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Chapter Eight The International Legal Environment of Business

At the outset of  Chapter 2 , we noted that U.S. managers can no longer afford to view their firms as doing business on a huge island between the Pacific and the Atlantic Oceans. Existing and pending multilateral trade agreements open vast opportunities to do business in Europe and Asia, throughout the Americas, and indeed throughout the world. If present and future U.S. managers do not become aware of these opportunities, as well as the attendant risks, they and their firms will be at a competitive disadvantage vis-à-vis foreign competitors from all over the world.

Critical Thinking About The Law

This chapter (1) introduces the international environment of business; (2) sets forth the methods by which companies may engage in international business; (3) indicates the risks involved in such engagement; (4) describes organizations that work to bring down tariff barriers, and thus encourage companies of all nations to engage in international business; and (5) identifies the means by which disputes between companies doing business in the international arena are settled. Please note carefully that when we use the word companies in an international context, we are referring not only to private-sector firms, but also to nation-state subsidized entities and government agencies that act like private-sector companies.

Because of today’s widespread international opportunities and advances in communication, business managers must be aware of the global legal environment of business. As you will soon learn, the political, economic, cultural, and legal dimensions are all important international business considerations. The following questions will help sharpen your critical thinking about the international legal environment of business.

1. Consider the number of countries that might participate in an international business agreement. Why might ambiguity be a particularly important concern in international business?

Clue: Consider the variety of cultures as well as the differences in languages. How might these factors affect business agreements?

2. Why might the critical thinking questions about ethical norms and missing information be important for international businesses?

Clue: Again, consider the variety of cultures involved in international business. Why might identifying the primary ethical norms of a culture be helpful?

3. What ethical norm might influence an entity’s willingness to enter into agreements with foreign companies?

Clue: How might international agreements differ from agreements between two U.S. companies?

Dimensions of the International Environment of Business

Doing international business has political, economic, cultural, and legal dimensions. Although this chapter emphasizes the legal dimensions of international business transactions, business managers need to be aware of those other important dimensions as well. (Ethical dimensions were examined in  Chapter 7 .)

Political Dimensions

Managers of firms doing international business must deal with different types of governments, ranging from democracies to totalitarian states. They are concerned with the stability of these governments and with whether economic decisions are centralized or decentralized. In the Marxist form of government, such as that which existed in the former Soviet Union and in Eastern Europe until the 1990s, economic decisions were centralized, and there was political stability. This would seem to be an ideal environment in which to do business from a multinational business manager’s perspective. But it was not ideal, because a centralized economy limits the supply of goods coming from outside a country, the price that can be charged for goods inside the country, and the amount of currency that can be taken out of the country by multinational businesses.

Despite the collapse of communism and the development of new political systems professing support of free enterprise in Eastern Europe and throughout the former Soviet Union, companies in the industrialized nations have delayed investing in some of these areas because they are uncertain of these areas’ political stability and willingness to adhere to economic agreements. In the People’s Republic of China (PRC or China), an early rush to invest was slowed by foreign companies’ experiences with a seemingly capricious government. For example, McDonald’s leased a prime location in Beijing from the centralized government but found itself ousted a few years later when the government revoked the lease to allow a department store to be built on that site. Moreover, doubts about the Chinese government’s intention to honor its agreement with the British government—that Hong Kong would retain its separate political and economic status for 50 years after the 98-year British lease expired in 1997—led one long-time Hong Kong trading company, Jardine, to move its headquarters to the Bahamas. In 2010, China’s monitoring of Google users’ Internet communications prompted Google initially to move most of its activities to Hong Kong, a district now belonging to China. Three months later, China rejected the scheme. Google, instead of continuing to reroute queries to its Hong Kong engine, started sending visitors to a new “landing page” that linked to the Hong Kong website where users could perform searches beyond the reach of Chinese censors. Later in 2010, a compromise was reached. China allowed Google to operate in China if it tweaked its mainland search box to ask users if they still wanted to have communications sent to the Hong Kong site. Chinese users of Google thus had a choice, and both the Chinese government and Google saved face. Despite these political problems, China’s growth rate in 2007–2009 proceeded at an annual gross domestic product (GDP) of 10–12 percent. Further, China has brought investment capital to Latin American, Asian, and African nations. It is searching for minerals and energy to develop its infrastructure. As this search continues, China’s political influence spreads worldwide.

Economic Dimensions

Every business manager should do a country analysis before deciding to do business in another nation-state. Such an analysis not only examines political variables, but also dissects a nation’s economic performance as demonstrated by its rate of economic growth, inflation, budget, and trade balance. Four economic factors in particular affect business investment:

1. Differences in size and economic growth rate of various nation-states. For example, when McDonald’s decided to engage in international business, the company initially located its restaurants only in countries that already had high growth rates. As more and more developing nations moved toward a market economy, McDonald’s expanded into Russia, China, Brazil, Mexico, and other countries deemed to have potentially high growth rates.

2. The impact of central planning versus a market economy on the availability of supplies. When McDonald’s went into Russia, it had to build its own food-processing center to be certain it would get the quality of beef it needed. Furthermore, because of distribution problems, it used its own trucks to move supplies.

3. The availability of disposable income. This is a tricky issue. Despite the fact that the price of a Big Mac, french fries, and a soft drink equals the average Russian worker’s pay for four hours of work, McDonald’s is serving thousands of customers a day at its Moscow restaurant.

4. The existence of an appropriate transportation infrastructure. Decent roads, railroads, and ports are needed to bring in supplies and then transport them within the host country. McDonald’s experience in Russia is commonplace. Multinational businesses face transportation problems in many developing countries.

Cultural Dimensions

Culture  may be defined as learned norms of a society that are based on values, beliefs, and attitudes. For example, if people of the same area speak the same language (e.g., Spanish in most of Latin America, with the exception of Brazil and a few small nations), the area is often said to be culturally homogeneous. Religion is a strong builder of common values. In 1995, the Iranian government outlawed the selling and use of satellite communications in Iran on the grounds that they presented “decadent” Western values that were undermining Muslim religious values. Now, in 2010, it monitors Internet communications, which has led some U.S. congresspersons to seek a ban on all trade with Iran.

culture

Learned norms of society based on values and beliefs.

A failure to understand that some cultures are based on ascribed group membership (gender, family, age, or ethnic affiliation) rather than on acquired group membership (religious, political, professional, or other associations), as in the West, can lead to business mistakes. For example, gender- and family-based affiliations are very important in Saudi Arabia, where a strict interpretation of Islam prevents women from playing a major role in business. Most Saudi women who work hold jobs that demand little or no contact with men, such as teaching or acting as doctors only for women.

Another important cultural factor is the attitude toward work. Mediterranean and Latin American cultures base their group affiliation on family, and place more emphasis on leisure than on work. We often say that the Protestant ethic, stressing the virtues of hard work and thrift, is prevalent in Western and other industrialized nations. Yet the Germans work no more than 35 hours a week and take 28 days of paid vacation every year. The average hourly wage is higher in Germany than in the United States, and German workers’ benefits far outpace those of U.S. workers.

Business managers must carefully consider language, religion, attitudes toward work and leisure, family versus individual reliance, and numerous other cultural values when planning to do business in another nation-state. They also need to find a method of reconciling cultural differences between people and companies from their own nation-state and those from the country in which they intend to do business.

Corruption and Trade

The nature of trade between nations, between multinationals, and between multinationals and nation-states has led to global competition, and sometimes bribery, and thus corruption (see the “Corruption Perception Index” from Transparency International in the “Comparative Law Corner” feature later in this chapter). Attempts to lessen such bribery and corruption through bilateral and multilateral agreements have been led by the United States Foreign Corrupt Practices Act of 1977 (FCPA) and the Convention on Combating Bribery of Foreign Officials in International Business Transactions (CCBFOIBT) drafted by the Organization for Economic Cooperation and Development (OECD) and signed by 34 countries. The Convention adopts the standards of the FCPA.  Chapter 22  provides additional details governing both acts.

In this text,  Chapter 23 , you will find a brief discussion of the FCPA provisions that forbid payments to foreign officials when those amounts are more than “grease payments.” “Facilitating payments” made to obtain permits, licenses, or other official documents associated with contract performance, or movement of goods across a country, are considered lawful. The Justice Department, as well as other agencies and individuals, may enforce the FCPA. Activities that constitute a bribe are often the basis for legal action. The case excerpted here deals with this problem.

 Case 8-1 United States v. Kay

359 F.3d 738 (5th Cir. 2004)

David Kay (defendant) was an American citizen and a vice president for marketing of American Rice, Inc. (ARI), who was responsible for supervising sales and marketing in the Republic of Haiti. Douglas Murphy (defendant) was an American citizen and president of ARI.

Beginning in 1995 and continuing to about August 1999, Kay, Murphy, and other employees and officers of ARI paid bribes and authorized the payment of bribes to induce customs officials in Haiti to accept bills of lading and other documents that intentionally understated the true amount of rice that ARI shipped to Haiti for import, thus reducing the customs duties owed by ARI and RCH to the Haitian government.

In addition, beginning in 1998 and continuing to about August 1999, Kay and other employees and officers of ARI paid and authorized additional bribes to officials of other Haitian agencies to accept the false import documents and other documents that understated the true amount of rice being imported into and sold in Haiti, thereby reducing the amount of sales taxes paid to the Haitian government.

Kay directed employees of ARI to prepare two sets of shipping documents for each shipment of rice to Haiti, one that was accurate and another that falsely represented the weight and value of the rice being exported to Haiti.

Kay and Murphy agreed to pay and authorized the payment of bribes, calculated as a percentage of the value of the rice not reported on the false documents or in the form of a monthly retainer, to customs and tax officials of the Haitian government to induce these officials to accept the false documentation and to assess significantly lower customs duties and sales taxes than ARI would otherwise have been required to pay.

ARI, using official Haitian customs documents reflecting the amounts reported on the false shipping documents, reported only approximately 66 percent of the rice it sold in Haiti and thereby significantly reduced the amount of sales taxes it was required to pay to the Haitian government.

In 2001, a grand jury charged Kay with violating the FCPA and subsequently returned the indictment, which charged both Kay and Murphy with 12 counts of FCPA violations. Both Kay and Murphy moved to dismiss the indictment for failure to state an offense, arguing that obtaining favorable tax treatment did not fall within the FCPA definition of payments made to government officials in order to obtain business. The district court dismissed the indictment, and the United States of America appealed.

Justice Wiener

The principal dispute in this case is whether, if proved beyond a reasonable doubt, the conduct that the indictment ascribed to defendants in connection with the alleged bribery of Haitian officials to understate customs duties and sales taxes on rice shipped to Haiti to assist American Rice, Inc. in obtaining or retaining business was sufficient to constitute an offense under the FCPA. Underlying this question of sufficiency of the contents of the indictment is the preliminary task of ascertaining the scope of the FCPA, which in turn requires us to construe the statute.

Because an offense under the FCPA requires that the alleged bribery be committed for the purpose of inducing foreign officials to commit unlawful acts, the results of which will assist in obtaining or retaining business in their country, the questions before us in this appeal are (1) whether bribes to obtain illegal but favorable tax and customs treatment can ever come within the scope of the statute, and (2) if so, whether, in combination, there are minimally sufficient facts alleged in the indictment to inform the defendants regarding the nexus between, on the one hand, Haitian taxes avoided through bribery, and, on the other hand, assistance in getting or keeping some business or business opportunity in Haiti.

