International Business Law

This article discusses the sources and content of the international business law. Trading nations have entered into a series of treaties and organizations to promote free trade and end discriminatory or isolationist practices. The WTO is the premier organization that negotiates and regulates agreements among nations. This article will take look at the processes that establish international business law and the general features of the law.

Keywords: Foreign direct investment; International business transactions; International Law; International Trade; Outsourcing; Treaty; World Trade Organization; Comparative advantage

Law > International Business Law

Overview

International business is a critical part of the world economy that shapes the fortunes of individuals and entire nations. This article provides an overview of the sources, content and consequences of the "International business law" that regulates business across borders. The goal is to identify major themes, mechanisms and institutions that govern international business. International business law embraces many specific fields of practice that relate to a wide array of business transactions. Each type of international commerce (export and import of goods and services, foreign direct investment, joint ventures, research and development arrangements, franchising, sale and distribution arrangements and licensing of intellectual property) has a distinct body of law.

To introduce the idea of international law it helps to start by contrasting it with domestic law. Domestic laws are law because a legislature has the power, under our political system, to pass legislation binding people within its jurisdiction. Accordingly, a court has the authority to apply the law. The power to do so comes from the sovereignty of the nation. A sovereign has supreme and ultimate authority over affairs and individuals within its borders and does not have to answer to any higher authority. Each nation is sovereign.

On the other hand, international law involves an arrangement between sovereign nations. As a matter of theory, it may seem strange that law could operate on sovereigns, when neither sovereign state has to account to any higher power and can ultimately behave as they wish. Law that does not have to be followed is no law at all, some would argue. However, despite this theoretical problem, nations do, in practice, obey international law.

International law arises from the willingness of each nation to bind itself. A nation will do so because adherence to the law is in its best interest. Generally, nations have a self interest in promoting a systematic rule of law to foster predictability and stability in international affairs over the long term. While other nations and international bodies often lack the authority to compel compliance, if a nation decides to behave contrary to an international law, there still may be consequences. The violating nation's image may be tarnished both at home and abroad, economic sanctions may be imposed; in short, the country could lose the benefit of reciprocal treatment from other nations.

When violations do occur they are rarely flagrant and not usually tolerated silently by others. Protest often breaks out due to perceived violations of international law. Violators themselves concede the authority and importance of the law by usually trying to explain their actions on legal grounds.

International law largely arises from three categories: general principles, customary international law and treaties. General principles are fundamental understandings common to the world's great legal systems. When an advocate can show that almost every nation agrees on a principle, then that principle can be elevated to a binding rule of international law. An example of a general principle would be the rule of good faith in international obligations. Of course, the more abstract a principle is, the easier it would be to find consensus, but the less useful it would be in practice to resolve a specific problem. This paradox limits the practical use of general principles to situations where a party cannot find a more concrete alternative.

Customary international law arises from the persistent conduct of international actors including nations, international institutions and international business organizations. A court may consider a practice international law if the advocate can show that the practice has been followed generally and also has been accepted by those actors as law as opposed to courtesy or convenience. Proving a customary international law is very difficult and requires extensive evidence.

While courts may recognize international law based on the methods noted above, the bulk of international business law comes from written agreements between nations called treaties. As a practical matter, treaties are international business law. As opposed to general principles and customary international law, treaties are specific and negotiated to address particular conduct. There are a huge number of treaties on a huge number of topics and are sometimes called a pacts, protocols, conventions, covenants, or declarations. Treaties are divided into two general categories. Agreements between two countries are called bilateral treaties and agreements among three or more countries are called multilateral treaties. International institutions can also enter into treaties with other organizations or with nations. A treaty once signed and ratified by the government of each host country becomes law in each country and an agreement between the countries. For example, in the United States, the executive branch negotiates and signs and the Senate must then approve it. This is called "advice and consent." Once the treaty is ratified it becomes federal law. In that way, international law is not an entirely distinct body of law that acts upon nations from the outside; it is also part of domestic law that operates within a country. Therefore, the degree of enforcement depends, in part, on the strength of a given country's legal system.

Another factor in the enforcement of international law is treaty interpretation. A leading authority on interpretation and procedure related to treaties is the multilateral treaty called the Vienna Convention on the Law of Treaties (VCLT). The interpretation of treaties determines how a country observes international law. It is very difficult, if not impossible, to draft legal documents that clearly determine the outcome of every set of facts that may occur in the future. Circumstances may arise that the drafter of a relatively simple legal document, e.g., a will or contract, may not have foreseen which cause ambiguity or vagueness as to its application. Treaties are no different and the problem is often compounded because treaties are political compromises that sometimes defer resolution of contentious issues in order to achieve some current agreement (Bederman, 2001).

