Research: Trends & Conclusions 2014
“Sanctions” was the first word on the lips of almost every practitioner we spoke to this year when asked to identify the biggest development in the trade and customs arena. Iran and Libya were already providing lawyers with significant amounts of work – and with Russia now targeted by the US and the EU, as well as responding with its own sanctions, the area is booming. Trade remedy matters continue to be a solid source of work for many, with some noting an uptick in anti-dumping cases (or predicting one for the near future), and customs-related advice and disputes work have also steadily increased.
Sanctions, export controls and corruption in regards to the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act (UKBA) have all been growing parts of many firm’s trade practices over the past five years and this trend has spiked in the past 12 months. Lawyers unsurprisingly reported the greatest uptick in sanctions-related work regarding Russia, as the US and EU have continued to ratchet up sanctions against the country since the Crimea crisis began in March. Prior to this Iran, Syria and Libya were already making this area an increasingly significant part of practices – but with one of the world’s largest countries now in the mix, “it is a completely different ball game”.
What was once a “sleepy area” that took up a few hours a year of lawyers’ time has become almost all-consuming for some, with clients constantly seeking counsel on compliance and corporate responsibility. According to practitioners, the current sanctions are a “huge grey zone” in regards to how they should be construed and they are grappling with a mass of questions and issues due to the lack of clear and comprehensive guidance from authorities and regulators on how they should be interpreted. In the US, the Office of Foreign Assets Control has issued some guidelines but many questions remain unanswered. At a European level there has been nothing, with member states on a national level failing to adopt a harmonised interpretation.
This ambiguity is worrying for clients as it is set against a backdrop of increasing enforcement and regulatory expectations in relation to compliance by the US and others. As highlighted with BNP Paribas, which was recently fined a record US$8.9 billion for violating US sanctions regarding Iran, penalties for breaching sanctions are severe and thus the current situation, particularly the lack of clarity, is resulting in real concern. Private practitioners are being sought out on a deal by deal, sometimes even a step by step, basis to ensure that they do not fall short.
Although it is possible that sanctions regarding Russia could potentially be scaled back in the near future, depending on how the situation plays out, sanctions as the initial tool of choice for Western authorities when it comes to applying political pressure are here to stay. As one US source explained, “It is a lot easier for the government to apply force through sanctions and slowly expand their scope than it is to get involved in any way militarily; furthermore, there is a real belief that they can be effective as shown with Iran, which has now become the poster child for their success as a policy tool.”
Export controls have “made a comeback”, say sources – most recently being used in conjunction with sanctions against Russia, particularly in relation to the defence sector, and corruption-related work, stemming from the global scope and stringent enforcement of the FCPA and UKBA, has been steadily increasing. With regulators around the globe being increasing active in investigations, there has been a big trend for clients being proactive rather than reactive and seeking tailor-made compliance programmes. Furthermore, US lawyers reported an uptick in foreign and multinational companies wanting to be compliant with US law and overall there seems to be much more demand for worldwide compliance programmes which cover all bases. This is particularly benefiting international firms who can offer “seamless” multi-jurisdictional advice due to their worldwide coverage.
These developments have resulted in some changes to the orientation of firms’ practices. Although the majority of those we spoke to felt the total size of trade and customs groups had remained stable, their focus has shifted to reflect the high level of activity in the sanctions, export control and corruption sector. However, a few lawyers we spoke to, notably in Belgium, did comment on some growth, especially a demand for more Russian-speaking lawyers at firms, which is partly sanctions-related and also due to the uptick in disputes work involving Russia.
The Russian legal market has been most affected by sanctions in regards to volume of work, with international and US firms facing challenging times due to the limitations on acting for certain clients. However, their trade and customs practices are bucking this trend by being highly sought after due to their on-the-ground presence and experience.
Trade remedies remain “an area of ups and downs”, as one Belgian lawyer summarised, although they continue to form a significant part of many practices. The main case keeping Brussels-based practitioners busy was the EU-China solar panel case, which settled at the end of July. Following a downturn in new cases, EU practitioners are expecting several to be launched, with China, Russia and Turkey all cited as key targets. The change in EU trade commissioner next year is also likely to usher in more litigation, with some lawyers attributing the drop off in cases to the uncertainty surrounding this. Cecilia Malmström has now been announced as the candidate and it is likely that as the Commission becomes more creative and tests out new rules aimed at strengthening its position there will be an uptick, with practitioners hoping that more cases will be seen at the European court in Luxembourg. Already lawyers are commenting on a “bounce back” in the second half of 2014 and they see no reason why this should not continue in 2015.
