Capital Thinking Magazine

On August 31, 2010, as the United States formally ended its combat operations in Iraq, Prime Minister Nouri al-Maliki reminded his people in a televised address: "Iraq today is sovereign and independent." Unspoken that day, but as true then as when articulated by Maliki during his appearance at the October 2009 U.S.-Iraq Business and Investment Conference in Washington, D.C.: Iraq today is open and ready to do business.

For U.S. and other foreign firms, rebuilding Iraq's war-destroyed infrastructure is worth billions in construction and supply contracts alone. Abundant investment opportunities similarly beckon across industries and sectors, from energy, defense and communications to agriculture, education and banking. In addition, Iraq has a fairly well-educated middle class that is hungry for employment and the world's second-largest untapped oil reserves. As Washington, D.C.-based Patton Boggs partner David Tafuri, who was also a speaker at the October 2009 conference with Prime Minister Maliki, states, "Iraq will be an economic powerhouse in the Middle East." For U.S. companies willing to take risks now, the opportunities are immense, but as Tafuri warns in the same breath, "Investing in Iraq is not for the faint of heart."

While sharply accentuated in Iraq, reward-risk scenarios of all stripes increasingly define the best investment opportunities in today's economically geopoliticized world and are as diverse as the nations themselves. The Sri Lankan government, for example, is exploring a "multi-faceted relationship" with the U.S. that embraces trade, security and economic ties, while contending with the aftermath of its protracted fight with the Tamil Tigers terrorist group. Korea is simultaneously pursuing trade agreements with the U.S., the European Union and Canada, with significant economic consequences for the U.S. if it fails to find an accord. India and the U.S. are generally aligned in big-picture economic and strategic thinking, yet U.S. pharmaceutical firms face uncertain IP protection in India, while Indian multinationals are contending with the U.S. government's recent decision to hike fees for immigration visas. And in Latin America, Ecuador is adopting unique solutions for leveraging its assets and resources in a world of shifting realities.

Wherever U.S. firms go, successful trade and commercial dealings start with a keen understanding of the interplay of sovereignty and business. Iraq is a prime example. "Prior to 2009, companies operating in Iraq under contracts with the U.S. government and coalition countries enjoyed absolute immunity from the laws of Iraq," explains Tafuri, who recently spent 15 months in Iraq as the U.S. Department of State's Rule of Law Coordinator for Iraq at the U.S. Embassy in Baghdad. "Following the passage of the Status of Forces Agreement, or SOFA, which effectively made continued U.S. presence in Iraq possible, all companies must now fully comply with Iraqi law."

While foundationally unequivocal and uncontestable, considerations of sovereignty—described by Patton Boggs senior partner Joseph Brand as "a political issue recognized by legislative acts and judicial decisions, period"—can complicate business dealings and put investments at risk. Case in point: the recent restrictions imposed by the governments of Indonesia, Saudi Arabia and the United Arab Emirates on BlackBerry devices, viewed in those countries as "a threat to civil authority."

The bottom line? Whether transacting with foreign economies that are established, emerging or exotic, make sure that you don't trip over the intersections of independence and interdependence.

India: Knotted ties

Bound by a common interest in free trade and the creation of a strategically stable Asia, the U.S. and India—the world's two largest free-market democracies—recently articulated their joint commitment to collaboration in areas including energy, trade and counterterrorism at the inaugural session of the U.S. India Strategic Dialogue, held this past June in Washington, D.C. The world's 12th largest economy and third-largest in Asia, India has straightforward investment protocols with the U.S., its largest investment partner. As the relationship progresses and India, through economic modernization and liberalization, continues its rise up the value chain of global competitiveness and sophistication, there are points of contention.

On the one hand, India enjoys global standing as an outsourcing destination, IT and software development center, and brain trust, producing the second-highest number of Ph.D.s in the world. Additionally, conglomerates such as automaker Tata are helping put India on the world economic map. The underside of this story—and a defining aspect of Indian sovereignty—lies in economic development needs for its vast populace, estimated at 1.17 billion by the U.S. State Department. "There are 700 million people in India earning less than $2 a day," says Patton Boggs' Anurag Varma, Of Counsel in the firm's Washington, D.C., office and public policy counsel for the Embassy of India to the U.S. "Accordingly, the Indian government is obsessed with development issues affecting this part of the population."

One viable solution had been employment in India's multi-billion-dollar diamond and jewelry industry. "We represented the Gem & Jewelry Export Promotion Council of India in securing duty-free treatment for their exports," explains Varma. This duty-free treatment had been extended to the industry for many years to assist with the development of this part of the economy. The initiative contributed to the employment of around two million Indians in cutting and polishing diamonds and other precious stones. With prescribed development and competitive benchmarks now met, however, the U.S. has ended duty-free status for gold necklaces, silver and other categories. "Around one million of those jobs are now gone," says Varma, "which has created a pressing issue for the industry and the government."

Another rankling matter is the Emergency Border Security Supplemental Appropriations Act, recently passed by the U.S. House of Representatives. Designed to raise revenue for border security, the legislation has substantially raised visa fees for skilled employees of major Indian multinationals working in the United States. "This is a struggle for both sides," says Gregory Kalbaugh, director of the D.C.-based U.S.-India Business Council. "The free movement of people is vitally important, and you have to be able to get employees from one place to another—especially when many of these Indian workers provide valuable knowledge and technical services to U.S. firms."

