a global minimum 15 percent corporate tax rate for corporations established in each country.  Pillar Two will not require any increase in G7 tax rates because they are already at 15 percent or higher. Nor will it require any of the G20 members to raise their basic corporate rates. But besides Ireland, well known for its 12.5 percent rate, there are another 34 low-tax and zero-tax jurisdictions outside the G7 and G20 – mostly small countries – at rates below 15 percent (see table). Nine additional jurisdictions, including Albania, Georgia, Lithuania and Serbia in Eastern Europe, Iraq, Kuwait and Oman in the Middle East, and Mauritius and the Maldives among small island states, have a 15 percent corporate tax rate.

But will an arrangement to reach a 15 percent minimum stick? When pressed to raise their corporate rates, some members of this low-tax group argue bodog casino that they could lose the ability to attract firms, since they lack an equivalent array of resources, markets, or subsidies that large nations can offer.  If the low-tax countries are eventually forced into adopting the 15 percent minimum headline rate, they may adopt workarounds. They could, for example, legislate new deductions or tax credits as offsets.  If  all the G7 countries were to adopt “make-up” taxes on their multinational corporations (MNCs) that eliminate the advantage of moving intangible income (mainly royalties) to low-tax countries, it may not  make that much difference if some jurisdictions use other methods to lure corporations to do business within their borders or provide low-tax export platforms.   

Pillar One would require some portion of the earnings of the largest multinationals—perhaps 100 firms, especially those known as GAFA (Google, Apple, Facebook, and Amazon)—to be taxed in the country where goods and services are sold. These taxes would be in lieu of taxes paid in the country where the goods and services are produced (the practice under current international tax rules).  Hammering out the main parameters, G7 finance ministers agreed that 20 percent of profits above a basic 10 percent rate of return should be allocated to the country of sales.  This is called Amount A. Thorny details remain to be agreed, not only among the G7 but also among the G20 and countries at large, as to the details of Amount A.  Which large corporations will be covered by the new rules?  What accounting standards will be used for the 10 percent threshold?  How will above-threshold digital profits be divided between countries? 

The potential consequences for the low-tax countries listed in table 1 of a 15 percent global minimum tax rate coupled with reallocation of Amount A between countries are a matter of speculation. For a handful of low-tax countries that have acquired tax haven reputations, the 15 percent global minimum would probably entail the loss of vast book assets.  These legally parked assets yield small incidental tax revenues (stamp duties and the like) and create employment for skilled professionals such as financiers, lawyers, and accountants.  Jurisdictions affected by such losses would include the Bahamas, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Cyprus, Guernsey, Isle of Man, and Jersey. These jurisdictions should, however, experience some revenue gains if they chose to tax the locally allocated share of Amount A from the largest MNCs. But such gains would probably be small, because resident populations are a minor share of world population. 

A second group of low-tax countries have succeeded in attracting significant multinational corporation employment for production and service workers, partly through low corporate rates.  Countries in this category include Bahrain, Bulgaria, Hungary, Ireland, Liechtenstein, Macao Special Administrative Region of China, Montenegro, Northern Macedonia, Serbia, and the United Arab Emirates.  If they accept the minimum 15 percent rate, these countries will probably explore alternative fiscal incentives to retain local employment.  Again, the reallocation of Amount A may lead to some local revenue gains, but those gains might arrive later than the threat to local employment, simply because it will take time to work out Amount A details.

In sum, without G7 legislation that imposes “make-up” taxes on multinational corporations that book profits in low-tax countries, it will be difficult to persuade many of the countries listed in the table below to adopt the new global minimum rate. For this reason, the G7 proposal must surmount some serious obstacles before it is adopted and changes the landscape of international tax rules. 

To read the full commentary from the Peterson Institute for International Economics, please click here.

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Since its inception, SelectUSA has facilitated more than $84 billion in client-verified investment, supporting more than 106,000 U.S. jobs. Even during the global pandemic, companies across the world continue to target the United States as the launch pad for global growth, with the SelectUSA team supporting them through client services such as assistance navigating the federal regulatory environment, market research, and counseling.

Following a year of adjusting to our new reality in the wake of the global COVID-19 pandemic, this news comes as no surprise, showcasing the United States’ ability to adapt and overcome unprecedented challenges. At SelectUSA, we are celebrating the retention of our #1 spot in the 2021 Confidence Index, as FDI creates jobs and contributes to economic development across the United States. The ranking in the Index is a direct reflection of the appeal of the U.S. economy and how that economy enables businesses of any size to access a massive consumer base, explore working within a culture that welcomes innovation, and employ a world-class, productive workforce.

When looking to invest, investors look for established markets that are safe and stable, possess strong infrastructure, strong governance, macroeconomic stability, and are known for their progress in technology and innovation. These are all attributes the U.S. market is proud to maintain. The United States offers unmatched diversity, a culture of innovation, and the world’s most productive workforce to companies of all sizes, from startups to multinationals, looking to grow and succeed in the U.S. market.