The interpretation of treaties has a couple of default rules and three general perspectives. The default rules are, first, that treaties are applied prospectively, to future events, unless the parties expressly agree otherwise. Second, treaties are normally assumed to apply to the entire territorial sovereignty of a nation, unless expressly agreed otherwise. Determining how a treaty is to apply to specific set of facts can be done with a textual approach, an intentionalist approach or a teleological approach and can involve all three. The textual approach looks to the plain meaning of the text in a specific section and throughout the document. For example, whether a treaty section that uses the word "airplane" also applies to a "glider" can turn on whether the document uses the more general term "aircraft" in other sections suggesting that "airplane" should be a more inclusive term. Under the VCLT, treaty interpretation begins with the "plain language" a textual approach that is limited by shades of meaning in language particularly when a treaty is translated into different languages (Bederman 2001).

Under the VCLT, the intentionalist approach can be used to fill in the text where the text is ambiguous or leads to an absurd result. The intentionalist approach employs an understanding of the original parties that drafted the treaty in order to determine what the treaty means. To understand the intent of the drafter, the negotiating history or traveaux preparatoires is often consulted. The intentionalist approach is somewhat disfavored, in part, because many nations join a treaty regime after drafting is over and it seems unfair to bind a nation to negotiating history they did not participate in. Further, negotiating parties often have different reasons for their involvement and negotiating history can often be contradictory and difficult to establish for someone claiming its use.

The teleological approach looks to the object and purpose of a treaty as opposed to slavishly following the text or attempting to determine the intent of the drafters. For example, a written agreement can produce results counter-productive to the stated goals of the treaty; the teleological approach allows interpretations of the treaty to depart from the "plain meaning" of the text. The VCLT endorses the teleological approach by requiring that treatises be viewed in light of their object and purpose (Bederman 2001). The important point for the international trader to remember about treaty interpretation is that there are sometimes several ways to read the same words and care should be taken to fully understand the meaning and consequences of the often complex international law.

In addition to bilateral and multilateral treaties, nations join international organizations that produce rules relating to business and trade. For example, the North American Free Trade Agreement (NAFTA) is a trading block composed of the United States, Mexico and Canada whereby the members have made a number of agreements designed to promote trade within their collective borders. Many other areas of the world have likewise engaged in such agreements, for example, Association of South East Asian Nations (ASEAN), MERCOSUR includes many South American cone nations, and the Asia Pacific Economic Cooperation (APEC). The European Union (EU), is probably the most aggressive and integrated agreement between nations to encourage free trade. The EU employs a common currency, the Euro, and super-governmental institutions, like the European Central Bank, the European parliament and the Court of Justice of the European communities.

With 150 member nations, the World Trade Organization (WTO) is the largest and most comprehensive international organization related to international business law. The WTO was created in 1995, to implement and institutionalize a collection of multilateral agreements known as the (GATT) General Agreements on Tariffs and Trade. Negotiations began on the GATT in 1948 and continued for eight successive rounds that each produced new agreements to liberalize world trade. The WTO intends to regulate most all areas of trade law and permits organizations such as those mentioned above provided they do not interfere with the WTO's rules. Because the substantive rules of the WTO are composed so heavily of the agreements negotiated during the GATT rounds, the WTO is sometimes referred to as WTO/GATT; reference to one should be taken as reference to the other.

The motivation for the global move to free trade was the theory of comparative advantage. It is widely held that free trade enhances the wealth of all trading partners because it takes advantage of each county's comparative advantage. A comparative advantage is the increased effectiveness a particular nation has in producing specific goods as opposed to others. Those efficiencies may arise for many reasons including the nation's people, natural resources or climate. Accordingly, every nation should concentrate on producing the product that they can produce most effectively. Nations then trade with other nations for all other goods. In that way, the overall production of the world increases and all nations benefit.

In accord with the theory of comparative advantage, the stated objectives of the GATT are to raise living standards, ensure full employment, raise real income and effective demand, develop full use of the world's resources and expand the production and exchange of goods. The GATT seeks to achieve those goals by adhering to certain principles. Prior to entering the WTO, nations must enter into mutually advantageous agreements to reduce tariffs and other barriers to free trade, eliminate discriminatory treatment in international commerce and agree to the general elimination of quantity restrictions like duties, taxes or other charges that restrict the import or export of goods.

