Legal Newsletter SAUDI ARABIA AND INTERNATIONAL TRADE LAWblakesfiles.com/newsletters/blakes_gulf_newsletter_vol_2_issue_2... · INTERNATIONAL TRADE LAW Legal Newsletter Dr. Saud Al-Ammari

SAGIA SIMPLIFIES FDI PROCESS

TRANS PACIFIC PARTNERSHIP AGREEMENT

A DISPUTE ABOUT DISPUTES: THE GATHERING STORM OVER ISDS

THE KINGDOM AND RECENT DEVELOPMENTS IN WORLD TRADE

SAUDI ARABIA AND INTERNATIONAL TRADE LAW

Legal Newsletter

Dr. Saud Al-Ammari Law Firmin association with

December 2015

VOLUME 2, ISSUE 2

LEGAL NEWSLETTER


TRANS PACIFIC PARTNERSHIP AGREEMENT



CONTENTS

Blakes periodically provides materials on our services and developments in the law to interested persons. This Legal Newsletter is intended for informational purposes only and does not constitute legal advice or an opinion on any issue. We would be pleased to provide additional details or advice about specific situations if desired.

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VOLUME 2 , ISSUE 2 1

Dear Readers,

In this issue of our Legal Newsletter, we take a look at Saudi Arabia’s status in the international trade arena and its initiatives to sustain and increase foreign direct investment (FDI) into the Kingdom.

We highlight the initiatives the Kingdom is undergoing to ensure it remains an attractive and growing investment destination while focusing on its development goals in an article titled “SAGIA Simplifies FDI Process.” The article brings forth the points raised and discussed during a lecture and panel discussion hosted by Harvard Alumni of Saudi Arabia, together with the Council of Saudi Chambers, back on April 29, 2015.

The lecture focused on the Kingdom and recent developments in world trade and highlighted the various objectives of the Kingdom to further enhance its appeal to FDI with a focus on sustainable development. The objectives range from technology transfer and indigenization to creating and sustaining environmentally friendly enterprises that manufacture in accordance with global quality standards. Those objectives are in the SAGIA “General Rules of Licence Applications and Follow-Up Procedures,” published by the SAGIA Investor Service Agency during the month of Ramadan in the year 1435 After Hijrah.

Professor Raj Bhala, a world-class expert in international trade law and Associate Dean for International and Comparative Law at The University of Kansas School of Law, was part of the panel and introduced a working paper under the title “The Kingdom and the Recent Developments in World Trade,” which is also included in this issue.

I had the privilege of being part of the panel and took the opportunity to point out that the intended objectives to achieve “sustainable development” require arrangements that create and sustain a more attractive investment environment, design flexible and transparent systems, increase our free trade agreements and consolidate the country’s position in areas of services, manufacturing and export to diversify the economy and increase the Kingdom’s GDP.

On a macro level, we discuss the proposed Trans Pacific Partnership (TPP) Agreement and its implications on the GCC, Arab and Muslim states as well as the Investor-State Dispute Settlement mechanism.

I hope you find the articles herein of interest and value, and I look forward to receiving your thoughts and comments.

Sincerely,

Saud Al-AmmariChair, Saudi Arabia & Middle East Dr. Saud Al-Ammari Law Firm in association with Blake, Cassels & Graydon LLP

Dr. Saud Al-Ammari

FOREWORD

LEGAL NEWSLETTER2

The Saudi Arabian General Investment Authority (SAGIA) has recently engaged in a transparent program of renewed self-assessment, dialogue and adjustment in order to ensure that the Kingdom’s foreign investment regulations remain competitive while addressing the development goals of the Kingdom. This program has already resulted in the announcement of several new important reforms designed to streamline the foreign investment licence process and extend licence terms up to 15 years in some cases. Additional reforms under consideration, including the possible opening of the wholesale and retail sectors to 100 per cent foreign ownership in certain sectors, could result in substantial increased foreign investment in the Kingdom if realized.

The evolution of the Kingdom’s foreign investment regime began in the year 2000 with the passage of the Kingdom’s Foreign Investment Law. Another large step forward took place when the Kingdom acceded to the World Trade Organization (WTO) on December 11, 2005. Now, SAGIA is revising its foreign investment regulations to create an even more

competitive foreign investment regime that will significantly reduce the burden on foreign investors wishing to invest in the Kingdom.

SAGIA’s main objectives in evolving its foreign investment regime include Saudization, technology transfer, diversification of the economy, development of exports and the implementation of state-of-the-art quality standards.

