INTERNATIONAL TRADE
FALL 2002
Problem 6.1: Trading with Non-Market Economies or Transitional Economies countries;
WTO membership
 MFN is cornerstone (GATT Art. I): (permanent) normal trading relations; concessions
granted to one nation must be granted to all members; serves overall goal of trade
liberalization;
 Problem: free riders- some countries may avoid concessions even while benefiting from
others’ concessions
 So, some countries prefer reciprocity- tension b/w reciprocity and MFN/NTR
 National Treatment (another GATT cornerstone): have to treat imports the same way
you treat domestic produced goods. Treatment can be different but can’t have different
effects. (example- bank fees)
China’s Accession to WTO
 2-step process for accession to WTO
o negotiate bilateral concessions with each WTO member that asks for one (usually
countries with export interest in applicant’s market)
o negotiation of protocol of accession with WTO as a whole- represents the terms
of entry into WTO and outlines the applicant’s current trade laws and what must
be done to bring them into conformity with the WTO
o some applicants seek developing country status to take advantage of special and
different (S&D) treatment
Historical Context of China’s Trade Laws
 very concerned with reciprocity
 prefers to negotiate bilaterally rather than multilaterally
 worried about free rider problem
WTO Dispute Settlement/US Disputes
 DSU disputes are between sovereigns- not private parties! This is true for all trade
agreements except for one small part of NAFTA!
 Five Stages:
1. Consultations
a. 10 days to reply to call for consult, and agree to enter within 30 days
b. once consult begins, 60 days to achieve settlement
c. a lot of times, this turns into a political negotiation, and the agreement reached
has nothing to do with the issue!
2. Panel est., investigation and report
a. Inverted consensus not to establish panel
b. WTO Secretariat maintains list of well-qualified panelists
c. 20 days to agree on panelists
d. complaints can involve 2 things:
i. violation of covered agreements
ii. nonviolation nullification and impairments of benefits under the CAs
e. procedure is similar to civil law- panel can engages in own fact finding
1
3.
4.
5.



f. panel produces 2 written reports: interim and final- DSB adopts by inverted
consensus
g. decisions are final as to fact, but not necessarily as to law
Appellate review
a. available as a matter of right, unless inverted consensus
b. seven judges, 3 assigned on rotating base
Adoption of panel and appellate decisions
a. adopted unless rejected by Inverted Consensus
Implementation
a. Potential resolutions (in order of preference)
i. Mutually satisfactory resolution
ii. Bring offending measure into conformity (w/in 15 mos)
iii. Winner compensated for injury
iv. Retaliation- winner can suspend some of its concessions, usually
must be within the same sector
parallel procedure for arbitration
inverted consensus
no direct form of enforcement- enforcement through members
Post-Cold War Trading System
 2 unintended and unwanted consequences of US generosity after WWII- convergence of
European and Japanese economies with US in 1970s and their emergence as different
forms of market economies than the US
 system friction: diversity in the trading policy agenda
 3 themes of this trade era:
o no such thing as free trade; all trade is managed trade
o most significant issue is b/w LDCs and DCs (differing viewpoints)
o persistent doubts about the benefits of free trade; Stolper-Samuleson Theorem
Problem 6.1 (class notes)
 Oxycorp trades with NME/TE
 GATT Art. I applies to concessions under ANY agreement (not just contracting party to
contracting party, but country to country); give concessions to anybody and must give
them to your GATT partners. Keeps people from making bilateral deals.
o Wouldn’t NAFTA, EU violate this? NO- these are provided for in GATT, as long
as their basic agreement with everyone else doesn’t get any worse. (But, still
actually does violate MFN status). Rationale: overall trade liberalization down
the line.
o China - we negotiate special deals, transitional arrangements for every single
sector- China claims that no country can go directly to GATT levels. China asked
to be classified as an LDC in order to get special treatment. It was decided to
classify whether China was DC or LDC, sector by sector.
o Most of the new WTO members are LDCs b/c the DC were in from the beginning
 How do tariffs/MFN affect a managed economy? Irrelevant b/c no price competition.
But, what is the point in joining GATT if no intent to open up and compete? Once
transition begins, snowball effect… Answer: probably does have an effect because of
the concurrent effects of modernization, consumer preferences, etc…
2


Structure of US Trade Institutions
o Congress
o Executive
 Dept. of Commerce
 ITA
 BXA
 Dept of Treasury
 Customs
 ITC
 USTR
 Asks for rates based on ITC studies, inputs based on parties
demands
Use of WTO DSU: used by some countries more than others; mostly DCs bringing
against other DCs (may be based on cultural differences).
o Ex. Ecuador-EU bananas
6.2: Customs Classification and Valuation: Peanut Butter and Jelly Swirl from China
(Don’t really need to study)
I. Double Happiness wants to export PB&J swirl to Fast Food to sell in the US; offering a lower price
depending on volume of order; FF wants to know the duties that will be imposed and country of origin issues to
see whether it is worth their while to make a deal with DH.

Three different HTS Tariff Rates
o Col. 1 General Rates (NTR)- unconditional rates, meaning reciprocity not req’d
o Col. 1 Special rates: Free Trade Areas (NAFTA) and eligible LDCs under GSP (preferencesbetter than MFN/NTR)
o Col. 2 Smoot Hawley Rates (apply to a few disfavored nations)
 Types of tariffs:
o Ad valorem: assessed in proportion to the value of the article
o Specific- measured by weight
o Compound: mixture of ad valorem and specific rate
o Tariff rate quotas: limit imports at certain tariff rate; imports beyond subject to higher rate
 3 steps for customs classification:
o product classification
o country of origin (substantial transformation, change in tariff classification)
o valuation (last transaction)
A. Product Classification
a. Initial product and origin classification of the imports are made by the importer, consignee or
broker; importer is liable for all import duties
b. If more than one possible classification, how do you pick?