China continues to be a key player in trade disputes both in and outside the WTO, with some practitioners claiming that up to 80 per cent of their work is China-related. The big matter for US lawyers has been the “US-China solar wars” and they have been kept extremely busy advising and representing companies, coalitions and government bodies on both sides since the matter came to the fore in 2011. The case remains ongoing as, following the July WTO decision that found the US had overstepped the mark in regards in its countervailing duties against Chinese exporters, China has surprisingly appealed the decision. Conversely, China lost earlier in the year regarding its restrictions on the export of various forms of rare earths. However, as one lawyer explained, despite WTO rulings “the ongoing battle is getting China to comply”.
There is continued debate among lawyers and others as to whether China has got into the habit of filing retaliatory trade cases. Some believe that a definite pattern has developed in recent years with the country hitting back at those that hit it. This concern over backlash has, according to our sources, made some companies in the US fearful of endorsing cases due to concerns over being targeted, with one lawyer claiming two of his clients are “really agonising over whether to bring cases”. Others see China as merely “coming of age”, particularly in its use of the WTO, having spent much of the first decade of its membership watching and learning. US and international firms, particularly those with Beijing offices, have especially benefited from helping the government “learn the ropes” and ultimately more trade disputes equals more work for practitioners.
However, it is not all good news; the continued confidence with which China launches cases and uses the WTO is resulting in strong competition on the respondent side of the bar, with particular pressure on fees driven by the Chinese government. This is resulting in a lot of low-value work which is not economically viable for the largest firms, and thus there is greater competition for the high-value cases which are larger, more complex and correspondingly more time-consuming. This seems to have created a greater divide in the legal market as firms have to choose which type of work they will do and has resulted in a squeezed middle who struggle to compete for either.
Russia, which joined the WTO in 2012, has the potential to be “the new China”. It filed its first case in December 2013 targeting EU duties on imports of ammonium nitrate and certain steel products a few months after Brussels challenged its vehicle recycling fees. Then in April it launched a second case against the EU concerning measures relating to the energy sector, which swiftly followed a case filed by the EU regarding its ban on imported pork products. As tit-for-tat sanctions continue to mount and escalate it is likely that trade disputes will be used as a form of playing out political tensions, with Russian Economy Minister Alexey Ulyukaev telling the media in September that “the latest round of sanctions provides grounds to appeal to the WTO. And we will appeal.”
Other countries, notably Indonesia and Argentina, have been particularly active in WTO disputes, which, as one source stated, “is either a sign that it is maturing or a signal that countries have become increasingly frustrated with the WTO system”. Either way it is resulting in a steady stream of work for top trade firms and potentially for more sophisticated national firms who are coming to the fore as they cater to the use of this forum by their governments.
There has been a noted increase in regional disputes, particularly in South America and Asia. Mercosur, South America’s main trade bloc, continues to be a fractious coalition with a track record of disputes, especially between its two key members, Brazil and Argentina. Brazil in particular is considered “one to watch” as its trade authority has recently beefed up its numbers, hiring 47 additional trade defence investigators. Similarly, Asia has evolved as a significant region for disputes work; Vietnam filed its first ever anti-dumping case against its neighbours China and Indonesia. Our sources in this region are expecting more disputes of this nature in the year ahead, as producers follow their US and EU counterparts’ lead and national governments see the tangible benefits of such cases for local manufacturing. This is set to benefit domestic trade bars and we have seen an increasing specialisation by local lawyers to reflect this trend as more countries adopt trade remedy measures.
The more established markets for trade remedy work have seen solid levels of disputes and globally levels of work seem to be up, with lawyers in the US and Australia especially commenting on the high levels of anti-dumping and counterveiling cases they have seen. Notable recent cases filed by the US include the anti-subsidy import duties slapped on Mexican sugar and anti-dumping duties against South Korea and other producers of steel pipes for the energy sector. Practitioners expect steel to remain a hot area, and also predict the potential refiling of the US-Canada lumber case, which will be massive and keep lawyers on both sides very busy. As one DC lawyer said “2015 should be a good year.”
With the inability to reach agreements in the WTO in recent years, bilateral, regional and inter-regional free trade agreements are being sought by countries or regions around the world. The “big two” under negotiation are the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) and they are already impacting on the type and volume of work private practice lawyers are seeing although neither one has been concluded yet.