No one contends that the FCPA criminalizes every payment to a foreign official: It criminalizes only those payments that are intended to (1) influence a foreign official to act or make a decision in his official capacity, or (2) induce such an official to perform or refrain from performing some act in violation of his duty, or (3) secure some wrongful advantage to the payor. And even then, the FCPA criminalizes these kinds of payments only if the result they are intended to produce—their quid pro quo—will assist (or is intended to assist) the payor in efforts to get or keep some business for or with “any person.”

Stated differently, how attenuated can the linkage be between the effects of that which is sought from the foreign official in consideration of a bribe (here, tax minimization) and the briber’s goal of finding assistance or obtaining or retaining foreign business with or for some person, and still satisfy the business nexus element of the FCPA?

Invoking basic economic principles, the SEC reasoned in its amicus brief that securing reduced taxes and duties on imports through bribery enables ARI to reduce its cost of doing business, thereby giving it an “improper advantage” over actual or potential competitors, and enabling it to do more business, or remain in a market it might otherwise leave.

Section 78dd-1(b) excerpts from the statutory scope “any facilitating or expediting payment to a foreign official . . . the purpose of which is to expedite or to service the performance of a routine governmental action by a foreign official. . . .” 15 U.S.C. § 78dd-1(b).

For purposes of deciding the instant appeal, the question nevertheless remains whether the Senate, and concomitantly Congress, intended this broader statutory scope to encompass the administration of tax, customs, and other laws and regulations affecting the revenue of foreign states. To reach this conclusion, we must ask whether Congress’s remaining expressed desire to prohibit bribery aimed at getting assistance in retaining business or maintaining business opportunities was sufficiently broad to include bribes meant to affect the administration of revenue laws. When we do so, we conclude that the legislative intent was so broad.

Obviously, a commercial concern that bribes a foreign government official to award a construction, supply, or services contract violates the statute. Yet, there is little difference between this example and that of a corporation’s lawfully obtaining a contract from an honest official or agency by submitting the lowest bid, and—either before or after doing so—bribing a different government official to reduce taxes and thereby ensure that the under-bid venture is nevertheless profitable. Avoiding or lowering taxes reduces operating costs and thus increases profit margins, thereby freeing up funds that the business is otherwise legally obligated to expend. And this, in turn, enables it to take any number of actions to the disadvantage of competitors. Bribing foreign officials to lower taxes and customs duties certainly can provide an unfair advantage over competitors and thereby be of assistance to the payor in obtaining or retaining business. This demonstrates that the question [of] whether the defendants’ alleged payments constitute a violation of the FCPA truly turns on whether these bribes were intended to lower ARI’s cost of doing business in Haiti enough to have a sufficient nexus to garnering business there or to maintaining or increasing business operations that ARI already had there, so as to come within the scope of the business nexus element as Congress used it in the FCPA. Answering this fact question, then, implicates a matter of proof and thus evidence.

Given the foregoing analysis of the statute’s legislative history, we cannot hold as a matter of law that Congress meant to limit the FCPA’s applicability to cover only bribes that lead directly to the award or renewal of contracts. Instead, we hold that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly, in obtaining or retaining business for some person, and that bribes paid to foreign tax officials to secure illegally reduced customs and tax liability constitute a type of payment that can fall within this broad coverage. In 1977, Congress was motivated to prohibit rampant foreign bribery by domestic business entities, but nevertheless understood the pragmatic need to exclude innocuous grease payments from the scope of its proposals. The FCPA’s legislative history instructs that Congress was concerned about both the kind of bribery that leads to discrete contractual arrangements and the kind that more generally helps a domestic payor obtain or retain business for some person in a foreign country; and that Congress was aware that this type includes illicit payments made to officials to obtain favorable but unlawful tax treatment. *

*  United States v. Kay 359 F.3d 738 (5th Cir. 2004).

Reversed and remanded in favor of the United States.

Critical Thinking About The Law

Congressional intent is a guiding principle of judicial interpretation. Here the court is asked to make a judgment about the scope of legislation. It answers that question by examining the purpose of the law and the applicability of that purpose to the facts of this case.

1. What is the difference between bribery and “innocuous grease payments?”

Clue: For a payment to be innocuous, what effects would it have had to avoid?

2. What ethical norm is advanced by enforcing the statute in this case?

Clue: How is fairness affected by permitting a firm to escape some of its tax liability?

Comparative Law Corner

Least Corrupt		Most Corrupt
Denmark	9.4	Somalia	1.4
Finland	9.4	Myanmar	1.4
New Zealand	9.4	Iraq	1.5
Singapore	9.3	Haiti	1.6
Sweden	9.3	Uzbekistan	1.7
Iceland	9.2	Tonga	1.7
Netherlands	9.0	Sudan	1.8
Switzerland	9.0	Chad	1.8
Canada	8.7	Afghanistan	1.8
Norway	8.7	Laos	1.9
Australia	8.6	Guinea	1.9
Luxembourg	8.4	Equatorial Guinea	1.9
United Kingdom	8.4	Congo, Democratic Republic	1.9
Hong Kong	8.3	Venezuela	2.0
Austria	8.1	Turkmenistan	2.0
Germany	7.8	Papua New Guinea	2.0
Ireland	7.5	Central African Republic	2.0
Japan	7.5	Cambodia	2.0
France	7.3	Bangladesh	2.0
United States	7.2	Zimbabwe	2.1
Belgium	7.1	Tajikistan	2.1
Chile	7.0	Sierra Leone	2.1
		Liberia	2.1

Corruption generally discourages foreign investment, according to data published by Transparency International in its annual Corruption Perception Index (CPI). The CPI is determined by an annual survey of businesspeople, academicians, and analysts in each of 91 countries. The CPI, in its latest published data, lists Nigeria, Uganda, Indonesia, Bolivia, Kenya, Cameroon, and Russia as countries most prone to corruption. Finland, Denmark, New Zealand, Iceland, Singapore, Sweden, and Canada are perceived as having the least corruption. The United States ranks seventeenth. a

a Corruption Perception Index, 2009,  transparency.org . © 2009 Transparency International EU.

When doing business with countries where corruption is rampant (e.g., a U.S. company trading oil equipment with Nigeria), it would behoove the business managers to learn what “facilitating payments” are lawful under U.S. law (FCPA), and what payments are legal under host-country laws (e.g., Nigerian statutes), if there exist such statutes. Even in countries that have statutes similar to those of the United States, it is also important to check with legal counsel to determine exceptions to host-countries’ laws (e.g., when a U.S. company is trading oil equipment with Canada). In both cases, one should not presume that either Nigerian or Canadian laws are similar with regard to “facilitating payments” (grease payments) as set out in the FCPA.

Legal Dimensions

When they venture into foreign territory, business managers have to be guided by the national legal system of their own country and that of the host country, and also by international law.

National Legal Systems

 When deciding whether to do business in a certain country, business managers are advised to learn about the legal system of that country and its potential impact in such areas as contracts, investment, and corporate law. The five major families of law are (1) common law, (2) Romano-Germanic civil law, (3) Islamic law, (4) socialist law, and (5) Hindu law ( Table 8-1 ).

The common-law family is most familiar to companies doing business in the United States, England, and 26 former British colonies. The source of law is primarily case law, and decisions rely heavily on case precedents. As statutory law has become more prominent in common-law countries, the courts’ interpretation of laws made by legislative bodies and of regulations set forth by administrative agencies has substantially increased the body of common law.

Countries that follow the Romano-Germanic civil law (e.g., France, Germany, and Sweden) organize their legal systems around legal codes rather than around cases, regulations, and precedents, as do common-law countries. Thus, judges in civil-law countries of Europe, Latin America, and Asia resolve disputes primarily by reference to general provisions of codes and secondarily by reference to statutes passed by legislative bodies. As the body of written opinions in civil-law countries grows, and as they adopt computer-based case and statutory systems such as Westlaw and Lexis, however, the highest courts in these countries are taking greater note of case law in their decisions. Civil-law systems tend to put great emphasis on private law, that is, law that governs relationships between individuals and corporations or between individuals. Examples are the law of obligations, which includes common-law contracts, torts, and creditor–debtor relationships. In contrast to common-law systems, civil-law systems have an inferior public law: This is a law that governs the relationships between individuals and the state. In fact, their jurists are not extensively trained in such areas as criminal, administrative, and labor law. 1

1  See R. Davids and J. Brierly, Major Legal Systems in the World Today (Free Press, 1988) p. 437, and Schaffer, Richard, Augusti, Filiberio, and Dhooge, Lucien, International Business Law and Its Environment (Cengage Learning, 8th edition, 2015) p. 47.

More than 1.3 billion Muslims in approximately 30 countries that are predominantly Muslim, as well as many more Muslims living in countries where Islam is a minority religion, are governed by Islamic law. 2  In many countries,

2  Id. at 437–38; Id. at 49.

Table 8-1 Families of Law

Family	Characteristics
Common law	Primary reliance is on case law and precedent instead of statutory law. Courts can declare statutory law unconstitutional.
Romano-Germanic	Primary reliance is on codes and statutory law rather than case law.
Civil law	In general, the high court cannot declare laws of parliament unconstitutional (an exception is the German Constitutional Court).
Islamic law	Derived from the Shari’a, a code of rules designed to govern the daily lives of all Muslims.
Socialist law	Based on the teachings of Karl Marx. No private property is recognized. Law encourages the collectivization of property and the means of production and seeks to guarantee national security. According to classical Marxist theory, both the law and the state will fade away as people are better educated to socialism and advance toward the ultimate stage of pure communism.
Hindu law	Derived from the Sastras. Hindu law governs the behavior of people in each caste (hereditary categories that restrict members’ occupations and social associations). Primarily concerned with family matters and succession. Has been codified into India’s national legal system.

Islamic law, as encoded in the Shari’a, exists alongside the secular law. In nations that have adopted Islamic law as their dominant legal system (e.g., Saudi Arabia), citizens must obey the Shari’a, and anyone who transgresses its rules is punished by a court. International business transactions are affected in many ways by Islamic law. For example, earning interest on money is forbidden (however, Islamic banks have found a way to work around this stricture: in lieu of paying interest on accounts, they pay each depositor a share of the profits made by the bank).

Socialist law systems are based on the teachings of Karl Marx and Vladimir Lenin (who was, incidentally, a lawyer). Right after the Bolshevik Revolution of 1917 in Russia, the Czarist legal system, which was based on the Romano-Germanic civil law, was replaced by a legal system consisting of People’s Courts staffed by members of the Communist Party and peasant workers. By the early 1930s, this system had been replaced by a formal legal system with civil and criminal codes that has lasted to this day. The major goals of the Soviet legal system were to (1) encourage collectivization of the economy; (2) educate the masses as to the wisdom of socialist law; and (3) maintain national security. 3  Most property belonged to the state, particularly industrial and agricultural property. Personal (not private) property existed, but it could be used only for the satisfaction and needs of the individual, not for profit—which was referred to as “speculation” and was in violation of socialist law. Personal ownership ended either with the death of the individual or with revocation of the legal use and enjoyment of the property. Socialist law is designed to preserve the authority of the state over agricultural land and all means of production. It is still enforced in North Korea, Cuba, and to some degree, Libya, but the countries that made up the old Soviet Union and the East European bloc have been moving toward Romano-Germanic civil-law systems and private-market economies in the past decade or so.

3  Id. at 437–38; Id. at 49.

Hindu law, called Dharmasastra, is linked to the revelations of the Vedas, a collection of Indian religious songs and prayers believed to have been written between 100 BC and AD 300 or 400. 4  It is both personal and religious. Hindus are divided into social categories called castes, and the rules governing their behavior are set out in texts known as Sastras. The primary concerns of Hindu law are family matters and property succession. Four-fifths of all Hindus live in India; most of the remaining Hindus are spread throughout Southeast Asia and Africa, with smaller numbers living in Europe and the Americas. After gaining independence from England in 1950, India codified Hindu law. Today it plays a prominent role in Indian law alongside secular statutory law, which, especially in the areas of business and trade, uses legal terminology and concepts derived from common law. Both the Indian criminal and civil codes strongly reflect the British common-law tradition. 5  The civil code is particularly important today when issues involving outsourcing to and from India are discussed by the multinationals and governments involved.