The WTO regulatory regime rests on what are called the "Four Pillars" of WTO membership. First, when a nation joins the WTO it gets the benefit of, and is bound to extend, "Most favored Nation" (MFN) status. MFN prohibits discriminatory trade practice by requiring that a trade privilege granted to one nation must also be granted to all WTO members. Second, each country is entitled to "national treatment" of its goods, services and intellectual property. After a product enters into a country, that host country must treat and protect the imported product as if it were a domestic product. Third, each country must agree to tariff bindings. Tariff bindings are agreements to limit, reduce or eliminate tariffs over a given period of time. Predictable and decreasing tariffs provide stability for traders. Fourth, every nation must commit to eliminate or reduce non tariff barriers that impede free trade. Non tariff barriers include quotas, excessive paperwork requirements and undisclosed trade rules. To encourage transparency and discourage restrictive policies, the WTO has a dedicated committee to examine trade policies. In addition to the "Four Pillars," the WTO has other agreements that take aim at the goal to liberalize and promote fair world trade. Some of those areas include laws related to dumping, countervailing duties, subsidies and initiatives to systemize procedures for customs administration and valuation (Friedland, 2002).

Dumping is when a particular company exports goods at a lower price than it normally charges at home. Dumping effectively eliminates competition and as a result, causes governments to take action in order to protect their domestic industry. Because the WTO is an agreement among nations it does not regulate individual businesses. Therefore, the WTO anti-dumping agreement regulates how governments respond to dumping. The anti-dumping agreement allows a government, in certain circumstances, to act contrary to the normal WTO principles of binding a tariff or not discriminating between trading partners. Governments may impose a duty on specific products if the government can show genuine injury to domestic industry from dumped goods. The extra duty seeks to equalize the price of the dumped products with the price normally charged. However, before a government may impose those duties the price difference must be calculated based on WTO rules and a detailed investigation must show that domestic industry is actually being harmed by dumped products. Anti-dumping prevents potentially unfair competition injurious to a nation's economy and limits the restrictive affect of duties on international trade by controlling the reaction a government may employ (www.WTO.org).

A countervailing duty protects domestic industry by off-setting subsidies given by foreign governments to manufacturers of the goods for export. For example, a company in country X receives assistance from its domestic government, in the form of interest free loans, and is therefore able produce an item at a lower price for sale in country Y. Country Y may want impose a countervailing duty so that country Y manufacturers do not have to compete with that lower priced product. A subsidy is a grant made by the government to an enterprise that is judged to be in the public interest. Subsidies put industries or enterprises at a competitive advantage with respect to foreign producers. One often hears of farm subsidies whereby a farmer is paid by the government to help produce or, or some cases not produce, certain products. Subsidies can damage the trade of other nations by hurting competing exporters from another nation, by hurting foreign exporters trying to compete in the subsidized market and by hurting domestic industry in the importing country.

The WTO agreements on countervailing duties and subsidies control the use of subsidies and regulate the measures a government can take to offset the affect of a particular subsidy with countervailing duties. The WTO sets out rules whereby countries can challenge subsides, have them judged harmful and immediately repealed. If the offending country does not repeal the subsidy, the complaining country is allowed to take countervailing measures themselves. The rules with regard to countervailing duties and subsidies are similar to the anti-dumping agreement. Dumping and subsidies are very similar in effect, in that each artificially lowers the price that goods are offered for sale, and the permissible governmental responses are likewise similar. Some subsidies are important to developing countries and least developed countries and the WTO has special provisions and exceptions in certain circumstances to promote those interests (www.WTO.org).

The WTO has several agreements that address bureaucratic or legal issues with the potential to hinder trade. These agreements cover import licensing, rules for the valuation of goods at customs, pre shipment inspections, rules of origin and investment measures. The Agreement on Import Licensing Procedures calls for import licensing to be simple, transparent and predictable. The Agreement requires countries to notify the WTO of new or changed procedures and offers guidance to countries on how to evaluate applications for licenses. The agreement also sets up procedures and criteria for licenses to issue automatically in certain cases.

The objective of the WTO customs agreement is to set up a fair, uniform and neutral system to allow traders to accurately estimate the value of their goods. Standard Industrial Classification (SIC), Standard International Trade Classifications (SITC), Harmonized Tariff Schedules, U.S. (HTS) and North American Industry Classification Systems (NAICS) are all examples of systems designed to promote stability and ease the administrative burden of international trade.

Some developing governments use pre shipment inspection to check the shipment details (like price, quantity and quality) to help safeguard their financial interests (like fraud and duty evasion). The WTO agreement has an independent review procedure and obligates governments that engage in pre-shipment inspection to non discrimination, transparency, protection of confidential business information, the avoidance of undue delay and the use of specific guidelines for price verification.

