5 Baker McKenzie and Mergermarket, Simplifying business in a complex world, Part II,” 2017.


7 ”WTO’s Trade Facilitation Agreement enters into force,” 22 Feb. 2017;


9 Id.

10 Global Future Council on the Future of International Trade and Investment, “From Bad to Worse? The Case for Arresting the Slide in Global Trade Cooperation”;

11 Baker McKenzie, “Rising Scrutiny: Assessing the global foreign investment review landscape,” 2017;

12 Baker McKenzie and Oxford Economics, “Global Transactions Forecast 2018: Deal Appetite Rising,” 2018;

13 Baker McKenzie and Rhodium Group, Rising Influence: Assessing China’s Record FDI Surge in North America and Europe (2017).

14 Baker McKenzie and Rhodium Group, "Chinese FDI Squeezed in 2017 by Regulatory Crackdowns at Home and Abroad," 17 Jan. 2018;


Preparing for the evolving trade and investment landscape
As countries throughout the world adapt their trade and investment policies to respond to new risks, multinational companies will need to closely monitor the landscape. Below we offer strategies to help companies capture the benefits of free trade agreements and get deals through.

Think strategically about trade In order to harness the benefits of the multilateral agreements that are taking shape, companies should:
+ Review FTAs, including duty phase-out schedules, when planning future expansion and distribution activities.
+ Consider new suppliers to take advantage of preferential duty programs and rates.
+ Consider the use of FTAs for investment structuring purposes, such as to reduce foreign investment limits and to protect investments. Service and investment commitments in FTAs provide qualified investors / service providers with preferential market access. This will impact holding company structures and the activities that must be performed by holding companies to benefit from preferential access.
+ Consider rules of origin that make it easier to achieve more flexibility in sourcing operations, but still ensure entitlements to preferences.
+ Review pricing and sourcing to ensure benefits are being derived from FTA duty preferences when purchasing goods from a distributor or supplier and that the company can claim preferences when assembling materials from many sources.

Ensure a robust compliance program As companies develop increasingly sophisticated and optimized global supply chains, it is critical to ensure their programs and controls are sufficiently robust to support compliance with the web of international trade rules. Unsubstantiated or incorrect certifications can result in penalties and retroactive duties with interest. To minimize risks, companies should:
+ Conduct an international customs and trade compliance health check on internal systems, processes and controls, tariff classification, valuation and origin.
+ Ensure suppliers meet origin rules. Origin audits and investigations are becoming more common, particularly in the Asia-Pacific region, and will continue to proliferate as FTAs increasingly provide for self‑certification.
+ Obtain warranties and indemnities from suppliers and conduct regular internal audits and visits.

Anticipate e-commerce and privacy provisions
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership leaves intact TPP provisions promoting electronic commerce and eliminating barriers such as “data localization” requirements. These provisions were built on the foundational concept that data must be able to flow back and forth across borders, subject to certain baseline protections. While the future of digital trade rules is uncertain, companies are likely to see more regulation in this area. To prepare, companies should:
+ Examine current privacy policies and procedures to ensure that they are broad enough to address consumer data and marketing issues (e.g., online collection of data, opt-in/opt-out requirements for electronic email solicitations) and are not focused only on home country rules and regulations. Companies need to consider each country’s legal and regulatory framework.
+ Ensure that their privacy governance structure is flexible enough to address differences across countries, including standards of stricter regions such as the EU. A one-size-fits-all approach may not work across the organization.
+ Prepare for heightened focus on privacy and cyber security-related issues by regulatory authorities, as well as privacy advocates and individual consumers.

+ Consider non-tariff barriers associated with e-commerce activities.

