IBM 554 Chapter 2 Regulations And Policies Affecting Exports PDF

CHAPTER 2 REGULATIONS AND POLICIES AFFECTING EXPORTS AT THE END OF THE CHAPTER, STUDENTS SHOULD BE ABLE TO UNDERSTAND:- ❑ Export Licensing and Administration ❑ Antiboycott Regulations ❑ Foreign Corrupt Practices ❑ Antitrust Laws and Trade Regulation ❑ Incentives to Promote Exports 2...

CHAPTER 2 REGULATIONS AND POLICIES AFFECTING EXPORTS AT THE END OF THE CHAPTER, STUDENTS SHOULD BE ABLE TO UNDERSTAND:- ❑ Export Licensing and Administration ❑ Antiboycott Regulations ❑ Foreign Corrupt Practices ❑ Antitrust Laws and Trade Regulation ❑ Incentives to Promote Exports 2 EXPORT LICENSING AND ADMINISTRATION ❑ Governments use export controls for a variety of reasons such as : i) To achieve certain desired political and economic objectives. Example : US has restricted exports to certain countries through legislation as the Embargo Act, trading with the enemy act, the neutrality act and the export control act. ii) The Export Control Act (1949) represents the first comprehensive export control program enacted in peacetime. iii) Export controls prior to this time were almost exclusively devoted to the prohibition or curtailment of arms exports (arms embargoes). The 1949 legislation was primarily intended to curtail the export of certain commodities to communist nations during the cold war era. iv) Export controls were thus allowed for reasons of national security, foreign policy and short supply. v) Export controls also were originally intended to be used against former communist countries. However, with the end of the Cold War, there was no longer a clearly defined, single adversary, and it became necessary to adjust the system of export controls to take into account the new reality in international relations. vi) An increasingly global economy also presented new challenges for managing export controls ( growing number of global suppliers of high technology and defense related items, increase levels of global R7D and dissemination of dual use technologies, as well as divergent views among Western countries militated in favor of liberalization of export controls. 3 COMMERCE EXPORT LICENSE ❑ Exports and other activities that are subject to the EAR ( Export Administration Regulations) are under the regulatory jurisdiction of the BIS. They may also be controlled under export related programs of other agencies. ❑ Before proceeding to complete any export transaction, it is important to determine whether a license is required. ❑ The following steps are important in establishing whether a given export item is subject to a license (refer Figure 15.1,page 380) 4 STEPS TO DETERMINE WHETHER A COMMERCE EXPORT CONTROL LICENSE IS REQUIRED Step 1 ✓ Is the item ( intended for export) subject to EAR? Items subject to the EAR regulations include all items in the US or abroad (including those in a US free trade zone), foreign made items that are direct products of US origin technology or software. If the items is subject to EAR, it is necessary to classify it under an ECCN (Export Control Classification Number) on the CCL (Commerce Control List). If it is not subject to EAR, there is no need to comply with the EAR. Step 2 ✓ Is the item classified under the ECCN on the CCL? Any item controlled by the Dept of Commerce has an ECCN. Exporters should classify their product against the CCL. ✓ A request can be made if an item has been wrongly classified @ should be transferred to another agency ✓ Some companies may opt to use a computerized product/ country license determination matrix. ✓ The CCL is composed of TEN (10) categories of items ranging from nuclear materials to propulsion systems, space vehicles and equipment. 5 STEPS TO DETERMINE WHETHER A COMMERCE EXPORT CONTROL LICENSE IS REQUIRED Step 3 ✓ Do the general prohibitions (4-10 apply) ? ✓ This refers to whether a product is listed under an ECCN on the CCL or not (EAR99). It is important if general prohibitions apply, that is, export/re-export to prohibited end uses, users or to embargoed destinations. ✓ The general prohibitions also include engaging in activities prohibited by a denial order or supportive of proliferation activities as well as routing in transit shipments through certain destinations. ✓ If an item is not listed under the ECCN on the commerce control list (EAR 99), and general prohibitions do not apply, NO LICENSE is required. However, if the prohibitions apply (for items listed/not listed on ECCN), an application for a license should be submitted. Step 4 ✓ Are there any controls on the country chart? ✓ The commerce country chart allows you to determine the export/re export requirements for most items listed on the CCL. ✓ If an “x” appears in a particular cell, transactions subject to that particular reason for control (eg : national security, antiterrorism)/ destination combination require a license unless alicense exception applies. No license is required if the license exception is available provided that general prohibitions 4-10 do not apply to the proposed transaction. No license is required if there is no X indicated in the CCL and the country chart 6 STEPS TO DETERMINE WHETHER A COMMERCE EXPORT CONTROL LICENSE IS REQUIRED Step 5 ✓ Applying for an export license ✓ The BIS provides formal classification for a product or service, and issues an advisory opinion or licensing decision upon review of a completed application submitted in writing or electronically. ✓ Even though it is the applicant’s responsibility to classify the export, the BIS could be requested to provide information on whether the item is subject to the EAR and if so, its correct ECCN. ✓ In addition to classification requests, potential applicants could also seek advisory opinions on whether a license is required or is likely to be granted for a particular transaction. Such opinions, however, do not bind the BIS from issuing a license in the future. 