1. General Note 17 – commingling
2. Mixture vs. commingling? Vs. composite?
3. GN 2b4. GN 3a- 2 headings
a. - most specific desc.
b. Doesn’t apply to PB&J
5. GN3b- essential chac
a. PB? Jelly? Which do you prefer?
6. GN3c- last in numerical order
a. Peanut Butter
3
b.
c.
But, then this requires further determination of country of origin to
determine tariff rate
7. GN1- go to headnotes instead of general rules
Harmonized Tariff Schedule of the US (HTS) (also, HTSUS, used to be TSUS)
i. Commingled goods are subject to the highest rate of duty applicable to any part unless
they can be separated, unless proof that cannot be separated and commingling not
intended to avoid paying duties.
1. HS has 20 sections, 96 chapters listing 5000article descriptions
ii. GRI are proper way to interpret HS- under 2 headings
1. essential character test- the attribute which is indispensable to the structure,
care or condition of the article
Better Home Plastics v. US
Issue: Should a packages containing the shower curtain, plastic liner and plastic rings be characterized by the liner
or the curtain?
Rule: the essential character test
Reasoning: the rule of relative specificity doesn’t apply when 2 competing headings refer to items within a set.
The essential chac test is appropriate. Here, the liner is the essential aspect of the set- it serves the purpose of having
a shower curtain, the fabric part is merely aesthetic. Thus, the lower tariff rates of the plastic liner should apply to
the set rather than the higher rates imposed on imported textiles.
Amoco Oil v. US
Issue: apply tariff to commingled entity even though it’s individual parts are duty free?
Facts: imported mixture of >50% propane and rest NGL; NGL duty free, propane duty free; but, mixture of 2 or
more compounds, 5% ad valorum.
Rule: mixture is dutiable
Reasoning: highest rate rule only applicable if articles subject to diff rates are commingled
d. Is PB&J a mixture, a composite or commingled?
e. Rules concerning country of origin can be very important
B. Place of Origin Classification
 Origin of the PB:
o Substantial transformation: has to occur to change country of origin
 If peanuts are from Laos, made into PB in HK
 Value added- yes! Expensive to make PB
 Change in use: producer to consumer good- swirl only good for one use
o
o
if this peanut butter is from Laos- problem!! Pays the highest rate (Col 2)
Philippines is Col. 1 General, but quota is higher than quota for China which is subject to lower
tariff (certain amount is free if falls within the quota; after this, subject to much higher rate- tariff
quota rate).
Superior Wire v. US
Facts: Spanish wire rod producer ships to Canada; Canada co transforms into wire and ships to the US; US has
VRA in place to limit amount of Spanish wire coming in.
Issue: Does the process in Canada sufficiently alter the product so as to change its place of origin to Canada?
Rule: Substantial transformation must occur to change country of origin. Includes: name change (not
dispositive), change from product with many uses to one with limited uses; complicated or expensive processing; or,
relatively high value added.
Holding: Substantial Change test not met- only 15% value added, name change is irrelevant.
a. Four Methods for determining origin:
i. Rule of last substantial transformation: good is attributed to country where it
underwent last substantial transform
1. producer – consumer good; value added; complexity of processing operation;
change in use; change in tariff classification
4
ii. Ad valorem percentage test (value-added percentage): minimum percentage of its value
that must come from the originating country or maximum amount of its value that may
come from the use of imported parts and materials
1. ignores exchange rates and price fluctuations
2. bright-line- can be arbitrary
iii. specific processing that does/does not confer national origin: technical, supplemental
rule of origin
iv. specified tariff reclassification: not always appropriate or effective
b. The Origin Agreement (Uruguay Rd.)
i. 2-step process
1. 3 year transitional period for rules to be drafted and adopted- members can
apply own rules
a. LAST SUBSTANTIAL TRANSFORMATION!! (not most
significant!)
2. adopted and applied to all signatory countries
c. NAFTA Rules: Annex 401
C. Valuation
 How to Value the PB?
o Transaction Value: price paid (include cost of freight and insurance?): $.50. (Tariff Act 1930 s.
1401 (c), p. 386 Doc Supp.)
 What if set up US sales office? Sell it to US office for less, say $.30 (get lower tariff)won’t fly b/c not an arms length transaction, these are related parties. Conspiracy to
Defraud the US gov’t.
 Intra-Firm trade can’t be valued this way for this reason- must use one of the other
methods.
o Identical/Similar goods
o Computed value
o Unit price
a. Old: American Selling Price- usual wholesale price at which same item manufactured in the US
was offered for sale (GATT Art. VII eliminated this)
b. WTO Agreement on Valuation is essentially the same as the 1979 code of the US
i. Transaction value: price actually paid or payable for the goods when sold for export to
the US (plus certain amounts for packing, commissions, royalties, licensing fess…)
c. EU: same as US
i. transaction value
1. Price paid or payable
2. close approximation
3. excludable costs
ii. identical goods
iii. Similar goods
iv. Unit Price in greatest aggregate quantity
v.
Computed Value
d. US/EU Valuation Processes essentially the same
e. History of Judicial Decisions Concerning Value
Nissho Iwai American Corp. v. US
Issue: where to determine the transaction value? Price of sale from foreign mfr to middleman or from middleman
to ultimate US purchaser?