4  Id. at 176–79.

5  Id. at 468–71.

Selected National Legal Systems

Common Law	Romano-Germanic Civil Law	Islamic Law	Socialist Law
United States	Italy	Saudi Arabia	Russia
Canada	Japan	Kuwait	North Korea
Great Britain	Mexico	Abu Dhabi	Cuba
New Zealand	Poland	Iraq	China
Singapore	France	Indonesia
Australia	Sweden	Bahrain
	Finland	Libya
	Germany	Algeria
Comment: With the growth of the Internet the classification of each nation’s law has become blurred. Further, former colonies, now independent, inherited legal principles and systems which are mixed with present-day principles, customs, and religious rites in many nations.

International Law

 The law that governs the relationships between nation-states is known as  public international law.   Private international law  governs the relationships between private parties involved in transactions across national borders. In most cases, the parties negotiate between themselves and set out their agreements in a written document. In some cases, however, nation-states subsidize the private parties or are signatories to the agreements negotiated by those parties. In such instances, the distinction between private and public international law is blurred.

public international law

Law that governs the relationships between nations.

private international law

Law that governs the relationships between private parties involved in transactions across borders.

The sources of international law can be found in (1) customs; (2) treaties between nations, particularly treaties of friendship and commerce; (3) judicial decisions of international courts, such as the International Court of Justice; (4) decisions of national and regional courts, such as the U.S. Supreme Court, the London Commercial Court, and the European Court of Justice; (5) scholarly writings; and (6) international organizations. These sources are discussed throughout this text.

Applying the Law to the Facts . . .

Let’s say that Sandra, a resident of Detroit, Michigan, is selling a car to Brianna, who lives in Detroit but is a citizen of The Bahamas. The two women draft and sign a contract for the sale of the vehicle. However, Brianna later finds out Sandra lied about the car and it was defective. Brianna wants to sue Sandra. What kind of international law would govern the conflict of the individuals from the two countries?

International business law includes laws governing (1) exit visas and work permits; (2) tax and antitrust matters and contracts; (3) patents, trademarks, and copyrights; and (4) bilateral treaties of commerce and friendship between nations and multilateral treaties of commerce such as the North American Free Trade Agreement (NAFTA), the European Union (EU), and the World Trade Organization (WTO). All are explored later in this chapter.

The U.S. Constitution grants the U.S. president the power to enter into treaties, with the advice and consent of the U.S. Senate (two-thirds must concur). The Constitution prohibits a state from entering into “any Treaty, Alliance or Confederation.” 6  The U.S. Supreme Court, however, has allowed the states to enter into treaties that “do not encroach upon or impair the supremacy of the United States.” 7  The states’ power to enter into treaties is very limited, as indicated by the following case. This issue has gained some significance in today’s world because states of the United States are presently seeking to enter into trade and other agreements with other countries, independent of the federal government.

6  U.S. CONST. ART 1, § 10.

7  Virginia v. Tennessee, 148 U.S. 503, 518 (1893).

 Case 8-2 Crosby v. National Foreign Trade Council

Supreme Court of the United States

530 U.S. 363 (2000)

In 1996, the Commonwealth of Massachusetts passed a law barring governmental entities in Massachusetts from buying goods or services from companies doing business with Burma (Myanmar). Subsequently, the U.S. Congress enacted federal legislation imposing mandatory and conditional sanctions on Burma. The Massachusetts law was inconsistent with the new federal legislation. The National Foreign Trade Council sued on behalf of its several members, claiming that the Massachusetts law unconstitutionally infringed on the federal foreign-affairs power, violated the Foreign Commerce Clause of the U.S. Constitution, and was preempted by the subsequent federal legislation. The district and appeals courts ruled in favor of the council, and the Commonwealth appealed.

Justice Souter

The Massachusetts law is preempted, and its application is unconstitutional under the Supremacy Clause of the U.S. Constitution. State law must yield to a congressional act if Congress intends to occupy the field, or to the extent of any conflict with a federal statute. This is the case even where the relevant congressional act lacks an express preemption provision. This Court will find preemption where it is impossible for a private party to comply with both state and federal law and where the state law is an obstacle to the accomplishment and execution of Congress’s full purposes and objectives. In this case, the state act is an obstacle to the federal act’s delegation of discretion to the president of the United States to control economic sanctions against Burma. Within the sphere defined by Congress, the statute has given the President as much discretion to exercise economic leverage against Burma, with an eye toward national security, as law permits. It is implausible to think that Congress would have gone to such lengths to empower the President had it been willing to compromise his effectiveness by allowing state or local ordinances to blunt the consequences of his actions—exactly the effect of the state act.

In addition, the Massachusetts law interferes with Congress’s intention to limit economic pressure against the Burmese Government to a specific range. . . . Finally, the Massachusetts law conflicts with the President’s authority to speak for the United States among the world’s nations to develop a comprehensive, multilateral Burma strategy. In this respect, the state act undermines the President’s capacity for effective diplomacy. *

*  Crosby v. National Foreign Trade Council, Supreme Court of the United States 530 U.S. 363 (2000).

The Court affirmed the lower courts in favor of the defendant, National Foreign Trade Council.

Methods of Engaging in International Business

For purposes of this chapter, methods of engaging in international business are classified as (1) trade, (2) international licensing and franchising, and (3) foreign direct investment.

Trade

We define  international trade  generally as exporting goods and services from a country and importing the same into a country. There are two traditional theories of trade relationships. The theory of absolute advantage, which is the older theory, states that an individual nation should concentrate on exporting the goods that it can produce most efficiently. For example, Sri Lanka (formerly Ceylon) produces tea more efficiently than most countries can, and thus any surplus in Sri Lanka’s tea production should be exported to countries that produce tea less efficiently. The theory of comparative advantage arose out of the realization that a country did not have to have an absolute advantage in producing a good in order to export it efficiently; rather, it would contribute to global efficiency if it produced specialized products simply more efficiently than others did.

international trade

The export of goods and services from a country, and the import of goods and services into a country.

To illustrate this concept, let’s assume that the best attorney in a small town is also the best legal secretary. Because this person can make more money as an attorney, it would be more efficient for her to devote her energy to working as a lawyer and to hire a legal secretary. Similarly, let’s assume that the United States can produce both wheat and tea more efficiently than Sri Lanka can. Thus, the United States has an absolute advantage in its trade with Sri Lanka. Let us further assume that U.S. wheat production is comparatively greater than U.S. tea production vis-à-vis Sri Lanka. That is, by using the same amount of resources, the United States can produce two-and-a-half times as much wheat but only twice as much tea as Sri Lanka. The United States then has a comparative advantage in wheat over tea. 8

8  J. Daniels, L. Radebaugh, and D. Sullivan, International Business: Environments and Operations (10th ed.) 148, 149 (Upper Saddle River, NJ: Pearson Prentice Hall, 2004).

In this simplified example, we made several assumptions: that only two countries and two commodities were involved; that transport costs in the two countries were about the same; that efficiency was the sole objective; and that political factors were not significant. In international trade, things are far more complex. Many nations and innumerable products are involved, and political factors are often more potent than economic considerations.

Trade is generally considered to be the least risky means of doing international business, because it demands little involvement with a foreign buyer or seller. For small and middle-sized firms, the first step toward involvement in international business is generally to hire an export management company, which

Linking Law And Business Global Business

Your management class may have discussed the growing trend of globalization. One level of an organization’s involvement in the international arena is the multinational corporation. There are three basic types of employees in multinational corporations: (1) expatriates—employees living and working in a country where they are not citizens; (2) host-country nationals—employees who live and work in a country where the international organization is headquartered; (3) third-country nationals—employees who are expatriates in a country (working in one country and having citizenship in another), while the international organization is located in another country. Typically, organizations with a global focus employ workers from all three categories. The use of host-country nationals, however, is increasing, considering the cost of training and relocating expatriates and third-country nationals. By hiring more host-country nationals, managers may spend less time and money training employees to adapt to new cultures, languages, and laws in foreign countries. In addition, managers may avoid potential problems related to sending employees to work in countries where they do not have citizenship or understand the culture; thus, managers may still obtain organizational objectives through cheaper and respectable means by hiring a greater number of host-country nationals.

Source: S. Certo, Modern Management (Upper Saddle River, NJ: Prentice Hall, 2000), pp. 78, 84–85.

is a company licensed to operate as the representative of many manufacturers with exportable products. These management companies are privately owned by citizens of various nation-states and have long-standing links to importers in many countries. They provide exporting firms with market research, identify potential buyers, and assist the firms in negotiating contracts.

Export trading companies, which are governed by the Export Trading Act in the United States, comprise those manufacturers and banks that either buy the products of a small business and resell them in another country or sell products of several companies on a commission basis. Small- and medium-sized exporting companies may also choose to retain foreign distributors, which purchase imported goods at a discount and resell them in the foreign or host country. Once a company has had some experience selling in other countries, it may decide to retain a foreign sales representative. Sales representatives differ from foreign distributors in that they do not take title to the goods being exported. Rather, they usually maintain a principal–agent relationship with the exporter.

International Licensing and Franchising

International licensing  is a contractual agreement by which a company (licensor) makes its trade secrets, trademarks, patents, or copyrights (intellectual property) available to a foreign individual or company (licensee) in return either for royalties or for other compensation based on the volume of goods sold or a lump sum. All licensing agreements are subject to restrictions of the host country, which may include demands that its nationals be trained for management positions in the licensee company, that the host government receive a percentage of the gross profits, and that licensor technology be made available to all host-country nationals. Licensing agreements may differ vastly from country to country.

international licensing

Contractual agreements by which a company (licensor) makes its intellectual property available to a foreign individual or company (licensee) for payment.

In the following case, the court was asked to resolve a conflict between two licensees of exclusive distribution rights to Russian films in the United States.

 Case 8-3 Russian Entertainment Wholesale, Inc. v. Close-Up International, Inc.

787 F. Supp. 2d 392 (2011) United States District Court (E.D.N.Y.)

Two Russian film studios (the studios) granted rights to produce and distribute DVD versions of their films to multiple licensees. Each licensee received different limited exclusive rights. Krupny Plan, which could distribute the films only in the original Russian language, sublicensed its rights to the films for home use in the United States and Canada to Close-Up, a New York corporation. Ruscico could distribute multilingual versions of the same films that were dubbed or subtitled and sublicensed its rights to its distributor in the United States, Image. At the time of licensing, none of the parties considered that a viewer of the subtitled films could simply turn off the subtitles and hear the film in any of several languages, including Russian. None of the agreements had a requirement that the films prevent the disabling of subtitles. Close-Up brought this action against Ruscico and Image for damages from copyright infringement, claiming that it is the “exclusive” U.S. licensee of the Russian-language only versions of the films. The federal district court held for the defendants, and Close-Up appealed.

Judge Cogan

The Copyright Act establishes that the “legal or beneficial owner of an exclusive right under a copy-right” may bring suit for infringement under the act [citations omitted]. However, when this provision is invoked by an exclusive licensee, the licensee may seek relief from infringement only for the rights that the licensee has been exclusively licensed by the copyright holder. Plaintiff has shown that . . . it was the legal and beneficial licensee of the narrow right to reproduce and distribute Russian-language-only versions of the subject works. Therefore, even if plaintiff had a valid sublicense, plaintiff would still only have standing to sue for infringement of the narrow right to reproduce and distribute Russian-language-only DVDs. . . .