For foreign companies considering investing in the United States and for economic development teams looking to attract job-creating business investment, there is no better place to connect than the virtual 2021 SelectUSA Investment Summit from June 7-11, 2021. This is the United States’ highest profile event dedicated to promoting FDI, and plays a key role in attracting and facilitating business investment and job creation by raising awareness about the wide range of investment opportunities in the United States and enabling vital direct connections between investors and U.S. economic development organizations.

The 2019 SelectUSA Investment Summit was one of its largest, drawing more than 3,100 attendees to Washington, D.C. Several new announcements were made, including nearly $100 million in new investment projects and the release of SelectUSA’s case-study report on reshoring in the United States. In total, 1,200 business investors from a record 79 international markets joined economic developers from 49 states and territories. The Investment Summit has directly affected more than $48.4 billion in new investment projects supporting more than 45,000 U.S. jobs.

I hope you will join us this year to network, learn more about how to expand through investment, and see firsthand why the United States continues to remain top destination for business investment for the ninth year in a row.

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China’s economy has grown rapidly since its WTO accession in 2001, compounding at 14% per year in nominal USD terms, the measure that is perhaps most relevant to trade and investment flows. While Purchasing Power Parity (PPP) adjustments have their uses, for example in measuring poverty, trade and investment are transacted at market exchange rates and therefore GDP at market exchange rates is the most pertinent measure of potential. At US$14.3 trillion in 2019 (the last pre-COVID 19 year), China was still about 33% behind the United States at US$21.4 trillion (1).

One remarkable feature of China’s ascent has been the bifurcation in the structure of growth on either side of the Global Financial Crisis. At the time of China’s accession to WTO, trade in goods and services was just 38% of GDP but rose dramatically to 65% of GDP by 2006. Since then, it has declined back to 36% of GDP, making China more autarkical now than it was prior to WTO accession. As this ratio implies, both export and import growth have lagged GDP growth substantially post 2006.

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For months, the prospect of restarting the multilateral summit remained muddy. Even before the pandemic, participating members in the CEE region openly questioned its utility. CEE governments had hoped the initiative could attract more direct Chinese investment to the region. But the bulk of China’s investment went to five non-EU members in the Balkans, and the rest largely concentrated in Hungary, Poland, and the Czech Republic, leaving many CEE capitals including Warsaw and Prague thoroughly underwhelmed. As bilateral trade grew, reaching $103.45 billion according to the Chinese government, CEE countries’ trade deficit with China also balloned, while local exports to China saw only modest growth. The anticipated economic benefits of a closer relationship with China seems rather asymmetric.

China’s diplomatic performance during the pandemic further added to the chorus of critical voices in the region. After the initial dash to secure masks and other PPE through Chinese channels, many CEE countries were soon alarmed and appalled by Beijing’s pandemic-related disinformation and propaganda efforts in Europe as well as Chinese “Wolf Warrior” diplomats who publicly attack and threaten China’s critics. It’s a hard lesson that Beijing will define both the terms as well as the results of its partnerships.

With China, the EU, and the United States increasingly competing for geopolitical influence, a line to Beijing and face time with top Chinese leaders may provide additional incentives for all interested parties to up their games with CEE countries.

China may be down, but it’s certainly not out. Despite growing CEE skepticism toward China and the 17+1 initiative, no CEE member openly rejected China’s call to revive the summit. With China, the EU, and the United States increasingly competing for geopolitical influence, a line to Beijing and face time with top Chinese leaders may provide additional incentives for all interested parties to up their games with CEE countries.

The EU has repeatedly voiced concerns about Chinese activities in the CEE region. Brussels also warned that continued China-CEE exchanges could undermine a coherent EU approach to China. Sure, growing Chinese influence in the Balkans and EU members like Hungary raises serious questions regarding fiscal responsibility, environmental pollution, and even erosion of democratic governance. But if Angela Merkel could push through the EU-China Comprehensive Agreement on Investment (CAI) despite internal EU dissent, why shouldn’t Warsaw or Prague or Bucharest call up Xi Jinping to advocate their own business plans? Despite continuing EU support for CEE economic development, creative solutions, hard commitments, and equitable input into the EU’s policy decisions on China are much more effective than critical rhetoric in securing CEE solidarity.

That very sentiment has already laid ground for increased U.S. engagement in the CEE region. The Trump administration’s campaign against Chinese telecommunications company Huawei led to multiple tours of top U.S. government officials across the region. Those efforts saw most CEE members signing up for the Prague Proposals that call for scrutinization of 5G vendors and their home governments, joint declarations supporting the U.S. “Clean Network” campaign, as well as a number of CEE countries such as Poland and Romania excluding Huawei from their 5G networks. Washington also publicly supported the Three Seas Initiative (3SI) and committed up to $1 billion for its funding.

