ITAR Satellite Revisions... Thoughts

ISSUE

Obama, for all of his deficiencies or lack thereof (depending on your persuasion) in his political life as POTUS, has had the common sense to ensure that we get a revision of a part of the ITAR- or the International Traffic in Arms Regulations- that is in sore need of overhaul.  As part of his effort in the Export Controls Reform arena, Category XV of the US Munitions List ("USML"), is getting a serious tune-up.  I have written this post not only to explain to those of you who have absolutely no idea what I am talking about why these revisions are a godsend to those in the business of using satellites (Telecom, Media and Technology people will sympathize here) but also as a friendly reminder for any and all attorneys out there who have been sitting on their hands about sending in a revision suggestion- you have two weeks left to get it done (the call for input remains open until July 8th, 2013).

Nitty-Gritty

Last updated in 1999, as part of the Strom Thurmond National Defense Authorization Act, Category XV of ITAR (cited 22 C.F.R. § 121.1 XV) is focused on clearance for use of everything related to satellites.  While the call for revisions do seem to still hope to regulate satellites that can launch ICBM's, send death rays down to pinpointed locations on the earth a la  James Bond weaponry in Diamonds Are Forever and GoldenEye,  these general call seems to acknowledge that your standard satellite is more likely to be used for Google Maps, your cell phone call to your supplier in Rotterdam or to allow your Garmin to help you escape Jersey Turnpike Friday traffic rather than cutting edge technology that can can negate U.S. defensive capabilities.

Limitations still seem to include satellites that can:

1. Assemble, refuel or otherwise aid in outer orbit transit
2. Move faster than gravitational pull allows (If your satellite is volitionally moving faster than 9.8m/s^2, its probably more likely a missile or an object that can do harm. If its not volitional, well then we have a meteor and you have probably just suffered a multimillion dollar balance sheet hit on your PP&E)
3. Has some capability (examples include kinetic, radio-frequency, laser charged particle device or "directed energy") to destroy or attack other satellites or something on the ground. I will be honest, when I read this part of the USML I think "Someone read too much Assimov as a kid" and "You know that there is probably some science we can't comprehend or left off that gets around technical restrictions of the USML but not the spirit"
4. There are more, but those are the "fun" part of the list.

Remember- all these Satellites have to be pointed towards the earth. If you want to send a satellite to orbit Mars, it's not considered SME (Significant Military Equipment) and escapes all the ITAR hulabaloo (See note 3 to paragraph (a)(7)).


Take-Away Practitioners

- If you deal with ITAR and the DDTC on a regular basis regarding Category XV,  chances are you can now get your Technical Assistance Agreements, Manufacturing License Agreements, or Warehouse Distributions Agreements cleared out of the defense controls and into the relatively lower hassle realm of commercial export.

- July 8, 2013 is the deadline for revisions for Category XV of ITAR. If you think that there is something wrong with this part of the Munitions List, read through the call to change I linked to in the intro, and then make sure you get it in before the deadline (you have 16 days).

-If you don't deal with satellites (or the programs that run them or the component parts), then be thankful that haven't had to deal with something that was last updated when cell phones were as big as our faces (regrettably we may be heading back that way, but I digress).

-Lastly, this is about the 4th part of ITAR where there has been call to change this year (don't quote me on the number, but it seems to be a new category or chapter ever 2-3 months). So even if you are not dealing with Category XV but you are instead dealing with ITAR on a regular basis, please please please please check to see if there has been a new call for reform on your particular area. The DDTC isn't running through this in numerical order, so the part that affects your trade could be up next. Also side note- If the DDTC went through a revision in the past 2 or 3 years on a chapter that affects you, you can expect it to be a while before another overhaul.

Doha Talks Revisited Again.....

Interesting article on whether or not we truly need to get through another round of the DDA:

http://tax-news.com/features/TaxNews_Global_Trade__Do_We_Need_Doha__570572.html

ISSUE

Doha has honestly been deader than Bernie (of Weekend at Bernies fame). Too many differences of opinion, too little that has gotten done. It is the International trade equivalent of dating a movie star... I'm sure it would be really nice, and life would seem much easier, but the chances of it happening are slim to none and the unforeseen headaches that would accompany it would not be worth the trouble.

