The International Legal
Environment of Business
Chapter 22
International Issues
• International law and business
• U.S. import policy
• Business structures in foreign
markets
• Foreign Corrupt Practices Act
• International contracts
• International dispute resolution
The International Business
Environment
• Includes all business
transactions that involve
entities from 2 or more
countries
– Movement of goods
across countries
– Movement of services
across countries
– Issues regarding capital
– Issues regarding
personnel of
multinational enterprises
Risks of International Business
Transactions
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Financial
Political
Regulatory
All of these stem from
differences in
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Currencies
Language
Customs
Legal systems
Social philosophies
Government policies
Origins of International Law
• Commercial codes date
back to Egypt in 1400 B.C.
• Early trade centered around
law of the sea
• Greek/ Roman Empires
both had codes of
international trade
• Middle Ages: Lex Mercatoria
(Merchant Law) – Governed
trading customs in Europe
• Today’s codes still partially
derived from early efforts
Sources of International Law
• Individual countries create their own laws
• Trade agreements between countries
• Worldwide/regional organizations, i.e.
– United Nations
– European Union (EU)
• No universal international court system for
resolving international conflicts of businesses
• Difficult to enforce decisions and contracts
• See Exhibit 22.1: Selected Organizations
Affecting the International Legal Environment
International Trade Agreements
• Improve economic relations
of countries
• Cover variety of commercial
issues
• Tax agreements prevent
double taxation
• Examples:
– North American Free Trade
Agreement (NAFTA, 1992)
Canada/US/Mexico
– General Agreement on
Tariffs & Trade (GATT)
replaced in 1995 by World
Trade Organization (WTO)
U.S. Import Policy
(Taxes on Imports)
• Tariffs--Taxes
imposed by a
government on
imported goods
– specific tariffs:
fixed duties on
products
– ad valorem tariffs:
% of price of
product
• Harmonized Tariff
Schedules--
worldwide
classification of
goods for customs
officials
• Bans on Certain
Products--i.e.
weapons, illegal
products, narcotics,
national security
concerns, products
made from
endangered species
BASF Corp. v. United States
• BASF imports Lucarotin 1%, which contains 1% of beta-carotene and is
used as a food colorant.
• Classified as 3204.19.35 (Beta-carotene and other carotene coloring
matter) under Harmonized Tariff Schedule of the U.S. (HTSUS)
• Is subject to a tariff
• BASF argued it should be duty-free because beta-carotene is listed on
duty-free Pharmaceutical Appendix of the HTSUS (i.e. generates
Vitamin A in carrots)
• Customs classified Lucarotin 1% under 2109.90.99 (food preparations
not elsewhere specified or included: Other) which is subject to tariff.
• BASF appealed ruling to the Court of International Trade.
• Court held product only used as food coloring, and is properly classified
as 3204.19.35.
• BASF appealed.
• HELD: Affirmed.
• Pharmaceutical products are those “used in the prevention, diagnosis,
alleviation, treatment, or cure of diseases in humans or animals.”
• Customers buy Lucarotin for beta-carotene colorant.
• Lucarotin not eligible for duty-free importation.
Import Controls
• In U.S. – Dept. of Commerce through International Trade
Administration (ITA) & International Trade Commission (ITC)
• Antidumping Orders: When there is charging a lower price in an
export market than in a home market. Duty is determined by
comparing market price in home market vs. price charge in U.S.
When item is imported, then duty is applied to product.
• Duties on Governmental Subsidies: Tariff applied to offset
subsidies by foreign governments to their industries that lower
prices of products imported into the U.S. Duty applied is = to
foreign governmental subsidy. (Purpose: To assist U.S. products
to be competitive in the U.S. market) (counterveiling duties)
• Foreign Trade Zones: Goods processed. Duties assessed upon
leaving zone.
• Duty Free Ports: No duties or tariffs assessed on products, i.e.
Hong Kong
Huaiyin Foreign Trade Corp. v. U.S.
• U.S. crawfish processors filed antidumping petition with Department of
Commerce, claiming freshwater crawfish tail meat from PRC was sold in
U.S. at less than fair market value.
• Commerce investigated, sending questionnaires to PRC freshwater
crawfish tail meat exporters and producers.
• Determined most crawfish producers in PRC controlled by government
(called nonmarket economy [NME]) and were not selling at market price.
• Commerce imposed dumping duty of 201.63% for all crawfish tail meat
from NME processors and 91.5% duty for crawfish producers showing
they were not controlled by government.
• Huaiyin was accidentally classified as not under government control,
receiving duty rate of 91.5%.
• Commerce then issued Final Determination reclassifying him at higher
duty. Decision upheld by Court of International Trade. Huaiyin appealed.
• HELD: Affirmed. Huaiyan was not entitled to lower duty margin.
• Huaiyin did not participate in initial investigation and did not provide
any evidence that it was independent from PRC.
• Huaiyin therefore falls within the NME presumption.
Export Regulation and Promotion
(To Reduce U.S. Trade Deficit)
• Federal/State governments
– Commerce Department helps promote exports through
ITA activities
• Export Restrictions, if goods, for instance:
– Injure domestic industry
– Jeopardize national security
– Conflict with national policy (i.e. goods to support terrorist
activities)
• Commodity Control List
– List of goods subject to restricted licenses
– If item is not on Export Administration Regulations list,
then not subject to special controls
• Application to Reexported U.S. Goods
– Commerce licensing requirements apply
– Goods exported into country #1; then reexported into
country #2 (May violate U.S. licensing regulations)
Penalty Provisions for Violation of
Commerce’s Licensing Provisions
• Include criminal and civil penalties
• Can also have administrative sanctions
• If an exporter “knowingly” violates the Export
Administration Act, there can be fines up to
$50,000 per violation
• Person who “willfully” violates the Act, can be
fined more and receive up to 20 years in prison,
with a possible suspension or revocation of a
business’s authority to export
• Example: McDonnell Douglas paid $2.1 million
fine for improper sale of sensitive equipment to
China.