Beijing’s challenges now also include souring regional public opinion, an expanding regional network of independent China critics, and potential for growing U.S.-CEE security synergy.

As it’s increasingly clear that the Biden administration will hold a hardline toward China, with President Biden calling the relationship with Beijing “extreme competition,” some in the CEE region see an opportunity for closer U.S.-CEE partnership. They argue that CEE countries are more in tune with Washington’s national security assessment toward China than its Western European neighbors and the deepening Sino-Russian security and technology cooperation greatly alarms government officials from Tallin to Sofia. For CEE countries, it seems, the road to Washington could run through Beijing.

China, for its part, is increasingly aware that its old tactic in the region may not help it score another easy diplomatic win. Beijing’s decision to upgrade the 17+1 summit with Xi Jinping as host and its creation of a range of additional China-CEE initiatives, including agriculture expos and cloud service dialogues, are clear indications of China’s renewed focus to sway the CEE region and leverage Europe amid a prolonged global strategic competition with the United States. Aside from its still decidedly bilateral diplomatic engagement with CEE countries and an underwhelming record, Beijing’s challenges now also include souring regional public opinion, an expanding regional network of independent China critics, and potential for growing U.S.-CEE security synergy. How China defines the 17+1 agenda at the upcoming summit could provide important clues to its future fortunes in the region.

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But preparation and cooperation among African leaders and African Union agencies, particularly the Africa Centers for Disease Control and Prevention, have resulted in many successes – including increased testing capacity, resource mobilization, and coordinated policies to prevent and contain the coronavirus’s spread and promote economic recovery.

Despite these successes, Africa is still facing significant challenges. These include a continued rise in COVID-19 cases, a need for greater testing capacity and improved health infrastructure, difficulties acquiring medical and food supplies, weak social-welfare systems that are struggling to support vulnerable populations during the economic crisis, and high government debt coupled with a need for increased spending.

Although African countries are capable of continuing their progress on the long road to recovery, external support would greatly bolster their efforts. Aside from humanitarian principles and solidarity, a strong and rapid African recovery is in the world’s interest. As long as the virus is unchecked in some regions, no part of the world can be safe from it. Moreover, if COVID-19 further weakens fragile African states or causes health or economic disasters on the continent, a migration crisis or increased threats to international security could ensue.

We therefore propose six ways the world can cooperate with Africa to improve the continent’s crisis response, accelerate its economic recovery, and build momentum for its post-pandemic development.

First, external partners can provide sufficient resources and investment to enable effective COVID-19 responses and inclusive post-pandemic economic recoveries. Although multilateral and bilateral partners have already provided some financial support in the form of debt relief, loans, and grants, African governments need much more. Some estimate the continent’s pandemic-response funding gap at about $100 billion annually over the next three years. Given Africa’s health-care and economic vulnerabilities, additional financial support and debt relief are critical.

Second, partners should support and invest in the African Continental Free Trade Area, which is one of Africa’s best economic-recovery plans. The AfCFTA aims to increase intra-African trade significantly, and thus develop regional value chains, local manufacturing, and sourcing of intermediate and final goods. By reducing the continent’s vulnerability to external shocks through decreased dependence on non-African trade, the agreement will foster economic diversification and resilience, thereby promoting Africa’s integration and assisting its recovery. In addition to backing and investing in the AfCFTA, partners can provide expertise regarding trade regulations and manufacturing capacity.

Supporting private-sector growth is a third way to unlock Africa’s economic potential, representing a significant opportunity – in terms of both trade and investment – that will benefit Africa and global businesses. Although both the formal sector and the large informal sector are currently struggling, owing to lockdowns and economic restrictions, private firms will be crucial to Africa’s recovery and future development. External partners can support African businesses through increased investment, including in small and medium-size enterprises that are today trying to stay afloat and pay their employees. International partners can also help to improve the business environment, for example by overseeing a mandatory regulation process.

Next, external partners can support Africa’s efforts to embrace the Fourth Industrial Revolution (4IR) and achieve a successful digital transformation. During the pandemic, technology has enabled real-time medical forecasting and modeling, better communication between leaders, and the virtual operation of businesses. But Africa’s technology infrastructure, specifically Internet access, lags severely, and the continent has benefited less from digital technology than the rest of the world. Partners can help accelerate the 4IR in Africa by sharing technological innovations, collaborating in adapting them to African contexts, and providing investments that will unleash young African innovators’ technological potential and enable existing innovations to be scaled up.

Fifth, the world can help to ensure that no African is left behind, including through job creation, skill-building, social protection, and gender equality. Vulnerable groups such as those living in urban slums or rural areas, youth, women, and the poorest families need extra government support, but social-welfare systems are weak, especially in fragile states. External partners should therefore give special consideration to assisting the most-affected countries and communities by channeling resources toward these populations, instead of giving unconditional aid to governments, and by collaborating with African leaders to create innovative policies that benefit these groups.

