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Exclusive Q&A on International Trade with Daniel Martin

Posted: 30th January 2018 08:30
Can You Outline The Main Import And Export Regulations In Your Jurisdiction?

While it remains a member of the ‎EU, the UK continues to implement and enforce EU sanctions.
We are very busy at the moment dealing with a range of queries regarding the impact of sanctions against Russia, which continue to have a real impact on businesses across a range of sectors.
Those sanctions (which have recently been renewed) include the usual asset freeze, which prevents EU individuals and companies from dealing with certain listed individuals and entities. Potentially more significant for our clients are the restrictions on supplying equipment and services for Russian oil and gas projects and also the so-called sectoral sanctions, which affect very significant entities (including the likes of Rosneft, VTB Bank and Sberbank) but which impose restrictions which fall short of the blocking measures under the asset freeze. This means that clients need to identify not only whether one of the entities which is subject to sectoral sanctions is involved, but also whether the intended transaction infringes any of the specific prohibitions, which mainly affect the ability of the Russian entities to access EU debt and equity markets.
We are also advising a host of clients on the opportunities in Iran, in light of the current sanctions relief. This is an exciting time, as – one year after the initial phase of sanctions relief under the Joint Comprehensive Plan of Action – it appears that a number of projects are finally getting off the ground.
There remains a need to conduct due diligence on Iranian counterparties, to ensure that there is no breach of the remaining EU asset freeze, and there are still certain limited restrictions on goods which can be supplied to Iran, but this is certainly an area in which, if the proper checks are carried out, and support from banks and insurers can be obtained, there are very real opportunities.
There is a lot of uncertainty at the moment about what, if any changes, President Trump will make to US sanctions against Iran (including not on the domestic measures which affect US persons, but also the secondary measures, which apply extra-territorially) and Russia. This uncertainty means that some projects are still on hold, which may create opportunities for those who are able to secure "first mover" advantage.
In addition to EU sanctions, ‎the UK also imposes its own restrictions. ‎These include export controls on certain goods, equipment and technology. The primary focus of our work in this area is on identifying and classifying dual use items (i.e. items which have both military and civilian uses) and advising on the licensing regime. 

What Are The Key Attractions And Challenges In Your Jurisdiction?

The UK benefits from having a great deal of expertise on the scope and impact of financial sanctions and other trade restrictions.
As well as experienced legal advisors, banks and insurers, the main regulators (the Office of Financial Sanctions Implementation (“OFSI”) in respect of financial sanctions and the Export Control Organisation (“ECO”) in respect of export controls) are knowledgeable and we have worked hard to develop good links with them. This means that we can often get guidance from them on their interpretation of particular restrictions, on either a formal or an informal basis. 
The key challenge for businesses remains navigating the complex web of restrictions, obtaining sufficient information to complete their due diligence and satisfying banks and insurers that particular transactions are lawful. Sanctions are constantly changing, and it can be a challenge for businesses and other organisations to keep up to date. We are fortunate in having a large enough team that we can dedicate resources to this.
There have also been criticisms that the UK Government (as well as certain UK banks) have not done enough to encourage and support UK businesses which want to trade with Iran, and that government can be slow to provide responses to queries.
Finally, while the lack of published enforcement of EU sanctions appears, at least on the face of it, to be a good thing from a business perspective, some published enforcement might actually be welcomed by the business community, as it might give greater clarity around some of the less clear provisions within the EU sanctions framework (as well as giving hard working Compliance Officers some real world examples which they can provide to the business to demonstrate why compliance is so important). 

Can You Summarise The Current International Trade Landscape With Reference To Any Recent Changes Or Interesting Developments?

