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Chapter 35

International
Business
Law

35-2

Global Business

The need for international law has arisen from factors


such as:
Increasing volume of international trade and tourism.
Globalization of the marketplace.
Growing incidence of multinational business organizations.
Cultural exchanges.

Although the use of English as the language of business


is increasing, cultural differences, disparate legal
systems, and fluctuating exchange rates remain major
obstacles to conducting business internationally.

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35-3

What Is International Law?

International law: The broad study of the legal


systems of major countries, treaties, practices,
tariffs and nontariff trade barriers, and import
and export quotas.
The study of international law also includes
national and international organizations that
regulate personal and commercial activity and
facilitate international trade.

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35-4

Sources of International Law

International laws resulting from the trading


relationships among nations have a rich history.
Efforts to negotiate peaceful solutions to
international disputes culminated in the
formation of the League of Nations following
World War I.
The League was short-lived and failed to prevent
another war.
After World War II, the worlds nations organized a
forum for peaceful negotiations and established the
United Nations.

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Sources of International Law


(cont.)

Practices and treaties are the major sources of


international law, and these are recognized in
the Statute of the International Court of Justice.

The U.S Constitution (Article II) states that


treaties are negotiated by the president and
must be ratified by two-thirds of the senators
present.

35-5

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35-6

Applying Other Countries Laws

The doctrine of comity: A major legal principle


involved in international law which holds that the
courts of one country should refrain from
deciding cases involving the acts of persons
from another country.
The doctrine is discretionary, and courts of individual
countries decide whether or not to apply it based on
the facts of each case.

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35-7

International Trade Institutions

Trade among nations remains a vital ingredient


to the economic health of the worlds population.
While countries are sovereign and create and
interpret their own sets of laws, the goal is that trade
should be governed by transnational institutions,
whose purpose is to maintain legal and economic
order in trade.

These transnational institutions are established


contractually by several countries that agree to
be legally bound by the rules of the organization.

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35-8

The World Trade Organization

In 1947, an international agreement called the General


Agreement on Tariffs and Trade (GATT) was entered into by a
multitude of nations.
By 1995, tariffs had become less commonplace, most nations
came to recognize that GATT was no longer sufficient, and
the new World Trade Organization (WTO) was formed.
The WTO is responsible for overseeing the implementation of all
multinational trade agreements negotiated now or in the future.
In addition to GATT, the WTO has authority for:
GATS: The General Agreement on Trade in Services.
TRIPS: Agreements on trade-related aspects of intellectual
property rights.
TRIMS: Trade-Related Investment Measures.

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The International Monetary


Fund

35-9

International Monetary Fund (IMF): Formed in 1944, the


purpose of this organization is to maintain a stable
environment for the economies and the currencies of its
members by providing protection against large
fluctuations in the value of one currency versus another.
Most international experts agree that the IMF has
performed its job admirably, but the IMF also has come
under great pressure due to various economic
downturns in several nations.
The IMF is also criticized for failing to respond adequately to the
economic challenges created in the early 1990s, subsequent to
the dissolution of the Soviet Union, and the heavy borrowing by
developing countries during the mid-1990s.

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35-10

The World Bank

In 1944, in order to provide relief to the countries suffering


from the ravages of World War II, the International Bank for
Reconstruction and Development was created, which is now
the World
World Bank.
Bank. This organization works closely with the IMF
to
that developing
countries
access
to funds
ensure
This organization
works closely
with have
the IMF
to ensure
that in
order
to stimulate
theirhave
economies.
developing
countries
access to funds in order to stimulate
economies.
Thetheir
World
Bank also has come under a great deal of criticism
The
World
Bank reasons:
also has come under a great deal of criticism
for the
following
for
theoften
following
reasons:
It has
provided
funds to countries with arguably corrupt
Provided
countries withthe
arguably
regimes
that
regimes
thatfunds
havetosquandered
funds corrupt
rather than
provide
squandered
the funds rather than provide real relief to their
realhave
relief
to their economies.
economies.
It has provided funds to developing countries, but, despite the
Provided
funds
to developing
countries, but despite
the large
large
inflow
of
money,
major
improvements
in
these
inflow of money, major improvements in these economies have
economies
have not been realized.
not been realized.