Rule: first sale rule- but apply on case by case basis. Consider when the goods are clearly destined for export to the
US and when mfr and middleman deal with each other at arms’ length.
f. distinguish freight charges within and outside the US
g. danger of incorrectly assuming low duty/ high duty
h. prospective rulings- “ruling letter” is binding on all Customs Personnel, but only if the actual
import transaction corresponds with the ruling letter.
5
Problem 6.3 (424-468): Nontariff Trade Barriers (NTBs)
I. Environmental/ Conservation Laws as NTBs



GATT/WTO arbitrates most environmental disputes
GATT Art. XX (b) and (g); also the preamble, but not persuasive
General Exceptions (XX(b) or (g))- not applied in a manner constituting a means of
arbitrary or unjustifiable constitution
o Complaints based on: III- national treatment; XI quotas
o XX are defenses (exceptions!!)
 (b): necessary to protect human, animal or plant life or health
 (g): conservation of exhaustible natural resources
 Tuna-Dolphin Controversy
o Tuna I- (1991)- extraterritoriality- can’t do it out of your jurisdiction
o Tuna II- extraterritoriality OK, but can’t be too indirect
 Shrimp-Turtles
o If don’t catch shrimp using a TED or something comparable, can’t export shrimp
to US (s 609: develop int’l agreements, prohibit non-TED imports; applied to
whole world)
o Decided nation by nation whether to import
o India, Malaysia, Thailand, Pakistan bring GATT dispute
 US lost b/c applied in a discriminatory manner; should be:
 Shipment by shipment (or, vessel by vessel)
 Comparable std used
 P. 446 Questions and Comments
o Tuna I and tuna II never adopted- still important? Yes, b/c gives clues about how
to do things without violating GATT
o Animal rights vs. endangered species- Tuna II might actually pass now (MMPA
upheld as OK)
o Changed DS procedures- consulted outside experts; shrimp-turtle amicus briefs
(controversial b/c this is gov’t to gov’t, not NGOs)
 Doha dealing with this- US wants amicus briefs accepted from now on
 Secrecy of panel proceedings (pro- transparency; con- secrecy, save face)
Problem:
 Catching endangered sea turtles while tuna fishing; US passes act that requires imported
tuna to have been caught using TEDs; India, et al challenge the validity of this under
GATT.
a. Role of Science in Uruguay Rd and NAFTA: fundamental GATT cornerstones
apply here as in other areas; GATT Art. XX lays out two express exceptions
(narrowly construed)
A. (b) For measures “necessary to protect human, animal or plant health or
life, and (necessary turns on the effect of the measure)
B. (g) For measures relating to the conservation of exhaustible natural
resources if such measures are made effective in conjunction with
restrictions on domestic production or consumption
6
b. In the Wake of Tuna II: 3 Step Analysis for Art. XX:
A. Is the policy meant to conserve an exhaustible natural resource and was
it made effective in conjunction w/ domestic restriction?
B. Is the trade measure “related to” conservation of exhaustible natural
resources?
C. Was the measure applied arbitrarily/discriminatorily between countries
with similar practices?
D. Art. XX contains no limit on extraterritorial application- but the
application must be direct
c. Necessary = an alternative measure that could be reasonably be expected to be
employed and which is not inconsistent with other GATT provisions is available
to it. (almost impossible/ labeling requirements appear to be the only ones)
US – Shrimp Case (WTO A.B. 1998)
S. 609 to protect sea turtles violate GATT?
 although access to WTO is limited to member states, the Panel’s decision to accept
unsolicited information (i.e. from NGOs) is discretionary
 Customary Rules of Interpretation of Public International Law:
o Ordinary meaning of the words of a treaty, read in their context and considered in
light of the object and purpose of the treaty involved
o Where ordinary meaning is ambiguous, light from the purpose of the treaty as a
whole
o Focus on the manner in which the measure is applied, not the design of the
measure itself




Exhaustible natural resources not limited to minerals or non-living resources; exhaustible
and renewable are not mutually exclusive
o Sea turtles are definitely exhaustible as evidenced by their placement on
endangered species list
The means employed by the act are reasonably related to the end of protecting sea turtles
The measures imposed by the US are also imposed in the US
3 elements must be met for this law to violate GATT:
o measure must result in discrimination
o discrimination must be arbitrary or unjustifiable
 Made agreements with some countries, but imposed import embargo on
others? Not justifiable
 Arbitrary? yes
o discrim must occur between countries where the same conditions prevail
II. Public Heath Regulations as NTBs
 EU banned import of US hormone-injected meat; Appellate Body found in favor of the
US; now, the US may ban EU meat (mad cow disease) and may have to face the EU
making the same arguments that it made before.
 US uses 301 to retaliate
a. GATT rule
A. GATT uses SPS to set base for int’l standards
7
B. Uruguay Rd. put the SPS agreement in place- sanitary and phytosanitary
measures; fleshes out XX(b)
C. Many US env’tal and consumer standards are much higher than SPS
D. SPS requires “SPS measures are applied only to the extent necessary to
protect human, animal or plant life or health, are based on scientific
principles and are not maintained against available scientific evidence
1. national std higher than int’l not presumed to be necessary;
stronger std can’t be maintained in the face of conflicting scientific
evidence
EU – Hormones (WTO AB 1997) (US, Canada v. EU)
AB held that EU was not justified in banning the import of US meat treated with hormones, and
was given 15 months to come into compliance with the ruling by May 1999). (EU raised 10
issues on appeal). The risk assessment was not an evaluation of the adverse effect of growth
hormones on human health.