The evidence presented at trial proves that [the studios] elected to grant a “Russian language only” right to one licensee, and a separate “multilingual” right to another. The rights-holders did not consider sales of the multilingual DVDs manufactured by [the defendants] to violate the “Russian language only” license separately given to Krupny Plan. Instead, they considered the multilingual DVDs to be a distinct line of products, geared towards the separate non-Russian–speaking market.

Plaintiff has failed to put forth any evidence that defendants ever produced or distributed works that infringed plaintiff’s limited rights in Russian-language–only DVDs . . . Instead, the evidence shows that all of the DVDs produced and distributed by defendants were multilingual DVDs, which [the studios] viewed as being distinct from the Russian-language-only DVDs that they had authorized Krupny Plan to reproduce and distribute. Plaintiff thus has failed to make out a claim for copyright infringement against any of the defendants.

Because there is no evidence that defendants reproduced or distributed DVD copies of the [films] that did not contain subtitles or dubbing in foreign languages, defendants’ conduct was entirely within the scope of their rights . . .

Plaintiff next argues that paragraph 1.2.1 [of defendants’ license], which states that “[r]eproduction of the Films in the original language without the accompaniment of the picture by sound and/or subtitles in a foreign language is a violation of the present Agreement,” should be interpreted to mean that production of DVDs that could be watched in Russian without subtitles or dubbing was a violation of the agreement. However, plaintiff reads too much into this provision, which explicitly states that its purpose was to ensure that the DVDs produced by [the defendants] would be “multilingual versions.” In this context, it is clear that paragraph 1.2.1 simply forbade [the defendants] from producing DVD copies . . . that did not include foreign subtitles or dubbing accompanying the films. Because all of the DVDs produced by defendants were multilingual versions that included subtitles in numerous foreign languages, defendants did not violate this provision of the agreement by producing DVDs that did not contain a disabling feature. *

*  Russian Entertainment Wholesale, Inc. v. Close-Up International, Inc. 787 F. Supp. 2d 392 (2011) United States District Court (E.D.N.Y.).

The district court’s opinion was affirmed in Russian Entertainment Wholesale, Inc. v. Close-Up International, Inc., 482 Fed. Appx. 602 (2d Cir. 2012).

International franchising permits a licensee of a trademark to market the licensor’s goods or services in a particular nation (e.g., Kentucky Fried Chicken franchises in China). Often companies franchise their trademark to avoid a nation-state’s restrictions on foreign direct investment. Also, political instability is less likely to be a threat to investment when a local franchisee is running the business. Companies considering entering into an international franchise agreement should investigate bilateral treaties of friendship and commerce between the franchisor’s nation and the franchisee’s nation, as well as the business laws of the franchisee country.

international franchising

Contractual agreement whereby a company (licensor) permits another company (licensee) to market its trademarked goods or services in a particular nation.

In some instances, licensing and franchising negotiations are tense and drawn out because businesses in many industrialized nations are intent on protecting their intellectual property against “piracy” or are adamant about getting assurances that franchising agreements will be honored. These are major and legitimate concerns. For example, between 1994 and 1999, the United States threatened to impose sanctions against China because of that nation’s sale of pirated U.S. goods and its failure to comply with international franchising requirements. A series of last-minute agreements encouraged by Chinese and U.S. businesses averted the sanctions, which would have proved expensive for private and public parties in both countries. By the year 2000, Congress and the president of the United States granted normal trade relations with China and left open the opportunity for the latter to join the WTO. 9  In June 2001, with a China–U.S. agreement on agriculture, a major barrier to entrance was overcome.

9  See “Backers Hope China Pact Will Promote Reform,” USA Today 10 (Sept. 20, 2000).

In November 2001, China and Taiwan entered the WTO after considerable negotiations between the Western nations over many issues. For example, at China’s insistence, all membership documents refer to China as the People’s Republic of China, whereas Taiwan is referred to as the Separate Customs Territory of Taiwan, Penghu, Kinmen, and Matsu. (The latter three islands are under the control of Taiwan.) Taiwan is not recognized as an independent nation by many, but as a territory belonging to the mainland. (See  Chapter 25  for a discussion of franchising.)

Foreign Direct Investment

Direct investment in foreign nations is usually undertaken only by established multinational corporations. Foreign direct investment may take one of two forms: The multinational either creates a wholly or partially owned and controlled  foreign subsidiary  in the host country, or enters into a joint venture with an individual, corporation, or government agency of the host country. In both cases, the risk for the investing company is greater than the risk in international trade and international franchising and licensing, because serious amounts of capital are flowing to the host country that are subject to its government’s restrictions and its domestic law.

Large multinationals choose to create foreign subsidiaries for several reasons: (1) to expand their foreign markets; (2) to acquire foreign resources, including raw materials; (3) to improve their production efficiency; (4) to acquire knowledge; and (5) to be closer to their customers and competitors. Rarely do all these reasons pertain in a single instance. For example, U.S. companies have set up foreign subsidiaries in Mexico, Western Europe, Brazil, and India for quite different reasons. Mexico provided cheap labor and a location close to customers and suppliers for U.S. automobile manufacturers. In the case of Western Europe, the impetus was both a threat and an opportunity. The member nations of the EU have been moving to eliminate all trade barriers among themselves, but at the same time imposing stiffer tariffs on goods and services imported from non-EU countries. U.S. companies have been rushing to establish foreign subsidiaries in EU countries, not only to avoid being shut out of this huge and lucrative market, but also to expand sales among the EU’s approximately 380 million people. Brazil is not only the largest potential market in Latin America, but it also offers low labor and transportation costs, making it ideal for U.S. automakers desiring to export to neighboring Latin American countries.

Union Carbide, Inc., a producer of chemicals and plastics, decided to establish a subsidiary in India, where cheap labor (including highly skilled chemists and engineers) and low-cost transportation enabled the parent company to produce various materials cheaply and thus boost its bottom line. The Indian subsidiary turned out to be a very expensive investment for Union Carbide after the Bhopal disaster. The civil suit that resulted illustrates an issue that is often overlooked by managers of multinationals when setting up subsidiaries in foreign nation-states: Should a parent corporation be held liable for the activities of its foreign subsidiary? Although the case presented here is framed in a jurisdictional context (whether a U.S. court or an Indian court should hear the suit), bear in mind the issue of corporate parent liability as you read it.

 Case 8-4 In re Union Carbide Corp. Gas Plant Disaster v. Union Carbide Corp.

United States Court of Appeals 809 F.2d 195 (2d Cir. 1987)

The Government of India (GOI) and several private class action plaintiffs (Indian citizens) sued Union Carbide India Limited (UCIL) and the parent corporation, Union Carbide Corporation (UCC), for more than $1 billion after a disaster at a chemical plant operated by UCIL in 1984. There was a leak of the lethal gas methyl isocyanate from the plant on the night of December 2, 1984. The deadly chemicals were blown by wind over the adjacent city of Bhopal, resulting in the deaths of more than 2,000 persons and the injury of more than another 200,000 persons. UCIL is incorporated under the laws of India; 50.9 percent of the stock is owned by UCC, 22 percent is owned or controlled by the government of India, and the balance is owned by 23,500 Indian citizens. The federal district court (Judge Keenan) granted UCC’s motion to dismiss the plaintiffs’ action on the ground that Indian courts, not U.S. courts, were the appropriate forum for the suit. The plaintiffs appealed this decision.

Judge Mansfield

As the district court found, the record shows that the private interests of the respective parties weigh heavily in favor of dismissal on grounds of forum non conveniens. The many witnesses and sources of proof are almost entirely located in India, where the accident occurred, and could not be compelled to appear for trial in the United States. The Bhopal plant at the time of the accident was operated by some 193 Indian nationals, including the managers of seven operating units employed by the Agricultural Products Division of UCIL, who reported to Indian Works Managers in Bhopal. The plant was maintained by seven functional departments employing over 200 more Indian nationals. UCIL kept daily, weekly, and monthly records of plant operations and records of maintenance, as well as records of the plant’s Quality Control, Purchasing, and Stores branches, all operated by Indian employees. The great majority of documents bearing on the design, safety, start-up, and operation of the plant, as well as the safety training of the plant’s employees, is located in India. Proof to be offered at trial would be derived from interviews of these witnesses in India and study of the records located there to determine whether the accident was caused by negligence on the part of the management or employees in the operation of the plant, by fault in its design, or by sabotage. In short, India has greater ease of access to the proof than does the United States.

The plaintiffs seek to prove that the accident was caused by negligence on the part of UCC in originally contributing to the design of the plant and its provision for storage of excessive amounts of the gas at the plant. As Judge Keenan found, however, UCC’s participation was limited and its involvement in plant operations terminated long before the accident. Under 1973 agreements negotiated at arm’s length with UCIL, UCC did provide a summary “process design package” for construction of the plant and the services of some of its technicians to monitor the progress of UCIL in detailing the design and erecting the plant. However, the UOI controlled the terms of the agreements and precluded UCC from exercising any authority to “detail design, erect and commission the plant,” which was done independently over the period from 1972 to 1980 by UCIL process design engineers who supervised, among many others, some 55 to 60 Indian engineers employed by the Bombay engineering firm of Humphreys and Glasgow. The preliminary process design information furnished by UCC could not have been used to construct the plant. Construction required the detailed process design and engineering data prepared by hundreds of Indian engineers, process designers, and subcontractors. During the ten years spent constructing the plant, the design and configuration underwent many changes.

In short, the plant has been constructed and managed by Indians in India. No Americans were employed at the plant at the time of the accident. In the five years from 1980 to 1984, although more than 1,000 Indians were employed at the plant, only one American was employed there and he left in 1982. No Americans visited the plant for more than one year prior to the accident, and during the five-year period before the accident the communications between the plant and the United States were almost nonexistent.

The vast majority of material witnesses and documentary proof bearing on causation of and liability for the accident is located in India, not the United States, and would be more accessible to an Indian court than to a United States court. The records are almost entirely in Hindi or other Indian languages, understandable to an Indian court without translation. The witnesses for the most part do not speak English but Indian languages understood by an Indian court but not by an American court. These witnesses could be required to appear in an Indian court but not in a court of the United States. India’s interest is increased by the fact that it has for years treated UCIL as an Indian national, subjecting it to intensive regulations and governmental supervision of the construction, development, and operation of the Bhopal plant, its emissions, water and air pollution, and safety precautions. Numerous Indian government officials have regularly conducted on-site inspections of the plant and approved its machinery and equipment, including its facilities for storage of the lethal methyl isocyanate gas that escaped and caused the disaster giving rise to the claims. Thus India has considered the plant to be an Indian one and the disaster to be an Indian problem. It therefore has a deep interest in ensuring compliance with its safety standards. *

*  In re Union Carbide Corp. Gas Plant Disaster v. Union Carbide Corp., United States Court of Appeals 809 F.2d 195 (2d Cir. 1987).

Affirmed in favor of Defendant, Union Carbide.

Critical Thinking About The Law

Please refer to  Case 8-4  and consider the following questions:

1. Highlight the importance of facts in shaping a judicial opinion by writing an imaginary letter that, had it been introduced as evidence, would have greatly distressed Union Carbide Corporation (UCC).

Clue: Review the first part of the decision, in which Judge Mansfield discussed the extent of UCC’s involvement in the plant where the accident occurred. What facts would counter his statement that the parent company had only “limited” involvement?