Nitty-Gritty

If you thought the Warsaw Pact or Roe v. Wade would be hot button issues... you have not read up on Doha. The Doha Development Agenda (DDA) is a current trade negotiation structured by the WTO to reduce global tariffs and trade barriers. Negotiations first started in November of 2001... yup it has been almost 12 years,  with the last break down of talks occurring in 2008 over agricultural import issues. To put the Doha Round in perspective:

1) It was started 2 months after 9/11, 18 months after the US accidental bombing of the Chinese Embassy in Kosovo, 3 years before the invention of Facebook. 

2) When talks broke down in 2008, the break down was so halting as to cause a separate round of talks about the meta of the talks themselves (talks about the procedures of the talks).

3) The break down in these talks "coincidentally"coincided with initiation of the the United States and 8 other countries in the Trans-Pacific Partnership FTA, Expansions of ASEAN, EU-South Korea FTA, etc.

To be fair, the DDA seemed like it faced an uphill battle. At the time talks had broken down, the Lisbon Treaty (forming the EU) had been signed but not sealed incurring transition period issues, among them the best direction for the EU in trade strategy. China's leadership was turning a blind eye to blatant IP infringement of EU and US technologies, the US was facing a huge change in leadership and The Great Recession.... the bottom line: all the big players had internal factors that made exploring a unified external position with regards to trade barriers a long shot.

Take-Away

President Obama's announcement of renewed trade negotiations between the US and EU at the G8 has caused speculation that Doha might yet actually be completed (for my analysis of the announcement, see this post). I am not very hopeful that Doha will ever be completed, and it seems like the big players in the world have just gone ahead and negotiated smaller agreements with each other, undercutting the urgency which would rekindle the Doha fire. reduced global tariffs, lightened embargoes and a World Unified customs classification system could increase the money in a exporters pocket ten-fold, but some of this is politics, some of this is protectionism, and not as much of it is common sense.
In the meantime, for those of you in the US reading this who would like a better perspective on recent EU FTA developments and the possibility of the G8 talks amounting to meaningful, translatable change for the common custom's brokerage, check this article out: EU perspective on FTA with the US.

Oh where, oh where has the AUD gone?

This will get a little Macro for the die hard currency buffs and is a bit of a commentary on politics but, this FX acknowledgement is important to those of you importing and exporting to the land of Kangaroos and the best British prison ever.... Australia. AUD/USD article Male Voters Desert PM Julia Gillard article
Issue

PM Julia Gillard is going down in flames.... Hard.  Aussie or not, woman or not, Labour party activist or not, under her stewardship "The Land Down Under" has seen a greater demand by China in trade (mostly mining), a strengthening of their currency against the dollar and what is inexplicably a very strange housing bubble (everyone thinks the bubble will burst, or has burst, or might burst, but it still costs 500,000 AUD to buy a 1 bedroom closet in downtown  Sydney or roughly 475,000 USD for those of you who want a ballpark).


Nitty-Gritty
After being recently asked by a radio host if she was a lesbian, if her marriage was a sham, etc. (picture Rush Limbaugh interviewing Hillary Clinton and Hillary's husband was a garrishly dressed hair-dresser from the West Village, and then you get the tone of the interview) the Aussie PM has taken on a 'Gender War' mantle, causing circumspection in the male constituency and some scarlet lettering from fellow male politicians. There is a level of vitriol towards the PM that doesn't quite make sense to me, and it may go beyond the gender war It doesn't help that that there is wide held expectation that the PM's Labour party is about to get beat in a big way in the elections coming up in 3 months. Why should you really care about all this political rigmarole?

1. Aussieland is currently one of the largest exporters of mining byproducts in the world
2. It ranks 3rd in trade partners with China
3. When you also acknowledge that both the Thai Baht and the Japanese Yen are being actively driven down by their central banks, the Aussie Dollar has until now largely remained as a safe, liquid, Pacific Ocean currency with a relatively free float for to use as an invoice currency for international business transactions with SE asian exotics and emerging markets.

Take-Away

Loomis announced today that there the big short movement on the AUD/USD may signal a time to buy Link. There has been a slight rally today after AUD USD hit a 33 month low on June 11th. I don't think this is going to be a long term rally unless the political landscape lowers its volatility a bit. Loomis may think the suckers have cleared out of the short positions or that the bottom hit last week, but for those of you looking for a hedge on invoicing in your international business transactions...caution is the best policy. I might recommend call options as the way to go with a 3 month strike as a way to level out the volatility if you are willing to risk the premium. The other way to play this may be to lock in long term fowards contracts at the going rate and then simply buy shorter term puts if the currency moves against you to limit your overall exposure. Either way, just please be aware that the volatility in the region is going to impact the price of your widgets and the money you will get after you are done trading with the sovereign republic of whatever.