 US authorized to retaliate $160 million in tariffs
o EU still refuses to comply b/c believes it is justified as a public health measure
 Burden of Proof: complaint must establish prima facie case of inconsistency with
provision of SPS agreement; this shifts the burden to the D, who must counter the
claimed inconsistency
 Relevance of precautionary principle in the interpretation of SPS
 Application of SPS to measures enacted before 1/1/95: no grandfather rights!
 Objective assessment of the facts
 Interpretation of Articles 3.1 and 3.3 of the SPS Agreement
o EU’s assessment is not based on SPS standards
o Member may establish higher level of sanitary protection under 3.3- but must be
based on scientific justification or as a consequence of something laid out in Art.
5.
o Risk assessment must proceed on case-by-case basis
o Panel found use of growth hormones safe; as did the EU itself (so long as
properly used, and even if not, no evidence)
o EU didn’t proceed to an assessment of the risks arising from failure to properly
use hormones
 Complaint in violation of SPS 5.5 must show three elements
o Member imposing the measure in dispute has adopted its own appropriate levels
of sanitary protection against risks to human life or health in several situations
o Those levels of protection exhibit arbitrary or unjustifiable differences in their
treatment of different situations
o These differences result in discrimination or a disguised restriction on int’l trade
 AB recommends the DSB request the EU to bring the SPS measures found in this report
to be inconsistent into conformity. Arbitrator gave them 15 months from Feb. 1998 to
comply
p. 466 Questions and Comments
 Allowed to have Nat’l standard higher than int’l std? Need to have scientific evidence to
justify higher standard; less restrictive options, like consumer education (labeling)- if no
one buys it, we won’t export it.
8


Precautionary Principle: err on the side of caution; don’t use until proven safe (food
safety cases)
o What about the fact that the EU allows hormones in pork, but not in beef? Hurts
their argument!
Is WTO DSU working better than under GATT?
o No precedent because based on civil law traditions
o What is the AB standard of review? It’s chaos now (acting autonomously)
o Rotating panel of judges- appearance of neutrality makes it necessary to have
judges from smaller countries.
6.4 Free Trade Areas and Customs Unions: Japan’s Perspective
SUNRISE (“quality is everything”)
 engineering and design in Japan
 components made in Japan and shipped abroad for assembly- ensure reputation for
quality (screwdriver assembly plant)
o does this make it a European/North American product?
 or, use components obtained in France or US (or anywhere in NAFTA or EU)
 product safety
 rising value of the yen making Japanese bikes less competitive abroad
o losing market share because French or US bikes have no tariffs within
EU/NAFTA









Production in the US or France?
NAFTA “free trade area”- tariffs, quotas, and other barriers to trade in goods and
services among participating states are removed or reduced while individual barriers vis a
vis third party states are retained.
EU “customs union”-removes barriers among participating states, but also create
common tariffs and other trade policies for all participating states as regards third-party
states.
o Which is preferable for foreign investor? Customs Union
o Can Sunrise take advantage of NAFTA ?
Common markets: customs markets + free movement of factors of production among
participating states
Economic communities: common markets + harmonization of basic national policies
related to the economy of the community
Economic unions: embrace a more or less complete harmonization of national policies
related to the economy of the union (difference in number and importance of
harmonization)
Regional trade blocs: economic development and more bargaining power
All regional agreements monitored by WTO, governed by Art. XXIV.
Japan is not a member of a regional economic alliance
9
A. European Union
a. All regional forms of economic integration are inherently discriminatory in their
trade impact
i. FTA and Rules of origin- keep third parties from seeking highest quota
or lowest tariff and then exploiting the trade advantages within a free trade
area. Trade is “free” only for goods substantially originating therein.
Apply to NAFTA.
1. Rules of origin don’t really matter for customs union because
pay the same tariff no matter where the good enters, then subject to
no internal tariffs.
2. “Customs Union Dilemma”: Trade diversion more obvious in
customs unions, common markets, etc
ii. GATT Article 24: Free trade area and customs union proposals must be
formally allowed by GATT, which can make “binding” recommendations
to bring the proposals into conformity with Art. 24.
1. Treaty of Rome (EEC)- many GATT complaints that 24 violated,
especially regarding the method of calculating the common
external tariff.
2. BUT- GATT ultimately gave way to the EEC!
b. WTO: No Clash of the Blocs- although there has been an increase in blocs and
inter-regional trade, MFN tariffs remain very low, attention has shifted to the
problems of NTBs, which are not administered preferentially within trade blocs,
and few regional blocs cover services, agriculture and IPR the way the WTO
does.
c. Regionalism and the Multilateral Trading System (WTO)- nearly all 131 WTO
members have signed regional trade agreements. Compatibility?
i. Article 24 Main requirement: purpose of the regional trade agreement is
to facilitate trade b/w the constituent territories (A.24(4)) and not to raise
trade barriers against other WTO non-regional bloc members. (A.25(5)).
1. Committee on Regional Trade Agreements
ii. Can make tariffs lower within the regional bloc, but they cannot be any
higher on the whole vis a vis non-bloc countries than they were before.
1. tricky because they all had different external tariffs to begin with;
when they adopt one, someone’s is bound to have gone up (EU)
d. Europe is a customs union
i. Committed to elimination of tariffs, quotas and “measures of equivalent
effect” (i.e. administrative fees at borders)
1. def: any national rule directly or indirectly, actually or potentially
capable of hindering internal trade is generally forbidden as a
measure of equivalent effect to a quota.