“Currently, Saudi Arabia not only meets WTO standards, but also offers a host of additional incentives to compete for foreign investment”

Currently, Saudi Arabia not only meets WTO standards, but also offers a host of additional incentives to compete for foreign investment, including the following:

• 100 per cent foreign ownership is now allowed in most business activities

• Investors have access to public funds through equity investment and loan schemes

• Investors can take advantage of the Human Resources Development Fund to identify, recruit and train qualified Saudi labour for their operations

• Investors have access to affordable land in the Kingdom’s industrial and economic cities

• Capital and profits can be transferred abroad with ease

• The life of a patent has been increased from 10 to 20 years to attract smaller, innovative enterprises

• A fast-track [procedure awards investment licences to qualified investors in five days or less, which is so attractive that many domestic investors have expressed interest in a similar regime for domestic investments

SAGIA SIMPLIFIES FDI PROCESSMICHAEL QUIGLEY*

* Partner, Saud Al-Ammari Law Firm in association with Blake, Cassels & Graydon LLP



• All investment regulations are available in one succinct, clear document

• A “one-stop shop” at SAGIA allows investors to liaise quickly with all government departments whose consent is needed to establish a business in the Kingdom

The Unified Investment Plan, which will provide investors with access to information on how they can take advantage of an educated Saudi workforce, government procurement opportunities and spending, will be launching soon in a number of sectors. Opportunities within the health-care and transportation sectors alone are expected to be worth more than $140-billion US dollars.

In addition to the above incentives, facilities and opportunities, SAGIA has participated in a number of recent workshops and fora with investors to identify further ways to attract foreign investors. Out of these discussions, a few key areas for reform were identified that were of interest to the greatest number of investors. On September 6, 2015, SAGIA announced a series of further measures designed to increase investment opportunities and reduce administrative burdens for foreign investors.

The new reforms are expected to result in the following new benefits for foreign investors:

• Fast-track procedures will apply to all investment applications from January 1, 2015

• The number of documents needed for an investment licence under the fast-track will be cut from 12 to 3, all of which will be able to be submitted digitally

• The new, simplified application will reduce the time from application submission to licence issuance from four weeks to a maximum of one week

• Qualifying strategic investors will be able to extend their foreign investment licence terms after

their first year for a period of up to 15 years (subject to the status of the investment). The licences will be renewable upon expiration of their terms.

• Visa requirements will be simplified for entrepreneurs

• Perhaps most significantly, the Minister of the Ministry of Commerce and Industry and the Governor of SAGIA have announced the Kingdom’s intention to open investment in the wholesale and retail sectors beyond WTO requirements, including up to 100 per cent foreign ownership, subject to conditions to be announced. It appears likely that single-brand retailing will be one of the first sectors for which 100 per cent foreign ownership will be allowed.

“SAGIA announced a series of further measures designed to increase investment opportunities and reduce administrative burdens for foreign investors”

When implemented, the measures described above should increase the appetite for foreign investment in the Kingdom. They will also allow SAGIA to allocate significant resources from licensing and compliance activities to the promotion and assistance of new investments.

Saudi Arabia’s existing foreign investment regime has already resulted in the creation of large and successful joint ventures in the petrochemical sector, such as Petro Rabigh and SADARA. We expect the latest evolution in its foreign investment regime to also attract larger numbers of small and medium-size innovative companies and, depending on the conditions attached to 100 per cent foreign ownership, large wholesalers and retailers. The

availability of world-class research hubs (such as KAUST) and Islamic venture capital on competitive terms, the opening of the stock market to foreign investors and easy access to GCC and other markets further enhance the attractiveness of the Kingdom as foreign investment destination.

The global market for foreign investment market looks to become increasingly competitive, given the announcement of a major foreign investment initiative in India and the anticipated lifting of sanctions against Iran. It will become more so if the current negotiations over the Trans-Pacific Partnership result in a viable agreement. There are also social and security challenges that must be addressed to encourage foreign investment in the Kingdom. But the latest reforms send a positive signal to foreign investors that should result in significant additional foreign investment in the Kingdom, especially as the rules governing investment in the wholesale and retail sectors are liberalized.

If other government agencies and authorities follow SAGIA’s lead in listening to its stakeholders, learning and adapting, the Kingdom could experience a new wave of positive development and even enhance its leadership role among developing countries. With its lean and centralized decision-making structure, if it decides to do so, Saudi Arabia could out-reform and out-perform its Indian and Iranian rivals in the competition for foreign direct investment.

LEGAL NEWSLETTER4

For a decade, there has been ongoing talk in international trade and investment circles about a new agreement called the Trans-Pacific Partnership (TPP). After 33 rounds of negotiations, the deal was finished in Atlanta on October 5, 2015. Although the United States was not among the countries that started the negotiations, it soon became a strong supporter, joined in and helped lead the talks to conclusion.

The TPP is a type of free trade agreement (FTA) that can be summarized as a multilateral agreement for free trade aiming towards liberating commodities, products and services in Asia and the Pacific Ocean region.

The TPP contains the agreement between the founding countries, Brunei, Chile, New Zealand and Singapore, which they initiated in June 2005. In February 2008, the U.S. joined the TPP talks. In November of the same year, Australia, Peru and Vietnam joined the TPP negotiations, followed by Malaysia in October 2010, Canada and Mexico in October 2012 and Japan in March 2013, raising the total number of countries that officially participated in the TPP negotiations

to 12. South Korea and Taiwan, among others, have expressed their desire to join the TPP but have not yet become official parties. India, too, has debated possible TPP entry.