G8 Trade deal....overstated?

Issue

President Obama, in conjunction with British PM David Cameron have announced that they will begin first round of negotiations of a bilateral trade agreement between the EU and the US. and that this will be the biggest trade agreement EVER. (link here)

Nitty-Gritty
um.... NAFTA? CAFTA-DR? ASEAN FTA (AFTA)? and those are just recent multi-lateral trade agreements. I get that if we treat the EU as one "entity" (Check back in 10 years after Germany has to deal with another decade of sloth and fiscal irresponsibility coming out of places such as Greece and Portugal), it may be the biggest "bilateral"... but we are really splitting hairs at this point. Some big showmanship by Obama may have been needed after the Syria invasion talks and NSA leaks last week and the EU may need this chip to gain a better bargaining position with China over the solar panels, but thats a little to Macro for this blog.

Take-Away
1)  If you are trading back and forth between Europe and the U.S., this could signal lower tariffs and a simplification of negotiations over who pays the VAT and what goods become VAT-exempted  (especially for the UK) as well as finally giving US-EU the accord advantage in trade it really needs to have a fighting shot against BRIC and MIST countries from economically relegating these OECD powers.  Do note that most of the countries in this trade agreement have shifted primarily away from manufacturing as a boon for their economies and have moved more towards a financial/banking/services/consumption model. So expect the customs compliance portion of the agreement to have a waning relevancy in global trade barring unforeseen developments.

2) Echoing my previous post on the TPP, these agreements take years. CAFTA-DR has been the poster child for stagnant, constipated trade agreement negotiations.  TPP is five years in the making with no sign of wrapping up before Obama leaves office. Given the political diversity of the parties in the agreement, I wouldn't factor this one into any five year business assessment plan. One need only to look at UN security council votes on anything to realize France rarely aligns with the US-UK-Spain voting bloc, whilst Germany and Italy continually face off over a myriad of EU issues from immigration to currency and ECB lending (though Merkel seems to be able to quell much of that strife) to realize that there are many embedded issues  to work around before negotiations can truly become meaningful.

3) CURRENCY/FX One final note- expect in the short term that this announcement will probably stabilize a higher USD/EUR, other factors (ehmm, AUDUSD) aside. This will be viewed as a win for the U.S. finally breaking through some restrictions that kept the dollar second fiddle in valuation and a sign that the EUR may more interchangeable as a reserve, given MFN treatment or preferential partnership access. Please don't overweight the Macro in favor of chartist theories if you are trading spot, but simply use this news as another bimodal time period trendline for the next two days and then for the week surrounding the start of negotiations in DC.  This may be worth a .5% weighting if you are playing some sort of 3 year futures swap to hedge against rising shipping costs, but a straight call or buy here is worth a look given the right calculation of the Greeks in your models.

Customs Compliance- Equal Protection against the HTSUS?

Larry has a great blog on U.S. Customs Law (I urge you all to read it religiously if you are more legally oriented in the industry and significantly interacting with U.S. Customs), and his most recent post sums up the demise of a good attempt to work around the HTSUS classification tables by bringing claims of constitutionally violative discrimination.

Issue:

Customs Law: Equal Protection Claims Dismissed

Nitty-Gritty

After reading the opinion (also linked in Larry's post), I have to say that this appears, probably to everyone else also prepping for the bar, that the legal theory under which the case was brought is a stretch... mostly because the HTSUS sounds exactly like the basic hypo they give in Barbri or Kaplan PMBR to show acts (laws, regulations, etc.) serving a public good or welfare purpose that are not overtly discriminatory which nevertheless effect a certain group more than another group usually win the Equal Protections' arguments.

Take-Away

The HTSUS is what it is (all 3546 pages of it), and frankly I would fathom companies have a better chance arguing EP discrimination of the law or executive agreement made to allow the classification for that part of the HTSUS rather than the HTSUS itself (i.e. you have a better shot at proving NAFTA discriminates than the HTSUS, and even the NAFTA argument is probably not a good one either). I would also think arguing that your particular product fits under a more favourable classification should be the first attempt, rather than venture into the ethereal realm of "constitutional law settling business transactions", but they may have already tried that.