Formed in 1975, USIBC is the premier business advocacy organization representing America's top companies investing in India. Serving as a direct link between business and government leaders, USIBC has an insider's view of India's economy—and its problem areas. "Probably the biggest issue facing U.S. companies right now is the lack of safeguards for intellectual property rights, especially in the area of pharmaceutical patents," says Kalbaugh. "In a misguided effort to protect its generic drug industry, India maintains patent laws that impede invention and innovation, and for U.S firms and investors, pose a level of uncertainty." With its intellectual power and scalable manufacturing capacity, continues Kalbaugh, "India has a real opportunity to be at the forefront of pharmaceutical development and innovation—if its government can come around on policy issues."

Sri Lanka: Dividends of peace

Iraq does not have the monopoly on complex post-conflict situations. Of equal, if not greater, complexity is the situation in Sri Lanka, as the island nation transitions to peace after three decades of savage civil conflict. The Sri Lankan military emphatically crushed the Tamil Tiger separatists in May 2009, but, as the U.S Senate Committee on Foreign Relations noted later that year, "The war in Sri Lanka may be over, but the underlying conflict still simmers."

Of Counsel in Patton Boggs' Washington, D.C., office, Graham Wisner's experience with Sri Lanka goes back decades, including work in an orphanage there in his youth. "There is a thrilling opportunity at hand to literally rebuild a society long brutalized by war and fear," he says. "However, the U.S. must understand Sri Lanka's interest in self-determination. The U.S. has made human rights a focal point following the war's denouement and aftermath, but all our good intentions aside, Sri Lanka is determined to heal its wounds on its own terms."

From still-simmering frustration to a mass of internally displaced persons, there is much to resolve and resettle in this nation off the southern coast of India, which Wisner describes as a "paradise" of mountains and white-sand beaches. As Capital Thinking went to press, the U.S. Commerce Department was planning to take a delegation of U.S. businesses to Sri Lanka, focused on investment and economic opportunities in the devastated North. "Part of our job is to encourage U.S. companies that previously turned away from Sri Lanka to reconsider," says Wisner.

As in Iraq, the devastation of war in Sri Lanka has created immense redevelopment and investment opportunities for foreign companies, from roads and schools to the suddenly hot beachfront real estate market. As Wisner explains, the building blocks of development are favorable too: "With attributes including a highly educated and motivated English-speaking populace and a tax confederation with India that makes Sri Lanka a natural staging area for foreign companies seeking entry into the Indian market, Sri Lanka is a high-efficiency, low-cost proposition."

Korea: Ready if we are

According to the Office of the United States Trade Representative, the U.S. presently has free trade agreements in force with 17 countries, including Canada, Israel and Mexico. Signed FTAs also exist with Colombia, Korea and Panama, but all await congressional approval before going into effect. The proposed pact with Korea carries profound significance.

If approved, writes the USTR, the United States-Korea Free Trade Agreement, signed in 2007, "would be the U.S.' most commercially significant free trade agreement in more than 16 years."

With provisions including tariff reductions and market access across multiple sectors, KORUS FTA promises much for both countries. The U.S. International Trade Commission estimates that the reduction of Korean tariffs and tariff-rate quotas on goods alone would add $10 billion to $12 billion to the annual U.S. GDP, and around $10 billion to annual merchandise exports to Korea.

Meanwhile, Korea has other irons in the fire. In September, all 27 members of the European Union approved their own FTA with Korea, one of the biggest free trade deals ever between two economies, rivaled only by Australia's trade pacts with China and the U.S. Korea has another pending free trade agreement, with Canada.

While the E.U.-Korean FTA has yet to be ratified by the European and Korean parliaments, the implications for the U.S. are clear. "The U.S. could be disadvantaged by remaining on the sidelines," says Washington, D.C.-based Patton Boggs partner Frank Samolis, who has represented several sovereign entities in FTA negotiations with the U.S., including the Korean International Trade Association in the present pact. "As these are comparable agreements, Europe could gain better market access than the U.S." (Chul Chung, KITA's chief economist, comments on U.S.-Korea issues in the Q&A)

Ecuador: Stopping the "anti-business cycle"

While continuing negotiations for a trade pact with Colombia, the U.S. is also talking trade with neighboring Ecuador. "Ecuador was part of the negotiations for a U.S.-Andean free trade agreement, but bilateral discussions between Ecuador and the U.S. lapsed and have not been revived," explains Samolis. "However, the U.S. and Ecuador found agreement in the Andean Trade Preference Act of 1991, which was expanded by the Andean Trade Promotion and Drug Eradication Act." Providing trade preferences in exchange for counter-narcotics cooperation, ATPDEA is due to expire December 31 after a series of periodic short-term renewals—a pattern that Luis Gallegos, Ecuador's ambassador to the U.S in Washington, D.C., would like to see changed.

"We have been at this for the last five years, extending ATPDEA months at a time," comments Ambassador Gallegos. "In my view, this represents an antibusiness cycle. My producers cannot program a venture which may end every year, while buyers in the U.S. are also challenged by an irregular market. We would prefer an extension of five years, which would make ATPDEA visible, secure and compatible with the interests of the business community. Investments tend not to go to unsecure places in terms of markets and accessibility."

The U.S. is Ecuador's main trading partner, with petroleum preeminent among some 150 export products including tuna, broccoli and cut flowers. "We calculate that between Ecuadorean and Colombian flower producers, we provide between 70,000 and 100,000 jobs in the U.S.—and because the flowers mostly move along the U.S. supply chain, we estimate that 75 cents out of every dollar stays in the U.S.," says Ambassador Gallegos. "It's time for a new framework."

Globalization may have flattened the world, as author Thomas Friedman has written, but even as the extent of commercial interplay suggests one giant interdependent super-economy, there are no easy strolls across sovereign borders.

"There are all kinds of issues regarding market access and business practice abroad," says Samolis. "Every country has unique challenges and complexities which need to be dealt with individually—and navigated with care."