The final priority is to help Africa address its fragilities and bridge the gaps between policy goals and outcomes, including through evidence-based policy research. Ineffective institutions, corruption, and a lack of accountability can undermine even perfect policies. Partners can monitor projects or provide experts to assist in implementation, and can promote good governance through measures and indicators such as Transparency International’s Corruption Perceptions Index, the Fund for Peace’s Fragile States Index, or the World Bank’s Worldwide Governance Indicators. Research institutes and think tanks such as the Brookings Institution are playing an important role in this effort.

Each of these six proposals can help Africa to combat and recover from the COVID-19 pandemic, but they are also critical for realizing the continent’s potential and accelerating its future development. By collaborating with external partners to secure additional resources, develop new initiatives, and invest in key sectors, African countries can mitigate the virus’s immediate impact and hasten economic recovery while building resilient systems for long-term growth and success.

This commentary is co-signed bybodog casino a former president of Malawi; Rosalía Arteaga Serrano, a former president of the Republic of Ecuador; Phumzile Mlambo-Ngcuka, United Nations Under-Secretary-General and Executive Director of UN Women, and a former vice-president of South Africa; Laimdota Straujuma, a former prime minister of Latvia; Yves Leterme, a former prime minister of Belgium; and Rovshan Muradov, Secretary-General of the Nizami Ganjavi International Center.

Landry Signé, a professor and senior director at Arizona State University’s Thunderbird School of Global Management, is a senior fellow at the Brookings Institution, a distinguished fellow at Stanford University, a member of the World Economic Forum’s Regional Action Group for Africa, and the author, most recently, of Unlocking Africa’s Business Potential.

Ameenah Gurib-Fakim, the first female president of Mauritius, is the author of her autobiography, Ameenah Gurib-Fakim: My Journey.

To read the original blog post, click here.

© Project Syndicate – 2020

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Then again, while the U.S. and Kenyan governments have a strong commitment to a successful outcome, the challenges cannot be minimized.

Both sides have described what they hope to achieve in the negotiations. The U.S. objectives are predictably comprehensive. USTR has identified 24 chapters on which it plans to negotiate, including technical barriers to trade, intellectual property, digital trade, anti-corruption, good regulatory practices, and subsidies, among others. Kenya’s statement of objectives is equally fulsome if not quite as detailed. The Ministry of Industrialization, Trade, and Enterprise Development has identified 22 chapters it intends to negotiate with the U.S.

At this point, the political commitment to the negotiations of both leaders is of paramount importance. President Uhuru Kenyatta is one of the few African leaders to have established a positive rapport with President Trump and is the only African leader to have made two visits to the White House. In the wake of their second meeting in February, the U.S. Chamber of Commerce established a U.S.-Kenya Trade Working Group to build mutual trust and seek common ground between the parties on key trade priorities for the business community.

While these negotiations are intended to produce the first bilateral trade agreement with a country in sub-Saharan Africa, negotiators will have to navigate a number of challenges including:

Regional agreements. One of the most frequently asked questions is how a U.S.-Kenya Free Trade Agreement will impact efforts to implement the African Continental Free Trade Agreement (AfCFTA). So far, USTR’s statement on this issue has been ambiguous, saying only that the U.S. will “support regional integration, where appropriate.” U.S. businesses and groups such as the U.S. Chamber of Commerce avow that they support both the FTA talks and the AfCFTA, and that the two mutually reinforce Kenya’s growth and development goals. President Kenyatta has also sought to dispel fears that the ongoing trade talks between Kenya and the U.S. will undermine the AfCFTA. In his view, Kenya’s trade deal with the U.S. will assist the continent more broadly by creating a reference upon which other African nations can negotiate bilateral arrangements within the AfCFTA framework going forward. Kenya also has obligations as a member bodog poker review of the East African Community (EAC) Customs Union. Like its fellow EAC members, Kenya applies a common external tariff and may have the limited latitude to negotiate concessions in that area. As for the future of AGOA, USTR has not indicated whether it supports an extension past 2025 for those African countries who have not negotiated a free trade agreement which, obviously, would be the majority of current beneficiaries.

Taxes on data. Few countries have advanced as quickly in the use of mobile-based financial services and digital transformation as Kenya. In an effort to derive more revenue from digital transactions, the government recently imposed two taxes: A 1.5 percent digital services tax, which will take effect on January 1, 2021 and an earlier withholding tax charged on “marketing, sales promotion and advertising services provided by non-resident persons.” American technology companies find these taxes discriminatory. In fact, last month, the U.S. announced tariffs on some French goods in retaliation for France’s unilateral digital services tax targeting American companies. While this matter has not been directly linked to the trade talks, it remains to be seen how the U.S. might approach this issue in the negotiations. How will efforts to resolve this matter in the OECD factor into discussions between the parties?

