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Clifford Chance

Clifford Chance

Trade and Investment Risk

A priority focus for your board

Changes to government international trade policy can create significant obstacles to conducting cross-border business. Similarly, businesses can be susceptible to protectionist policies and government interference with their foreign investments.

International trade can be impacted by the imposition of tariffs, the adoption of quotas or embargoes, or the suspension of trade relations or trade agreements with other countries. The implications for businesses can be substantial. Prices for inputs and commodities can go up; in certain cases, product availability can be disrupted. It may also become more difficult to provide services to customers overseas. Importantly, trade differences between governments can lead to uncertainty and make it challenging for businesses to plan for the future.

Foreign investments can be at risk, in the most extreme cases, from government expropriation – as has happened, for example, with natural resource concessions. The economic value of investments can also be compromised in less obvious ways through changes to regulation or taxation, revocation of licences and permits, withdrawal of incentives or inability to obtain redress through local courts. The financial and strategic business implications can be substantial. It is important with any investment to ensure that the investment benefits from the protections available under investment treaties specifically designed to promote and protect investments.

Wherever you do business, Clifford Chance can help you put in place a multi-faceted strategy to help navigate these trade and investment risks.

Be clear on trade and investment risk

5 questions to ask yourself

1

Are we keeping track of changing political landscapes everywhere we operate?

In addition to doing standard due diligence, it is key to understand the political landscapes of the jurisdictions in which you operate, how they might change and how those changes will impact your cross-border trade and investments. Are you monitoring trade and investment policy developments globally and across the regions and countries in which your business operates? Are you engaging with all relevant stakeholders and maintaining relationships both with incumbent national and local governments and with politicians in opposition parties, as well as with local communities and civil society, local businesses and the media?

2

Have we elevated international trade and investment risk to the boardroom?

As Brexit and the recent trade differences between the United States and China have shown, swings in international trade policy can have fundamental impacts on how businesses operate. The board should be fully briefed on international trade issues and ready to navigate and adapt the business to trade policy and political changes.

Without available investment protections, State interference can destroy the value of investments. Bilateral and multilateral investment treaties provide the means to mitigate this risk by providing important protections and a right to enforce them directly against the host State in an international arbitration forum that is outside the host State's control. Are you confident that potential political risks are factored into your business and investment decisions? Is the board focused on structuring investments to benefit from investment treaty protections, to maintain avenues for recouping investment losses if State interference happens?

3

Are our contracts and policies fit for purpose?

Have you considered what changes to international or local trade policy may mean for your key contracts? Factors such as the terms of market access, liability for tariffs, supply chain delay and disruption, and many others can shift with changing trade relationships.

Have you factored the availability of investment protections under investment treaties into your transaction documents? The inclusion of stabilisation or “economic equilibrium” clauses in contracts with State entities protects investments by fixing fiscal terms or by indemnifying the investor against the costs of changes to regulation or taxation. The prospects of winning in a claim against the host State are higher if you have commitments recorded in contractual form. You may also want to assess the availability, costs and benefits of political risk insurance.

4

What can we do to protect future investments?

When considering future investments, it is key to understand local restrictions and conditions imposed on investments and investors, as well as the implications of any relevant national security screening. Many bilateral investment treaties expressly require that, to qualify for protection, the investments must be made in accordance with the law of the host State. Is investment protection planning part of your due diligence process when making new investments?

The protection investment treaties offer is free, and it is there to be used by investors like you. Have you explored what other protections or guarantees are available, whether from the State where you plan to invest, or in connection with financing the investment? Where specific commitments or representations are made in connection with a proposed investment by host government officials, it is critical to keep a record of these.

5

What is our response plan in the event that our investment is threatened or impacted by State action?

Before taking action when your investment is threatened or adversely affected by State action, you should coordinate your business and legal strategy to maximise your opportunity to reach a quick resolution of the problem and preserve your ongoing working relationship with the State. If this is not possible, we recommend working alongside investment arbitration specialists to take steps to increase your chances of receiving effective compensation for losses suffered by your investment. Do you have mechanisms in place to move quickly in this situation?

Why Clifford Chance

With a global network of individuals, experienced in international trade law and advising on investments around the globe, our industry-leading team is perfectly placed to advise you on international trade and investment risk. Our investment protection team includes professional advocates experienced in interacting with governments and international tribunals. Our team also includes senior lawyers with strong academic profiles, who are at the forefront of law and policy development in relation to international trade and investment.

Meet our Trade and Investment Risk team

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Trade and Investment Risk | Podcast

Foreign Direct Investment: Regulation in Germany – sharp sword or blunt knife?

There are growing concerns in Europe about the impact on public security and order of foreign acquisitions of Europe-based entities, with an increasing number of EU member states introducing investment screening rules and a new EU regulation on foreign direct investment in place. Foreign direct investment (FDI) specialists counsel Dimitri Slobodenjuk and senior associate Ulrich Pfeffer discuss the latest developments in Germany on FDI matters.

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Trade and Investment Risk | Podcast

CFIUS: Tech, China and Trump

US national security specialist Josh Fitzhugh speaks about current trends in the US Government's screening of foreign investment. CFIUS review now presents significant deal risk for inbound investments across a broad spectrum of industries. Josh shares insight into the trends in CFIUS enforcement, the driving factors behind them, and the strategies corporate boards, executives, M&A managers and others can adopt to manage the risk.

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