2. Suppose a U.S. plant exploded, resulting in extensive deaths in the United States. Further, suppose that all the engineers who built the plant wrote and spoke German only. Could Judge Mansfield’s decision be used as an analogy to seek dismissal of a negligence suit against the owners of the plant?

Clue: Review the discussion of the use of legal analogies in  Chapter 1  and apply what you read to this question.

3. What additional information, were it to surface, would strengthen Union Carbide’s request for a dismissal of the case described?

Clue: Notice the wide assortment of facts that Judge Mansfield organized to support his decision.

Comment:

The Bhopal victims filed their claims in U.S. courts against UCC because the parent company had more money than the subsidiary (UCIL). Also, suing the parent company made it more likely that the case would be heard in U.S. courts, which are considered to be far better forums for winning damages in personal injury actions than Indian courts are. After the lawsuits were removed to an Indian court, UCC agreed to pay $470 million to the Bhopal disaster victims. Union Carbide’s stock substantially decreased in value, and UCC was threatened by a takeover (though the attempt was thwarted in 1985). More than half of UCC was subsequently sold or spun off, including the Indian subsidiary (UCIL). In 1989, the Indian Supreme Court ordered UCC to pay $470 million to compensate Bhopal victims; criminal charges against the company and its officials were dropped. About 12,000 people worked for UCC in 1995, in contrast to the 110,000 employed by the company a decade earlier. In 2001, Dow Chemical acquired Union Carbide (see Wall Street Journal, August 12, 2009, p. B-10).

On June 7, 2010, a district court in Bhopal found seven former Union Carbide India, Ltd. officials guilty of “causing death by negligence” for a gas leak at the plant that killed approximately 3,000 people some 25 years before. This was the first criminal conviction. All convicted were Indian citizens. They were sentenced to 2 years in prison and fined 100,000 rupees ($2,130). The former Union Carbide subsidiary was convicted of the same charges and fined 5,000 rupees. All seven defendants were freed on bail. As of June, 2010, no cleanup has taken place in the affected area (see Lydia Polgreen and Hari Kumar, “8 Former Executives Guilty in ‘84 Bhopal Chemical Leak,” New York Times, June 8, 2010, p. A-8; T. Lahiri, “Court Convicts Seven in Bhopal Gas Leak,” Wall Street Journal, June 8, 2010, p. A-11).

Joint ventures , which involve a relationship between two or more corporations or between a foreign multinational and an agency of a host-country government or a host-country national, are usually set up for a specific undertaking over a limited period of time. Many developing countries (such as China) allow foreign investment only in the form of a joint venture between host-country nationals and the multinationals. Recently, three-way joint ventures have been established among United States–based multinationals (e.g., automobile companies such as Chrysler and General Motors), Japanese multinationals (e.g., Mitsubishi and Honda), and Chinese government agencies and Chinese nationals. Joint ventures are also used in host countries with fewer restrictions on foreign investment, often to spread the risk or to amass required investment sums that are too large for one corporation to raise by itself. Some of these joint ventures are private associations, with no host-government involvement.

foreign subsidiary

A company that is wholly or partially owned and controlled in a company based in another country.

Risks of Engaging in International Business

Unlike doing business in one’s own country, the “rules of the game” are not always clear when engaging in business in a foreign country, particularly in what we have classified as middle- and low-income economies. Here we set out three primary risks that managers engaged in international business may face: (1) expropriation of private property by the host foreign nation, (2) the application of the sovereign immunity doctrine and the act-of-state doctrine to disputes between foreign states and U.S. firms, and (3) export and import controls.

Expropriation of Private Property

Expropriation —the taking of private property by a host-country government for either political or economic reasons—is one of the greatest risks companies take when they engage in international business. Thus, it is essential for business managers to investigate the recent behavior of host-country government officials, particularly in countries that are moving from a centrally planned economy toward one that is market oriented (e.g., Russia and Eastern European nations).

joint venture

Relationship between two or more persons or corporations or an association between a foreign multinational and an agency of the host-country government or a host-country national set up for a business undertaking for a limited time period.

One method of limiting risk in politically unstable countries is to concentrate on exports and imports (trade) and licensing and franchising. Another method is to take advantage of the low-cost insurance against expropriation offered by the Overseas Private Investment Corporation (OPIC). If a U.S. plant or other project is insured by OPIC and is expropriated, the U.S. firm receives compensation in return for assigning to OPIC the firm’s claim against the host-country government.

Bilateral investment treaties (BITs) , which are negotiated between two governments, obligate the host government to extend fair and nondiscriminatory treatment to investors from the other country. A BIT normally also includes a promise of prompt, adequate, and effective compensation in the event of expropriation or nationalization.

expropriation

The taking of private property by a host-country government for political or economic reasons.

bilateral investment treaty (BIT)

Treaty between two parties to outline conditions for investment in either country.

Sovereign Immunity Doctrine

Another risk for companies engaged in international business is the  sovereign immunity doctrine , which allows a government expropriating foreign-owned private property to claim that it is immune from the jurisdiction of courts in the owner’s country because it is a government rather than a private-sector entity. In these cases, the company whose property was expropriated often receives nothing because it cannot press its claims in its own country’s courts, and courts in the host country are seldom amenable to such claims.

sovereign immunity doctrine

States that a foreign-owned private property that has been expropriated is immune from the jurisdiction of courts in the owner’s country.

The sovereign immunity doctrine has been a highly controversial issue between the United States and certain foreign governments of developing nations. To give some protection to foreign businesses without impinging on the legitimate rights of other governments, the U.S. Congress in 1976 enacted the Foreign Sovereign Immunities Act (FSIA), which shields foreign governments from U.S. judicial review of their public, but not their private, acts. The FSIA grants foreign nations immunity from judicial review by U.S. courts unless they meet one of the FSIA’s private exceptions. One such exception is the foreign government’s involvement in “commercial activity.”  Case 8-5  clarifies the U.S. Supreme Court’s definition of “commercial activity” under the FSIA. Note how the Court emphasizes the nature of the Nigerian government’s action by asking whether it is the type of action a private party would engage in.

 Case 8-5 Keller v. Central Bank of Nigeria

United States Court of Appeals 277 F.3d 811 (6th Cir. 2002)

Prince Arthur Ossai, a government official in Nigeria, entered into a contract with Henry Keller (plaintiff), a sales representative for H.K. Enterprises, Inc., a Michigan-based manufacturer of medical equipment. They agreed that, among other things, Ossai would have an exclusive distribution right to sell H.K. products in Nigeria, which would buy $4.1 million of H.K. equipment for $6.63 million, plus a $7.65 million “licensing fee.” Before the deal closed, though, Ossai demanded that $25.5 million on deposit in the Central Bank of Nigeria (CBN) be transferred into an account set up by Keller. CBN employees charged Keller $28,950 in fees for the transaction, but the funds were never transferred. Keller and H.K. filed a suit in a federal district court against the CBN and others, asserting in part a claim under the Racketeer Influenced and Corrupt Organizations Act (RICO). The defendants filed a motion to dismiss under the Foreign Sovereign Immunities Act. The court denied the motion, concluding that the claim fell within the FSIA’s “commercial activity” exception. The defendants appealed to the U.S. Court of Appeals for the Sixth Circuit.

Justice Norris

[The defendants] claim that the illegality of the deal alleged precludes a finding that it is a commercial activity. The FSIA defines “commercial activity” as “either a regular course of commercial conduct or a particular commercial transaction or act.” The commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose. [W]hen a foreign government acts, not as regulator of a market, but in the manner of a private player within it, the foreign sovereign’s actions are commercial within the meaning of the FSIA.

In the instant case, the conduct was a deal to license and sell medical equipment, a type of activity done by private parties and not a “market regulator” function. The district court correctly concluded that this was a commercial activity, and that any fraud and bribery involved did not render the plan non-commercial.

Defendants claim that plaintiffs cannot establish another element of the commercial activity exception, namely, that there was a direct effect in the United States. [A]n effect is “direct” if it follows as an immediate consequence of the defendant’s activity.

In this case, defendants agreed to pay but failed to transmit the promised funds to an account in a Cleveland bank. Other courts have found a direct effect when a defendant agrees to pay funds to an account in the United States and then fails to do so. The district court in the instant case correctly concluded, in accord with the other [courts], that defendant’s failure to pay promised funds to a Cleveland account constituted a direct effect in the United States. *

*  Keller v. Central Bank of Nigeria., United States Court of Appeals 277 F.3d 811 (6th Cir. 2002).

Affirmed for the Plaintiff.

Critical Thinking About The Law

Context plays a vital role in any legal decision. The existence or nonexistence of certain events directly affects the court’s verdict. In  Case 8-5 , the court applies the strictures of the FSIA to the specific facts of the case. If certain facts exist, the federal statute protects the plaintiff, and the court should appropriately reject the defendant’s motion to dismiss. Otherwise, the CBN is immune, and the statute does not protect the plaintiff.

Understanding the facts is the starting point for legal analysis. The following questions encourage you to consider the significance of the facts in  Case 8-5 .

1. What facts are critical in the court’s ruling in favor of the plaintiff?

Clue: Reread the introductory paragraph.

2. Look at the facts you found. To illustrate the importance of context, which fact, if it had not been included in the case, might have resulted in the court’s granting the defendant’s motion to dismiss?

Clue: Find the elements of the federal statute that the judge discusses and use these elements as a guide to highlight the most significant facts.

Act-of-State Doctrine

The  act-of-state doctrine  holds that each sovereign nation is bound to respect the independence of every other sovereign state and that the courts of one nation will not sit in judgment on the acts of the courts of another nation done within that nation’s own sovereign territory. This doctrine, together with the sovereign immunity doctrine, substantially increases the risk of doing business in a foreign country. Like the sovereign immunity doctrine, the act-of-state doctrine includes some court-ordered exceptions, such as when the foreign government is acting in a commercial capacity or when it seeks to repudiate a commercial obligation.

act-of-state doctrine

A state that each nation is bound to respect the independence of another and the courts of one nation will not sit in judgment on the acts of the courts of another nation.

Congress made it clear in 1964 that the act-of-state doctrine shall not be applied in cases in which property is confiscated in violation of international law, unless the president of the United States decides that the federal courts should apply it. As  Case 8-6  demonstrates, the plaintiff has the burden of proving that the doctrine should not apply—that is, the courts should sit in judgment of public acts of a foreign government, in this case, a former government.

 Case 8-6 Linde v. Arab Bank, PLC

United States Court of Appeals Second Circuit 706 F.3d 92 (2013)

Founded in 1930, Arab Bank is one of the largest financial institutions in the Middle East. Headquartered in Jordan, it serves clients in more than 500 branches in 30 countries, including branches in Australia, New York, and Switzerland. The bank is a major economic engine in Jordan and throughout the Middle East/Northern Africa, providing modern banking services and capital, and facilitating development and trade throughout the region. Victims of terrorist attacks that were committed in Israel between 1995 and 2004—during a period commonly referred to as the Second Intifada—filed a suit in a federal district court against Arab Bank, PLC, seeking damages under the Anti-Terrorism Act (ATA) and the Alien Tort Claims Act. According to plaintiffs, Arab Bank provided financial services and support to the terrorists. Over several years and despite multiple discovery orders, the bank failed to produce certain documents relevant to the case. As a result, the court issued an order imposing sanctions. Arab Bank appealed to the U.S. Court of Appeals for the Second Circuit, arguing that the order was an abuse of discretion.

Justice Carney

The Bank argues that the documents are covered by foreign bank secrecy laws such that their disclosure would subject the Bank to criminal prosecution and other penalties in several foreign jurisdictions. The sanctions order takes the form of a jury instruction that would permit—but not require—the jury to infer from the Bank’s failure to produce these documents that the Bank provided financial services to designated foreign terrorist organizations, and did so knowingly.