Genetically modified organisms (GMOs). U.S. agri-food industries are innovators in GMOs and related technologies that improve yields and reduce the need for chemical fertilizers and pesticides. Kenya is adamantly opposed to the importation of any foods that have been genetically modified. In fact, these foods are not allowed to enter or transit Kenyan ports for other destinations. Like the WTO Sanitary and Phytosanitary Standards (SPS) agreement, U.S. trade agreements require that SPS rules be science- and evidence-based, which sets up a clash with Kenya’s stance on GMOs. This disagreement could impact small and medium enterprises, especially in the agriculture sector, that rely on low-cost feedstock and other inputs. Based on conversations with industry representatives in the U.S. and Kenya, we anticipate that both sides will be able to find a satisfactory resolution on this issue.

The calendar. Trade agreements can take several years to negotiate. In just over three and a half months, the U.S. will hold its presidential elections. As we saw in the transition from the Obama to the Trump administrations, trade negotiations can be scuttled. If Biden wins in November, will his administration continue the negotiations with Kenya? The strong bipartisan support that has existed in Congress over the course of four administrations for programs in Africa suggests that there will be continuity on this initiative. Another challenge is that Trade Promotion Authority (TPA)—the law that lays out parameters for consultations between the administration and Congress and ensures an up-or-down vote on the final deal—will expire in July 2021. Without TPA, the eventual implementing bill could be amended by Congress, potentially unraveling it. Another potential complication is that President Kenyatta’s second term ends in 2022. He sees the FTA as a legacy issue. Will it be completed by then? And then, there is the reality of COVID-19. In fact, shortly after the first round of virtual negotiations, the Kenyan government paused the trade talks over concern that its negotiators were exposed to the coronavirus.

The talks between Kenya and the U.S. on a free trade agreement set a new marker for increasing the competitiveness of U.S. firms in one of the continent’s most vibrant economies and regions. They also pave a path for Kenyan businesses to build on the successes of AGOA, while locking in trade benefits such as market access beyond 2025. In completing this agreement, the U.S. will send a strong signal that it is serious about the importance of Africa, its people, and its long-term prosperity.

To view the original blog post at the Brookings Institute, please click here

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Two years ago, US President Donald J. Trump welcomed then President of the European Commission Jean-Claude Juncker to the White House to face off escalating trade tensions between Washington and Brussels, and ultimately to call a truce. It was an interesting sell for staffers on both sides of the Atlantic. US officials argued that ultimately the best thing to do was get the two in a room together to hash it out and give negotiators a fresh mandate after the Transatlantic Trade and Investment Partnership (TTIP) had fizzled and the US president threatened tariffs on automobiles—a cleverly identified Achilles heel for European exporters. For those of us in the Rose Garden that day, watching with disbelief as the two leaders delivered a hastily assembled joint statement that set us on the road to new talks, there was a giddy sense of relief but also a long sigh of recognition—our work would never be as easy as getting Trump and Juncker to kiss.

In his recent address at Chatham House, US Trade Representative Robert Lighthizer criticized the EU for negotiating seventy-seven individual trade agreements globally, promulgating European and not internationally arbitrated standards. Whether you believe the EU is justified in doing this is a matter of opinion, but what was more striking in this comment was not the criticism of Brussels, but what that number revealed about the transatlantic dilemma. Europe can take home ancillary prizes but the golden goose—an agreement with the United States—remains out of reach.

TTIP grew too big for its britches because of the sheer scope of the negotiating mandate, as experts and politicos set aside the prospect of a narrower agreement in the glow of the moment. But the rhetoric went even further. The United States and the European Union are a community of values—transparency, democracy, open markets—” so there is no reason why we can’t reach an agreement,” officials repeated, and “this should be the easiest thing.” It’s time to turn this argument on its head and manage expectations. Moving forward, let’s acknowledge that this is one of the hardest and most nuanced negotiations out there.

The United States and the EU are nearly equal-sized markets and are competitors. In many sectors they are near perfect competitors—witness the Airbus-Boeing standoff playing out in real-time—meaning there are fewer comparative advantages available to make concessions worthwhile. To take an easy example, let’s wager that both the United States and the EU want to import cheap textiles from Vietnam, and not from each other. Previous negotiations had gotten most tariff lines to zero, but the going gets tough on standards and regulation. Washington and Brussels each present two sophisticated and advanced regulatory frameworks, with equal claim to fairness and transparency, and an equally long list of the other’s transgressions. Geopolitics aside, it’s hard to see, by the analogy of game theory or just a chessboard, why either would give way.

But where can we show some leg? Tax and state aid. Let’s try and give an optimistic case for both.