“Assuming all 12 countries ratify this free trade agreement (FTA), TPP will be the largest free trade agreement (FTA) in the history of the world.”

Assuming all 12 countries ratify this agreement, the TPP will be the largest FTA in history. Those 12 TPP countries account for more than 40 per cent of the world’s gross domestic product (GDP), one-third of all international trade, over 775 million consumers and 40 per cent of total American trade in goods.

The agreement is regarded as one of the most liberal and ambitious FTAs, with its objectives and mechanisms — based on the leaks from the negotiations — aiming at reaching

advanced stages of huge economic growth in the near future for the TPP member countries. It is styled as a “21st century” deal, partly because it removes or reduces many behind-the-border barriers to cross-border transactions in goods and services, enhances protections for intellectual property (IP), addresses novel questions concerning pharmaceuticals, encourages greater regulatory coherence, and promotes labour and environmental standards. Simply put, while the TPP abolishes approximately 18,000 tariffs (that is, eliminates duties on 18,000 products imported by TPP members), it goes far beyond coverage of traditional tariff elimination issues.

Thus, the agreement aims to create a formidable world economic bloc by advancing goals and adopting measures including:

(1) The consolidation, development and facilitation of trade exchange between the member countries by reducing (immediately or over a phase out period) cross-customs tariffs imposed on imported goods originating within the TPP region, until finally disposing of all tariffs on all but a very small number

TRANS-PACIFIC PARTNERSHIP AGREEMENTSAUD AL-AMMARI*

* Chair, Saudi Arabia & Middle East - Dr. Saud Al-Ammari Law Firm in association with Blake, Cassels & Graydon LLP


TRANS-PACIFIC PARTNERSHIP AGREEMENT

of goods (in particular, beef imported into Japan and dairy products imported into Canada). Likewise, organizational barriers and obstacles not related to the tariffs and charges are to be removed so as to liberate trade on originating goods. Ultimately, trade liberalization will be a fruit of the effective management of trade exchange and the ground for unprecedented future growth.

(2) The establishment of a regional framework, based in part on a pre-TPP network of FTAs among some of the TPP members, leading to greater integration. This includes having a unified set of rules of origin (ROOs) and supporting express transportation of goods among the members with the aim of facilitating their trade transactions and enhancing the efficiency of supply chain management among them. The special ROOs on autos and auto parts are a good example of this point.

(3) The regulation and facilitation of how to address new issues such as electronic trade, the digital economy, environmentally friendly “green” production and products, and the legal, administrative and commercial aspects of these issues. Coverage of these matters is evidence of the orientation of the TPP toward the future, as well as the quest of TPP members to engage in sustainable development.

(4) Flexibility in the TPP, to enable the members to deal with and respond to new developments in science and technology and IP that affect trade and foreign direct investment (FDI). This makes it an adaptable non-stagnant agreement, in contrast to some other FTAs, and some of the agreements associated with the World Trade Organization (WTO).

As mentioned earlier, press reports indicate that the TPP deal is far-reaching and innovative. During the negotiations, TPP trade ministers and their teams worked hard to formulate trade-liberalizing legal provisions on a vast array of goods, services, IP and FDI. The agreement promises to yield significant benefits for the U.S. and the other 11 members that will reinforce their competitiveness, increase their exports, augment their volume and mode of trade exchanges and investments, and open new markets for small and medium-sized enterprises (SMEs).

Here, I would like to raise a genuine and important issue regarding the TPP that concerns us in Saudi Arabia, the Gulf Cooperation Council (GCC), Arab countries and the majority of Muslim countries is that the agreement does not include any Arab country, and aside from Brunei and Malaysia, has no other Muslim countries other than Brunei and Malaysia.

The question that needs to be considered, then, is as follows: does the solution for Saudi Arabia lie in utilizing the economic and other benefits enjoyed through the GCC to enhance the economic strength and efficiency of the Kingdom, and then

seek to form an alliance similar to the TPP, including with countries in the Near East and East Asia, by perhaps reviving the ancient Silk Road trade with China and the East? Or should the GCC enter into an FTA with TPP countries to facilitate trade integration between the GCC and TPP blocs? The GCC already has an FTA with Singpore, so this could be a second but more significant FTA that would lead to greater trade liberalization in this part of the world.

In the face of challenges posed by the TPP, our hopes here in the GCC specifically, are boosted by our wise leadership, which steered the GCC until today and which has proven to be the most successful experience of cooperation and integration in the entire region. Some still believe the ambitions of the people of the GCC are higher than what this customs union has achieved so far. But the solid conviction is that the GCC is on the right path. Perhaps the challenge imposed by the creation and launch of the TPP will motivate the GCC to step up economic integration, fully activate this FTA, encourage efforts towards diversifying economic activity, attract investment of domestic and foreign capital, and focus on opportunities that add real value to the region’s economies. The success of the GCC in this regard would help forge and strengthen economic alliances in the Arab world, among Muslim countries and possibly with the countries far beyond the Middle East.