Iran- Elections

There is some huge news coming out of Iran... a  Reformist Cleric named Rohani may have the inside track of being the Next President. (Story here)

ISSUE:
Lets face it, the West has issues with Iran ranging from women's rights and freedom of expression to hostile acts threatening violence and support of North Korea. But the biggest issues facing trade in and around Persia have been two-fold:

1) Shipping through the Straight of Hormuz is a tenuous proposition, with the risk of detainment, interdiction or otherwise impediment should the politics of Iran go against whatever potential flag your ocean carrier is flying.

2) Iran's Nuclear Development Program has caused international sanctions to lay down huge impediments to trade in the Persian Gulf. Shipping goods to three very affluent countries: Bahrain, U.A.E and Qatar becomes a risky proposition if Iran blocks their one free waterway access to the outside world, requiring goods to either be flown in or moved over land through Saudi Arabia or Oman (kuwait is in a similar predicament and Iraq is not a safe option given its current state of unrest).

Rohani presents a surprising good opportunity for the betterment of trade.

NITTY-GRITTY: 

The Persians are generally unhappy with Mahmoud Ahmadinejad given that his hard-line stance has thrown unemployment and inflation to levels that could set the economy back decades. Fortunately (if he hadn't angered the Ayatollah last year who knows if this would still hold true), its been declared that by law Ahmadinejad is not allowed to hold the Presidency for three consecutive terms.

Iranians, though fairly free with the actually voting process, are only allowed to vote on someone who has been first cleared by the Ayatollah's election council. Based on that, I had little hope of seeing someone open to changing Iran's current headlong path towards Islamic, anti-western, radicalism and the trade barriers that would come with it (note, I have had Tehranian friends and co-workers  in the past who are perfectly awesome people, and they seem to hate the way their religion and country have been used by Iranian leadership). However Rohani, from the Reformist Party, may change all that.

He is a cleric who also is a lawyer, and has acknowledged that while he supports the Ayatollah's mandate regarding nuclear program development, has spoken about the well -being of his people first.

TAKE-AWAY:
Read the article and take some solace that Rohani, if elected, could move the needle back to a more open economy with one of the region's biggest powerhouses. At the very least, we in international trade can hope that his election will allow the calculus to become algebra when it comes to shipping through the Hormuz and trading in the Gulf. He might even be able to dial back the rhetoric long enough to make trading in Iran as a Westerner a feasible (though certainly not preferential in most cases) option.

Side-note
This will have a much bigger tangential impact on a post I will be uploading later this week on the CISG and the logistics of trading goods in and out of Qatar ahead of the 2018 World Cup.

*EDIT- Rohani was just announced to have officially won the Election.

Economics- Why Li Keqiang may be the best thing that has happened to Sino-World trade in 20 years- CHINA DAILY EDITION

China Daily is by far the best news source on the planet. As the editorial arm of the Central Communist Party (the only political party in China, really), this newspaper, printed in English, gives a very thinly veiled Pro-China and Pro- "Communism" (they are really more of a blend of capitalists and socialists now) slant on all current news. It is directed propaganda, but better than that, these stories give us insight into how the leadership feels about international trade. You have to read these stories understanding the basic political tenets of the Chinese political philosophy. Once you can grasp that, these "unbiased" reports basically telegraph government positions on certain items.

Issue

There are two articles on the front page of the China Daily website today which need looking at:

Protectionism harmful for all: Li

followed by: 

China, EU may hold investment deal talks

(Note: The article bashing Murdoch's  divorce is pretty hilarious. They clearly don't like Fox News over in Tiananmen)

In reading both articles, I noticed three observations should be made regarding Chinese actions in the international trade environment.

1) Premier Li will most likely be opening up chinese economic policies to a more capitalistic stance because external restrictions on Chinese trade is hindering their own domestic economic ascendency.

2) That these changes will come to allow more transparency in trade and agreement to customary international law norms in the realm of transactions

3) That the issue with which this will be couched in is Solar panel countervailing duties imposed by the EU.