The TPP, which involves 12 countries including the US, Canada, Australia and Japan, is supposedly close to completion although the US and Japan remain apart on several key issues as of September, making it highly unlikely that it will close this year. According to one of our sources, Japan has decided it will go ahead but is holding back more for international relations-related reasons than its concern over imports of “sacred” agricultural products, including beef, rice and sugar. However, some also suggest that President Obama has not done enough to extol the benefits of the agreement to US politicians and the public, especially as many still have recent memories of the recession and are suspicious of opening up barriers to trade and investment, which could result in US jobs leaking to low-wage countries. Despite these issues and concerns there is definite consensus that agreement will be reached before Obama leaves office.
The TTIP is at a much earlier stage and the majority of those we spoke to are not expecting it to be completed before the end of the current US administration. Reports from the seventh round of discussions held in early October claim that solid progress has been made towards sweeping away trade barriers; however there is a lot of debate among lawyers on how comprehensive the final version of the agreement will actually be. Some are hopeful that it will be deep and comprehensive, whereas others are much more sceptical. While there is definite enthusiasm amongst the business community on both sides of the Atlantic, there are concerns by European lawyers about the level of awareness of the ins and outs of the negotiations by member states and many have yet to take a position. Furthermore, there is “a lot of education needed” for both US and EU agencies if there is to be greater convergence between them in the way they operate. At this stage it remains very much a work in process although in conjunction with TPP it is certainly providing a steady stream of work for practitioners as they keep clients abreast of developments, lobby and advise governments in the proceedings.
Once the TPP and ultimately the TTIP are enacted, work flow for lawyers will increase as regulations are revised in line with the agreements and clients seek counsel on compliance. Furthermore, once they have come into play they are likely to throw up some issues, especially in relation to the protection of domestic industries which could result in an increase in import relief cases. However, overall the feeling from lawyers is that these regional agreements will not translate into a massive boom in work as clients have a much more sophisticated knowledge of them (not unsurprising, given the amount of free trade agreements in recent years) and private practice expertise is thus not as essential as it once was. As one DC lawyer explained, “It is not going to be like the glory days with the North American Free Trade Agreement [NAFTA], as in-house teams are much more clued up these days, but we will certainly expect an uptick.”
As one lawyer admits, “[Customs] is not a sexy area but issues regarding classification, valuation and origin keeping coming up and keep us busy.” Many attribute the strength of this field to the global proliferation of free trade agreements, which is resulting in increased litigation, especially regarding classification. In Brussels there is a reported trend of companies structuring imports in a much more aggressive way and “trying to take advantage and doing clever things with classifications”. Thus, the growth of activity in this area is driven by clients and their lawyers pushing the boundaries, rather than stricter regulatory enforcement.
Conversely, in the US, the increased level of litigation is driven by a more thorough and aggressive approach by US Customs and Border Protection (CPB) as a result of pressure from Congress. The agency is supposedly much more cautious of its handling of cases and “wants to ensure it is seen to be doing its job”. This is resulting in fewer cases being settled and more going to court, as the CBP is tending to stand by its original decisions with greater resolution than ever before. Another much-commented-on trend is the “new and frightening customs audits” on which the CPB is spending a lot of time and effort. These audits can last months and be very complex, which means they are taking up a significant proportion of private practitioners’ time as they guide clients through the process. Furthermore, the CPB’s more vigorous approach has resulted in increased counsel in regards to compliance and best practices as clients seek to have the required systems and procedures in place.
Another development across the Atlantic has been the increasing number of cases regarding the misrepresentation of country of origin in violation of the Trade Agreements Act provisions brought under the False Claims Act at the instigation of a whistleblower. Two significant cases have recently settled, with Samsung agreeing to pay a penalty of $2.3 million and Smith & Nephew, a maker of medical devices, settling for $8.3 million. Samsung is the first reported case in which the party held responsible for the fraud was not directly selling to the government; rather, it provided its distributers with false information and they passed it onto the US government. These cases highlight two things: first, that that the government is prepared to go back along the supply chain to find those responsible; and second, given they take 30 per cent of the award there is a huge incentive for whistleblowers to report on origin violation. For lawyers it has brought into the spotlight the lack of harmonisation in regards to the definition of country of origin, which can vary according to NAFTA, free trade agreements and between the government bodies and authorities; as one source explained, “There is a range of different standards and definitions for country of origin and more than ever we need a consensus. Until then, clients need to be more careful than ever in regards to which body is asking about the origin and why.”
