We’re actually making stuff in America now. We’re exporting stuff. We’re inventing things.
—Amy Klobuchar, U.S. senator from the state of Minnesota
Going into global business puts you and your firm in the position of having to comply with a number of legal considerations that affect how you acquire business, contract, and deliver products and services to your global customer. Many legal considerations have to do with U.S. export regulations and some with foreign government import regulations. Complying with U.S. export-related regulations is paramount for U.S. firms. U.S. export-related regulations come from several key sources that include the Export Administration Regulations, International Traffic in Arms Regulations (ITAR), the Anti-diversion Clause, Anti-boycott Regulations, and the Foreign Corrupt Practices Act. At first glance, you might think complying with the law is an overwhelming global business requirement, but not really, and it’s essential to generating a foreign income stream.
The Export Administration Regulationsi (“EAR”)ii administered and enforced by the U.S. Commerce Department’s Bureau of Industry and Securityiii (BIS) and published by the Office of the Federal Register,iv regulate export and re-export of U.S.-origin “dual-use” goods, software, and technology. “Dual-use” goods are those items that have civil applications as well as terrorism and military or weapons of mass destruction (WMD)-related applications.v The specific items subject to the export control restrictions under the EAR are identified on the Commerce Control Listvi (“CCL”). In many cases, your exports may require an export license, so it is best to comply with the regulations even when the BIS determines there is “No License Required” (NLR).vii The EARs do not control all goods, services, and technologies you contemplate exporting. The U.S. Department of State controls defense articles, for example, aircraft, etc., and defense services, for example, training in the use of defense articles. A list of other agenciesviii involved in export controls can be found in Supplement No. 3 to Part 730,ix General Information. To determine whether or not you need a Commerce Department export license, determine what you are exporting, where are you exporting, who will receive your item, and what will your item be used for. You can learn more about the EAR via BIS training seminars about export control policies, regulations, and procedures delivered by experienced export administration and regulatory policy specialists, engineers and enforcement personnel via an online training roomx and receive updates via e-mail notificationxi on seminars delivered countrywide. See an Introduction to the Commerce Departments Export Controlsxii for a primer on this important topic.
At first glance, you might think complying with the law is an overwhelming global business requirement, but not really.
If you plan to export items and services designed for military application, you must comply with the International Traffic in Arms Regulationsxiii ( ITAR)xiv administered by the U.S. State Department’s Directorate of Defense Trade Controlsxv (DDTC) . The ITAR regulates exports from the United States and re-exports from abroad of U.S.-origin “defense articles,”xvi and “defense services,”xvii as well as certain temporary imports of foreign-made defense articles and “brokering” activities. These items and services are subject to extensive export controls. In addition, the full text of the ITAR (22 C.F.R. Parts 120 to 130), including the United States Munitions Listxviii is posted there. The DDTC offers and you should read its “Getting Started in Defense Trade”xix as a primer to this sensitive, important, and complicated field of exporting. In examining the ITAR, you will see a list of Partsxx to acquaint yourself with. Many exporters of defense articles and services employ export control specialists well versed in obtaining the export licenses and interfacing with government personnel. Noncompliance with the ITAR can result in revocation of export privileges, imposition of financial penalties, even criminal penalties. The U.S. government is serious about compliance in this arena. You also need to know obtaining appropriate export licenses takes time so apply early to ensure you have an export license that supports the contract delivery schedule commitment you have made to your customer.
Anti-diversion Regulations
The U.S. government ensures U.S. exports are shipped to legally authorized destinations, thus, Department of Commerce Bureau of Industry and Securityxxi requires a Destination Control Statementxxii required by the Export Administration Regulationsxxiii (EAR) and International Traffic in Arms Regulationsxxiv (ITAR) that the goods in your shipment are destined for their ultimate destination abroad, specifically on the commercial invoice and bill of lading you prepare and within the text of licensing, manufacturing, and distribution agreements. The Destination Control Statement is required for all exported items listed on the Commerce Control Listxxv that are not classified as EAR99xxvi or are eligible for an export license exception. Inserting the Destination Control Statement on every commercial invoice and bill of lading protects you, if the goods you sell to a domestic customer are unexpectedly exported from the United States. At a minimum, your Destination Control Statement should read as follows:
These items are controlled by the U.S. Government and authorized for export only to the country of ultimate destination for use by the ultimate consignee or end-user(s) herein identified. They may not be resold, transferred, or otherwise disposed of, to any other country or to any person other than the authorized ultimate consignee or end-user(s), either in their original form or after being incorporated into other items, without first obtaining approval from the U.S. government or as otherwise authorized by U.S. law and regulations.