2. Cassis Formula: Rule of Reason: If EU law has not developed
rules in the area concerned, the member states may enact
“reasonable” and “proportional” (no broader than necessary)
regulations to ensure that the public is not harmed.
a. Products meeting reasonable national criteria may be freely
traded
10
b. Country of origin labels are measures of equivalent effect.
Also national procurement laws, minimum and maximum
pricing, compulsive patent licensing, linguistic labeling
requirements.
c. Exceptions: cultural interests, national marketing laws
(applied w/o discrim b/w national and imported products)
ii. Art. 30 and NTBs
1. NTBs are major trade barrier in EU; authorized in the absence of
harmonizing directive, Treaty of Rome permits national
restraints on imports and exports justified on the grounds of:
a. Public morality, public policy or public security
b. Protection of health and life of humans, animals and plants
c. Protection of national treasures possessing artistic,
historical or archeological value
d. Protection of industrial or commercial property.
2. 2 approaches to eliminating NTBs in EU:
a. when possible harmonization (auto pollution)
i. In certain areas (env’t and occupational safety),
Treaty of Rome expressly indicates that member
states may adopt laws that are more demanding than
Union legislation.
b. Mutual reciprocity- minimalist approach- requires
member states to recognize the laws of other member states
and deem them acceptable for the purpose of the operation
of the common market.
Commission v. Federal Republic of Germany
Facts: Germany (D) prohibited the marketing of beer containing additives. Since almost every other member state
besides Germany brewed using additives, the Commission (P) concluded that D’s law created a barrier to imports
into Germany of beer lawfully manufactured in other countries, contrary to Article 30 of the EEC Treaty. D argued
that its regulations were intended to reduce consumption of additives in Germany and to protect consumers against
misleading labeling.
Rule: Prohibitions must be restricted to only that which is necessary to protect public health. Have to allow it in
unless you have a really good reason no to.
Holding: Germany excludes all of the additives that are authorized in beer production in the other member states,
without justifying this exclusion in terms of health risks. Proportionality requires that other states be able to apply to
Germany for approval of their additive; the German law contains no such provision. Germany is attempting to
prevent the evolution of German beer consumer tastes while at the same time giving its own producers an advantage.
Plus, there are less restrictive means to achieve the end of consumer protection- labeling requirements. And,
Germany uses additives themselves.
B. NAFTA – free trade area; no internal tariffs, but each country maintains its own
external tariffs (don’t need to know RO details!!)
a. Rules of Origin, may be an NTB
i. CUSFTA; then, Mexico announced its intention to negotiate an agreement
with the US; so, NAFTA (1991).
1. US wanted to do it because of cheap labor in Mexico; solve illegal
immigration problems; get the Uruguay Round moving; response
to the EU.
11
2. Mexico: access to US market, respect- third world side by side
with US and Canada.
ii. Honda Case: roll up and roll down; Canada says car is NA b/c engine is
NA, puts content over 50% so roll up to 100% NA; US says car is not NA
b/c engines aren’t NA, so content less than 50% so roll down to 0% NA.
PROBLEM- conflicting results!!
b. Diversionary effect of NAFTA’s rules of origin on trade b/w US and Asia: nonNAFTA members worried that Mexico, with its lower labor and other costs, could
be used as an entry platform into the US of goods consisting largely of thirdcountry materials
i. Tariff-shift rules: qualify as an originating good only when each
nonoriginating material used to produce the good undergoes an applicable
change in tariff classification as a result of production in one or more of
the NAFTA countries.
ii. Value-content rules: percentage of the value of the good must be North
American.
1. transaction-value method: assembly of its parts within NAFTA
accounts for 60% of the finished value; generally means the price
actually paid or payable for the good or,
2. net-cost method: 50% of the net cost of the product; price paid for
non-NAFTA-origin materials from the net cost to the producer of
the good and dividing that figure by the net cost to the producer.
iii. Japan: loudest complainant and least damaged by NAFTA. Japan’s
quality so good that demand for its goods probably won’t decrease much;
Japanese investment in NAFTA territories will comply with rules of origin
1. Textiles: textile imports into US subject to both tariffs and quotas
under Multifiber Arrangement; NAFTA will eliminate both tariffs
and quotas for qualifying goods
a. Originating goods “yarn forward”- textile and apparel
goods must be constructed from yarn produced in a
NAFTA country.
b. Net effect: increased imports of Mexican mfrd textiles and
apparels using North American yarn and fiber.
2. Motor Vehicles: relatively little impact on exports of automobiles
to North America (low tariffs anyway); BUT- will affect the Asian
automobile parts industry significantly
a. General NAFTA rule is 62.5% regional content to qualify
for regional benefits- incentive to buy NA parts
b. 25% tariff on light truck imports from Asia
c. NAFTA- Product Standards
i. Incorporates GATT Agreement on Technical Barriers to Trade (TBT)
and all other int’l agreements, specifically including env’l and
conservation, of Canada, Mexico and the US
1. diff b/w SPS and TBT:
a. TBT- product standards; nondiscrimination (Cassis)
12
b. SPS- accordance w/ scientific principles and risk
assessment (beef hormones)
ii. NAFTA permits the use of product standards as NTBs
1. Safety, Health, Env’l and consumer protection:
a. A.904- each member can adopt appropriate standards- right
preserved to all levels of gov’t
b. must be administered w/o discrimination
c. cannot intend or have the effect of creating unnecessary
obstacles to NAFTA trade
d. adoption of int’l standards is req’d but higher stds may be
chosen
e. each country promises to work jointly toward compatible
product stds and certification procedures
f. duties to keep standards issues out in the open
2. Legitimate Regulatory Objectives:
a. A.915 “legitimate objectives”- include safety, health
protection, env’l, consumer and “Sustainable development”
b. Must also assess risk and consider discrimination rules
iii. Chapter 20 Dispute Resolution: faster than WTO
1. preserves right of each member to use WTO instead, but once
decision is made, it is binding
2. Respondent controls use of NAFTA for certain env’l agreement
disputes, SPS disputes and env’l, health, safety or conservation
product or service stds disputes.
