It seems that these days, it is difficult to avoid a daily dose of bad economic news.Another drop in the markets, another drop in housing starts, another bankruptcy. These are troubled and uncertain times, and it too often seems that large segments of the American economy stand on the brink of misfortune. In this milieu, the stunning growth in U.S. exports has emerged as the bright star in the U.S. economic constellation. Having long lived in the shadow of sales to the domestic market and import trends, exports have now stepped boldly onto center stage. More and more, U.S. companies - manufacturers and service providers alike - have grown to realize not only that the world is flat, but that all the world is indeed a stage.
Of all the leading economic indicators, U.S. exports alone can claim to have set a new record high in each of the past twelve months. The value of U.S. exports has nearly doubled in just over a decade's time, registering $1.63 trillion in 2007. In fact, the U.S. trade deficit declined last year for the first time since 2001 (and for only the second time since 1991), not because of a drop in imports - imports continued to increase despite a string of highly-publicized news stories on problems involving imported food, toys, tires and other products - but due to exports, which increased by $182 billion over the 2006 total, for a 12.6 percent jump. About two-thirds of that increase, $126 billion, was in goods, with the remainder, $56 billion, in services. Indeed, export growth is credited with keeping the country out a recession during the end of 2007, and is viewed by most economists as one of the few firewalls to a possible recession this year.
The declining value of the U.S. dollar, while certainly a major factor, is not the only reason for the increase in exports. Nor is the fact that many developed and developing countries abroad are experiencing GDP growth rates that far exceed that of the U.S. To some extent, U.S. exporters have moved successively into foreign markets which have been previously closed to one degree or another because of high tariffs or complex regulatory requirements. In the wake of the WTO agreement concluded in 2000 and a succession of free trade agreements negotiated by the present and prior Administrations, U.S. exports now face far lower barriers to entry into foreign markets than a decade ago. But perhaps to even a greater extent, exports have been rising at such an impressive clip because more and more U.S. companies see opportunities by expanding into foreign markets, and are willing to make this a strategic priority. Both large and small businesses have seen a substantial increase in export sales; according to one recent study, small businesses have registered a fourfold increase in exports in just fifteen years. Manufacturers of niche or specialty products - ranging from biotech to IT and even to steel - have been particularly adept and creative in finding receptive markets abroad.
But the role of the exporter is not for the untrained. Aside from mastering basic commercial practicalities, market participants need to be aware of licensing and related requirements on U.S. exports. Depending on the product, the destination and the customer, U.S. exports are generally controlled by three Federal agencies. First is the Bureau of Industry and Security (BIS), an agency within the U.S. Department of Commerce. BIS administers licensing requirements for so-called "dual-use" items, meaning products, services and data that have both commercial and military applications, or a commercial use alone. Second is the Directorate of Defense Trade Controls (DDTC) within the Department of State, which administers licensing requirements for items on the "United States Munitions List," which includes items that may have a military application, even if the particular product is being used by a civilian end-user. The third agency is the Office of Foreign Assets Control (OFAC) in the U.S. Department of Treasury. Among other things, this agency administers U.S. economic sanctions programs against countries, most notably Cuba and North Korea, and prohibitions on dealings with specific individuals or companies. In fact, each of these agencies maintain lists of persons with whom export trade is prohibited or controlled, including the Denied Persons List, the Unverified List, the Entity List, the Specially Designated Nationals List and the Debarred List.
U.S. exporters need to know which agency's controls they need to follow, which can often present confusing jurisdictional issues. They need to know when they are required to register with one of these agencies - even if they are not currently involved in an export transaction. They need to know when they must apply for an export license for a particular transaction. And they need to know which of the several lists must be reviewed before they can enter into an export transaction.
Not only that, but U.S. export controls extend to areas that may not even cross a company's consideration. For example, many requirements and restrictions extend not only to companies situated here in the United States, but to their overseas branches and, in some cases, to their foreign subsidiaries. They often extend to so-called "re-exports" - typically a U.S. sourced component shipped to a foreign manufacturer, which incorporates the component in a finished product and ships that product to another foreign destination. Furthermore, there are certain types of activities that are considered "exports" and fall within export control and licensing requirements, even if they physically transpire within the borders of the United States, such as the release of software or technical data to foreign nationals here in this country. This latter group of activities - called "deemed exports" - is particularly nettlesome and has become increasingly contentious since it commonly arises in academia, as more and more foreign nationals participate in university research programs, or government-funded research and developments projects that involve the release of technical data. Violations can arise from an improper release of such data without an appropriate export license.
The penalties for getting these questions wrong have recently become much steeper. A law signed by President Bush in October 2007 increased the maximum civil penalty for many export control violations from $50,000 to $250,000 or twice the value of the transaction, whichever is greater. Criminal penalties now top off at a million dollars and/or 20 years in prison. The law also contained a new provision aimed at conspiracies to violate export control rules.
For these reasons, all U.S. exporters should design and implement a written export compliance program. A compliance program not only systemizes a company's adherence to the web of export control requirements, but it also establishes a basis for mitigation should they run into trouble. An effective export compliance program should include such elements as the designation of a responsible official within a company that is charged with ensuring that all export related requirements are met, a procedure to ensure that licensing requirements have been fully addressed for each particular export transaction, a procedure for checking parties to an export transaction against the several lists administered by the relevant federal agencies, and a procedure for reporting problems that come to light up through a company's internal chain of command so that it expeditiously receives the attention of a responsible official within the company. An effective export compliance program, in writing and understood throughout a company, can mitigate a proposed civil penalty by up to 25 percent. It can also mitigate up to 50 percent of a proposed civil penalty if a "voluntary disclosure" is made. It is low cost, high-valued protection, and every company that exports should have one in place.
As U.S. companies work their way through export controls, they could also consider an array of tools made available by Federal agencies that are designed to help current and prospective exporters. In essence, these export assistance programs help companies identify appropriate foreign markets and customers for exports, and provide practical assistance on such commercial issues as export financing and the international sales process.Through the use of these programs, U.S. companies that are looking to develop export markets can access listings of prescreened export leads, international business contacts, trade shows, export guidelines, company profiles and market research sources. The programs - including the U.S. Commercial Service and its web-based component, Export.gov - carry a relatively reasonable fee, and pool a range of expertise, including the Export-Import Bank, the Overseas Private Investment Corporation and the Small Business Administration. The program officials are well-trained, well-versed in the realities and nuances of global commercial sales, and anxious to assist U.S. companies. Many states have also created similar assistance programs.
We live in a time of heightened security concerns, and the government takes export control issues very seriously these days. In these times, an understanding of and compliance with these rules is very much part of the cost of doing business. But the business of exports has been good, and seems to be one of the few things that is getting better.
Jeffrey Levin is Special Counsel in the International Business and Trade Group of Saul Ewing LLP.