Should you exclude the Destination Control Statement for exported items listed on the Commerce Control List, you could be subject to the EAR Enforcement and Protective Measuresxxvii that impose civil (monetary) and criminal (jail time) penalties, denial of export privileges, even exclusion from practice—should you be an attorney, accountant, consultant, freight forwarder. Your best practice is to exercise due diligence (know) your customer.
Anti-boycott Regulations
As is the case with anti-diversion regulations, the U.S. government per AR 760,xxviii opposes restrictive trade or boycottsxxix “fostered or imposed by foreign countries against other countries friendly to the United States or against any United States Personxxx to report receipt of those requests to BIS and whether they took the requested action.” Historically, anti-boycott regulations in the United States addressed withholding support from Israeli business based on a 1948 Arab League agreement requiring boycott of trade with Israel and companies that trade with Israel. EAR 760 also prohibits employment discrimination based on nationality, race, or religion detailing criminal and civil penalties in accordance with EAR 760 Antiboycott Penalty Guidelinesxxxi and implementing the foreign policies of other countries when those policies differ from U.S. policy.
The Foreign Corrupt Practices Actxxxii of 1977(FCPA) was enacted in response to the U.S. government’s discovery of widespread briberyxxxiii of foreign officialsxxxiv by U.S. companies to win or retain business. The law, applicable to all U.S. persons and certain foreign issuers of securities, has both anti-bribery and accounting provisions that prohibit payments to foreign officials and require U.S. companies to make and maintain books and records that accurately and fairly reflect the transactions of the corporation and to develop and maintain an adequate system of internal accounting controls. Knowingly falsifying those books and records and knowingly failing to implement internal accounting controls are also addressed by the law’s accounting provisions. Both the Securities Exchange Commission and Department of Justice share enforcement authority with involvement of the Internal Revenue Service, the Department of Homeland Security, and the Federal Bureau of Investigation. As you can see from these wide-ranging sources of enforcement, the U.S. government is serious about enforcing this law, given its record of enforcement actionsxxxv that continues to this day.
Specifically, the anti-bribery provisions prohibit offering, paying, promising to pay, or authorizing the payments of money or offering, giving, or promising to give anything of value to a foreign official to influence him/her in their official capacity to do an act or omit an act to secure an improper business advantage in obtaining or retaining business. Under the FCPA, there is no statute of limitations for the anti-bribery provisions.xxxvi Penalties for violating the FCPA by corporations, other business entities (such as distributors and representatives), and individuals can be severe with fines and imprisonment for up to 20 years for criminal violation, even suspension or debarment from contracting with the federal government, and suspension or revocation of export privileges. Should you elect to sell or distribute your products via a distributor or representative agreement, ensure the agreement’s provision includes a termination clause and ensure you keep a detailed record of the distributor/representative’s performance as some countries’ requirements for termination are burdensome. Ethics provisions should also be incorporated into the agreement as it is important to ensure that business partners agree to uphold U.S. laws, not engage in either bribery or “kickback” payments. The United States is not alone in its interest in eliminating corruption in foreign transactions. It is among the 35 Organization for Economic Developmentxxxvii (OECD ) countries and 6 non-OECD countries—Argentina, Brazil, Bulgaria, Colombia, Russia, and South Africa—in 1997 that have adopted the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions.xxxviii
You, your staff, and your firm should consult an attorney when confronted with FCPA issues and pose specific questions by datafax to the Department of Justice Foreign Corrupt Practices Act coordinator at (202) 514-7021, viewing the government’s Transparency and Anti-bribery Initiativesxxxix website and becoming knowledgeable about “Red Flags”xl for possible violations of key U.S. laws for companies exporting and operating overseas.