It is now a little over one year since Iran‎benefited from sanctions relief under the Joint Comprehensive Plan of Action. That has prompted a great deal of interest in Iran, as businesses look to seize the opportunities in this USD 400 billion economy with a population of 77 million (second only to Saudi Arabia in the region).
Iran has the fourth largest oil reserves in the world and either the largest or the second largest gas reserves in the world (depending on which measure you use), and we have advised clients across a variety of sectors (including energy, commodities, media, aviation and consumer goods) on how they can take advantage of the opportunities in Iran, whilst also managing the regulatory risks. 
Having advised on the challenges and opportunities, it is exciting to see some deals come to fruition and signs of more on the horizon. This is particularly the case in the oil and gas arena, where 29 companies, including Shell, France's Total, Italy's Eni, Malaysia's Petronas and Russia's Gazprom and Lukoil, as well as companies from China, Austria, Japan and other countries recently pre-qualified and will be allowed to invest in Iran's oil and gas projects under the Iran Petroleum Contract (“IPC”) model
Another area of interest is of course sanctions against Russia, and it will be interesting to see whether President Trump makes good on his suggestion that the US might grant Russia sanctions relief in exchange for cuts to its nuclear arsenal (rather than any progress in respect of Ukraine and the implementation of the Minsk agreements).
It is certainly clear that sanctions remain a favoured tool of diplomats and politicians, and we can expect to see sanctions used in response to political developments, as evidenced by the recent suspension of many US sanctions against Sudan in connection with ongoing US-Sudan bilateral engagement and in response to positive developments in the country over the past six months related to bilateral cooperation, the ending of internal hostilities, regional cooperation, and improvements to humanitarian access.
Another key development has of course been Brexit. Once the UK actually leaves the EU, this will bring about major changes in the international trade landscape, but for now, while there is a lot of uncertainty about the eventual outcome, the legal position remains unchanged. One key question will be the extent to which the UK chooses (and is able) to adopt a different approach to the EU on key regulations and other legislation, in order to secure a competitive advantage for UK businesses.

Have There Been Any Noteworthy Case Studies Or Examples Of New Case Law Precedent?

The bulk of enforcement continues to come from the United States. For example, in 2017 we have seen OFAC enforcement against Aban Offshore Limited (for placing an order for oil rig supplies from a vendor in the United States with the intended purpose of re-exporting these supplies from the United Arab Emirates to a jack-up oil drilling rig located in the South Pars Gas Fields in Iranian territorial waters) and Toronto-Dominion Bank (for processing payments in breach of the US sanctions against Cuba and Iran).
The decision of Judge Richard Berman of the Southern District of New York in United States of America v Reza Zarrab [3 April 2017] is potentially significant on the ability of US courts to enforce US sanctions against non-US persons who use US Dollars for their trade with countries which are subject to comprehensive US sanctions.
In the UK, the Office of Financial Sanctions Implementation (“OFSI”) was established within HM Treasury on 31 March 2016 with a mandate to work closely with law enforcement to help ensure that financial sanctions are properly understood, implemented and enforced. From April 2017, OFSI will be able to impose civil monetary penalties for serious breaches of up to £1 million or 50% of the breach (whichever is higher) and we are taking part in a consultation launched by OFSI into how they will use these new powers. 
Sanctions cases which affect commercial organisations seldom end up in the Courts (there are cases before the Courts which deal with the issue of whether certain individuals or entities were incorrectly included on sanctions lists), and one of the criticism of sanctions legislation is that there are few examples of case law precedent which would guide businesses in how the sanctions operate.

How Significant Is The OPEC Oil Production Cut Agreement For The International Crude Oil Market? 