“…does the solution for Saudi Arabia lie in utilizing the economic and other benefits enjoyed through the GCC to enhance the economic strength and efficiency of the Kingdom, and then seek to form an alliance similar to the TPP”

LEGAL NEWSLETTER6

Investor-State Dispute Settlement (ISDS) is a mechanism that is included in many regional and bilateral free trade agreements, as well as in bilateral and multilateral investment agreements. In general terms, the ISDS mechanism allows investors of a party to an international agreement to take direct legal action — in the form of international arbitration — against the government of another party to that agreement in response to measures taken by that government that negatively impact the investor and that are inconsistent with the mutual commitments made under the agreement.

“… the threat of arbitration is thought to be an efficient way to deter governments from stepping outside the boundaries of their negotiated commitments”

A USEFUL TOOL FOR INVESTORS

The ISDS mechanism is generally viewed favourably from the investor’s point of view, as the threat of arbitration is thought to be an efficient way to deter governments

from stepping outside the boundaries of their negotiated commitments. From the government’s point of view, signing on to an agreement containing an ISDS mechanism has two advantages: it ensures their own citizens are protected when investing abroad and it serves as a signal to foreign investors that the government is serious about creating a secure investment climate.

RECENT CONTROVERSY

ISDS has become an increasingly controversial topic since the United States began negotiating the Transatlantic Trade and Investment Partnership (TTIP) with the European Union in July of 2013. To the extent that recent objections to ISDS can

A DISPUTE ABOUT DISPUTES: THE GATHERING STORM OVER ISDS GREG KANARGELIDIS*CO-AUTHORED BY ZACHARY SILVER**

* Partner, Blake, Cassels & Graydon LLP** Associate, Blake, Cassels & Graydon LLP



be said to have a unified theme, it is that the mechanism is too great of an imposition on a government’s “right to regulate,” with some critics going so far as to say that it constitutes an erosion of the democratic principle itself.

Anger over ISDS in the TTIP has spilled over onto the recently concluded, but not yet ratified, free trade agreement between Canada and the European Union — the Comprehensive Economic and Trade Agreement (CETA) — which also contains an ISDS mechanism. Although the CETA negotiations have already come to a close, the agreement may need to be ratified not only by the European parliament, but also by each national government, several of

which have been outspoken critics of the agreement’s ISDS provisions.

“Despite the current wave of controversy, ISDS in some form or another has become a standard feature of trade and investment agreements”

WHAT TO EXPECT GOING FORWARD

Despite the current wave of controversy, ISDS in some form or another has become a standard

feature of trade and investment agreements and will likely continue to find its way into future trade and investment agreements. ISDS critics are, however, unlikely to be entirely ignored, and so we can expect that going forward the scope of ISDS provisions will become more circumscribed, allowing governments more flexibility and freedom to pass legitimate measures that are in the public interest without being subject to claims for damages caused to private investors.

LEGAL NEWSLETTER8

ISSUE 1:

Developing Countries’ Perspectives on Recent WTO Cases on Dumping, Subsidies, and Import Barriers1

I. WTO Adjudication

(1) Has the DSU been successful?

Yes, it is the “Crown Jewel” of the WTO.

(2) How active is the DSU docket overall?

Very.

(3) How active is the Appellate Body docket?

Very.

(4) Are delays a problem?

Yes, and the DSU risks becoming a victim of its own success.

(5) What are some reasons for delays?

Panel composition.

Translation.

Submission Length.

Issue Number and Complexity.

Resource Constraints.

(6) Is participation by developing countries and LDCs impressive?

Yes and No.

1 Import barriers other than AD-CVD are discussed under Issue 2.

(7) What is the Kingdom’s DSU participation record?

0 cases Complainant.

0 cases Respondent.

27 cases Third Party.

Note: WTO Accession of Kingdom was 11 December 2005.

(8) How does the Kingdom’s DSU participation record compare to …

Arab Middle East?

Same, though Egypt more active as Respondent and Third Party.

Non-Arab Middle East?

Same, though Turkey more active as Respondent and Third Party.

Far East Developing Countries (plus Mexico, Pakistan)?

Greater participation in this category, especially Indonesia, Mexico, Thailand.

Asian Tigers?

Greater participation in this category, especially Korea.

BRICS?

Greater participation in this category, especially Brazil, India, China.

Developed Countries?

THE KINGDOM AND RECENT DEVELOPMENTS IN WORLD TRADE RAJ BHALA*

* International Legal Consultant,Dr. Saud Al Ammari Law Firm, in association with Blake, Cassels & Graydon LLPand Associate Dean for International and Comparative Law and Rice Distinguished Professor at The University of Kansas, School of LawLawrence, Kansas - http://en.wikipedia.org/wiki/Raj_Bhala



Greater participation in this category, with (predictably) EU and US the most common participants.

II. Prominent WTO AD Appellate Body Cases for Developing Countries

Primer:

Dumping is the sale of subject merchandise in an importing country at a price (Export Price or Constructed Export Price) that is less than the price (Normal Value, or if necessary, a proxy such as Third Country Price or Constructed Value) at which the foreign like product is sold in the home market (exporting country) of the producer-exporter.