You already comply with government regulations in doing domestic business in such areas as human resources, taxation, etc. While it might cost more money to comply with all of these regulations, don’t get discouraged. The increase in sales volume has more than enough profit potential to satisfy the cost of compliance. Complying with export regulations is just a fact of doing business globally. Both tasks are within your capabilities! Consult with specialists as needed.
U.S. Foreign Trade Agreements
Free trade agreements, to which the United States is a party, actually help U.S. business more easily compete in foreign countries with which the agreement is struck. They level the playing field by either reducing or eliminating tariffs, improving intellectual property rights and protection, and opening government procurement opportunities. They also eliminate inconsistent customs procedures; improve and reduce burdensome paperwork; minimize risks in foreign markets by providing certainty and predictability for U.S. small-business owners and investors; and importantly, promote the rule of law so that small businesses know what the rules are and that they will be applied fairly and consistently.
The North American Free Trade Agreementxli (NAFTA), most prominent in the minds of North American exporters, was negotiated among the United States, Mexico, and Canada; signed in 1992; and took effect on January 1, 1994. The agreement eliminates previously imposed barriers to cross border investment and movement of most goodsxlii and services that originate between its partners over a maximum transition period of 15 years. NAFTA partners Canada and Mexico are the top two destinations for U.S. small- and medium-sized exporters for whom there are many opportunitiesxliii to engage in cross-border trade. Trilateral trade among its partners amounts daily to $3.5 billion.xliv In the 2016 U.S. election cycle, the agreement became a hot topic as its impact and support of U.S jobs has come under fire and now, Donald Trump, as president, via the U.S. Trade Representative, has notified Congress of the president’s intent to begin talks with Mexican and Canadian leaders to support higher paying jobs and grow the U.S. economy. How discussions unfold will determine the way forward to improving the 23-year-old agreement struck before the emergence of the Internet and e-commerce, including if piecemeal reforms are possible or whether or not it will require starting over. Regardless of the pros and cons, it remains the current law by which you can ship goods and perform services for cross-border partners in North America.
NAFTA is not the only foreign trade agreement the United States has entered into. The United States has free trade agreements in the following regions with the following countries.
Central American and the Caribbean
Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua fall under the Dominican Republic-Central America-United States Free Trade Agreementxlv (CAFTA-DR); and Panama is under the United States-Panama Free Trade Agreement.xlvi
The Central America-United States Free Trade Agreementxlvii was signed into force March 1, 2006. U.S. goods exports to CAFTA-DR markets (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic) have demonstrated impressive growth. Though each country represents a smaller market (2015 U.S. goods exports: Dominican Republic: $7.1 billion; Costa Rica, $6.1 billion; Guatemala: $5.9 billion; Honduras: $5.2 billion; El Salvador: $3.3 billion and Nicaragua: $1.3 billion), taken together these countries offer substantial opportunities for U.S. exporters with key opportunities for importing the following:
Petroleum products;
Machinery;
Electrical/electronic products;
Cotton yarns;
Plastics;
Motor vehicles;
Paper products; and
Medical instruments.
The U.S. International Trade Administration reports there’s no better time to explore opportunities in Central America and leverage CAFTA-DR to join the U.S. export boom to the region!
The United States-Panama Free Trade Agreementxlviii went into effect on October 31, 2012, guaranteeing American access to one of the fastest growing economies in Latin America. A 0% percent tariff is a competitive advantage for U.S.-made goods with some 30% market share of Panama’s imports opening export opportunities on industrial goods such as computers and Information Technology (IT) equipment, agricultural and construction products, medical and scientific equipment, pharmaceuticals, and environmental products. Agricultural product exporters will find a market for high-quality beef, frozen turkeys, sorghum, soybeans, almost all fruit and fruit products, wheat, peanuts, whey, cotton, and many processed items.
South America
Chile, under the United States-Chile Free Trade Agreementxlix; Colombia, under the United States-Colombia Free Trade Promotion Agreement,l Peru, under the United States-Peru Trade Promotion Agreement.li
The United States-Chile Free Trade Agreementlii entered into force in 2004, and U.S. investments in Chile have grown at comparable rates due to a transparent, rules-based business environment. Chile is the 4th largest export market in Latin America for U.S. exports and the 22nd largest in the world. Over 15,000 U.S. firms currently export to Chile, 80% of which are U.S. SMEs. The United States is the leading foreign investor in Chile, accounting for 24.2% of foreign direct investment (FDI) that spans all industrial sectors. Opportunities exist for U.S. Agricultural equipment exporters willing to pursue them.