Foreign Manufacturing
• Franchise Agreement
• Wholly Owned
Subsidiary
– Business owns the
facilities – some
countries limit % of
ownership
• Joint Venture
– Sharing ownership with
foreign partners
• Licensing Agreement
– Licensor grants
licensee access to
patents and
technologies
– Franchisor grants
franchisee the rights to
sell products or services,
i.e. McDonald’s, Hertz
• Contract Manufacturing
– Contract made for
production of products
• Issues to Consider
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Labor expenses
Shipping costs
Raw material costs
Avoid restrictions/tariffs
U.S.: The Foreign Corrupt
Practices Act (FCPA) 1977
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Punishment of payer of bribe to foreign officials
“Corrupt” person displays reckless or conscious disregard for
consequences of one’s actions
Accounting provisions require practices to track transactions
Payer knows payment will go to public official
– “Any reasonable person would have realized”
– “Consciously chose not to ask about what he/she had reason to
believe would be discovered”
– “Simple negligence” or “mere foolishness” exception
“Routine governmental action” exception: “facilitation or
expediting payment. . . the purpose of which is to expedite or
secure the performance of a “routine governmental action.” (i.e.
visas, providing basic utilities, transportation services, etc. – small
amount and very limited usage)
In 2006 Congress ratified UN Convention Against Corruption to
help bring international cooperation to corruption enforcement
practices.
Punishments Under FCPA
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Individuals: Maximum
of $100,000 & 5 years
in jail
Corporation: Up to
$2,000,000/violation
Exception: Department
of Justice “pre-deal
interpretation”
Watch: “Slush funds” or
“salaries, commissions
or fees”
disproportionate to
service provided
See U.S. v. King
United States v. King
• Owl Securities and Investments (OSI) of
Kansas City was raising funds for large land
development in Costa Rica
• FBI investigated King, one of OSI’s largest
investors
• Kingsley (OSI executive) and other executives
tape recorded conversations
• King convicted of planning a bribe to a senior
Costa Rican official for rights to develop land
• Fined $60,000 and sentenced 30 months in
prison under the FCPA
• Appealed to U.S. Court of Appeals
United States v. King
• HELD: Affirmed. Ample evidence to support
jury’s conviction
• Tape recordings; “I think we could pay the top
people enough, that the rest of the people
won’t bother us any. That’s what I’m hoping
this million and a half dollars does. I’m hoping
it pays for enough top people.”
• Knowingly participated in, approved of and
acted to further conspiracy to offer the bribe
• Six witnesses over 5-day period and other
exhibits supported jury’s conviction
• Guilty of conspiracy and violations of FCPA
International Contracts
• Forum Selection Clause
• Cultural Aspects
– Language, attitudes
toward relationships
different in different
countries
• Payment Clauses &
Exchange Rates
• Repatriation of
Profits
• Choice of Language
Clause
• Force Majeure
Clauses
– Selection of Court
• Choice-of-Law Clauses
– Selection of which laws
apply
• Financial Aspects
– Exchange Markets
– Use of Letters of Credit:
Assurance by bank of buyer
to pay seller upon receipt of
documents that prove
goods were shipped and
contract was fulfilled
– Revocable or Irrevocable
Loss of Investment
(Political Upheavals, Unstable Monetary Systems,
Changes in Laws)
• Insuring Against Risk of
Loss
• Nationalization: Gov’t
– Short-term private
“nationalizes” entire industry,
insurers
including foreign investment
– Major insurers (i.e.
– Gov’t may pay less than
former Lloyds of
value
London)
– Gov’t agencies (i.e.
– i.e. Iran, Russia, Saudi
Overseas Private
Arabia and Venezuela
Investment
• Expropriation: Taking foreign
Corporation [OPIC])
insures investors who
property in accordance with
invest in less
international law
developed countries
• Confiscation: Taking without
payment is unlawful
International Dispute
Resolution
• Litigation
– Differs within countries
– Complication of evidence,
witnesses and documents
– Judicial system may be
different from country to
country
– Some courts more
influenced by political
pressures
– Not enforceable outside of
country
– Treaties/Conventions may
assist potential parties
– Contract clauses assist
courts in enforcement of
claims
– Usually need “minimum
contacts” for jurisdiction
• International Court of
Justice (ICJ)
– Only nations have
standing--not individuals
– Nations may make claims
on behalf of persons
– No mandatory
compliance requirement
– UN Security Council must
enforce
• Arbitration: 3rd neutral
party decides outcome,
which is binding
• Mediation: 3rd neutral party
“suggests” outcome, which
is not binding
Doctrine of Sovereign Immunity
and
Doctrine of Act of State
• Act of State
– Court gives up right
of jurisdiction over
foreign country or
representative
– Court will bar
compensation
because the acts
were by a foreign
government or
representative
• Sovereign Immunity
– Bar to compensation
by foreign investors
– Immunity to foreign
representative or
country
– One country must
respect the
independence of
other countries and
their representatives