3. complaints for inconsistencies w/ NAFTA or against measures that
aren’t inconsistent but nullify or impair the expected benefits of
NAFTA
4. nonbinding arbitration before 5-member panel; no review body;
report done within 120 days; 3rd NAFTA party can join when has a
substantial interest; private parties may be experts
d. DR under NAFTA
i. Of 8 filed by 12/96, only 3 resolved; 8 unresolved- why?
1. no requirement to escalate if consultations don’t work
2. political factors- long-term survival of NAFTA over particularized
interest in controversial existence of NAFTA
Sunrise- tariffs not affected necessarily, but the effect of cheaper goods- this will hurt sunrise.
Rules of origin will be a problem.
European Union (EU)
 Sunrise- pay common tariff to get bike parts into EU, but then no internal tariffs to trade
after that.
 Product safety regulation within the EU: will the Japanese bikes pass the safety tests of
the EU? Two choices:
13
o Mutual recognition- if generally accepted as safe in one country, generally
accepted as safe in all EU countries
o Harmonization- harder to get; means the EU has a generally accepted standard
NAFTA
 More inclusive agreement than GATT- NAFTA includes IPR, services, etc.
 Sunrise- nonoriginating good, so going to have to pay tariffs to get into the US and to
trade within NAFTA!
o So, Sunrise should start using components from within NAFTA or relocate
production here.
o No considerations of harmonization for product standards.
o Honda case- Sunrise needs to be very concerned about the composition and
classification of its components. If bikes are classified like cars, Sunrise is
screwed.
o Sunrise could locate assembly in country with biggest market (US) because
minimizes movement across borders.
NAFTA Dispute Resolution
 Chapter 20: looks like WTO DSU- state to state (not many cases)
 NAFTA states have choice of whether to use NAFTA or WTO
o STRATEGIC CONSIDERATIONS, like joining with other countries, which
mechanism has more favorable laws
 NAFTA chapter 11 (investment): allows investor-state disputes to be heard; private
party can bring suit directly against a state without having to go through USTR; used a lot
for env’l protection
 Chapter 19: Appeals process from CVD or AD; private parties can appeal of would have
an appeal under domestic courts (lots of chapter 19 cases)
Rules of Origin (RO), WTO and Regional Trade Agreements
 NAFTA RO are really important; allowed to be more specific than WTO but cannot
violate (Art. 9)
 WTO RO are more general; WTO aims to harmonize rules of origin
 NAFTA-WTO conflicts- NAFTA specifically provides for conflicts in env’l (must use
NAFTA); if have a choice, complaining party can choose, but env’l is supposed to go to
NAFTA.
REVIEW:
 know difference b/w customs union and free trade area and differences
 rules of origin only to the extent of this
 know principle of how it works, but not the nitty gritty
 differences of location of production
 just know the general idea – NAFTA origin materials
o Don’t want parties to get benefit of NAFTA agreement that don’t deserve it.
o Hoped it would induce FDI and production in NAFTA countries – counteract the
move toward Asia.
 EU – all have a common external tariff – doesn’t matter where you send it in.
 RO important in FTA more than customs union.
14
Ch 7: Responses of Domestic Producers to Import Competition
Intro to 7.0: Protection from and adjustment to Imports
 2 major problems:
o Subsidies: gov’t of exporting nation may have subsidized the production of the
goods, artificially lowering the price
o Dumping: foreign seller selling at “distress price”, which are less than what is
charged at normal market conditions or at home price; can drive domestic
companies out of business, but, good for consumers
 2 Domestic Responses:
o CVD: deal with subsidies; money added on to bring good up to the “right” price
o AD: deal with sale at “less than fair price”
 CVD & AD: material injury to domestic industry actually occur or be
threatened, or establishment of it materially retarded
o GATT: escape clause/safeguards even when no subsidies or sale at less than fair
value (Section 201 actions); import surges
 Escape clause: imports are substantial cause of serious injury, or the
threat thereof to an existing domestic industry
 Administrative and Judicial Procedures for CVD
o Congress has plenary power over trade, but delegates to executive and to
administrative agencies
 House ways and means; Senate Finance
 Delegates to Pres, exec agencies
 Fast track authority (trade promotion authority)- Pres negotiates
and Congress has 90 days to accept or reject the agreement in
entirety; problem is that it may undermine the democratic-ness of
the legislative process
 Fast track lapsed after NAFTA, reinstated just recently
 Until 1950s, State Dept.; now, Commerce, State, Treasury, Agriculture,
Labor
 USTR- negotiates agreements
 Commerce- ITA; Bureau of Export Admin.