The United States-Colombia Free Trade Agreement. In the services market, this accord, entered into effect on May 15, 2012, opens Colombia’s entire services sector. Colombia agreed phase-out market restrictions in cable television. Colombia also agreed to provide improved access for U.S. suppliers of portfolio management services. Top U.S. exports include wheat, corn, cotton, soybeans, and corn gluten feed. The U.S.-Colombia trade agreement also eliminates duties on almost 70% of U.S. farm exports including wheat, barley, soybeans, soybean meal and flour, high-quality beef, bacon, almost all fruit and vegetable products, peanuts, whey, cotton, and the vast majority of processed products.
The United States-Peru Trade Promotion Agreement.liii Presidential Proclamation 8341, dated January 16, 2009, and published in the Federal Register on January 22, 2009 (74 FR 4105), implemented the U.S.-Peru Trade Promotion Agreement (PTPA) for goods entered or withdrawn, from warehouse for consumption on or after February 1, 2009. Under the agreement, U.S. consumer and industrial product exports—such as agriculture and construction equipment, auto parts, information technology equipment, medical and scientific equipment, and forest products—are duty-free. Tariffs are phased out on such U.S. farm products as high-quality beef, cotton, wheat, soybeans, soybean meal and crude soybean oil, apples, pears, peaches, cherries, almonds and many processed food products, including frozen fries, cookies, and snack foods. Peru has agreed to dismantle barriers on services and investments that have traditionally been in place, giving market access to U.S. firms in such services as telecommunications; banking, insurance, and securities; distribution services such as wholesale, retail, and franchises; express delivery services; computer and related services; audiovisual and entertainment services; energy services; transportation services; construction and engineering services; tourism; advertising services; professional services such as architects, accountants, and engineers; and environmental services.
Australia
The United States-Australia Free Trade Agreementliv went into effect January 1, 2005. For companies with the right products that are willing to market and price competitively, Australia also presents opportunities. Australia exports meat to its Asian trading partners, in particular, FTA partners China, Japan, and Korea, and U.S. exports of equipment for raising livestock—as well as mowers and other power equipment did well in 2016.lv
Asia
In Asia, the United States has free trade agreements with Korea, under the United States-Korea Free Trade Agreementlvi; and Singapore, under the United States-Singapore Trade Agreement.lvii
Under the United States-Korea Free Trade Agreementlviii effective on March 15, 2012, almost 80% of U.S. exports to South Korea of consumer and industrial products can be imported duty-free. Nearly 95% of remaining tariffs were eliminated within 5 years after that date, and most remaining tariffs were eliminated within 10 years. Additionally, nearly two-thirds of all U.S. exports of agricultural products to South Korea became duty-free starting March 15, 2012.
U.S. businesses, under the United States-Singapore Trade Agreementlix effective since 2004, are well positioned to assist in Singapore’s development through technologies and services in the energy, environment, infrastructure, health care, and information technology sectors. Bilateral trade between the United States and Singapore reached US$46.7 billion in 2015, a growth that has been enhanced thanks to the success of this free trade agreement.
Middle East/North Africa
In the Middle East/ North Africa, the United States has free trade agreements with Bahrain, under the United States-Bahrain Free Trade Agreement;lx Israel, under the United States-Israel Free Trade Agreement;lxi Jordan, under the United States-Jordan Free Trade Agreement;lxii Morocco, under the United States-Morocco Free Trade Agreement;lxiii Oman, under the United States-Oman Free Trade Agreement.lxiv
The United States-Bahrain Free Trade Agreement entered into effect on August 1, 2006. Services account for roughly 50% of Bahrain’s gross domestic product and its services sector provides many business opportunities for U.S. firms. Bahrainlxv has a very progressive banking sector and the country is considered the banking center of the Middle East. Opportunities for trade with U.S. companies exist in Infrastructure/Oil & Gas Services, defense, and civil aviation. Bahrain is also in the process of overhauling its finance and banking laws to leverage its expertise in financial services and Islamic financing to position itself as a regional Financial Tech hub.