Conduct an early risk assessment of foreign investment review risks Foreign investment is a hot-button issue in many advanced economies. While the vast majority of transactions continue to be approved, uncertainty related to foreign investment review risk inevitably makes some buyers less attractive than others. This activity underscores the need for investors to prioritize foreign investment review risks as early as possible, certainly pre-approach, to determine if potential concerns exist. In addition, to increase the likelihood of getting deals approved, foreign investors should:
Elevate national security risks for investors with any hint of a state affiliate: This includes investors that are directly or indirectly government-owned, -controlled, or even -influenced, as well as private investors headquartered in countries with state-directed economies.
Take a global view of national security risks: Early identification of impacted jurisdictions and cooperation between counsel on strategy are paramount. Even minor operations or activities in a country with strong national security laws can potentially present roadblocks, and countries are increasingly likely to coordinate their efforts. “Before engaging in any new project, investors need to assess carefully its commercial viability. As governments tighten regulatory and legal requirements and scrutiny, Chinese investors in particular have to factor in the increasing cost of compliance,” says Bee Chun Boo, a partner in Baker McKenzie’s Beijing office.
Craft a public and government relations strategy: Foreign investment reviews can be highly political and susceptible to negative media attention, and developments on this front in one country can easily impact the perception and process in another. “Apart from the exercise of a legal right, in practice, whether a bid is successful depends on how the government, investors, the press, unions and others talk about it,” says Tim Gee, a Baker McKenzie M&A partner in London. “It’s critical to manage stakeholder interests to get a fair wind behind the offer.”
Engage with the reviewing body early: Foreign investors should work with counsel to engage with relevant officials up front, even on an informal basis without disclosing the client’s name, to identify and quantify risks. “From a purely regulatory standpoint, the earlier you go in, the more receptive the regulators are likely to be because they feel you’re being respectful. At the end, you’re more likely to negotiate a favorable outcome than if you leave things to the last possible minute and take advantage of every statutory right,” says Arlan Gates, a regulatory partner in Baker McKenzie’s Toronto office.
Understand the process and timeline: The process and time frame for screening investments can vary widely and may not be as predictable as statutory provisions suggest. The procedural complexities can be even greater for multi-jurisdictional deals.

The challenges ahead
While global trade has borne the brunt of the backlash against globalization, technological change has been the larger force behind job losses in manufacturing. According to a recent study, 85% of US manufacturing job losses between 2000 and 2010 are actually attributable to technological change – primarily automation – and not international trade.15
New technologies from automation and additive manufacturing to AI could dramatically alter trade patterns as companies think differently about their business models and footprints. Similarly, factors other than low wages, such as customer needs, the availability of low-cost transportation, or access to skilled employees, may play a bigger role in investment decisions, reshaping supply chains.
The exponential growth of digital trade – which lacks a global framework – is also creating uncertainty for multinational companies. According to McKinsey, cross-border data flows grew by 45 times between 2005 and 2014, generating $2.8 trillion in economic value in 2014 – a greater impact on world GDP than global trade in goods.16 Many governments have responded to these changes by seeking to control (and tax) digital trade through measures such as filtering and/or blocking cross-border data flows, implementing data localization requirements, and imposing news aggregation fees.
On the foreign investment front, a looming question is whether, and to what extent, countries choose to consider economic interests in screening investments, either explicitly or within the rubric of national security. While some countries currently evaluate the economic impact of foreign investment as part of the review process – for example, Canada’s “net benefit” test – others have focused on sectors traditionally associated with national security. This may be changing, even in the absence of changes to regulations, as governments think more broadly about their national interests.
The changing global trade order could dramatically impact M&A and IPO activity
In our Global Transactions Forecast released with Oxford Economics in late 2017, we forecast an uplift in M&A and IPO activity in 2018 as dealmakers and investors gain greater confidence in the business prospects of acquisition targets and newly listed businesses.12 Two alternative scenarios, however, demonstrate the wide potential swing based on trade and investment policies.

In the upside forecast, sustained growth in the Chinese economy and stronger near-term growth in the US spur global optimism, accelerated global trade and a higher volume of deal-making in key trading sectors, such as manufactured goods and internationally-traded service sectors.

The second scenario is based on a return to US protectionism and anticipates a far more negative outcome. In this model, the US imposes tariffs of 45% and 35% on Chinese and Mexican merchandise goods, respectively, and also raises tariffs on imports from South Korea and Taiwan, prompting these countries to retaliate with similar tariffs on US exports. In addition, deportation of illegal immigrants and curbs on legal immigrants result in a decline in the size of the US labor force. Under these conditions, M&A activity could fall by up to $1 trillion in 2018 and around $500 billion in 2019.
Changes to investment policy could also impact deal activity. In 2016, for instance, Chinese investors walked away from 30 deals for US and European companies worth $74 billion where regulatory and political scrutiny was a contributing factor.13 Similarly, while the total number and value of abandoned deals declined in 2017 — mostly because of Beijing’s tougher regulatory stance on outbound investment — overseas regulators and political backlash sunk more Chinese deals than ever before.14 More than two-thirds of the total withdrawn / canceled transactions last year can be attributed to overseas regulatory intervention, with at least $7 billion in deals terminated because of CFIUS concerns.
Cooperation on trade and investment is becoming more difficult
While countries continue to look to free trade agreements to support closer economic integration, a striking development in the post-financial crisis period has been a surge in restrictive trade policy. Since the height of the crisis in November 2008, governments around the world have implemented more than 2,300 protectionist measures, according to Global Trade Alert.9