Finance ministries have a way of getting along even while fighting. Like lawyers, economists like to exchange friendly fire over principle. The Trump administration’s sweeping tax reform caused many in Europe to bristle, not over politics but out of jealousy that the United States could push corporate rates through a glass floor. The OECD negotiations on digital taxation—derailed just as much by Congress as the coronavirus—will continue despite USTR’s bullseye on French wine. The European Court of Justice’s rejection of the Commission’s case against Apple last week is a lob into America’s court. Brussels had wrongly presumed that a proxy battle with a US tech company could lay a stake in EU tax harmonization because taking on Ireland would never survive a veto by the same. There is also reason for optimism that individual EU member states introducing autonomous regimes at the promise of the quick windfall will see their efforts backfire, especially as tech holds up a greater percentage of the corona-economy. The companies themselves have stopped trying to ax the concept and are now, reasonably, lobbying for clarity.

One of the greatest parries on the regulatory front surrounds state aid and public procurement, an unforgivable irony for two trade blocs waving the free trade flag. The United States has cleverly funneled sponsorship for technology innovation and heavy industry through defense budgets, and the Buy America Act, according to Brussels, is not even thinly veiled protectionism. Meanwhile, Washington maintains a longstanding bugaboo over Europe’s direct subsidies to key industries such as agriculture and manufacturing. In this area, both are equal sinners with constituencies that won’t take changes lightly. But things are moving. First, the coronavirus has shifted conversations on both sides of the Atlantic on what it means to be competitive to include structural changes within our economies. If the United States needs to introduce comprehensive unemployment insurance and a viable option for universal public health care, the European Union is learning the hard way (at the recent EU Summit for example) that fiscal heterogeneity is a lasting and dangerous holdover from the eurozone crisis.

Second, a parallel agenda in negotiations with China will eventually force a convergence of interests and tactics. Phase 2 of the proposed negotiations (when and if it starts) between Washington and Beijing, which should cover subsidies for state-owned enterprises, sounds a lot like the draft EU-China Investment Agreement (when and if those negotiations resume). The Capital Markets Working Group, comprised of US agencies examining the behavior of Chinese corporates in US markets, sounds like the EU’s recently amended competition policy, which requires third party participants to adhere to the rules of the Single Market. “Why are we going after each other when we need to go after China together?” is a common lament of the past years. On a hot, sticky July day in Washington, this author is cautiously optimistic that this convergence will occur in time to avoid irreparable damage to the global economy.

In the meantime, Brussels and Washington will chip away at the cracks in Bodog Poker the areas identified two years ago in the Rose Garden. BusinessEurope’s excellent publication from this month provides an exhaustive list of a positive US-EU trade agenda. US and EU leaders don’t need to kiss (please don’t!), but they do need to recognize that fair competition, alongside cooperation, is the idea that our institutions dare to uphold.

Julia Friedlander is the C. Boyden Gray senior fellow and deputy director of the Global Business and Economics Program at the Atlantic Council. She has served as senior policy advisor for Europe at the US Treasury and director for European Union, Southern Europe, and Economic Affairs at the National Security Council from 2017 to 2019.

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Last year, the U.S. exported $106 billion worth of goods to China. About $68 billion worth of those exports are covered in the Phase One deal, and China has agreed to purchase more than double that over the next two years.

Those include soybeans, cotton, lobsters, cars, crude oil, semiconductors, and more.

But what about the goods China won’t be buying more of? What about the other $38 billion worth of goods U.S. exporters normally sell to China?

The biggest items that were left out of the deal were civilian aircraft, engines, and parts, which the U.S. exported more than $10 billion worth of to China last year.

Other items—which may not grab headlines like soybean and corn sales—include optical equipment, motor vehicle parts, chemicals and plastics, platinum, scrap (paper, copper, aluminum), and other miscellaneous goods.

Nonetheless, those are goods Americans work hard to create and sell when and where they can.

The administration has given no indication of whether more purchases will be included in the second—Phase Two—deal with China. It has indicated that Phase Two is to include more structural issues, like dealing with China’s government support for its industries.

But even then, Phase Two negotiations are a long way off.

In fact, the administration isn’t even thinking about Phase Two right now.

That makes sense, given that Phase One was just signed in January. Negotiations will likely have to wait until 2021, and progress on Phase One is measurable. But it also means Americans will have to continuing paying high tariffs on imports from China.

The administration has said tariffs on $370 billion worth of imports from China will remain until Phase Two is finished.

But even then, the administration’s lead negotiator is no longer sure what the goal of the past three years of the U.S.-China trade war has become.

“I don’t know what the end goal is,” U.S. Trade Representative Robert Lighthizer said. “Right now, we need to stop an aggressive force.”

At one time, the administration’s goal was closing the trade deficit with China, which is a dubious objective, given the value that both exports and imports bring to the U.S. economy.

It’s also a goal that hasn’t been met. After actually increasing in 2017-2018, the goods trade deficit with China in 2019 is about the same as it was in 2016. 

Nevertheless, if the administration wanted the Chinese to buy more U.S. goods, why not ask them to buy more of all U.S. exports, instead of picking winners and losers?

Better yet, why not focus on the sort of structural trade liberalization in both the U.S. and China that would raise overall volumes of trade, a measure that has declined since 2016? 