 Treasury- Customs
o Int’l Trade Administration (ITA)/Commerce Dept./Executive branchindependent agency; designed to be helpful to individual businesses; decides
whether there are subsidies or dumping in cases; not involved in escape clause
o ITC: independent, bipartisan agency created by Congress; prepares reports about
int’l trade and economics for the executive branch, congress and other
government agencies and the public.
 Intended to be quasi-judicial, independent and bipartisan; extensive
procedures to ensure bipartisanship
 Determines whether there has been an injury
o Court of International Trade (CIT): Article III Court; Pres appoints 9 judges
(bipartisanship); geographic jd of US; exclusive SMJD except over import
15
restrictions having to do w/ public safety or health issues; CIT decisions appealed
to Ct of Appeals for Federal Circuit (CAFC) and SC
 NAFTA country can appeal to Chapter 19 instead of CIT, CAFC
 Canada could appeal adverse AD claim under NAFTA (ch. 19) instead of
CIT; when binational panel reviews it, going to be applying (US) law for
conformity
 This is good because less biased than CIT
 Extraordinary Challenge Committee (EEC)- major defect in the decision,
very rare
 Can bring NAFTA AD decisions to WTO




o Summary: CVD and AD processes may be initiated by either Dept of
Commerce or aggrieved industry; ITA decides whether this is a subsidy or
sale at less than fair value; ITC determines whether domestic injury
occurred or threatened.
Antidumping: foreign producer is selling it cheaper here than it is somewhere else;
need to add onto its price at the border to bring up to fair price; GATT allows this; these
are the most common issues in international trade law and practice
o Have to show threat of injury, material injury or material retardation of
establishment of domestic industry
o Dumping margin: difference in price; most of the argument is here
o See Handout on Steps of Antidumping case
Subsidies: economic benefit conferred on businesses to increase their competitiveness
(money, grants, low-interest loans); tack on CVD to make the good cost what it should
cost w/o the gov’t help; SCM Agreement; WTO addresses this.
o Show subsidy
o Show injury
o Subsidy margin determination
o See handout on steps of CVD case
Safeguards/Escape Clause: fair but still need help, unforeseeable import surges; higher
injury standard
o Temporarily raise tariffs to help domestic industry
o Other country can also suspend concessions, etc.
o US very seldom does this; politically costly, can trigger trade wars
o Last March, Bush imposed 30% tariffs on steel under escape clause; not very
successful, EU retaliated, went to WTO DSU
WTO DSU in AD and CVD Cases:
o Inverted consensus makes decisions binding
o Loser can compensate winner; or, winner authorized to retaliate by suspending
concessions
o Standard of Review:
 Issues of fact: if determination was unbiased and objective, even though
panel could’ve reached another conclusion, it may not overturn factual
finding
 Issue of Law: interpret provisions consistent with customary rules of
interpretation of public international law (Vienna Convention on Law of
16
Treaties); principle similar to judicial deference to agency interpretations
of a statute
o Implementation of Panel Reports:
 Congress must comply with adverse findings by amending a statute under
fast track procedure
 Escape Clause Proceedings: rarely invoked and rarely lead to relief
o Trade Act of 1974: not targeted at unfair practices, but at import surges; domestic
industry relief is temporarily appropriate while adjustments are made
o GATT XIX
 Rarely invoked b/c most trade partners can take compensatory action of
the Pres grants relief.
 Prevent seeking or using VER or VIR; need proof of serious domestic
injury, can present evidence, and there’s a max 4 year period of protection.
 No escape clause relief bilaterally with US-Canada or US- Mexico
 Main focus of US escape clause relief is trade adjustment assistance
 For workers: supplemental cash unemployment comp
 Companies: loans, technical aid
 Communities; no!
Review: Exam
 US has its own national laws on this (implementing legislation), for WTO and NAFTA
laws.
 Must have a certain percentage of the industry ask the gov’t to impose an import duty on
the goods b/c they’re being dumped or a subsidy
 Subsidies: subsidy + injury
o Show industry begind it
o Show the margin
 Dumping: dumping + injury
 Ignore the traffic light – as a practical matter, it’s dead
7.1: Subsidies and CVD: Tires From and To Canada
 Michelin has 2 plants in Nova Scotia that primarily export tires to US; Canada and NS
have given grants, tax breaks and low interest loans resulting in a 7% reduction in the
cost of producing tires; the Association has initiated a CVD case.
 Duties are determined on a country-wide basis (rather than industry)
 Countervailable subsidies (US law):
o Export subsidies: specific, compatible with GATT- give the $ but have to export
the product
o Domestic subs: have to look at facts to see if specific.

U.S. definition of a subsidy (Tariff Act of 1930 s. 1671, 1677 (570))
o Subsidies must be 3 requirements:
 Either financial contribution or income or price support
 Must confer a benefit
 Specificity: to distinguish b/w good and bad
 Specific: US law (5A, 572) Specificity of Domestic subsidies:
17
o Authority granting expressly limits access to subsidy to
specific industry
o Objective criteria for applying
o An enterprise or industry receives disproportionate share of
the subsidy
o Where a subsidy is limited to the geographical jd of the
authority granting the subsidy.
p. 586 Problems:
 Is there a subsidy in this case? There is a financial contribution and a benefit and it is
specific to Michelin. Is it export or domestic? Export because most of the tires are
coming to US (doesn’t have to be explicitly stated, but if implicitly tied to anticipated
exports, this is satisfied; this is presumed red light).
Part B: Tires to Canada
 Because we made everyone adopt our CVD laws, then we can’t do it either.