7 STEPS TO DETERMINE WHETHER A COMMERCE EXPORT CONTROL LICENSE IS REQUIRED Step 6 ✓ Destination Control Statement, shipper’s export declaration, and record keeping ✓ A Destination Control Statement (DCS) is intended to prevent items licensed for export from being diverted while in transit or thereafter. ✓ A DCS must be entered on all documents covering exports from the United States of items on the CCL but is not required for items classified as EAR99 (unless it is made under license exception BAG or GFT—see International Perspective 15.6). ✓ Destination Control Statement requirements do not often apply to re-exports. For holders of a Special Comprehensive License (SCL), use of a DCS does not preclude the consignee from re- exporting to any of the SCL holder’s other approved consignees or to other countries for which prior BIS approval has been received. ✓ An SCL allows experienced, high-volume exporters to export a broad range of items. 8 STEPS TO DETERMINE WHETHER A COMMERCE EXPORT CONTROL LICENSE IS REQUIRED Step 6 ✓ Destination Control Statement, shipper’s export declaration, and record keeping ✓ A Destination Control Statement (DCS) is intended to prevent items licensed for export from being diverted while in transit or thereafter. ✓ A DCS must be entered on all documents covering exports from the United States of items on the CCL but is not required for items classified as EAR99 (unless it is made under license exception BAG or GFT—see International Perspective 15.6). ✓ Destination Control Statement requirements do not often apply to re-exports. For holders of a Special Comprehensive License (SCL), use of a DCS does not preclude the consignee from re- exporting to any of the SCL holder’s other approved consignees or to other countries for which prior BIS approval has been received. ✓ An SCL allows experienced, high-volume exporters to export a broad range of items. ✓ It was introduced in lieu of special license and allows exportation of all commodities to all destinations (with some exceptions). ✓ Another DCS may be required on a case-by-case basis. The DCS must be shown on all copies of a bill of lading, airway bill, and commercial invoice (EAR, part 748). 9 STEPS TO DETERMINE WHETHER A COMMERCE EXPORT CONTROL LICENSE IS REQUIRED Step 6 ✓ Even though there are a few exceptions, submission of a Shipper’s Export Declaration (SED) to the U.S. government is generally required under the EAR. Information on the SED, such as value of shipment, quantity, and so on, is also used by the Census Bureau for statistical purposes. The exporter or the authorized forwarding agent submits the SED, which includes information such as the criterion under which the item is exported (i.e., license exception, no license required, license number and expiration date), the ECCN, and other relevant information. ✓ The exporter is required to keep records for every export transaction for a period of five years from the date of export. The records to be retained include contracts, invitation to bid, books of account, financial records, restrictive trade practices, and boycott documents or reports. ✓ The example below is an analysis using the CCL and Country Chart. In order to determine whether a license is required to export/re-export a particular item to a specific destination, it is essential to use the CCL in conjunction with the Country Chart (EAR, part 774). 10 SANCTIONS AND VIOLATIONS ❑ The enforcement of the EAR is the responsibility of the BIS’s, Office of Export Enforcement (OEE) (Department of Commerce). ❑ The OEE works with various government agencies to deter violations and impose appropriate sanctions. Its major areas of responsibility include preventive enforcement, export enforcement, and prosecution of violators. ❑ Preventive enforcement is intended to stop violations before they occur by conducting pre-license checks to determine diversion risks, reliability of overseas recipients/end users of U.S. commodities/technology, as well as post-shipment verifications. ❑ The OEE also conducts investigations of potential export control violations. When preventive measures fail, it pursues criminal and administrative sanctions. ❑ Violations of the EAR are subject to both criminal and administrative penalties. ❑ In addition, violators may be subject to prison time and denial of export privileges by placing them on the denied persons list, and/or seizure or forfeiture of goods 11 SANCTIONS AND VIOLATIONS ❑ The EAR also provides certain indicators to help exporters recognize and report a possible violation. It reminds exporters to look for the following in export transactions: ✓ Whether any of the parties to the transaction has a name or address that is similar to an entity on the U.S. Department of Commerce’s list of denied persons. ✓ Whether the transaction has “red flags,” such as a) the customer or purchasing agent is reluctant to offer information about the end use of the product; b) the customer is willing to pay cash for a very expensive item (when the terms provide for financing), has little or no business background, is unfamiliar with the product and declines routine training, installation, or other services; c) the product ordered is incompatible with the technical level of the country and its packaging is inconsistent with the stated method of shipment or destination; and d) the shipping routes are abnormal for the producer and destination, delivery dates are vague, and a freight forwarding firm is listed as the product’s final destination. 