The District Court carefully explained its decision to impose this sanction. It noted that many of the documents that plaintiffs had already obtained tended to support the inference that Arab Bank knew that its services benefitted terrorists. According to the District Court, these documents included documents from Arab Bank’s Lebanon branch that suggested Arab Bank officials approved the transfer of funds into an account at that branch despite the fact that the transfers listed known terrorists as beneficiaries. As a consequence of Arab Bank’s nondisclosure, the court reasoned, plaintiffs would be “hard-pressed to show that these transfers were not approved by mistake, but instead are representative of numerous other transfers to terrorists.” The permissive inference instruction will, according to the District Court, “help to rectify this evidentiary imbalance.”

Arab Bank argues that the District Court’s decisions ordering production and imposing sanctions should be vacated because they offend international comity. This argument derives from the notion that the sanctions force foreign authorities either to waive enforcement of their bank secrecy laws or to enforce those laws, and in so doing create an allegedly devastating financial liabilities for the leading financial institution in their region. The Bank asserts, further, that international comity principles merit special weight here because the District Court’s decisions affect the United States’ interests in combating terrorism and pertain to a region of the world pivotal to United States foreign policy.

The [District] Court expressly noted that it had “considered the interests of the United States and the foreign jurisdictions whose foreign bank secrecy laws are at issue.”

Additionally, international comity calls for more than an examination of only some of the interests of some foreign states. Rather, the concept of international comity requires a particularized analysis of the respective interests of the foreign nation and the requesting nation. In other words, the analysis invites a weighing of all of the relevant interests of all of the nations affected by the court’s decision. The District Court recognized the legal conflict faced by Arab Bank and the comity interests implicated by the bank secrecy laws. But [the Court] also observed—and properly so—that Jordan and Lebanon have expressed a strong interest in deterring the financial support of terrorism, and that these interests have often outweighed the enforcement of bank secrecy laws, even in the view of the foreign states. Moreover, the District Court took into account the United States’ interests in the effective prosecution of civil claims under that ATA [Anti-Terrorism Act]. This type of holistic, multi-factored analysis does not so obviously offend international comity. *

*  Linde v. Arab Bank, PLC, United States Court of Appeals, Second Circuit, 706 F.3d 92 (2013).

The U.S. Court of Appeals for the Second Circuit affirmed the lower court’s decision and order.

Export and Import Controls

Export Controls

Export controls are usually applied by governments to militarily sensitive goods (e.g., computer hardware and software) to prevent unfriendly nations from obtaining these goods. In the United States, the Department of State, the Department of Commerce, and the Defense Department bear responsibility, under the Export Administration Act and the Arms Export Control Act, for authorizing the export of sensitive technology. Both criminal and administrative sanctions may be imposed on corporations and individuals who violate these laws.

Export controls often prevent U.S. companies from living up to negotiated contracts. Thus, they can damage the ability of U.S. firms to do business abroad.

Import Controls

Nations often set up import barriers to prevent foreign companies from destroying home industries. Two such controls are tariffs and quotas. For example, the United States has sought historically to protect its domestic automobile and textile industries, agriculture, and intellectual property (copyrights, patents, trademarks, and trade secrets). Intellectual property has become an extremely important U.S. export in recent years, and Washington has grown more determined than ever to prevent its being pirated. After several years of frustrating negotiations with the People’s Republic of China, the U.S. government decided to threaten imposition of 100 percent tariffs on approximately $1 billion of Chinese imports in 1995, and again in 1996 and 1997. In retaliation, the Chinese government has threatened several times to impose import controls on many U.S. goods. Washington took action only after documenting that hundreds of millions of dollars’ worth of “pirated” computer software and products (including videodiscs, law books, and movies) was being produced for sale within China and for export to Southeast Asian nations in violation of the intellectual property laws of both China and the United States, as well as international law. The documentation showed that 29 factories owned by the state of Communist Party officials were producing pirated goods. A last-minute settlement in which the Chinese government pledged to honor intellectual property rights prevented a trade war that would have had negative implications for workers in import–export industries in both countries. American consumers would also have suffered because Chinese imports would have become twice as expensive had the 100 percent tariff taken effect—though the effect on consumers would have been offset by an increase in imports of the affected goods from other foreign countries (e.g., English and Japanese bikes would have replaced Chinese bikes in demand).

Another form of import control is the imposition of antidumping duties by two U.S. agencies, the International Trade Commission (ITC) and the International Trade Administration (ITA). The duties are levied against foreign entities that sell the same goods at lower prices in U.S. markets than in their own in order to obtain a larger share of the U.S. market (i.e., entities that practice “dumping”).

Legal and Economic Integration as a Means of Encouraging International Business Activity

Table 8-2  summarizes a number of groups that have been formed to assist businesspeople in carrying out international transactions. These groups range from the WTO (formerly the General Agreement on Tariffs and Trade), which is attempting to reduce tariff barriers worldwide, to the proposed South American Common Market, which would form a duty-free zone for all the nations of South America. The most ambitious organization is the EU, which is in the process of forming a Western European political and economic community with a single currency and a common external tariff barrier toward nonmembers.

Multinational corporations are learning that doing international business is much easier when they are aware of the worldwide and regional groups listed in  Table 8-2 . We will describe three of these groups: the WTO, the EU, and NAFTA. We chose to examine these three because they represent three different philosophies and structures of legal and economic integration, not because we do not appreciate the major effects of other integrative groups outlined in the table.

The World Trade Organization

Purpose and Terms

 On January 1, 1995, the 47-year-old General Agreement on Tariffs and Trade (GATT) organization was replaced by a new umbrella group, the World Trade Organization. The WTO has the power to enforce the new trade accord that evolved out of seven rounds of GATT negotiations, with more than 140 nations participating. All 144 signatories to this accord agreed to reduce their tariffs and subsidies by an average of one-third on most goods over the next decade, agricultural tariffs and subsidies included. Economists estimated that this trade pact would result in tariff reductions totaling $744 billion over the next 10 years.

Moreover, the accord, which the WTO will supervise, prohibits member countries from placing limits on the quantity of imports (quotas). For example, Japan had to end its ban on rice imports, and the United States had to end its import quotas on peanuts, dairy products, and textiles. Furthermore, the agreement

Table 8-2 Legally and Economically Integrated Institutions

Name	Members and Purpose
World Trade Organization (WTO)	Replaced General Agreement on Tariffs and Trade (GATT) in 1995 and the most-favored- nation clause with the normal trade relations principle. Composed of 144 member nations. Goal is to get the nations of the world to commit to the trade principles of nondiscrimination and reciprocity so that, when a trade treaty is negotiated between two members, the provisions of that bilateral treaty will be extended to all WTO members. All members are obligated to harmonize their trade laws or face sanctions. The WTO, through its arbitration tribunals, is to mediate disputes and recommend sanctions.
European Union (EU)	Composed of 28 European member states. Established as the European Economic Community (later called the European Community) by the Treaty of Rome in 1957. Goal is to establish an economic “common market” by eliminating customs duties and other quantitative restrictions on the import and export of goods and services among member states. In 1986, the treaty was amended by the SEA, providing for the abolition of all customs and technical barriers between nations by December 31, 1992. In 1991, the Maastricht Summit Treaty proposed monetary union, political union, and a “social dimension” (harmonizing labor and social security regulations) among EU members, although not all aspects were approved by all members. The treaty was subsequently amended by the treaties of Amstermdam (1997), Nice (2001), and Lisbon (2007). The Treaty of Lisbon entered into force in December of 2009 and is still effective today.
North American Free Trade Agreement (NAFTA)	The United States, Canada, and Mexico are members at present; Chile has been invited to join. NAFTA seeks to eliminate barriers to the flow of goods, services, and investments among member nations over a 15-year period, starting in 1994, the year of its ratification. Unlike the EU, NAFTA is not intended to create a common market. Whereas EU states have a common tariff barrier against non-EU states, members of NAFTA maintain their own individual tariff rates for goods and services coming from non-NAFTA countries.
Organization for Economic Cooperation and Development (OECD)	This organization was established in 1951 with Western European nations including Australia, New Zealand, United States, Canada, Japan, Russia, and some Eastern European nations as associate members. The OECD’s original purpose was to promote economic growth after World War II. Today it recommends and evaluates options on environmental issues for its members and establishes guidelines for multinational corporations when operating in developed and developing countries.
European Free Trade Association (EFTA)	Founded in 1960 and originally composed of Finland, Sweden, Norway, Iceland, Liechtenstein, Switzerland, and Austria. EFTA has an intergovernmental council that negotiates treaties with the EU. Finland, Sweden, and Austria left the EFTA in 1995 and joined the EU. In the future, EFTA will have only minor significance.
Andean Common Market (ANCOM)	Composed of Bolivia, Venezuela, Colombia, Ecuador, and Peru. ANCOM seeks to integrate these nations politically and economically through a commission, the Juanta Andean Development Bank, and a Reserve Fund and a Court of Justice. Founded in 1969, achievement of its goals has been hampered by national interests.
Mercado Commun del Ser Mercosul (Mercosul)	Composed of Argentina, Brazil, Paraguay, and Uruguay. Mercosul’s purposes are to reduce tariffs, eliminate nontariff barriers among members, and establish a common external tariff. The organization was founded in 1991, and these goals were to be met by December 31, 1994. For political reasons, they have not yet been fully met.
South American Common Market	A duty-free common market made up of countries in the ANCOM and Mercosul groups, created on January 1, 1995. On that date, tariffs were ended on 95 percent of goods traded among Brazil, Argentina, Paraguay, and Uruguay. All three nations adopted common external tariffs.
Asia-Pacific Economic Corporations (APEC)	Formed in 1989. A loosely organized group of 11 developed and developing Pacific Group nations, including Japan, China, United States, Canada, and New Zealand. APEC is not a trading bloc and has no structure except for a secretariat. An underlying Trans-Pacific Partnership (TPP) represents a proposed trade deal between the United States and 11 Asian-Pacific nations. If enacted, this TPP trade deal would affect nearly 1 billion people and 65% of global trade worldwide. It is opposed by trade unions, environmentalists, and political figures in all parties.
Association of Southeast Asian Nations (ASEAN)	Formed in 1967. Composed of Indonesia, Malaysia, Vietnam, Philippines, Singapore, Thailand, and Brunei. ASEAN’s purpose is to encourage economic growth of member nations by promoting trade and industry. There have been tariff reductions among members, and ASEAN’s secretariat has represented nations vis-à-vis other regional groups such as the EU.
Gulf Cooperation Council (GCC)	Founded in 1982. Composed of Saudi Arabia, Kuwait, Bahrain, Qatar, United Arab Emirates, and Oman. The GCC’s purposes are to standardize industrial subsidies, eliminate trade barriers among members, and negotiate with other regional groups to obtain favorable treatment for GCC goods, services, and investments.

bans the practice of requiring high local content of materials for manufactured products such as cars. It also requires all signatory countries to protect patents, trademarks, copyrights, and trade secrets. (See  Chapter 16  for a discussion of these topics, which fall under the umbrella of intellectual property.)

General Impact

 The accord created the WTO, which consists of all nations whose governments approved and met the GATT—Uruguay Round Accord. 10  Each member state has one vote in the Ministerial Conference, with no single nation having a veto. The conference meets at least biannually, and a general council meets as needed. The conference may amend the charter created by the pact—in some cases, by a two-thirds vote; in others, by a three-fourths vote. Changes apply to all members, even those that voted no.