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Regional Trade Organizations


and Agreements

35-11

NAFTA
In order to promote trade, the United States, Canada, and
Mexico have agreed to follow the rules of the North American
Free Trade Agreement (NAFTA).
Unlike many other regional agreements, the focus of NAFTA is
strictly on economic trade, rather than on the political
interrelationships among the three countries.
The agreement provides that:
The NAFTA countries will ensure that none of their national or
local laws discriminates against the goods of the other countries.
Each country will have greater market access within the borders
of the other two.
Some tariffs and import and export restrictions will be eliminated.

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35-12

European Union

In 1994, 12 countries in Europe formed what is


expected to eventually become Euroland, an
economic and political integration of the
members into one entity.
As a step in this direction, the European Union (EU) established
a legal and political relationship among its members that
promotes economic growth, as well as social and cultural
affiliations.

The European Union is comprised of 27 independent


sovereign countries which are known as member states.
There are four official candidate countries: Croatia, Iceland,
Republic of Macedonia, and Turkey.

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The International
Legal Environment

35-13

Companies that conduct business in several


countries face the challenge of having to comply
with a variety of legal systems that sometimes
conflict with one another.
The United States requires that foreign firms
that conduct business here comply with all the
regulations that govern American companies.
Likewise, many American companies doing
business internationally face the challenge of
adapting to local customs and practices.

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Example: The International


Legal Environment

35-14

Facts:
Johnson Corp., a U.S. firm, entered into a contract with Li
Company, a Chinese firm, in which Li Company agreed to
manufacture designer handbags for distribution.
After it began selling the manufactured handbags, Johnson
Corp. learned that Li Company did not obtain necessary
permission from the designer of the handbags, who owned the
trademark.

Regardless of the law in China, Johnson Corp. could be


liable for the tort of trademark infringement, and for
the crime of counterfeiting in the United States,
unless they cease selling the handbags bearing the
designers logo.

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Example: The International


Legal Environment

35-15

Facts:
Smirdorf, Inc., a Romanian automobile manufacturing company,
is opening a plant in the United States.

Smirdorf will be required to follow all Environmental


Protection Agency regulations pertaining to
emissions; all National Labor Relations Board
regulations pertaining to employees right to join
unions; and all Occupational Safety and Health
Administration regulations pertaining to employee
accident and sickness prevention, even though it is a
company with Romanian origin.

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Trade Sanctions
and Embargoes

35-16

Many governments place legal restrictions on trade in


order to achieve desired political results.
Trade sanction: Laws prohibiting trade with specific
countries, sometimes referred to as embargoes.
These activities by nations are acceptable under international
law and are indeed incorporated in the charter of the United
Nations.

The charter also expressly allows trade sanctions and


embargoes by regional organizations, such as the
Organization of American States, the Organization for
African Unity, and the Arab League.

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35-17

Export and Import Controls

Tariff: A form of tax, or other restriction, on imports


or exports to attain economic results, such as
protecting domestic industries or facilitating the
production of certain crops.
The use of export licenses can be used as an
adjunct to national security.
Many countries, in order to maintain a positive
balance of trade (i.e., ensuring that the number of
dollars of exports exceeds that of imports), place
restrictions on the numbers and kinds of products
that may enter into their nation.
These restrictions are referred to as quota systems.

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35-18

Governmental Actions

Many governments attempt to maintain control over the


actions of foreign businesses operating within the host
country by controlling the ownership of the foreign
companys assets.
These attempts can take three forms:
Expropriation: The act of the host countrys taking title to all the
assets of the foreign company.
Confiscation: As in expropriation, also involves the host countrys
taking title to all the assets of the foreign company.
Domestication: Occurs when the host country mandates that at
least partial ownership of the foreign company be sold to local
citizens or companies prior to the foreign companys conducting
business within the host countrys borders.