2005 year marks the 20th year anniversary of the United States-Israel Free Trade Agreement. With the exception of agriculture products, the United States-Israel FTA has eliminated nearly all tariffs on trade and administrative import licensing requirements between the two countries. In order for U.S. exporters to qualify for preferential access to the Israeli market under the United States Free Trade Agreement, a special certificate of origin must accompany all shipments from the United States to Israel. American exporters are encouraged to qualify for preferential tariff treatment and to obtain, when necessary, a certificate of non-manipulationlxvi for transshipments. Leading sectors for U.S. exports include aerospace, automotive after-market parts and equipment, educational services, energy, health care technologies, and semiconductors.
The United States-Jordan Free Trade Agreement, fully implemented on December 17, 2001, eliminated duties and commercial barriers in goods and services. Under the FTA, all textile, apparel, footwear, and travel goods trade between the United States and Jordan is duty-free, provided that such goods meet the Agreement’s rules of origin. Duty-free statuslxvii and tariff staging are listed by HS number in the Jordanian FTA tariff schedule.lxviii Each line item in the Jordanian FTA tariff schedule is assigned a letter code that indicates the staging by which the duty for each product was eliminated. See Annex 2.1 (Tariff Elimination)lxix of the U.S.-Jordan FTA for more details. Duty elimination for qualifying Jordanian products imported into the United States may be found in the U.S. FTA Tariff Schedule.lxx In order to take advantage of the duty elimination, products must qualify as “originating” goods under the terms of the agreement. In general, the product must have sufficient U.S. or Jordanian content or processing to meet the criteria. The FTA’s rules of origin are not substantially different from standard rules of origin. For U.S. goods to qualify for duty-free treatment in the Jordanian market, they must satisfy the following requirements :
Goods must be made entirely in the United States.
If any third-country materials are used, they must be “substantially transformed” by manufacturing or processing into a U.S. product.
Goods must contain at least 35% U.S. content. (Note: If this product also has Jordanian content, up to 15% of the Jordanian content can count toward the requirement of 35% US content.)
Goods must be imported into Jordan directly from the United States.
The United States-Morocco Free Trade Agreement became effective on January 1, 2006. Most industry sectors are quite active in Morocco, but the best opportunities for U.S. small- to medium-sized vendors include the following sectors:
IT
Safety and Security
Renewable Energy
Franchising
Civil and Defense Aviation
Environmental Technologies
Infrastructure Projects
Exports to Morocco from the United States totaled $1.6 billion, led by fuel oil; aircraft and aviation parts; and machinery, falling by 24% year on year from 2014. The decrease in large part is due to a reduction in the purchase cost of fuel oil (1 billion USD). There are roughly 150 U.S. firms operating in Morocco. Multinationals such as Fruit of the Loom, Kraft, Kohler, DuPont, Lear, and International Paper, as well as smaller companies,lxxi have established their presence in Morocco supporting their exports to the European Union.
The United States-Oman Free Trade Agreement entered into force on January 1, 2009. Companies interested in doing business in the Sultanate of Oman should contact the U.S commercial attaché at the U.S. Embassy. SMEs typically make up two-thirds of the companies that National U.S.-Arab Chamber of Commerce (NUSACC).lxxii The NUSACC takes on trade and investment missions to investigate the following promising sectors:
Manufacturing
Logistics
Mining and minerals
Health care
Oil and gas
National defense
Details of these free trade agreements can be found under Trade Agreementslxxiii on the website of the Office of the U.S Trade Representative.lxxiv Even though the United States has entered free trade agreements, trade with other nations is not always free. To address this problem, the U.S. Office of the U.S. Trade Representative, the Department of Commerce, and the Small Business Administration have unveiled a Free Trade Agreement Tariff Toollxxv that empowers more small- and medium-sized firms to take advantage of trade opportunities to enable a U.S. exporter to discover cost-saving tariff reductions for product/services and markets for their next foreign sale.