12 ANTIBOYCOTT REGULATIONS ❑ The U.S. antiboycott provisions of the EAR prohibited U.S. firms from participating in foreign boycotts or embargoes not authorized by the U.S. government. ❑ Even though this law was primarily aimed at the Arab boycott against Israel, it prevents U.S. firms from being used to implement foreign policies of other nations that are inconsistent or contrary to U.S. policy. The law requires companies to report boycott-related requests by other nations and imposes a range of sanctions in the event of violations. ❑ In May 2019, for example, Mirasco Inc. of Georgia agreed to pay a $15,500 civil penalty to settle charges that it violated the antiboycott provisions of the EAR. The BIS alleged that during the period 2014–2016, the firm violated the EAR by a) furnishing information about business relationships with boycotted countries or blacklisted persons; and b) failing to report the receipt of a request to engage in a restrictive trade practice or foreign boycott against a country friendly to the United States (BIS Annual Report, 2019). 13 WHO IS COVERED BY THE LAWS? ❑ The sources of U.S. antiboycott regulations can be found in the EAR and the Internal Revenue Code. The EAR applies to all “US persons” (individuals and companies located in the United States). ❑ It also covers foreign subsidiaries that are controlled by a U.S. company in terms of ownership or management. ❑ In such cases, the foreign affiliate will be subject to the antiboycott laws and the U.S. parent company will be held responsible for any noncompliance. ❑ The regulations cover the activities of individuals or companies relating to the sale, purchase, or transfer of goods or services within the United States or between the United States and a foreign country. This includes U.S. exports, imports, financing, forwarding and shipping, and certain other transactions that may take place outside the United States. To trigger the application of the antiboycott laws, the activity must involve U.S. Commerce with foreign countries (EAR, part 760). 14 WHAT DO THE LAWS PROHIBIT? ❑ Refusals to do business ❑ Discriminatory actions ❑ Furnishing information to a boycotting country ❑ Implementing L/Cs with prohibited conditions or requirements The statute also prohibits any U.S. person from implementing an L/C that contains a condition or requirement from a boycotting country. This includes issuing, honoring, paying, or confirming an L/C. The prohibition applies when a beneficiary is a U.S. person and the transaction involves the export of U.S. goods (i.e., shipment of U.S.-origin goods or goods from the United States). Some exceptions to the prohibitions include the following: compliance with import requirements of a boycotting country compliance with unilateral and specific selections by buyers in a boycotting country compliance with a boycotting country’s requirements regarding shipment and transshipment of exports compliance with immigration, passport, visa, employment, and local requirements of a boycotting country. 15 REPORTING REQUIREMENTS ❑ The regulations require U.S. persons to report quarterly to the U.S. Department of Commerce any requests they have received to take any action to comply with, further, or support an unsanctioned foreign boycott. ❑ The U.S. Treasury also requires taxpayers to report activities in or with a boycotting country and any requests to participate in a foreign boycott 16 PENALTIES FOR NON- COMPLIANCE ❑ The law provides both criminal and civil penalties for violations of the antiboycott statute. ❑ On the criminal side, a person who knowingly violates the regulations is subject to a fine of up to $50,000 or five times the value of the exports involved, whichever is greater. ❑ It may also include imprisonment of up to five years. In cases in which the violator has knowledge that the items will be used for the benefit of countries or persons to which exports are restricted for national security or foreign policy purposes, the criminal penalty varies. For individuals, a fine may be imposed up to $250,000 and/or imprisonment of up to ten years. ❑ For firms, the penalty for each violation can be $1 million or up to five times the value of the exports involved, whichever is greater. Administrative or civil penalties may include any or all of the following: revocation of export licenses, denial of export privileges, exclusion from practice, and imposition of fines of up to $11,000 per violation, or $100,000 if the violation involves items controlled for national security reasons. The Treasury may also deny all or part of the foreign tax benefits 17 FOREIGN CORRUPT PRACTICES ❑ The Foreign Corrupt Practices Act (FCPA) of 1977 was enacted as a public response to the Watergate Scandal and to revelations of widespread bribery of foreign officials by U.S. companies. ❑ In the 1970s, the Security Exchange Commission (SEC) investigations revealed that more than 400 