Rules of origin determine where a product was made. Origin is an important part of trade because some WTO policies involve countervailing duties, quotas and preferential treatment that discriminate by exporting country. Additionally, trade statistics are also compiled by country of origin. The rules of origin must be transparent, not have a disruptive effect on trade, and must be applied consistently, impartially, reasonably and must state a standard that describes what confers origin as opposed to what does not.

Trade Related Investment Measures (TRIMS) applies to investment policies that discriminate against foreigners or foreign goods or lead to quantity restrictions. TRIMS include a list of illustrative practices that are inconsistent with the WTO/GATT principles (www.WTO.org).

Going forward, the WTO promises to figure even more prominently in the global business environment. The GATT focused on trade rules for products and commodities. With the formation of the WTO, two new agreements were created in response to the changing landscape of the world's economy. First, the service industry become increasingly important as countries began to trade more heavily in industries such as financial services, transportation, telecommunication, construction, information technology and tourism. The WTO introduced the General agreement on Trade in Services (GATS). In response to concerns about the piracy of patents, trademarks and copyrights the WTO introduced the Trade-Related Aspects of Intellectual Property Rights (TRIPS). In 2001, the WTO began new negotiations called the Doha Development Agenda, which was aimed at multilateral agreements between developed and developing ecomomies. Stalemated in 2008, non-WTO negotiated preferential trade agreements (PTAs) and free trade agreements (FTAs) have proliferated (Hartman, 2013). It has been argued, however, that members are now better able to define their strategic objectives and usefully participate in negotiations to defend national trade interests (Smeets, 2013).

TRIPS was negotiated during the final round of GATT negotiations between 1986-94, called the Uruguay Round, and introduced the first intellectual property rules to multilateral trade regulation. "Intellectual property rights" refers to the right of a creator to prevent others from using a creation and the right to negotiate payment for its use. TRIPS covers copyrights, trademarks, service marks, geographical indications (like Cognac, Champagne, Scotch), industrial designs, patents, lay-out designs of integrated circuits and trade secrets and other undisclosed information. The TRIPS agreement establishes a minimum amount of protection that a government must extend to intellectual property and a systematic dispute resolution mechanism in addition to the basic principles of MFN and national treatment of intellectual property rights.

GATS, also negotiated during the Uruguay Round, is the first and only multilateral agreement on the trade in services. GATS covers all internationally traded services: services supplied from one country to another (like international phone calls), consumers making use of a service in another country (like tourism), foreign companies that set up branches or subsidiaries to provide services in another country (like Foreign banks) and individuals that travel to a foreign country to provide services (like consultants). Under GATS, if a nation allows competition in an area, MFN requires that all WTO members be treated alike, although some temporary exceptions are allowed where a nation had existing bilateral or small multilateral agreements. GATS also requires governments to publish all relevant laws and notify the WTO of any changes (called transparency). GATS includes rules in a number of other areas relevant to trade in service including international payments and transfers, reasonableness of domestic regulation, recognition of qualifications and provision for further negotiations

The Doha Development Agenda refers to a collection of negotiations conducted in several ministerial conferences. The Doha agenda was largely focused on the problems developing countries are having in implementing current WTO Agreements and involves many topics.

Conclusion

International business law has taken aim at a free trade, or at least freer trade, as opposed the protectionist approach of the past that some maintain contributed or caused the Great Depression (Forbes 2006). Protectionism as a general theory has been abandoned in favor of the theory of comparative advantage and an effort to maximize global production and wealth. So far, this practice has produced profound effects on the world economy. As a general matter, mature economies, like the U.S. are becoming more service based and U.S. companies are expanding their operations abroad to capitalize on new markets and opportunities. Emerging economies like China, Brazil and Mexico are taking on manufacturing. India is a leader in technology and service outsourcing. From a historical perspective, these changes are come fast and many more seem to be on the way (Mehring 2007).

However, the global shift to unrestricted trade has not been without challenges and opponents. Many people have seen their jobs move abroad and have been forced to adapt. Russia's membership in the WTO, or accession as it is called, has been stalled. The Doha Round of talks, mentioned earlier, has met with serious setbacks (Scott, & Wilkinson, 2010). The implementation and effectiveness of some WTO rules has been criticized (Zuckerman 2006). Despite these growing pains, more people are more prosperous in more parts of the world. International business law does not just regulate business between nations; it shapes the business within nations as well.