Now that would be a Phase Two worth having.  

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In addition to the unique features of the USMCA ISDS mechanism that have been highlighted by our contributors this week, USMCA also provides noteworthy innovations in State-to-State arbitration. USMCA Chapter 31 (Dispute Settlement) provides a mechanism that largely adopts the approach of NAFTA Chapter 20, while also addressing some of its flaws, which many commentators believe led to its infrequent use.

The scope of dispute settlement under USMCA Chapter 31 is narrower than NAFTA’s State-State dispute settlement framework. NAFTA Chapter 20 permitted panels to be convened to hear both violation complaints and nullification and impairment cases (non-violation cases) for all substantive NAFTA rights, except trade remedies and the labor and environment side agreements. Meanwhile, USMCA Chapter 31 denies panels the ability to hear violation cases for trade remedies, and it further excludes non-violation cases for claims under USMCA’s chapters on labor, environment, digital trade, financial services, telecommunications, alongside a number of other chapters. Procedurally, once a Party identifies a dispute, consultation with technical experts and the Free Trade Commission is required. Upon failure of such consultations, a binational panel may be convened to assist the Parties to resolve their dispute.

Chapter 31 further offers detailed rules and procedures to govern the establishment of a roster of panelists, their necessary qualifications, and how panelists are then selected from the roster to hear disputes. A key critique of NAFTA was the ability of a State to engage in “panel blocking”, employing its own failure to maintain an active and complete roster of candidates to prevent panel formation. This issue is resolved in USMCA through a commitment among the States to establish their rosters by the date USMCA enters into force (July 1, 2020). To protect from any future lapse in appointments, roster members maintain their position for a minimum of three years or until the Parties constitute a new roster. To this end, for example, in March this year, the U.S. concluded its open call for applicants to the roster.

Once a panel is appointed, Chapter 31 provides detailed guidance on the conduct of proceedings, including requirements for evidentiary submissions, hearing format, e-filing, third-party participation, and the use of experts. This detailed guidance is unique to Chapter 31 and is not mirrored in Chapter 14’s ISDS mechanism. In large part, this detail was added to USMCA through the December 2019 Amendment, which immediately preceded the Parties’ rapid and successive domestic ratification processes. Finally, Chapter 31 indicates processes for the release and implementation of panel decisions, as well as the consequences of non-implementation of such decisions.

The nuances and details of Chapter 31 are welcome additions to USMCA and reflect a thoughtful evolution of NAFTA’s Chapter 20. However, many commentators question the efficiency of both the negotiating process and even of the dispute settlement mechanism itself. An obvious alternative path would have been to draw upon the dispute settlement provisions of the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership (CPTPP). Both Canada and Mexico are already parties to the CPTPP. CPTPP negotiations also took into account American input, as the U.S. was involved with Trans-Pacific Partnership (TPP) negotiations until President Donald Trump signed an executive order to withdraw prior to domestic ratification. The TPP provisions were negotiated to account for flaws in NAFTA Chapter 20 that were well-known to American, Mexican, and Canadian TPP negotiators. As explained by Jennifer Hillman the approach of the TPP dispute settlement system was “designed to be broader, deeper, faster, and more transparent than either the WTO’s Dispute Settlement Understanding or [NAFTA Chapter 20.]”¹⁾

Where Does USMCA Fall in the Spectrum of Broader Global ISDS Reform?

TPP is also relevant to USMCA’s position with respect to global ISDS reform discussions. Many will recall that the TPP’s ISDS mechanism and the “risks” it posed to State sovereignty were among the U.S.’ reasons for withdrawing from the TPP. This position aligned with the “America First” rhetoric, which inspired the American negotiating position in USMCA. Yet, USMCA remains evolutionary in that it does not dispense with ISDS altogether. As Dr. Sheargold explained in yesterday’s post, the approach adopted in USMCA as between the U.S. and Canada is comparable to that adopted by Australia and the U.S. in their free trade agreement, where the exclusion of ISDS was justified – at least in part – by reference to the developed domestic legal systems of both States.

Compared to other more radical reform efforts, such as the European Commission’s proposal to implement a multilateral investment court, USMCA is not particularly revolutionary in its approach to structuring ISDS. It nonetheless incorporates many of the substantive and procedural reforms that differentiate new generation investment treaties from earlier models. As our contributors this week have noted, this includes various innovations concerning the scope and availability of ISDS itself. The treaty also imposes certain procedural safeguards for USMCA host States, including a requirement for would-be ISDS claimants to pursue local remedies for 30 months prior to filing their USMCA claim. Such innovations are reminiscent of reforms adopted in other contexts, including for example the inclusion in the 2015 Indian Model investment treaty of a five-year recourse to domestic remedies requirement.