U.S. companies admitted making illegal payments in excess of $300 million to foreign government officials. More recent FCPA enforcement and compliance actions also show that substantial payments were made by companies such as Siemens AG ($1.6 billion), Halliburton ($579 million), and Wilbros Group ($32 million) to foreign officials to obtain government contracts (Bixby, 2011). ❑ The overriding public concern was that this practice could tarnish the reputation of the United States in the world and was not in the best interest of U.S. corporations. ❑ The legislation represents an attempt to enforce morality and ethics in the conduct of international business transactions. ❑ The OECD Anti-bribery Convention came into force in February 1999 with the United States as a founding member. ❑ The principal objectives of the legislation are to: i. prohibit the bribery of foreign officials by U.S. individuals and corporations to obtain or retain a business; and ii. establish standards for maintaining corporate records and internal accounting control objectives. 18 ANTITRUST LAWS AND TRADE REGULATION ❑ Antitrust laws are intended to enhance efficiency and consumer welfare by proscribing practices that lessen competition or create a monopoly. ❑ Such laws also meet the sociopolitical objective of dispersing economic power. ❑ Historically, monopolies were often sanctioned in the area of trade and commerce. During the colonial period, for example, private companies such as the East India Company (1600), The Dutch West India Company (1621), and The Hudson Bay Company (1670) received charters from governments that granted them a monopoly of trade. In North America, British merchants were given monopolies over the export and import of goods. ❑ The idea of monopoly rights was soon found unacceptable, as it restricted the rights of individuals from competing freely. 19 INCENTIVES TO PROMOTE EXPORTS ❑ From the 1870s until 1971, U.S. exports typically exceeded U.S. imports, except during World War II. ❑ In 1971 the U.S. merchandise trade balance showed a $2.27 billion deficit in contrast to previous decades when exports exceeded imports. ❑ Some of the contributing factors to this state of affairs included the overvalued dollar and increased government expenditure at home and abroad that often resulted in purchases of foreign products and services. This situation was further exacerbated in 1973 when oil prices sharply increased and worsened the U.S. trade deficit due to large increases in expenditure for imports of petroleum products (Stein and Foss, 1992) ❑ Leads to formation of GATT (General Agreements on tariffs and trade)..monitored by WTO (World Trade Organizations). 20  SE 21 GLOBAL TRADE IMBALANCES ❑ The US current account deficit reached 2.87 % of GDP in the last quarter of 2019 ❑ Imports exceed exports by about USD616 billion (2019). ❑ The East Asian economies (including Japan) held about USD5 trillion in official foreign reserves exchange out of a global total of USD 11 trillion in 2019. ❑ China’s foreign currency reserves alone are estimayted at USD 3.11 trillion at the end of 2019. ❑ Export led growth in surplus countries feeds (and is dependant on) debt led growth in deficit countries. ❑ Surplus countries (income exceeds spending) , they lend the difference to countries where spending exceeds income, accumulating international assets in the process. ❑ Deficit countries spend more than their income, borrowing from surplus countries to cover the difference, in the process accumulating international liabilities or debts. ❑ Trade imbalances lead to destabilizing capital flows between economies. Eg: the global financial crisis of 2007 and the subsequent euro zone crisis were basically the result of capital flows between countries. 22 DEVELOPING COUNTRIES IN WORLD TRADE ❑ There has been a steady growth in the role of developing countries in world trade. ❑ Between 2000 and 2019, the value share of developed nations in world merchandise trade declined from 62 to 47% while developing nations increased from 29% to 53%. ❑ Over this period, China’s share alone increased from 2.6% to 12 %. The share of Latin America and the Caribbean also increased from 4.5% to 4.7% (WTO,2020) ❑ China joined the WTO in 2001. Within 3 years, its exports doubled, and the country is now the world’s largest merchandise exporter ($2.5 trillion in 2019) and second largest importer of goods ($2.07 trillion in 2011). ❑ About 83% of the increase in the share of developing countries total trade (2010-2019) accrued to a small number of emerging economies : the BRICs. Mexico, South Korea, India, China accounted for about one third of world exports and about two thirds of world exports of developing country exports in 2019. 23 TRANSPORTATION AND SECURITY ❑ About 60% (by value) of total world merchandise trade is carried by sea. ❑ In volume terms, 75% of world merchandise trade is carried by sea, whereas 16% is by rail and road (9% bu pipeline, 0.3 % by air). ❑ Increase in fuel prices will give effect to raising transportation costs. ❑ In air transportation(more fuel sensitive than shipping), rising oil prices could severely damage trade in time sensitive products such as fruits and vegetables, or parts in just in time production. ❑ World air cargo traffic has grown during the past decade due to an increased trade in high volume low weight cargo, globalization and associated just in time production and distribution systems. 24