Top international trade and export control developments in 2017 for ADG companies

by Hogan Lovells
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Hogan Lovells

Aerospace, defense, and government services (ADG) companies increasingly rely on international customers and global supply chains to stay competitive in today’s global market. In the United States, ADG companies rely heavily on an international trade and financial system that enables the export of defense and commercial products and services, while facilitating the import of necessary components and materials. The election of Donald Trump, as well as the rise of populist movements in other countries, is challenging the current rules-based international trade and financial system, resulting in uncertainty for ADG companies. The change is also impacting the manner in which non-U.S. ADG companies view potential direct investments in U.S.-based businesses. ADG companies that implement plans that address this changing environment are far more likely to successfully navigate the challenges and opportunities presented by the developments impacting international trade. Below, we review the most significant international trade related trends in the ADG industry sector that will shape your business in 2017. 

Changes to trade agreements could impact your supply chain

President Trump has already withdrawn the United States from the Trans-Pacific Partnership, pledged to renegotiate the North American Free Trade Agreement, and called for resetting the terms of trade with China and others to better serve American workers. Trump’s protectionist policies are likely to meet some resistance among Congressional Republicans, who traditionally have been staunch supporters of free trade, but the President does possess sufficient executive authority to take meaningful action without Congressional approval. In addition, House Republicans have proposed a border adjustment tax on imports into the United States as part of broader tax reform. While the President’s position on the border adjustment tax is not entirely clear, the tax would have a major impact on imports of parts, components, and raw materials. As the President’s plans begin to take shape, it will be important to assess the potential impact on global supply chains. In addition, if the imposition of punitive tariffs, e.g., on China or Mexico, triggers a trade war, U.S. exports of aerospace products could be leading candidates for retaliatory measures by U.S. trading partners.

National security reviews of foreign investment in the United States 

While President Trump’s stance on international trade issues has garnered significant attention, the new administration’s approach to foreign direct investment (FDI) in the United States and to national security reviews conducted by the Committee on Foreign Investment in the United States (CFIUS) is uncertain. A Trump transition team draft memorandum outlining Mr. Trump’s trade policy for the first 200 days of his presidency reportedly indicated that President Trump would mandate that CFIUS reviews be expanded to consider food security and reciprocity in the treatment of U.S. investments abroad. This proposed requirement could significantly affect global investors with ties to China, as Chinese investors have in recent years acquired a number of well-known companies in the global food and agricultural sectors (including Smithfield and Syngenta), in part due to concerns over food security in China. Moreover, a reciprocity rule could adversely affect Chinese and other country FDI in the United States because China and other countries already restrict or outright prohibit foreign investments in many sectors. Importantly, the Trump administration has broad discretion to alter the existing CFIUS review process without any regulatory or statutory changes, in part because under existing law, CFIUS reviews are focused on threats to U.S. “national security,” a term that is not defined in the relevant regulations or statute.

Cybersecurity breaches involving export controlled data pose a significant risk for ADG companies  

Reports have estimated the likely annual cost to the global economy from cybercrime and cyber espionage is now more than US$400bn. In particular, ADG companies will continue to be a primary target of cyber attacks. To the extent such companies have sensitive export controlled data on their networks, they can face significant U.S. Government scrutiny and penalties if their export controlled data is accessed by unauthorized foreign persons. As such, companies should assess their IT security and export control programs to confirm that they are meeting government expectations concerning the security of export controlled data, implement enhancements as appropriate, and develop effective breach response plans that can be immediately implemented in the event of an intrusion.

The future of ongoing export control reform is unclear

Launched by Presidential directive in 2009, the U.S. Export Control Reform process was one of the signature regulatory initiatives of the Obama administration. Long sought by U.S. ADG companies, the reforms have reduced licensing burdens for some companies, clarified the control lists and defined key terms. Nearly eight years later, however, the Trump administration has inherited a reform process that  is still not complete and has been met with criticism for adding complexity to the regulations and failing to significantly reduce burdens on U.S. exporters. With the new administration vowing to slash federal regulations and improve competitive conditions for U.S. companies, the ADG industry will need to watch for signs of the fate and direction of export control reform. 

Commercial space

The space industry is undergoing a dramatic transformation as an increasing number of companies invest in commercial ventures and innovative new technologies, such as deep space/asteroid mining, in-orbit refueling, and 3D printing in space. In addition, the rapid development of small satellites is fueling a race for the development of small and reusable commercial launch services. As these NewSpace ventures take off, they are encountering a range of complex regulatory issues under restrictive export control regulations and multilateral arrangements, such as the Missile Technology Control Regime. The ability to successfully navigate these regulatory hurdles will be a significant factor in the success of these new space ventures.   

U.S. economic sanctions in flux

U.S. economic sanctions law will continue to be in flux during the new administration as President Trump has indicated that he will take a different approach to certain sanctioned countries. With regard to Iran, the Trump administration has already imposed new sanctions on Iran’s ballistic missile testing program and has indicated that it will seek to more actively counter Iran’s activities in the Middle East. While the Trump administration may not formally withdraw from the nuclear deal with Iran in the near term, it has the ability to halt any further liberalization of sanctions that are not expressly set forth in the nuclear deal and create a climate that undermines the nuclear deal. It is not yet clear what position the administration will take concerning Cuba and Sudan, and whether it will support further liberalization or attempt to reverse course. With regard to Russia, the Trump administration has indicated that it is seeking to lift sanctions, but certain members of Congress are expected to push back.  

Trade with China and investments in and from China are likely to be subject to increased scrutiny

Amid all the uncertainties in the international trade area, one virtual certainty is that issues related to trade, investment, and monetary policies with respect to China will be increasingly sensitive and tense in the Trump era. With his focus on restoring American jobs and preventing the relocation of businesses overseas, President Trump has repeatedly criticized China’s trade policies, including its overproduction and subsidization of steel and aluminum and its manipulation of exchange rates to drive its exports. If relations between the United States and China veer toward an open trade war, trade litigation and tariffs are sure to follow. The proliferation of cyber breach incidents and broader security concerns related to China’s activities in the Asia-Pacific region are further driving up tensions in the region and with the United States.  

India’s emergence as a Major Defense Partner may shape ADG businesses

The U.S.-India defense relationship remains one of the few areas of bipartisan agreement, with both parties in support of an enhanced relationship. In June 2016, President Obama and Prime Minister Modi issued a joint statement designating India as a Major Defense Partner. In December 2016, President Obama signed a bill into law that codified India’s designation as a Major Defense Partner and directed the Departments of Defense and State to take certain additional actions to enhance the bilateral defense relationship. While neither Congress nor the Obama administration provided details on what it means to be a Major Defense Partner, a category created specifically for India, some government agencies have begun to take steps to facilitate the defense relationship. In January 2017, the Department of Commerce’s Bureau of Industry and Security implemented a general policy of approval for license applications involving highly controlled items, including certain military items, destined for India, and made other changes to facilitate exports of defense and dual-use items to India. The Trump administration is expected to continue to strengthen the defense relationship with India. 

Conclusion

The degree to which President Trump’s protectionist rhetoric will restrict international trade is unclear. However, a number of changes that will shape the ADG industry appear to be on the horizon. These include not only changes to trade agreements, but also a possible change in approach with regard to export control reforms, changes to U.S. sanctions regimes, increased scrutiny of deals involving China, and increased cooperation with India. Recent cyber attacks have also underscored the risk of cyber breaches for ADG companies housing export controlled data on their networks.

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