Nitty-Gritty

1) Li is open to negotiating and change. The Maoist Premier from Anhui province is showing that at heart, he is still more Shanghai than Beijing. While he has been speaking of anti-protectionism on a global scale (He did so in 2010 in his presentation of China's long term economic growth at the World Economic Forum in Davos), He did so doing so with an eye towards other country's regretful actions towards China. However, this was during his ascendency to power where Li had to carefully campaign within the party. He had to strike a fine balance between reverence towards the current leaders and their supporters while still putting forth a sexy campaign that allowed his candidacy to rise. He did so with his "olive" theory, stating that lowering protections would allow China to move more of its citizenry to a thriving, consuming, middle class (to make the classes apportion to the shape of an olive). Prior to his succession of Wen Jiabao, I had feared that the hard-line Maoist parties he had affiliated with throughout his life would cause him to turn the clock back to 1979 (and it was that side of him that may have allowed his election in the first place). Now it appears that his schooling in Economics is winning out as Li, having gained the second highest seat in Chinese Government is driving down the notion of Chinese protectionism and bringing China to the Negotiating table.

2) Although there was significant improvement in the China oversaw by Hu Jintao and Wen Jiabao (the predecessor President and Premier to Xi JingPing and Li), China was often accused of three international trade faux pas: 

      a) Lack of transparency in materials, accounting, and contracts, 

      b) IP piracy,  

      c) Violating international customary laws regarding competition. 

These two articles, in combination with Xi Jing Ping's talks with President Obama last week, Almost seem like an IPO "road show" for the country ( a "road show" is where a company about to go public flies all over to pitch major potential investors to buy their stock in an attempt to not only whip up a frenzy of positive valuation but also to lay the groundwork for a reaction to such a drastic change in the company). Both the President and Premier Li have shown that now that China has modernized (save the discussion about their toilet preferences later), it is seeking to become a well respected and abiding player in the realm of international trade law. The knock-offs will still be out there, but China is finally realizing that they now have companies, technology and trade that can be severely hindered if they don't start to "Play nicely".  Li is laying down this ground work for his message to be accepted both abroad and domestically.

 

3) In typical Chinese fashion, bold is not smart. Li and Xi can't just come out and say "Listen y'all, we surely do apologize for the way we've been acting and we were wondering if we can join y'alls club now." (yes I just made the President and Premier of China sound like Western Alabamans, and it was fun) If they did, they would lose support within their own party. It is considered extremely rude in that culture to say anything confrontational or direct that is not done so with circumspection or pleasantness. For example, unless you are at a Doctor or with a close family member (maybe a best friend), you never answer the question "How are you?" with anything less than "Not Bad". 

Here, Li and Xi need a vehicle for altering the discussion on China's lowering of protectionist practices and the Solar Panel "penalty" put forth by the EU is perfect. Acquiescing to the United States on any issue would be seen as cowardice in the People's Republic, and no other economic power besides the EU would be seen by the Chinese has having relatively equal stature to their own. The EU has enough clout to make them ok for Xi and Li to talk to as equals without the stigma of the U.S. (Australia and Japan are the other big options for China, but the History of Japanese Occupation rules them out and Australia is still viewed as kind of a second fiddle that merely meets China's mining needs).  The funny thing is that on the Global trade scale, The Chinese top trading partners are all outside of the E.U. and a particularly narrow product that is not a major industrial boon to China is not something usually worth a fight. However, Premier Li and President Xi need some root issue  as a platform to push this new trade stance direction, and Solar Panels are it (notwithstanding China's energy shortage issues).

Take-Away Practitioners

Custom and caution are big in China (their language has remained relatively unchanged for a couple of millennia), but Premier Li appears to be making good on his calls for anti-protectionist stance in his ascendency platform, even in acknowledgement of his own country's possible shortcomings on the issue. It might take years before we see a noticeable leap towards greater capitalism and fair dealing in trade out of the Middle Kingdom,

If you are in the business of buying products from or selling them to the People's Republic, you should start to be able to see a more efficient thwarting of piracy of your products (note: you will still have to give up certain technologies if you want to create an FDI in China due to their Joint Venture requirements). However, look in the next 18 months-three years for China's dealings with exports (and especially imports) to become more systematically friendly to westernized business practices. Customs, Customs inspections and duties/tariffs/etc. are a priority to the top CCP brass, as they looked to become more developed, costs of producing and sourcing in the PRC will rise, but at least more risk will be taken out of daily dealings.

Xi JingPing won't be running point on this as much as Li KeQiang, so only become concerned that the advances I referred to in Li's Olive theory aspirations  become contradicted by Xi's actions- though the fact that the President brought up similar issues in his talks with Obama last week serve as a kind of green light to Li's forward march of free markets.