Dumping is actionable only under two conditions:

First, the dumping margin (difference between Normal Value and Export Price) is positive and non-de minimis.

Second, dumping causes injury or threat of injury to the domestic producer in the importing country of a like product, or retards the establishment of an industry in the importing country.

The remedy is an AD duty up to the amount of the dumping margin, to offset the dumping.

6 Key Inferences:

First, there is a large and growing body of WTO jurisprudence on AD that significantly affects the trade interests of developing countries.

Second, this jurisprudence is legally technical, but it has major policy implications.

Third, developed countries are increasingly assertive about using AD law against imports from developing countries.

Fourth, developing countries should pay close attention to the “offensive” use of AD law to protect their interests, and not confine themselves to a passive, “defensive” position.

Fifth, there is no question developing countries can win AD cases against developed countries – they already have done so, on many occasions.

Sixth, do not expect any major changes to AD law from the Doha Round, which is dead; rather, focus on AD rules in FTAs and CUs.

(1) Investigations and POI

Timely, continuous POI. 2005 Mexico Rice.

(2) Dumping Margin Determination

Zeroing in Original Investigations?

No.

2001 EC Bed Linen, 2004 Softwood Lumber Zeroing, 2006 U.S. Zeroing (EC),

2007 Japan Zeroing

Zeroing in Administrative Reviews?

No.

2007 Japan Zeroing, 2008 Mexico Zeroing

Zeroing in Sunset Reviews?

No.

2007 Japan Zeroing, 2009 Continued Zeroing

Zeroing in New Shipper Reviews?

No.

2007 Japan Zeroing

Zeroing in Changed Circumstances Reviews?

No

2007 Japan Zeroing

Note:

US lost every case.

Zeroing in Targeted Dumping?

Maybe.

No case yet.

(3) Injury Determination

Sloppy injury determinations are not allowed. All factors must be examined.

2001 Thailand Steel

LEGAL NEWSLETTER10

(4) Remedies

Remedies must not exceed those specified in WTO AD Agreement.

2000 1916 Act, 2003 Byrd Amendment

III. Prominent WTO CVD Appellate Body Cases for Developing Countries

Primer:

A “subsidy” is a “financial contribution” granted by a “government” or “public body” that confers a “benefit” to the recipient, and is “specific” to an enterprise or industry (or group of enterprises or industry).

A “subsidy” is Prohibited (Red Light) if it is an export subsidy, or an import substitution subsidy, meaning it is de jure or de facto contingent on exportation or import substitution. In such a case, specificity and adverse effects are irrebuttably deemed to exist (there is no need to prove them).

A “subsidy” is Actionable (Yellow Light) if it takes a form other than a Red Light subsidy, is de jure or de facto specific, and causes an “adverse effect,” namely, serious prejudice (price suppression or depression), injury, or nullification or impairment of benefits.

The remedy is a CVD up to the amount of the illegal subsidization, to offset the subsidy.

7 Key Inferences:

First, there is a large and growing body of WTO jurisprudence on CVD that significantly affects the trade interests of developing countries.

Second, this jurisprudence is legally technical, and the cases are particularly complex because they are fact-intensive; but, this jurisprudence has major policy implications.

Third, developed countries are increasingly assertive about using CVD law against imports from developing countries.

Fourth, developing countries should pay close attention to the “offensive” use of CVD law to protect their interests, and not confine themselves to a passive, “defensive” position.

Fifth, developing countries should be on the alert for cases brought against them for pre-privatization subsidies they conferred on SOEs and STEs, before privatizing them, and use the jurisprudence (below) that the pass through of benefits to a newly privatized entity cannot be presumed.

Sixth, there is no question developing countries can win CVD cases against developed countries – they already have done so, on many occasions.

Seventh, do not expect any major changes to CVD law from the Doha Round (which is dead); rather, focus on AD rules in FTAs and CUs.

(1) What is a “financial contribution”?

Broad definition.

Tangible or moveable property qualifies.2005 Softwood Lumber

NASA Procurement Contracts, DOD Assistance Instruments, Washington State Business and Occupation (B&O) Tax Rate Reduction qualifies.2012 Boeing

Different aspects of the same transaction may qualify as different forms of a “financial contribution.”2013 Canada Renewable Energy

Mining rights granted by the government qualifies, and government lending through an intermediary qualifies.2014 India Carbon Steel

(2) What is a “government or public body”?

Broad definition.

A government may “entrust” or “direct” another entity, without formally commanding it or delegating authority to it, and that “entrustment” or “direction” qualifies as “governmental” action.2005 Korea DRAMs

A “public body” is an entity that possesses, exercises, or is vested with, government-like authority. Mere control of an entity by the government is not enough to render that entity a “public body.”2011 US AD-CVD

Whether an entity is a “public body” requires a case-by-case analysis of “with due regard being had to the core characteristics and functions of the relevant entity, its relationship with the government, and the legal and economic environment prevailing in the country where the investigated entity operates.” Vitally, “the mere ownership or control over an entity by a government, without more, is not sufficient to establish that the entity is a public body.”2014 India Carbon Steel

(3) Is a “benefit” conferred?