The environment for large trade agreements is also becoming more challenging, as evidenced by the negotiations over CETA. While it went into provisional application in September 2017 after ten years of negotiations, to fully enter into force it needs to pass 42 national and regional parliaments in 28 EU countries – no small feat in view of the vocal opposition in many countries and Belgium’s challenge to the Investment Court System in front of the European Court of Justice.
“The negotiations between the EU and Canada were extremely hard to conclude even though there were obvious benefits for both parties,” says Hedwall. “One regional government in one Member State – the Belgian regional parliament of Wallonia – was able to hold up the agreement for quite some time, and we are likely to see more of this in the future. Different interests at a local level can have a huge impact on the ability to conclude big multilateral agreements.”

Even bilateral and regional trade agreements may be under threat. The WTO has advanced a scenario where violations of such agreements become widespread, unilateral changes are introduced, and re-negotiations are forced or even unilaterally revoked.10 The likelihood of this adverse trade scenario being realized has dramatically increased, particularly as the Trump Administration has made a number of threats to withdraw from existing trade agreements such as NAFTA and KORUS.
“The debate over whether particular trade agreements are ‘fair’ is intensifying. This is creating much more uncertainty in the trade environment, which in turn is complicating companies’ ability to make long term investment decisions,” says Manuel Padron, the Latin America Chair of Baker McKenzie’s International Commercial & Trade Practice Group.
On the foreign investment side, regulation is becoming more complex as advanced economies respond to record levels of Chinese investment, increased activity by state-owned enterprises and sovereign entities, and changing ideas about national and economic security. As our recent report, Rising Scrutiny, highlights, seven of the nine most advanced economies have changed their foreign investment review procedures since 2014 (Australia, Canada, France and Germany) — or are considering doing so (the UK, the US and the EU) — to allow for greater government review of cross-border investments.11

Tensions between the US and China have continued to rise in early 2018, with one deal blocked already and debate over reciprocity and technology transfer. "No-one wins a zero sum game and cooperation between the world's largest economies is the only way to continue economic growth," says Danian Zhang, chief representative of Baker McKenzie's Shanghai office.

Cooperative trade and investment forces continue
Amid the changes unfolding across the global economic landscape, it’s useful to remember that trade and foreign investment are deeply woven into the fabric of the world economy. Trade represents 58 percent of global GDP and FDI flows have exceeded $1 trillion every year since 2005. 6 And there is evidence of new global cooperation. For example, last year:
+ The Trade Facilitation Agreement (TFA) entered into force – the first WTO multilateral deal concluded since its founding in 1995. Full implementation of the TFA is projected to cut members’ trade costs by an average of 14.3 per cent and add as much as 2.7 percentage points per year to world trade growth by 2030. 7 + Japan and the EU finalized a free trade agreement (excluding investor disputes) that covers over a quarter of the global economy.
+ The Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada entered into force provisionally, ending 98% of tariffs on goods. + Eleven signatories of the now defunct Trans-Pacific Partnership (TPP) agreement (excluding the US) announced the outline of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
More broadly, from 2012 to 2016 the number of trade liberalization measures enacted by governments around the world nearly tripled (though the absolute numbers were low compared to the volume of protectionist measures).8 That’s a reminder, says Miguel Noyola, an international commercial partner in Washington, DC, that “even in these challenging times, most countries recognize that there are clear benefits from trade.”  
While the previous generation of trade liberalization has been extraordinary, particularly in developed markets, many governments are recalibrating their approach to trade and investment in response to the effects of globalization, technological advances, state development strategies and geopolitical risks.
This dramatic rebalancing has the potential to slow economic growth, as multinational companies work out whether to forge ahead with their deal making or put investment decisions on hold. They also have to consider how to raise capital and allocate resources for trade deals and cross-border transactions when it’s unclear how the rules and terms of trade and foreign investment are going to change. Indeed, according to our recent survey, more than half of business leaders in the Asia-Pacific region cite trade deal uncertainty as one of the key complexities they face today.5
“While it’s difficult to predict concrete steps – and to separate political rhetoric from policy changes – multinational companies need to recognize that the landscape has changed,” says Mattias Hedwall, Global Chair of Baker McKenzie’s International Commercial & Trade Practice Group. “Trade liberalization is likely to become more difficult, and cross-border investment is likely to attract more attention from policymakers, advocacy groups, and the media.”
Before engaging in any new project, investors need to assess carefully its commercial viability. As governments tighten regulatory and legal requirements and scrutiny, Chinese investors in particular have to factor in the increasing cost of compliance.
Bee Chun Boo,
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Toward a new era of trade & investment policy
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