Terms & Concepts

Comparative Advantage: The economic theory that proposes free trade as an enhancement of the wealth of all trading partners. Comparative advantage encourages nations to trade in what they produce most effectively and import that which they do not.

Countervailing duty: A duty that protects domestic industry from imports that have been produced using government subsidies in the exporting country.

Dumping: The practice of selling goods below their fair market value in an effort to eliminate competition.

Direct foreign investment: An ownership interest of 10% by a domestic organization in the business of a company in another country.

GATT: The General Agreement on Tariffs and Trade; the basic agreements of the WTO.

Intellectual property rights: Refers to right of a creator to prevent another from using a creation and the right to negotiate payment for its use.

MFN: Most Favored Nation-a benefit WTO membership that eliminates discriminatory trade practices by requiring that a trade privilege granted to one nation must also be granted to all WTO members.

Ministerial Conference: The highest decision-making body of the WTO which has to meet at least every two years. It brings together all members of the WTO and can make decisions on all matters under any of the multilateral trade agreements.

NAFTA: The North American Free Trade Agreement entered into among the U.S., Canada and Mexico that eliminated trade barriers

National treatment: WTO principle that eliminates discriminatory treatment of foreign goods, services and intellectual property by requiring that the host country treat and protect an imported product as if it were a domestic product.

Non tariff barriers: Any impediment to free trade other than tariffs; may include quotas, excessive paperwork requirements and undisclosed trade rules.

Protectionist: A foreign trade policy that protects national industry with tariffs and other barriers to trade.

Sovereign: The idea that each nation has supreme and ultimate authority over affairs and individuals within its borders and does not have to answer to any higher authority.

Subsidy: A grant made by the government to an enterprise that is judged to be in the public interest.

Tariffs: Taxes levied on imported goods.

Tariff bindings: Agreements to limit; reduce or eliminate tariffs over a given period of time.

Transparency: Refers to full and accurate disclosure of the content and function of a body of rules

Treaty: A written agreement between nations; can be bilateral, between two parties or multilateral, among three or more.

WTO: World Trade Organization, organization of 150 trading nations committed to liberalizing world trade.

Bibliography

Bederman, D.J. (2001). Concepts and Insights Series, International Law Frameworks.

China Trade: WTO membership and most-favored-nation status: T-NSIAD-98-209. (1998). GAO Reports. Retrieved March 06, 2007 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=18223762&site=ehost-live

Eglin, M. (2004). Part 1: The origins and nature of the world trade organization: The development of multilateral trade agreements. Handbook of World Trade. Retrieved March 02, 2007 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=19310741&site=ehost-live

Engardio, P., Yang, C., Roberts, D., Byrnes, N., & Arndt, M. (2006). The runaway trade giant. Business Week,3981, 30-33. Retrieved Tuesday, March 06, 2007 from EBSCO Online Database Business Source Complete.

http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=20490333&site=ehost-live Hartman, S.W. (2013). The WTO, the Doha round impasse, PTAs, and FTAs/RTAs. International Trade Journal, 27, 411-430. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=91257045&site=ehost-live

Pearlman, R. (2007). Bridging the gap...globally. Smart Money, 16, 19-20. Retrieved March 06, 2007 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=23977502&site=ehost-live

Forbes, S. (2006). Ridiculously retarding trade. Forbes, 178, 28-28. Retrieved March 15, 2007 from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=21766757&site=ehost-live

Friedland J. (2002), Understanding International Business and Financial Transactions. Dayton, Ohio: LexisNexis.

Scott, J., & Wilkinson, R. (2010). What happened to Doha in Geneva? Re-engineering the WTO's image while missing key opportunities. European Journal of Development Research, 22, 141-153. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=48950952&site=ehost-live

Smeets, M. (2013). Trade capacity building in the WTO: Main achievements since doha and key challenges. Journal of World Trade, 47, 1047-1090. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=90499881&site=ehost-live

Suggested Reading

Fishman, T. (2005).China Inc. How the Next Superpower Challenges America and the World. New York: Scribner.

U.S. Dept of Commerce (1998). A Basic Guide to Exporting. UNZ & Co. (available in print and at http://www.unzco.com/basicguide)

Engardio, P (Editor) (2006). Chindia: How China and India are Revolutionizing Global Business. New York: McGraw Hill

Mehring, J. (2007). Expanding abroad — and growing at home. Business Week, Retrieved March 06, 2007 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=23855505&site=ehost-live

Zuckerman, M. (2006, January 23). A giant's growing pains. U.S. News & World Report, pp. 68, 66. Retrieved March 07, 2007 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=19420868&site=ehost-live