“Benefit” means some form of an advantage, so the focus of the inquiry is on the recipient, rather than on the cost to government. The marketplace provides an



adequate comparison as to whether a recipient is “better off.” Whether a measure is conferred on terms more favorable than the market requires recourse to a “Market Benchmark” (or “Comparison”) Test.1999 Canada Aircraft

In some cases it is permissible to use a “Commercial Reasonableness” Test to determine whether the terms of a financial transaction, such as debt restructuring, were more favorable than what was available on the market.2007 Japan DRAMs

Airbus “benefited” from Launch Aid loans, because the interest rate the EU government charged on them was more favorable than the rates private lenders would have charged Airbus. Airbus “benefited” from Infrastructure Support, because it otherwise would not have been developed by the private sector, or would have been at a relatively more significant cost to Airbus.2011 Airbus

NASA Procurement Contracts and DOD Assistance Instruments conferred a “benefit” to Boeing under Article 1:1(b). That was particularly because both measures had a predetermined allocation of IPRs under US law.2012 Boeing

There is no requirement to use a “But For” Test to determine whether the recipient “benefited” from a subsidy.2013 Canada Renewable Energy

(4) Is the (Yellow Light) subsidy “specific” (either de jure or de facto)?

Availability of a subsidy could be limited explicitly to the “financial contribution,” or to “benefit” conferred. Access does not need to be restricted both as to “financial contribution” and “benefit” to meet the Specificity Test. “Specificity” refers either to access of an enterprise or industry to a “financial contribution,” or to a “benefit” conferred on an enterprise or industry.2011 US AD-CVD

Research and Technological Development (RT&D) measures were “specific,” even though the EU said they were not designed to fund aeronautics research, but rather to compensate for the lack of funding for such research under the EU’s general funding schemes. The allocation of funding to aeronautics-related research did not ensure equal access to firms outside the aeronautics sector.2011 Airbus

Allocation of patent rights was not de jure “specific,” because the NASA and DOD contracts followed the same rules as were available to government contractors generally. But, Wichita, Kansas Industrial Revenue Bonds (IRBs) were de facto specific. Boeing purchased the IRBs

itself, thereby funding its own property development, and obtaining the sales tax exemptions associated with the IRBs. Wichita granted the IRB subsidies in disproportionately large amounts to Boeing. “[W]here the granting of the subsidy indicates a disparity between the expected distribution of that subsidy, as determined by the conditions of eligibility, and its actual distribution, [(2)] a panel will be required to examine the reasons for that disparity so as ultimately to determine whether there has been a granting of disproportionately large amounts of subsidy to certain enterprises.”2012 Boeing

(5) Is the subsidy “contingent” (either de jure or de facto), on exportation, and thus Red Light (Prohibited)?

The ordinary meaning of “contingent” is “conditional” or “dependent for its existence on something else.” For de jure contingency, the words of relevant legal texts must be studied. For de facto contingency, the Test is the “Totality of the Circumstances,” examining whether: (1) the “granting of a subsidy;” (2) “is ... tied to ... ;” and, (3) “actual or anticipated exportation or export earnings.”1999 Canada Aircraft

The OECD Arrangement, which establishes minimum interest rate guidelines for export credits supported by its participants, is one example of an appropriate market benchmark by which to assess whether payments by a government are used to secure a material advantage in the field of export credit terms.1999 Brazil Aircraft

The Auto Pact entailed a complex trade-balancing requirement: a specified requisite amount of exportation to obtain duty-free treatment for imports, under the guise of “Canadian-izing” the auto industry by mandating local production. Therein was the export contingency.2000 Canada Autos

The US Foreign Sales Corporation tax exemptions were foregone revenue “otherwise due, and thus subsidies, and were contingent upon export performance.2000 Foreign Sales Corporation

Step 2 Payments were import substitution subsidies, and also export subsidies, as they clearly were “tied to” exportation. Export Credit Guarantees were illegal export subsidies under Article 3:1(a). A subsidy still may qualify for the Red Light category as an export subsidy, if it is available both to exporters and domestic users. That subsidy is not export-neutral, even if it is available in both circumstances. Expansion of the universe of potential beneficiaries beyond exporters does not negate the reality an export subsidy exists. The export contingency remains.2005 Cotton


LEGAL NEWSLETTER12

There was not enough evidence to resolve whether Launch Aid for the A380 was “granted so as to provide an incentive to Airbus to export in a way that is not simply reflective of the conditions of supply and demand in the domestic and export markets undistorted by the granting of these subsidies.”2011 Airbus

(6) Does the subsidy “cause” adverse effects – price suppression or depression, injury, or nullification or impairment of benefits – and thus is Yellow Light (Actionable)?