Where ISDS is provided, USMCA builds on the legacy of NAFTA and the broader context of modern ISDS reform efforts to endorse a number of procedural safeguards and innovations. USMCA contains, for instance, detailed guidance as to the transparency frameworks applicable to ISDS proceedings. USMCA does not adopt the UNCITRAL Transparency Rules by reference but nonetheless contains many of the same disclosure requirements set out in those Rules, and in some cases, like other modern treaties, USMCA signals a willingness to go beyond the provisions on transparency contained in the UNCITRAL Rules. It imposes, for instance, obligations upon respondent States to make available to the public and the non-disputing USMCA State various documents associated with the proceeding (subject to certain safeguards). This includes the notice of intent, a notice of arbitration, pleadings, memorials and briefs, minutes and transcripts of tribunal hearings and orders, awards, and decisions of the tribunal (Article 14.D.8). The USMCA further provides for the holding of open hearings and filing of amicus curiae submissions.

While USMCA provides for significant elements of procedural transparency for ISDS, it misses others. This includes certain more specific elements of transparency, including Bodog Poker for example transparency associated with third party funding arrangements (a topic currently under discussion in UNCITRAL’s Working Group III). USMCA nevertheless addresses other aspects of transparency even if indirectly. Article 14.D.6, for instance, governs the selection of arbitrators, including to stipulate that arbitrators shall comply with the IBA Guidelines on Conflicts of Interest in International Arbitration “or any supplemental guidelines or rules adopted by the Annex Parties”. It is, therefore, possible that additional guidance could be provided by the USMCA Parties for assessment of arbitrator conflicts, including in the event Mexico and the U.S. endorse the recently-published Draft Code of Conduct for Adjudicators in ISDS.

USMCA also confronts the increasingly divisive issue of “double hatting”, where arbitrators also serve in other roles linked to ISDS proceedings (most commonly, as counsel). Would-be Chapter 14 arbitrators, once appointed, are prohibited from acting as counsel or in any other capacity in another pending USMCA Chapter 14 arbitration while the arbitrations in which they sit as arbitrators remain pending. Some critics suggest that banning “double hatting” may, as a side effect, decrease diversity among the pool of prospective arbitrators in ISDS proceedings, claiming that a ban effectively limits opportunities available to younger emerging arbitrators who are “transitional” in their practice and working to move to full-time arbitrator practices, while still acting as counsel.

There are no easy answers to the arbitrator diversity problem, but commentators agree that the system itself is only one piece of the puzzle. Counsel and their clients maintain decision-making power and should select (or at least consider) diverse candidates. Important projects are being developed in relation to diversity in ISDS more broadly, and stakeholders should continue to monitor appointment practices under USMCA to ensure appropriate diversity is achieved. Even broader ISDS reform efforts focused on diversity only can go so far. For example, the roster approached recently adopted by the Comprehensive Economic and Trade Agreement between Canada, the European Union and its member states (CETA) failed to reflect diversity goals, that failure was acknowledged, and improvement efforts are apparently underway. In this respect, the selection criteria of USMCA Article 14.D.6 are helpful. Arbitrators are not required to have any specific experience or training (e.g., in public international law and/or in international investment and trade law), thereby creating avenues for entry by diverse and/or emerging arbitrators who may provide complementary expertise, for example, in international commercial arbitration or in specific relevant industries.

USMCA is noticeably silent on a range of other matters, particularly when compared to the ISDS mechanisms developed in other new generation treaties. This includes the issue of potential investor obligations, a topic gaining increased traction in other negotiation settings. While a corporate social responsibility clause is included in USMCA Article 14.17, the clause focusses upon the responsibilities of each USMCA party and is likely too permissive to result in a legal obligation on investors to make or operate their investment consistently with such standards. Further, while the ISDS Annex between the U.S. and Mexico refers in passing to possible “counterclaims” by respondent States (Article 14.D.7), it is largely structured to focus upon claims filed by investors against their host State and not vice-versa.

What’s Next?

Placing USMCA amongst these broader discussions on evolution and innovation highlights the many challenges associated with modern treaty negotiation and ISDS reform. Yet, USMCA’s entry into force remains a historic and encouraging development regionally and globally. As mentioned in the introductory post to this series, NAFTA, despite the unprecedented trade flows it heralded, needed modernization because global commerce has changed dramatically over the past quarter-century. USMCA thus brings North American regional trade into the 21^stcentury in a manner that, at the very least, takes into consideration emerging global trends in treaty law and ISDS.

While today in 2020 our focus is on NAFTA’s termination and legacy claims provisions, soon it will be time to reconsider USMCA’s efficacy and future. A sunset provision at Article 34.7 provides that the agreement is subject to review and renewal by mutual agreement after six years (in 2026). At that time, its Parties would need to agree to a further 16-year extension, and absent mutual assent, USMCA would expire in 2036. The six-year review deadline is promising as it may provide an opportunity to revisit the challenges and opportunities already hotly debated among commentators.

This blog post originally was published on the Kluwer Arbitration Blog on June 28, 2020 as part of a series highlighting the USMCA’s entry into force.   

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