As an exporter, you should also consider the customs privileges of U.S. Foreign Trade Zoneslxxvi (FTZs). These zones are domestic U.S. sites that are considered outside U.S. customs territory and, thus, available for activities that might otherwise be carried on overseas for customs reasons. For export operations, the zones provide accelerated export status for purposes of excise tax rebates. There are no issues of duty drawback;lxxvii the refund of certain duties (in whole or in part, of the customs duties collected upon the importation of materials that are later exported unused or as a finished good); internal revenue taxes and certain fees collected upon the importation of goods are only allowed upon the exportation or destruction of goods under U.S. Customs and Border Protection supervision, because duties are not collected when the goods are in the FTZ. For import and re-export activities, no customs duties, federal excise taxes, or state or local ad valoremlxxviii taxes are charged on foreign goods moved into FTZs, unless and until, the goods or products made from them are moved into U.S. customs territory. Thus, FTZs can be profitable for operations involving foreign dutiable materials and components being assembled or produced in the zone for re-export. Also, no quota restrictions ordinarily apply to export activity.
As of January 2006, there were 268 approved FTZs and more than 400 subzones in communities throughout the United States. These facilities are available for storage, repacking, inspection, exhibition, assembly, and manufacturing operations. The value of merchandise handled by FTZs exceeds $170 billion. Information about the zones is available from local Export Assistance Centers, or from the Executive Secretary, Foreign-Trade Zones Board, and International Trade Administration.lxxix
Export Processing Zoneslxxx (EPZs) encourage and facilitate international trade. Countries all over the world have established many types of export processing zones (EPZs), which include free trade zones, special economic zones, bonded warehouses, free ports, and customs zones. EPZs have evolved from the initial assembly and simple processing activities to include high-tech and science parks, finance zones, logistics centers, and even tourist resorts. They now include not only general-type zones, but also single-industry zones and single-commodity zones. Both the number of EPZs and the number of countries hosting them have expanded rapidly. There are now more than 845 EPZs in more than 100 countries. Many U.S. manufacturers and their distributors use these zones for receiving shipments of goods that are reshipped in smaller lots to customers throughout the surrounding areas. For further information about these zones, contact your local Export Assistance Center or the Trade Information Center at (800) USA-TRADE (800-872-8723).
A Customs-bonded Warehouselxxxi is a building or other secured area in which dutiable goods may be stored, may be manipulated, or may undergo manufacturing operations without payment of duty. Authority for establishing bonded-storage warehouses is set forth in Title 19 U.S.C. 1555. Bonded manufacturing and smelting and refining warehouses are established under 19, U.S.C. 1311 and 1312. When goods enter a bonded warehouse, the importer and warehouse proprietor incur financial and legal liability under a bond. The liability is canceled when one the following happens with the goods:
Exported.
Withdrawn for supplies to a vessel or aircraft in international traffic.
Destroyed under U.S. Customs supervision.
Withdrawn for consumption within the United States after payment of duty.
Your company could enjoy several advantages by using a bonded warehouse. No duty is collected until merchandise is withdrawn for consumption. An importer has control over the use of the money until the duty is paid on withdrawal of merchandise from the bonded warehouse. If no domestic buyer is found for the imported articles, the importing company can sell merchandise for exportation, thereby canceling the importer’s obligation to pay duty. Many items subject to quota or other restrictions may be stored in a bonded warehouse.
Check with the nearest U.S. Customs office before placing any merchandise in a bonded warehouse. Duties owed on articles that have been manipulated are determined at the time of withdrawal from the bonded warehouse.
So far we have addressed compliance with U.S. Government laws and regulations. Entering foreign markets entails considering target market legal considerations that address the following:
Labor and employment laws technology transfer regulations.
Customs laws and import restrictions.
Tax laws at home and abroad addressing among other things repatriation of funds and applicable treaties.
Repatriation and immigration laws.
Trademark registration requirements.
Costs and methods for dispute resolution.
Agency laws.
Last, but not least, you may need information about specific industry regulations that may affect the specific product or service you offer your global customers, such as health care, financial services, environmental laws, food and drug labeling laws. Get going on your research and you’ll be poised and ready to take advantage of global business opportunities.