When defining the relevant “market” in which to check for price suppression or depression, there is no restriction that the “market” be that of the complainant, respondent, or any particular third country. The “market” can be the entire world market.2005 Cotton

Proof of a causal link (between a subsidy and adverse effects) requires as “a genuine and substantial relationship of cause and effect.” “[T]he mere presence of other causes that contribute to a particular market effect does not, in itself, preclude the subsidy from being found to be a ‘genuine and substantial’ cause of the effect.” Thus, a proper analysis must ensure the effects of those other causal factors are not attributed to the subsidies at issue. Establishing a causal relationship means ensuring “the effects of other factors are not improperly attributed to the challenged subsidies,” that is, a Non-Attribution Analysis is a key part of proving causation.2005 Cotton

Launch Aid, along with Infrastructure Support and Equity Infusion, were subsidies for Airbus that caused “serious prejudice” by displacing sales of certain Boeing Large Civil Aircraft (LCA) models in third country markets. The Airbus subsidies also cause “serious prejudice” under Article 6:3 in the form of lost sales of Boeing to Airbus.2011 Airbus

The effects of Aeronautics R&D Subsidies to Boeing were significant lost sales by Airbus, and also a threat of displacement and impedance of exports of Airbus. Further, these subsidies caused significant price suppression.2012 Boeing

(7) Are pre-privatization subsidies countervailable?

The core of this issue is:

When a SOE or STE is privatized, to what extent, if any, do benefits from subsidies the firm previously received while in state hands continue on after the privatization?

The US “Change in Ownership” Methodology is illegal. The US was wrong to conclude pre-privatization subsidies received by British Steel were transmitted through the privatization and onto the successor private company. Change in ownership matters, so pre-privatization subsidies cannot be deemed automatically to yield benefits to a former SOE. A doctrine of automatic pass through, or continuation of benefits, after privatization, is invalid. Rather, an inquiry into subsidization – whether or not the subsidy continues to exist – is essential. That continuation cannot be presumed. What must be shown is the subject merchandise has received, directly or indirectly, a subsidy. Failing to link the pre-privatization subsidies with the imports is unlawful.2000 British Steel

Even the Modified Change in Ownership Methodology removes the need for the US to establish the essential elements of a countervailable subsidy, namely, the existence of a financial contribution and a benefit from this contribution to the producers under investigation. Thus, the Methodology is illegal. Under it, the US presumes that if two companies, a SOE and its privatized successor, are the same person, and if the firm keeps the same factory, any of the same employees, any of the same customers, any of the same suppliers, that continuity is sufficient reason to presume an automatic pass-through of subsidies. This presumption means subsidies somehow become glued to, live in and then automatically travel with assets, even if those assets are sold, and regardless of the amount paid for them. (For example, if a buyer paid 5 times the actual market value for the assets, then the US would impose a CVD.) That is, if the US concluded the pre- and post-privatization entity were the same legal person, then it automatically disregarded information submitted to it to support the contention that no benefit from a prior financial contribution continued to exist. The US automatically declined to determine whether a benefit continues to exist despite this information. Only if the US found a distinct legal person would it study the new information and determine whether a benefit exists – and, even in that circumstance, the inquiry would be limited to whether a new subsidy is provided to the owners of the privatized entity.2003 Certain Products

ISSUE 2:

Promoting Sustainable Development under WTO and other International Investment Agreements: Challenges Facing Developing Countries

Primer:

Typically, “sustainable development” is thought of in terms of the environment, and defined as development in a manner that enables the current generation to meet



its needs without compromising the ability of future generations to meet their needs. The term inherently contains an inter-generational ethical obligation, namely, that the present generation should preserve, even enhance, the global environment in good stewardship for subsequent generations.

That definition is fair, but incomplete. The United Nations Division for Sustainable Development has expanded the definition to consider poverty, technology, finance, and health, amongst others, as obstacles to sustainable development.

All of these other factors – poverty, technology, finance, and health – may be put under the single term “inclusivity,” or “inclusiveness,” along with environmental concerns.

5 Key Inferences:

First, across the world today, there is skepticism about whether free trade under GATT-WTO agreements, and under FTAs, leads to inclusive development. Many observers say that free trade enriches the Top 1 percent, and impoverishes the bottom 99 percent.

These observers look to the period following the entry into force of NAFTA (on 1 January 1994), and after the entry into force of the Uruguay Round agreements (on 1 January 1995), and cite statistics such as:2

Developed countries that have experienced the fastest GDP growth also have experienced the greatest increases in inequality as measured, for example, by rising Gini coefficients.

One percent of the world’s population owns 50% of the world’s wealth (as of 2016), a clear increase from 44% in 2009 and 48% in 2014, and headed toward 54% (by 2020).3

The top 80 billionaires hold as much wealth ($1.9 trillion) as the bottom 50% of the rest of the world, an increase of 50% ($600 billion) in just 4 years (2011-2014).

Conversely, the material wealth (such as it was) of the poorest 50% of the world dropped during those years tumbled (by $750 billion).