In the EU, there is already a drive under way for greater uniformity in the application of EU customs law. The Commission is putting more pressure of member states to collect duty even if there is ongoing litigation, which previously would not have happened. However, recently it has brought cases against member states at the court in Luxembourg to make them collect so as to improve EU-wide harmonisation as well as bolster revenue.
The most notable feature of the trade and customs bar when considered from a global perspective is its stability, both in size and in major jurisdictions of significance. With volume of work across the board remaining stable or picking up the best are keeping busy and Brussels, Geneva and Washington, DC, remain the largest and most sophisticated legal markets for this area. This being said, a reported key trend of the past year has been the growth of local bars in particular jurisdictions outside these long-established hubs of activity, with Brazil and China especially being mentioned. According to our sources, with more and more countries involved in anti-dumping, subsidies and WTO cases than ever before, local lawyers are increasingly honing their skills.
Both international and boutique firms maintain a strong presence in the market. The international firms continue to benefit from their global reach and also the increasing synergy between this field of law and others. The latter has especially come to the fore over the past year, with a growing closeness reported between firms’ trade and regulatory practices. According to our sources, firms are starting to link the two practices more and more, especially in the Brussels market where EU regulatory law is frequently coming up in trade matters and vice versa. There is an expectation of even greater inter-play between the two over the next few years, with one lawyer stating, “Where there was once a lot of crossover with competition this seems to being replaced by regulatory.”
International players have also benefited the most from the long-term trend of the growing number of WTO disputes, as they have the global reach and the size of teams to most easily handle these. As shown in our research the Geneva bar is dominated by such firms, especially Sidley Austin and King & Spalding, which between them are home to over half of the experts we recognise there. However, as more countries join the WTO, with Yemen becoming the 160th member this year, and the global scope of those involved in WTO disputes increase, it is not just about being in Geneva, especially as the WTO is no longer a viable forum for negotiating international agreements. This is where our market-leading international firms deliver; they have experts who can advise anyone anywhere. In line with this, we have heard of greater diversification of the legal markets in certain jurisdictions as international and US firms ensure they have a contingent on the ground in key jurisdictions.
Having said this, the boutiques are more than holding their own. Their very competitive pricing and fewer conflict issues means they are very active players in the market and the trend for respondent lawyers or senior statesman founding or moving to boutiques continues. According to those we spoke to who recently joined boutiques, the key reason was so that they could have more creative fee arrangements which allows them to particularly cater for the mass of mid-size Chinese companies who demand low prices. As long these companies keep providing the strong flow of anti-dumping cases that we have witnessed in recent years we can expect this movement to continue. Even if it does die down it is still expected that boutiques will remain prominent in this area as their USP is above anything else cost and specialism, which are key concerns of all clients post-recession. As one source explained, client priorities have changed: “they no longer go to a firm for its name, rather they do more in-depth research into the top individuals and they prioritise value for money”. Although it has been six years since the recession began and economies are bouncing back this trend shows no signs of reversing. Ultimately there is room in the market for both types as often a boutique cannot handle large-scale matters or work encompassing areas beyond their scope, whereas it might not be viable for an international outfit to handle particular projects, especially when it comes to competing on price.
There has also been continued lateral movement among the larger players in the market on both sides of the pond. This reflects a realisation by some outfits that by having international trade experts they can keep more work with the firm. More than ever international deals have a trade, customs or sanctions aspect to them and having a leading practitioner on such matters brings in vital expertise and adds weight and depth to practices in increasingly competitive times. The two main sources of such experts are government departments or other firms, as there is not a large and experienced younger generation coming in this field. As one source explained, “The trade and customs legal market has always been fairly small in comparison to other areas, and more than ever partners and especially experienced associates have become hot commodities.”
Overall the past year has been a solid one for top trade and customs practitioners although there have been notable developments, most particularly the uptick in sanctions-related work. However, for the moment this has not caused significant changes to the legal market, rather in conjunction with the increase in export controls and corruption matters, there has been some shifting in the focus of practices. As always, top individuals and firms take into account global trends and challenges and reflect them in their development, with “flexibility” and “adaptability” being the buzzwords for those maintaining their market-leading positions.