10  Uruguay Round Amendments Act, Pub. L. No. 103–465, was approved by Congress on December 8, 1994. One hundred eight states signed the final act embodying the results of the Uruguay Round of multilateral trade negotiations. Bureau of National Affairs, International Reporter 11 (Apr. 20, 1994). Sixteen more states have joined since 1994.

The WTO has been given the power to set up a powerful dispute-resolution system with three-person arbitration panels that follow a strict schedule for dispute-resolution decisions. WTO members may veto the findings of an arbitration panel. This is a matter of great concern to the United States, and it figured prominently in the House and Senate debates preceding approval of the WTO. U.S. farmers (and other groups), who had previously won decisions before GATT panels, saw these decisions vetoed by the EU countries that subsidize the production of soybeans and other agricultural products; they enthusiastically supported the new WTO process. Environmentalists and consumer groups, in contrast, feared that the WTO would overrule U.S. environmental laws and in other ways infringe on the sovereignty of the nation. To assuage these fears, the framers of the accord added a provision that allows any nation to withdraw upon six months’ notice. Congress also attached a condition to its approval that calls for the establishment of a panel of U.S. federal judges to review the WTO panels’ decisions.

Impact on Corporate Investment Decision Making

 The WTO pact makes it less risky for multinationals to source parts—that is, to have them built in cheap-labor countries and then brought back to the multinational’s home country for use in making a product (e.g., brakes for automobiles). Industries that were expected to shift quickly to buying parts from all over the world for their products include computers, telecommunications, and other high-tech manufacturing. It is anticipated that with a freer flow of goods across borders, businesses will gain increased economies of scale by building parts-manufacturing plants at a location that serves a wide market area.

Because the tariff cuts were to be introduced gradually over a six-year period and were to be finalized only after 10 years, the impact on trade was not immediate. Once the major nations ratified the WTO pact, however, companies began to make investment and employment decisions predicated on dramatic reductions in tariffs, subsidies, and other government-established deterrents to free trade.

The European Union

Purpose

 The 28-member EU grew out of the European Economic Community (later called the European Community), established by six Western European nations through the Rome Treaty of 1957. Its goals were to create a “customs union” that would do away with internal tariffs among the member states and to create a uniform external tariff to be applied to all nonmembers. The EU is thoroughly committed to achieving the free movement of goods, services, capital, and people across borders ( Exhibit 8-1 ).

The EU’s ambitious plan to create an immense “common market” of 400 million people and $4 trillion worth of goods was greatly strengthened by the 1986 signing of the Single European Act (SEA), which set a deadline for economic integration of December 31, 1992, and instituted new voting requirements to make passage of EU legislation easier. A treaty that was proposed at the Maastricht Summit in 1991 was ratified in 1993. It provided for (1) monetary union through the creation of a single currency for the entire EU, (2) political union, and (3) a “social dimension” through the establishment of uniform labor and Social Security regulations. The leaders of the 12 nations that were members at the time agreed to the creation of a European Monetary Institute by 1994, a European Central Bank by 1998, and a uniform European currency unit (ECU) by 1999.

Three new members (Finland, Austria, and Sweden) joined the EU in 1994, bringing the total to 15 nations. In May 2004, 10 more nations joined the EU: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia (see  Exhibit 8-2 ). Bulgaria, Croatia, and Romania were accepted into the EU in 2007.

Structure

 The EU consists of (1) a Council of Ministers, (2) a Commission, (3) a Parliament (Assembly), (4) the European Court of Justice (with the addition of the Court of First Instance), and (5) the European Central Bank (ECB) and the European Monetary Union (EMU).

Exhibit 8-1 European Union and an attempt to Centralize Power

Exhibit 8-2 From 15 to 28: The EU Spreads to the East

Source: The Legal Environment of Business and On Line Commerce (5th ed.), by Henry Cheeseman (© 2007) p. 77, Ex. 5-2. Reproduced by permission of Pearson Education, Inc., Upper Saddle River, New Jersey

1. Council of Ministers. The Council of Ministers is composed of one representative from each of the member nations. Its purposes are to coordinate the economic policies of member states and, more recently, to negotiate with nonmember states. In the past, the council generally rubber-stamped legislation proposed by the Commission, but this docility is less assured as the council begins to flex some of the authority granted it by the SEA and the Maastricht Treaty.

2. Commission. The Commission consists of 20 members who represent the EU, not national concerns. It is responsible for the EU’s relations with international organizations such as the United Nations and the WTO. Member states are apportioned voting power in the Commission on the basis of their population and economic power. The Commission elects a president from among its members. Each Commission member supervises a functional area (e.g., agriculture or competition) that may be affected by several directorates. There are 22 directorates that are run by “supranational” civil servants called director generals. In theory, the directorates serve the Commission, but in fact the director generals often heavily influence legislation as it moves through the Commission.

Key Elements of the Treaty of Maastricht

Agreement	Goals and Stumbling Blocks
Monetary Union	The European Monetary Institute was created on January 1, 1994, and started operating on January 1, 1999. A single currency issued any day after January 1, 1999, is the goal of 25 nations that meet three standards: (1) Annual budget deficit cannot exceed the ceiling of 3 percent of gross domestic product; (2) the public debt limit for each country must not exceed 60 percent of gross domestic product; and (3) a country’s inflation rate must be lower than 2.9 percent, based on a complex formula set out in 1997. Great Britain was allowed to opt out of the EC currency union until an unspecified date. It opposes monetary union for ideological reasons. Denmark was also allowed to opt out pending a referendum on the issue, a constitutional requirement. The Danish government backs monetary union.
Political Union	EC jurisdiction in areas including industrial affairs, health, education, trade, environment, energy, culture, tourism, and consumer and civil protection. Member states vote to implement decisions. Increased political cooperation under a new name—European Union. Permanent diplomatic network of senior political officials created in the EC capitals. Great Britain rejected EC-imposed labor legislation, forcing the removal of the so-called social chapter from the treaty. It will be implemented separately by the other 14 members, officials said.
Federalism	EC leaders dropped reference to an EC “with a federal goal.” Instead, the political Union accord describes the community as “an ever-closer union in which political decisions have to be taken as near to the people as possible.” Great Britain rejected the “federalism” concept as the embodiment of what it feels would be an encroaching EC superstate.
Foreign Affairs	EC states move toward a joint foreign policy, with most decisions requiring unanimity. Great Britain wanted the ability to opt out of any joint decision. How this provision will be interpreted by the various sides is yet to be determined.
Defense	The Western EU, a long-dormant group of nine EC states, will be revived to act as the EC’s defense body but linked to the NATO alliance. Although France and Germany supported a greater military role for the Union, Great Britain, Italy, and others did not want to see NATO’s influence diluted.
European Parliament	The 754 member EC assembly gets a modest say in shaping some EC legislation. Its new powers fall short of what the assembly had sought (i.e., an equitable sharing of the right to make EC laws with the EC governments). Great Britain and Denmark refused to grant the assembly broader powers.

3. Parliament. The Parliament (Assembly) is made up of representatives elected from each nation-state for a term set by the nation-state. The representatives come from most of the major European political factions (Socialists, Christian Democrats, Communists, Liberals, etc.), and each of the parties in the Parliament also exists in the member states. The Parliament elects a president to preside over its deliberations. The Parliament’s general powers are to (1) serve as a consultative body to the Council, (2) refer matters affecting EU interests to the Commission or Council, (3) censure the Commission when necessary, (4) assent to trade agreements with countries outside the EU, (5) amend the EU budget, and (6) participate with the Commission in the legislative procedure.

4. European Court of Justice. The European Court of Justice performs the functions of arbiter and final decision maker in conflicts between EU law and individual member states. The national courts of member states are obligated to follow EU law and Court of Justice decisions. The Court of First Instance was established in 1989 to reduce the workload of the Court of Justice. It has jurisdiction over appeals of the Commission’s decisions on mergers and acquisitions. It also sets the penalties for price-fixing when non-EU companies are involved.

5. The European Central Bank and the European Monetary Union. The Maastricht Treaty required all member states of the EU to converge their economic and monetary policies with the goal of creating a single currency, the euro. The criteria set forth required the harmonization of budget deficits, inflation levels, and long-term interest rates, and specific levels of currency inflations to achieve exchange-rate stability. The European Monetary Union was created in January 1999. By giving up their national currencies, members of the EMU have relinquished control of their exchange rates and monetary policy to an independent European Central Bank based in Frankfurt. The primary duty of the ECB is to maintain price stability, by lowering or raising interest rates. With the exception of Denmark and Great Britain, most members of the EMU have adopted the euro.

Impact

Unity of Law

 Agricultural, environmental, and labor legislation is being made uniform throughout the member nations, with allowances and subsidies for the poorer members. The national courts of member states are now following decisions of the European Court of Justice.

Economic Integration

 The SEA and Maastricht Treaty have pushed the EU members to eliminate tariff and nontariff barriers among themselves. British and French differences over the creation of a single currency have forced the suspension of this goal.

Political Union

 The political union envisioned by the Maastricht Treaty has been an elusive goal for the EU, because member states (and their citizens) have proved more reluctant to make the necessary compromises on national sovereignty than the treaty’s architects anticipated. Nonetheless, the EU is the only regional organization that has in place the sophisticated structure required to make political union a realistic possibility.

The “Big Fat Greek” Bailout

On May 10, 2010, Euro-zone lenders (17 nations belonging to the European Union), the International Monetary Fund (IMF), and the European Central Bank decided to “bail out” the nearly bankrupt nation of Greece. They agreed to a nearly $1 trillion package of loans, guarantees, swaps, and bond purchases for use by Greece and other EU nations. The IMF contributed $318 billion. (It should be noted that the United States [taxpayer] had a role in this bailout because of its contributions to the IMF and its voting strength in that body. President Obama encouraged European leaders to act quickly. The Federal Reserve also provided credits for European banks that were lenders to Greece.) Given the existing precedents, the degree of international cooperation was surprising. As of May 2010, it seemed doubtful that the full $1 trillion would be needed, but the markets of Portugal, Spain, and Ireland, in the eyes of some, were similar to the situation in Greece.

Markets worldwide fell sharply following the bailout on May 9, 2010. Investors showed a lack of confidence in European markets and the euro. Similar to the U.S. bailout of banks and some other large business entities (insurance and automobile companies) in 2009, the EU sought to pledge support for debt markets in the Euro-zone combined with attempts to correct fiscal problems in certain countries. It may be easier to help individual banks and corporations in the United States than to bail out a sovereign country (or group of countries), having a single currency.

Why does a small country like Greece deserve a bailout, and why should it be able to shake the global financial system? Some thoughts follow:

· The problem may be larger than Greece. Many European nations, like Greece, have poor tax collection systems, and thus have problems servicing their sovereign debt. Spain, Portugal, Ireland, and Italy have similar problems. Spain may be too big to be bailed out.

· Prior to the establishment of the EU, problems with the countries of Europe would not have been as visible. If Greece had had its own currency (drachmas), it would have gone bankrupt, boosting both its exports and the cost of borrowing money, leaving it with less debt and perhaps more revenues and tax revenue to service the debt. Within the EU structure (with fixed exchange- rate systems like the euro), free-market signals are masked. Interest rates are held artificially low for reckless borrowers such as Greece, whose debt was largely held by private and state banks of Germany, France, and Spain. These nations played a role in bailing out Greece in 2010.

· The global economy may suffer deflationary effects. If enforceable austerity measures take place in countries that receive bailout money, millions of people (like residents in Greece) will end up living on less, resulting in less demand for worldwide natural resources, consumer goods, and housing components. The price of gold may initially jump as Europeans seek to protect a weakening euro.

· U.S. investors may be concerned about reduced earnings of multinationals that do business in EU countries. However, U.S. banks could gain from money that flees Europe, and U.S. consumer spending could benefit from weaker commodity prices.