The agreement in mid-December between OPEC and Russia to cut oil production by approx. 1.8m b/d resulted in an immediate boost to oil prices of around 6% in the period up to the New Year.
However, in a demonstration of the overriding importance of market fundamentals, those gains were then reversed at the start of 2017 as high gasoline and distillates inventory levels (resulting from the US end of year refinery run and record Southern Iraqi oil exports) were reported. This latter report firmed up doubts in the market over the willingness of certain OPEC members to abide by their production quotas under the agreement. When added to the longstanding position of over-supply in the market, the fear of US shale producers waiting in the wings to ramp up production and traders taking profits, it swiftly dampened the mood.
OPEC has found it difficult to police its members in the past on production caps and, while the overall aim of increasing prices is undoubtedly supported, many oil dependent nations are not above cheating on their quotas where they can. This is particularly the case where they have been hurting for so long. In response, Saudi Arabia and Russia have been notably vocal in reassuring the market that their own production levels have dropped.
The US is also an important factor. If oil prices continue to rise, US shale producers will ramp up output, in effect capping the oil price. In addition, the inauguration of President Trump will increase uncertainty in the market, given his stance on US self-reliance, tearing up the Iranian nuclear deal and re-imposing sanctions.
So, while the deal itself is a significant and positive step, there are many other factors in play which will influence the oil market, perhaps to a greater extent. Even if the deal is adhered to it is due to expire in six months’ time, which is unlikely to be enough to re-balance supply and demand.

6) How Will The United Kingdom’s Decision To Leave The European Union (“Brexit”) Impact International Trade?
If, as seems likely following Teresa May's speeches on 17 and 18 January 2017, the UK leaves the single market and the customs union, this will have a huge impact on international trade (at least trade between the UK and the so-called EU-27 i.e. the remaining 27 EU member states).
While it is difficult to provide an estimate of the financial impact on the volume of goods and services which are traded, businesses will undoubtedly face increased complexity, time and cost when engaging in such trade if the UK leaves the customs union. One group campaigning for the UK to remain within the customs union has estimated that UK businesses will have to deal with 60 million more pieces of paperwork each year if Britain leaves the customs union.
The current customs union allows tariff free trade between the UK and the rest of the EU. This means that no taxes on imports are imposed on goods which move from one country to another within the customs union (e.g. from Germany to the UK). An important consequence of this is that once a product is inside the customs zone it can be transported without customs checks to any other country in the union. That cuts down on paperwork, human intervention (e.g. checking) and delays, and allows goods to move quickly and cheaply across the EU.
While Mrs May has said that the UK will have some form of customs agreement with the rest of the EU, and she wants the UK's trade with the EU to be as frictionless as possible, the precise details are not currently clear, and it appears likely that there will be customs checks at major ports and other borders, with the potential for delays and disruption, particularly at busy periods. There are also concerns about the ability of IT systems used by customs authorities in the UK and the rest of the EU to cope with the volume of additional paperwork, and to be able to communicate with each other in an integrated and seamless fashion.
Increased checks and delays at ports and other borders will lead to increased costs, and the combination of additional checks (e.g. on country of origin, etc.) may mean that some current cross-border supply chains (e.g. in the automobile sector) are no longer viable or cost-effective, such that there could be changes to the place of manufacture and assembly.
If the UK reaches new trade deals, e.g. with the United States, Canada and Australia, there may be changes to the tariff regime (and potential non-tariff related barriers, such as product standards) for businesses to navigate. What is clear is that there is a period of uncertainty ahead about the shape of the UK's new relationships with the EU and others, and also what impact this will have on business, and the wider UK and EU economies.

During His Campaign Trail, President-Elect Donald Trump Talked About Introducing Protectionist Tariffs And Blocking The Ratification Of The Trans-Pacific Partnership (“TPP”). How Would These Moves Impact Manufacturers And Consumers?

On 23 January 2017, President Trump withdrew the US from the TTP”, which is a deal involving Canada, Mexico, Japan, Australia, New Zealand, Chile, Peru, Malaysia, Singapore, Vietnam, Brunei as well as the United States.
The TTP had not been approved by Congress, so the decision to withdraw from the TTP does not result in immediate changes (other than making clear that the US is not and will not be part of the TTP).
There are two significant impacts of the decision to withdraw from the TTP. The first is that US manufacturers may find it more difficult to sell to consumers in the other 11 countries (which together make up around 40% of the global economy) without the reduced tariffs on imports and exports which had been agreed as part of the deal.
The second, and potentially more significant, consequence is that the US may be seen to be losing its status as the champion of free trade and returning to a more protectionist approach. That could have an impact on the North American Free Trade Agreement (“NAFTA”) between the US, Canada and Mexico (with indications that President Trump will look to renegotiate or tear up NAFTA).
It could also mean that other countries (such as China) could seek to take the lead, with Chinese President Xi Jinping saying in a speech at the World Economic Forum in Davos on 17 January 2017 that "We must remain committed to promoting free trade and investment through opening up and say no to protectionism".