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35-19

Boycotts

Boycott: Sometimes citizens of a particular


country refuse to purchase goods made by
businesses located in other countries. This
action may be supported by the government or
may not be.
Example: Morandim Corporation, a Canadian
company, manufactures chemicals and regularly sells
these to firms in the Middle East. Several of its
customers, who are Arabic, organized a boycott and
now refuse to purchase Morandim chemicals unless
the company agrees to provide written documentation
demonstrating that it does not conduct business with
firms in Israel.

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Doing Business in Foreign


Countries

35-20

Organizations that opt to conduct business in


foreign countries must follow numerous laws
and regulations. These include:
The Foreign Corrupt Practices Act;
The treaty relating to the Contracts for the
International Sale of Goods; and
The Foreign Sovereign Immunities Act.

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The Foreign Corrupt


Practices Act

35-21

In some countries, it is perfectly acceptable and indeed


expected that there will be payments made to individuals
in order to secure their business.
In the United States, however, this type of activity amounts to
bribery, which is both illegal and ethically unacceptable.

The United States passed the Foreign Corrupt Practices


Act (FCPA), a federal statute designed to provide
executives of American companies with rules and
restrictions relating to paying persons in foreign
countries to expedite business in these foreign nations.
Because customs and practices vary so greatly between
countries, the law has helped numerous executives recognize
what is and what is not acceptable conduct for U.S. firms,
irrespective of acceptable ethical standards in the foreign
country.

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Contracts for the International


Sale of Goods

35-22

A treaty known as the United Nations Convention on


Contracts for the International Sale of Goods (CISG)
was drafted to establish a universal set of legal
procedures to be applied to contracts covering
international transactions.
Countries that have signed the treaty are bound to the
terms of the CISG.
Since the United States has ratified this treaty, the CISG
supersedes the provisions of the Uniform Commercial
Code (UCC) in certain cases.

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The Foreign Sovereign


Immunities Act

35-23

The Foreign Sovereign Immunities Act (FSIA), a federal


law passed in 1976, established certain exceptions to
foreign sovereign immunity.
Under this statute, a U.S. Court may allow a lawsuit
against a foreign sovereign nation to proceed provided
the plaintiff can prove that the foreign nation engaged in
one or more of the following:
Commercial activity that occurred in the U.S. in connection with
foreign activity; commercial activity outside the U.S. that caused
a direct effect on U.S. commerce; commercial antitrust actions;
expropriation, terrorism, or torture; or other torts committed in the
U.S.

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International Law and


Intellectual Property

35-24

Intellectual property: Includes both artistic as well as


industrial property rights.
Copyrights, patents, and trademarks are the principal
areas involved.
Related to these rights is industrial know-how or
technology.

World Intellectual Property Organization (WIPO): A


specialized agency of the United Nations; an
international organization that administers
numerous treaties concerning protection of
intellectual property rights.
WIPO announced the formation of a center for the
arbitration of disputes involving intellectual property rights.

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35-25

Intellectual Property (cont.)

Copyrights
Copyrights protect the authors or creators of literary, artistic, or musical
works and computer programs.
These laws prohibit the reproduction or alteration of an authors work
without his or her permission.

Copyrighted materials are given at least minimal protection in most


countries.

Patents
Patents are a statutory privilege granted by a nation to inventors for a
fixed period of years to exclude all others from manufacturing, using, or
selling a patented product without permission from the inventor.
A U.S. firm can take advantage of world markets by licensing foreign
firms to either manufacture a patented product or use an innovative
manufacturing process in the manufacture of a product.

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35-26

Intellectual Property (cont.)

Trademarks
Trademarks, trade names, service marks, and
certification marks are valuable tools used by
businesses to identify their products and services.
The treatment of these valuable properties in
international commerce does not greatly differ from
domestic treatment.
Trademarks are viewed as property and thus can be
transferred or licensed to others.
Foreign licensees must meet certain product quality
requirements so that the use of the mark does not
deceive the consumer or decrease the value of the
mark to the owner.

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