America is a case in point. The richest 10% of Americans account for over 50% of annual national income, whereas in the 1970s they claimed 1/3 of it. That is the most skewed distribution since 1917. Between 1993

2 See RAJ BHALA, INTERNATIONAL TRADE LAW: AN INTERDISCIPLINARY, NON-WESTERN TEXTBOOK (4th ed. 2015) (Volume I, Introduction: 10 Propositions).

3 See Richest 1% To Own More than Rest of World, Oxfam Says, BBC NEWS, 19 January 2015, posted at www.bbc.com/news/business-30875633 (reporting results of an Oxfam study).

and 2012, the top 1% of Americans (families with an income in 2012 of $394,000 or more) received more than 2/3 of the nation’s growth in income.

Second, there is concern about the new fragile middle class.4 More of humanity – 3 billion people, or almost half the world’s population – is in this cohort. They are just above the line of absolute poverty of U.S. $1.25 per day. But, they lack the hallmark of the middle class: financial security. The Asian Development Bank “middle class” as a per capita GDP of between $2.00-20.00 per day, whereas the fragile subset manages on $2.00-10.00 per day.

This new fragile middle class is remarkable came from poverty. It is thanks to globalization, market capitalism, open trade and investment, better governance, and the rule of law that so many people have been lifted out of abject poverty. In 1981, 58% of the world’s population lived on less than $2.00 per day, while just 20% (then 930 million people) were in the fragile middle class. By 1990, 1.9 billion people – far less than 58% of humanity – lived on less than $1.25 per day. By 2010, 1.2 billion people – less than 20% of the global population – earned below $1.25 per day.

The largest Muslim country in the world, Indonesia, is a case in point. In 2010, of its 240 million people, 111 million lived on less than $2.00 per day, but 125 million lived on between $2.00-$10.00 per day. Indonesia crossed the inflection point.

Of great concern is that the new fragile middle class might fall back to its origins: poverty. Will they continue to be the greatest beneficiaries of globalization, free markets, and free trade? Will governance and the rule of law help reinforce and boost their socioeconomic status?

Third, with respect to “sustainable” development, from a legal perspective, the most important factor in deciding where to place a direct or portfolio investment is the rule of law. No investor will put funds, facilities, or people at risk where there are no rules, bad rules, or unacceptably ambiguous rules susceptible to abuse or corruption.

Fourth, the Kingdom is in full compliance with its GATT-WTO, regional, and bilateral commitments. The Kingdom cherishes its high and well-deserved reputation as being dedicated to the international rule of law.

4 The statistics cited below are from Gillian Tett, Bad News for Western Jobs as Ideas Are Also Made in China, FINANCIAL TIMES, 2 May 2014, at 7; Shawn Donnan, Ben Bland & John Burn-Murdoch, A Slippery Ladder, FINANCIAL TIMES, 14 April 2014, at 7. Many of the points, and more, are treated in Thomas Piketty’s best-seller, Capital in the Twenty-First Century (2014).


LEGAL NEWSLETTER14

Moreover, the FDI legal regime in the Kingdom generally consists of good rules. Thus, it would be wrong to say the rules are “bad.”

Fifth, the Kingdom has identified precisely its 7 objectives to enhance further its appeal to FDI with a view to that FDI contributing positively to sustainable development. Those 7 objectives are in the SAGIA “General Rules of License Applications and Follow-Up Procedures” published by the SAGIA Investor Service Agency during the month of Ramadan in the year 1435 After Hijrah (AH):

1. Technology transfer and indigenization.

2. Diversification of the Kingdom’s sources of income.

3. Development of exports and import substitution.

4. Development of Saudi human resources.

5. Promoting the competitiveness of the economy and its products in local and global markets.

6. Balanced development of the Kingdom’s regions.

7. Environment-friendly enterprises which manufacture their products in accordance with state of the art specifications and global quality standards.

These objectives are exactly in line with the definition of “sustainable development” discussed above.

(1) Challenges?

Developing countries face many challenges in realizing “sustainable development.”

(2) 4 Additional issues?

Why do developing countries feel less advantaged than developed countries in the WTO?

Many countries feel globalization is not the “end game.” Is there more regionalism, because of FTAs and CUs, whereby countries unify their acts and obtain MFN exemptions?

Are WTO Members satisfied with the DSB, or should DSU rules be enhanced to make the WTO a more credible, serious entity?

Should countries emphasize “fair” trade, instead of “free” trade, in the new era of globalization?



Dr. Saud Al-Ammari Chair | Saudi Arabia & Middle East

[email protected] Al-Khobar: +966-13-847-5050 x9321 Bahrain: +973-1715-1500

For further information, please contact:

Graham McLeod Managing Partner | Middle East Offices

[email protected] Al-Khobar: +966-13-847-5050 Bahrain: +973-1715-1523

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Legal Newsletter SAUDI ARABIA AND INTERNATIONAL TRADE LAWblakesfiles.com/newsletters/blakes_gulf_newsletter_vol_2_issue_2... · INTERNATIONAL TRADE LAW Legal Newsletter Dr. Saud Al-Ammari