This Year Has Seen The Rise Of An Anti-Globalisation Movement Across Countries Such As The United States, France, Germany And The UK, Among Others. Has This Affected International Trade Strategies?

Businesses which are reliant on global markets and global supply chains (including the global supply of labour) have been forced to confront the risk that the long-running trend towards free trade and away from protectionism is likely to be reversed.
Anti-globalisation movements in countries such as the US, France, Germany and the UK have had such a serious effect that Chinese President Xi Jinping used the opportunity of his speech at the World Economic Forum in Davos on 17 January 2017 to defend globalisation, in the face of threats such as the UK leaving the EU, the US withdrawing from the TTP and the US looking to renegotiate NAFTA.
Businesses have had to consider carefully their plans for international growth and expansion in order to determine whether they can seize new business opportunities, or whether they should concentrate on markets closer to home. They have needed to think about how protectionism affects their supply chain, if they rely on components which are manufactured overseas, as these may suddenly be hit with tariffs, resulting in increased costs. There may also be delays in receiving goods, due to additional customs formalities at borders, resulting in more damage to their supply chain. And finally, they have had to think about whether they will be able to continue to rely on any non-native workers and whether they need to move any of their business locations or operations.
As well as these specific issues, the uncertainty around the UK's referendum, US Presidential election and concern about the impact of Brexit has caused many businesses to put plans on hold, while they wait to see what happens next.

What Key Trends Do You Expect To See Over The Coming Year And In An Ideal World What Would You Like To See Implemented Or Changed?

Unfortunately, it seems likely that trends towards protectionism are likely to continue, at least in the short term. While the fallout from Brexit is not yet clear, we will know far better by the end of the year how it has impacted on the UK economy, and also whether any other European countries are looking again at their own membership of the bloc. UK businesses will be keen to understand how they can trade with the EU, what (if any) trade deal has been negotiated with the US, and the impact of any restrictions on employing non-UK nationals.
On the sanctions front, it will be very interesting to see what actions President Trump takes in respect of Iran, Russia and Cuba, and also whether international banks are able to overcome their concerns with respect to legitimate trade, so that we can see a real increase in trade with Iran, particularly ahead of the Iranian elections in May 2017.
Any instability in the MENA region has an impact on international relations, and businesses will be looking closely at the ongoing conflict in Syria and the campaign against ISIS to see what impact these have. On a related note, it will be very interesting to see whether there is a changed relationship between the United States and Russia, and what impact this has on international trade.
Finally, with President Trump indicating a preference to put America first (as evidenced by his stance on, amongst other things, TTP and NAFTA, we are watching carefully to see whether China will increasingly takes the lead on the benefits of globalisation, following Chinese President Xi Jinping's speech at the World Economic Forum in Davos, and what impact that has.
After a year of so much uncertainty, with Brexit, US Presidential elections and the growing anti-globalisation movement, many business (and Global Counsel) would no doubt like to see a period of relative calm and certainty, so that businesses (and politicians) can take stock of everything which has happened in the past 12 months, and reflect on how best to deal with those changes.
Sadly, it seems that this is very unlikely, as we wait to see what happens in President Trump's first 100 days in office, whether Brexit negotiations can be managed to achieve a satisfactory outcome, and the results of hugely significant elections in France, Germany and Iran. 

Daniel Martin 
Holman Fenwick Willan LLP
T: +44 (0)20 7264 8000

Daniel advises traders, shipowners, freight forwarders, insurers and brokers on a host of regulatory and compliance issues, including international trade sanctions, export controls, customs and anti-corruption legislation. He advises on all aspects of the EU and UK sanctions legislation, and he is also familiar with the application of US sanctions to non-US persons.

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