Unit 12 - Problems & Exercises

To see how these principles are applied in practice, work under customary law principles all students should prepare the Agrobusiness Problem as a discussion problem.  Now from the Indonesian and American students’ perspective, you will note that there are potentially different views of the customary law.  What do you infer the respective foreign ministries (DEPLU in Indonesia, Department of State in the United States) think the customary law provides for the legal protection of foreign economic interests?  How do you think this protection would be implemented?

Now, for preparation and presentation by a student group to be named, assume for the sake of argument that instead of in Rien the Agrobusiness Problem takes place in Mexico.  Rework the problem under NAFTA 1.0.  What are your client’s options, and is the treatment of the Agrobusiness Problem the same under the customary law and NAFTA Chapter 11?  (Bear in mind that under USMCA as NAFTA 2.0 investor-state arbitrations under Chapter 11 would be eliminated for all except a few industries, namely telecoms and petroleum, so what changes if you rework the problem under NAFTA 2.0 aka USMCA as currently constituted?)  Then assume that the Agrobusiness problem takes place in Indonesia, or for that matter anywhere in ASEAN, and coverage exists, for example because a US parent company would form a Singapore-incorporated subsidiary, which would be protected under investment protection provisions of the 2003 US-Singapore FTA, meanwhile said Singapore subsidiary would then presumably be the investment vehicle in Indonesia or elsewhere in ASEAN, or would at least own the stock of any locally incorporated subsidiary.)  Are your options and is the treatment of the Agrobusiness problem the same under customary law and the ASEAN Comprehensive Investment Agreement?  What about NAFTA 1.0 versus 2.0?

Now, for all students again, to explore the problem of global supply chains and investment protection locally, remember BMW’s Upstate Greenville-Spartanburg plant?  Please recall separately problems most visible with the automobile industry already, in conjunction with the Trump Administration’s jaw-boning of BMW, a German multinational, in early 2017 about building more automobiles in the US.  At the time, BMW had tentatively decided to build a new, large plant in Mexico to produce three-series BMWs chiefly for the Central and South American markets, where Mexico had both commercial ties and trade agreements outside of NAFTA-USMCA.  So where did BMW of Greenville-Spartanburg fit? (Hint, BMW is just finishing construction of its new largest plant in the world, now located in Mexico.)

BMW is actually a foreign investor in the US, and South Carolina is distinguished by the fact that it has the most foreign investment of any US state (at least on a per capita basis).  But ask yourself whether only the US has foreign investment protection and FTA-style agreements for purposes of building out global supply chains?  Take a look at the 1998 Mexico-Germany Bilateral Investment Treaty to convince yourself that BMW could arrange its affairs via Germany if it really wanted to build that giant plant in Mexico for purposes of exporting to South and Central American countries.  The effect of terminating NAFTA threatened at the time by the Trump Administration probably would have been to move from Greenville-Spartanburg back to Germany the manufacture of sophisticated intermediate goods like engines, etc. meant to be installed in the cars to be built in BMW’s new Mexican plant.  The object lesson is that cancelling NAFTA and “blowing up” global supply chains in the name of politics is probably only a very temporary thing anyway, since the effected companies presumably re-plan and reroute their supply chains via other countries.

In fact, the Trump Administration’s tariff war with the Chinese eventually triggered BMW to move an X-5 production line to Shanghai, in order to escape the effects of the Chinese counter-tariff to be levied on US-manufactured X-5s exported to China.  Considerable unhappiness followed among the Upstate business community, because BMW Greenville-Spartanburg had a worldwide monopoly on the X-5 model’s production until then.  Now the expectation is that the line sent to Shanghai will never return, regardless how US-China relations develop in the longer term.  And at some point the expectation is that the new line in Shanghai may begin producing X-5s for the whole of Asia.

What would you have advised BMW and what would you have advised the US Trade Representative around 2017?  In practical terms, it is difficult if not impossible to corral multinational private sector enterprises into behaving in any manner other than what they think is best for their enterprise, which applies presumably to global supply chains as well as investments generally.  There were enormous social and political challenges associated with disaffected (low skilled, often former manufacturing) US workers from the Trump Administration perspective.

Meanwhile, it may be a bridge too far to assume that such problems could be addressed well via “de-globalization” as mechanical re-shoring exercise.  The risk of that kind of approach from the perspective of countries like Indonesia was that such an approach might derail their longer term economic development plans (premised on export-led development and raising incomes by moving rural workers initially into light manufacturing in urban areas, now also capturing natural resource processing domestically–  meaning as part of the renewable energy push mandating the local establishment of smelters by nickle miners as a effort to establish an EV battery industry by playing on local natural resources, for example, rather than just exporting nickle ore).  Among the campaign promises of the recently re-elected Indonesian president was to make Indonesia more competitive as manufacturing location (compared to Vietnam, Thailand, etc., in an attempt to capture a larger share of factories moving out of China as global supply chains re-form).  But that would require politically painful regulatory and labor reforms in Indonesia, so that disadvantaged labor problems in conjunction with trade law are not peculiar to the US.

Now come more speculative questions.  On the one hand, we are looking at ideas of supply chain "resilience" and reworking global supply chains post-Covid and in light of the discussion of potential "decoupling" of the US and China.  Time will tell, but the issue is whether and how you can now decouple via technology export controls on the same kind of basis as the West and Socialist countries were separated during the Cold War.  How do you think this process may look from a middle term perspective 5-10 years out, since opinions differ?  On the other hand, the Biden Administration is seemingly pursuing IPEF as arrangement not involving market-access arrangements that would present domestic political difficulties (arguably, in lieu of rejoining TPP).  It is early days for IPEF, but revisit Unit 2's IPEF materials and express an opinion whether and how IPEF will eventually function like or not like an FTA did traditionally.  Or is there a greater chance in the medium term that the US returns more towards traditional FTA approaches by embracing something like rejoining TPP?  What is the basis of your opinion on both questions, and are they related?