Update: As of July, 2013, Greece has been on an austerity program and received bailout money from the IMF, the ECB, Germany, and indirectly from the United States. With the election of a new government in 2015, a new liberal policy seeks to bring Greece away from an austerity program. What will result in Greece and the EU is unclear.

See Kopin Tan, “Bet on the Greenback to Beat the Euro,” Barron’s, May 17, 2010, F-19.

North American Free Trade Agreement

Purpose

 The NAFTA, ratified in 1994, sought to eliminate barriers to the flow of goods, services, and investments among Canada, the United States, and Mexico over a 15-year period. NAFTA envisioned a gradual phasing-out of these barriers, with the length of the phaseout varying from industry to industry. The ultimate goal was a totally free trade zone among the three member states, with eventual inclusion of other Central and Latin American countries. So far, the only country invited to join the founding members is Chile.

Structure

 NAFTA is administered by a three-member Trade Commission, which oversees a Secretariat and arbitral panels.

Trade Commission

 Staffed by trade ministers from each of the three nations, the Trade Commission meets once a year and makes its decisions by consensus. It supervises the implementation of the treaty and resolves disputes over interpretation. The daily operations of NAFTA are conducted by ad hoc working groups appointed by the three governments.

Secretariat

 The permanent Secretariat is composed of national sections (departments) representing each member country. Its purposes are to provide technical support for the Trade Commission and to put together arbitral panels to resolve disputes between members.

Arbitral Panels

 The treaty has detailed arbitration provisions for settling disputes, particularly those involving dumping of goods (selling a good in a member country at a lower price than at home) and interpretations of the treaty. Although the arbitration proceedings are designed especially to resolve disputes between member nations, the treaty encourages private parties to use them as well. If they do, they must agree to abide by the arbitral panel’s decision.

Each arbitral panel has five members, chosen from a roster of 30 legal experts from NAFTA and non-NAFTA countries. Within 90 days, the panel will give the disputant countries a confidential report. Over the next 14 days, the disputants may present their comments on the report to the panel. Within 30 days of the issuance of the initial report, the arbitral panel must present its final report to the parties and to the Trade Commission, which publishes the report. The countries then have 30 days to resolve their dispute, or, if the panel has found one party wrong, the other may legally retaliate.

Impact

 NAFTA has not only brought together three North American neighbors of different historical and cultural background, but it has also provided a model of economic integration for other countries in Central and Latin America.

The Asian Infrastructure Investment Bank and Development Bank

In April of 2015, China announced the formation of two new banks, attracting 46 countries, including Great Britain, Germany, Australia, and South Korea. The United States declined membership. The bank is to begin operation by the end of 2015. The Obama administration advised the allies not to join, fearing the undermining of the World Bank led by the United States and the Asian Development Bank led by Japan. Some nations feared that China’s large state-owned enterprises will dominate and push for large infrastructure projects to the exclusion of competitors. The Chinese sought to allay such concerns, despite the fact that they will be the biggest shareholder. This is similar to the United States’ interest in the World Bank.

The interim leader of the new Asian Investment Bank indicated that it will be “lean, clean, and green.” It will seek to be corruption free. This will apparently seek to be in contrast to the World and Asian banks which many nations have criticized for their bureaucratic infrastructure. Both originated following World War II.

Technology And The Legal Environment WTO Says U.S. Ban on Online Gambling Violates International Law

The island nation of Antigua and Barbuda (plaintiff) brought a case against the United States to a WTO panel. The nation licenses 19 companies that offer sports betting and casino games (e.g., blackjack) over the Internet. It argued that the United States is in violation of international law by prohibiting cross-border gambling operations via the Internet. The plaintiff argues that the U.S. trade policy does not prohibit cross-border gambling operations.

The WTO panel ruled in favor of Antigua and Barbuda. In its decision in 2004, the panel stated that U.S. policy prohibiting online gambling operations emanating from the plaintiff nation violates international law. WTO panels do not have to give reasons for their decisions.

Some important legal, political, and cultural considerations:

1. WTO panel decisions apply only to the set of facts and case before the panel. Internet gambling using credit cards takes place in the Caribbean, Costa Rica, Great Britain, and Canada. Although this case is not a precedent, the United States should expect more legal action, as several million customers are at stake, and revenues from offshore players are important to nation-states that operate Internet casinos.

2. Present federal law in the United States makes it illegal to bet over the Internet if not allowed by individual states. Although untested as legal theory, the Justice Department is seeking to crack down on broadcasters and print media that accept advertising from offshore Internet casinos, on the ground that they are aiding and abetting an illegal enterprise. The airwaves are controlled by the Federal Communications Commission. Some questions are being raised:

a. Is the lobbying of American gambling companies against Internet betting (emanating from abroad) the real reason for the U.S. government’s stand? American companies have a lock on U.S. gambling and do not want to lose it to worldwide Internet casino interests.

b. On the basis of international trade law, countries allowing online casino gambling may seek to raise tariffs on services or goods of U.S. companies doing business within their jurisdiction (e.g., AT&T) as a way of retaliating against U.S. policy. Will this prompt U.S. companies to express their concerns to members of Congress? Does AT&T contribute to the reelection of members of Congress? Do gambling interests provide funds for reelection bids? Will there be a clash of interests?

Update: In June of 2013, the Justice Department indicated that individual states may sponsor games such as online poker with certain conditions attached.

It has had a significant impact on each country’s exports and imports. It has served as an institution for arbitration of disputes. For example, one of the first arbitral panels was set up when the U.S. government filed a complaint on behalf of United Parcel Service (UPS) and UPS believed that it was being hampered by NAFTA government regulations in Mexico, which limit the size of delivery trucks to be used in delivering packages. The arbitral panel ruled in favor of UPS.

Global Dispute Resolution

Many times, when private or public parties enter into an international business agreement, they incorporate means for resolving future disputes (e.g., arbitration clauses) into the agreement. Another form of protection for firms doing business internationally is the insurance some nation-states offer domestic companies to encourage them to export (e.g., United States Overseas Private Investment Corporation). Still, the two methods used most frequently to resolve irreconcilable differences between parties involved in international transactions are arbitration and litigation.

Arbitration

Arbitration is a dispute resolution process whereby parties submit their disagreements to a private individual decision maker they have agreed on or to a panel of decision makers whose selection has been provided for in the contract the parties signed. Arbitration clauses in contracts involving international business transactions should meticulously stipulate what law will govern the arbitration, where and when the arbitration will take place, what language will be used, and how the expenses of arbitration will be shared. They should also stipulate a waiver of judicial (court) review by both parties to the dispute. All these matters should be carefully negotiated when the contract is being drafted.

Arbitration of disputes may also come about through treaties. For instance, the United Nations Convention on the Recognition of Foreign Arbitral Awards encourages the use of arbitration agreements and awards. The World Bank’s International Center for the Settlement of Investment Disputes (ICSID), created in 1965 by treaty (the Washington Convention), provides arbitration rules as well as experienced arbitrators to disputants, and the International Chamber of Commerce offers a permanent arbitration tribunal. Finally, individual countries have arbitration associations that can provide experienced arbitrators to parties desiring assistance in settling their disputes.

Litigation

When contracts do not contain arbitration clauses and no other alternative (such as mediation or conciliation) is available,  litigation  may be the only way to resolve a dispute between parties. Some private international business contracts include a choice-of-forum clause so that the parties know which family of law is to be applied in case of a dispute and what nation’s courts will be used. When negotiating contracts in the international arena, managers should make sure that choice-of-forum clauses are specific as to these questions. Either or both can make a major difference to the outcome. Because there is no single international court or legal system capable of resolving all commercial disputes between private parties, a choice-of-forum clause should be negotiated in all agreements involving major transactions. London’s Commercial Court, established in 1895, is the most popular neutral forum for resolving commercial litigation, owing to its more than 100 years of experience.

litigation

A dispute resolution process going through the judicial system; a lawsuit.

Most of the international and regional organizations discussed in this chapter emphatically encourage the arbitration of private contractual disputes, because the arbitration process is a quicker and less public means of resolving disputes than litigation. In certain areas of the world (particularly the Far East), companies and governments strenuously seek to avoid litigation.

Applying the Law to the Facts . . .

Let’s say that Jamal from Saudi Arabia and Annette from the United States have a contract stipulating that Jamal agrees to send Annette 15 pounds of Turkish coffee each week for six months. Jamal breaches the contract and Annette decides that she needs to take legal action. She is not sure what forum to use, but wants to choose the quickest option. What type of dispute resolution does she most likely attempt to pursue?

Globalization: Hurts or Helps

In most of the chapters in this text, we have examined the globalization aspect of several areas of business ethics and law. We have attempted to present some factual bases for these discussions. In the following table, you will find a debate that is taking place all over the world. We invite you to participate in this sometimes vigorous discussion of whether globalization of business helps or hurts societies all over the world. It is skillfully summarized by Professor Murray Wiedenbaum in his text Business and Government in the Global Marketplace.

Pros	Cons
“Accelerates economic growth, increasing living standards”	“Generates widespread poverty in the pursuance of corporate greed”
“Offers consumers greater variety of products and at lower prices”	“Results in greater income inequality”
“Increases jobs and wages and improves working conditions”	“Moves jobs to low-wage factories that abuse workers’ rights”
“Encourages a greater exchange of information and use of technology”	“Provides opportunity for criminal and terrorist groups to operate on a global scale”
“Provides wealth for environmental cleanup”	“Pollutes local environments that lack ecological standards”
“Helps developing nations and lifts millions out of poverty”	“Traps developing countries in high-debt loans”
“Extends economic and political freedoms”	“Threatens national sovereignty”
“Raises life expectancy, health standards, and literacy rates”	“Worsens public health and harms social fabrics of agricultural-based societies”

Source: M. Wiedenbaum, Business and Government in the Global Marketplace, 7th ed. (Upper Saddle River, NJ: Prentice Hall, 2004), p. 190.

Summary

Although the emphasis in this book is on legal and ethical issues, managers whose companies are undertaking international business ventures need to consider the political, economic, cultural, and legal dimensions of the international environment of business. The major families of law are common law, which relies primarily on case law and precedent; civil law, which relies primarily on codes and statutory law; Islamic law, which relies on the Shari’a, a religious code of rules; socialist law, which is based on Marxism–Leninism and does not recognize private property; and Hindu law, which relies primarily on the Sastras, a religious code.

International law is divided into public international law, governing the relationships between nation-states, and private international law, governing the relationships between private parties involved in international transactions.

The major methods of engaging in international business are trade, international licensing and franchising, and foreign direct investment. The principal risk of engaging in international business are expropriation, the sovereign immunity doctrine and the act-of-state doctrine, export and import controls, and currency controls and fluctuations (particularly in developing nations).

World and regional integrative organizations, especially the WTO, the EU, and NAFTA, are making a strong impact on international business. Arbitration and litigation are the major methods of international dispute resolution.

Assignment On The Internet

As this chapter demonstrates, there are many important issues to consider before engaging in international business. Go to www.lib.uchicago.edu and search for “Lyonette Louis-Jacques international law” (Louis-Jacques is a librarian and lecturer of law at the University of Chicago, and the author of the link you will be taken to). Under “catalog results,” click on the first link. Click on “details” and copy and paste the URL given. Once here, pick a country you are not familiar with and research the issues you think most important to consider before doing business in that country. What are its cultural, economic, political, and legal dimensions? What are its trade laws? Does it belong to any international treaties or organizations?

If you cannot find all the information you need, make a list of detailed questions you would want answered. Finally, for each of the questions you researched, explain why that question was significant in your thinking.