 Is this a de facto red light subsidy? Yes because same situation
 Actionable yellow light: SCM Article 2 (Specificity): yes
 Monoroyal can go to Canadian courts or NAFTA binational panel; pick binational panel,
but shouldn’t matter because both apply Canadian law and standard of review. So why
does it matter? More objective.
 Precedent system: does Canadian CIT have to follow panel decisions? NAFTA
binational panel has preference for retired judges because will adhere to precedent. CIT
and Canadian CIT are irritated by binational panel, so don’t really adhere to panel
precedents.
 NAFTA 1902(2): can’t amend domestic laws to be inconsistent with GATT.
 What happens to the money US gets from tariffs and CVD/AD?
o Went to Treasury until 2000, with BYRD Act
 Distribute money we collect annually to affected enterprises qualifying
expenses (“subsidies”). Now, financial incentive to file CVD claims.
 Completely reversed the whole system, pissed off our trade partners.
They filed WTO suit claiming that this is a subsidy- 11 countries including
Mexico and Canada, EU (largest dispute ever). The US lost (September 2,
2002, have 60 days to decide whether to appeal); this decision suggests
that the US will have to repeal the law to come into conformity with the
WTO.
Problem 7.2: Antidumping Duties: Supercomputers to the US
Facts: Grey developed new computer that is both vector and scalable. Two Jap firms also produce- CEN and
Jujitsu. GSA wanted to buy; Grey offered at $17m, Jujitsu for $9m; and it bought from CEN for $10m. Grey’s cost
is $15m (incl R&D costs). CEN doesn’t allocate these costs (neither does Jujitsu, because they are part of a larger
conglomerate that can afford to “take the hit” in the short run). Grey has 60% global share; Jujitsu and CEN are new
and have small share. CEN sells in Japan for $10m, one to India for $15. Nine other genealogical grps want
computers that are compatible; this would be 50% of the US sales for the year.
18

Has CEN sold to GSA at LTFV?
o Tariff Act of 1930 s 1673: compare normal value and export price
 LTFV b/c not factoring in R&D, so must use third country sale price; 15m
in India, 10m in US: 50% dumping margin
 Not LTFV b/c normal value and export price are the same.
o S 1677b: definition of normal value:
 Home price in ordinary course. Have there been a sufficient number of
sales to Japanese buyers? Sales in Japan must constitute 5% of US Sales.
(One sale is probably sufficient b/c so expensive, probably amounts to 5%
rule).
 US wants to throw out the Japanese sale because this would
probably prove against Japanese dumping.
 So use the sale to India (1 computer), or
 Constructed value (based on best information available); this is the best
option for the US industry because the info comes from the petitioner;
send inquiry to foreign producer, but they usually don’t fill it out.
o Determination of industry support: needed under Uruguay Round and US
Law (1930 Tariff Act s. 1673a(4))
 25% test: petitioners represent 25% of the total output of the “domestic
like product”, and
 50% test: represent 50% of domestic producers expressing an opinion
 if don’t show this, ITA will poll the industry; best bet is to show 50% for
the 25% test.
 Material Injury? Harm which is not inconsequential, immaterial or unimportant
o Yes- lower ability to compete, less money into R&D, may lose 50% of domestic
market share
o No- still has 60% of global market share
o Threat of material injury: list of ten relevant economic factors (p. 577 in Doc
Supp.); this might be better argument b/c hard to show immediate injury, easier
to show threat thereof b/c other nine genealogical groups are going to buy
compatible computers. Timing issue- wait until injury occurs, or file claiming
threat?
 Causation: show that dumping caused the injury or threat
o If can show that it’s predatory, easier to show causation!
Focus of Consideration: impose AD on any goods sold at LTFV; requires comparison of
normal value with export price to determine whether LTFV (ITA decides this); necessary injury
is a material injury, a threat thereof, or the material retardation of the establishment of an
industry in the US (ITC decides this). Goods imported after the preliminary determination will
be subject to any antidumping duties later imposed. This tends to discourage imports.
A. Fair Value Determinations under the AD Statute
a. Dumping: “price discrimination b/w national markets”
b. Act of a private party, rather than gov’t- not condemned by GATT, but GATT
authorizes countries to impose AD duties to offset the effect of injurious dumping
B. Rethinking AD Law
19
a. Def: international price discrimination; occurs when the exporter sells
merchandise in the importing country at a price below its cost of production
b. A product is dumped if its EP (export price) is less than NV (normal value).
c. Tariff Act of 1930, s 1677b: The NV is the foreign home market price of a
“foreign like product” sold in the ordinary course of trade (not to a rel’d party or
below cost) for consumption in the exporter’s home country.
i. Can also use NV in a third country or constructed value (CV) in lieu of
NV. CV (constructed export value) is based on the first sale to a
purchaser unrelated to the exporter. Must account for 5% of sales in a
year.
d. Must have dumping & Injury!
e. 2 part de minimis margin inquiry: Antidumping Code
i. is the volume of imports in question so low that authorities should ignore
the allegation? 3%
ii. is the dumping margin so slight that the authorities should ignore it for
purposes of dumping margin and injury determinations? 2%
1. dumping margin: normal value – export price; expressed as a
percentage because it’s the amount of duty levied. The dumping
margin divided by export price = dumping margin %!! This is the
amount tacked on the reach the fair price.
2. (NV-EP)/EP = dumping margin %
f. Material Injury Determination: industry wide consideration, not particular
company
i. Three variables to consider:
1. volume of subject merchandise in the importing country
2. the effect of such merchandise on prices for a domestic like
product, and
3. the consequent impact of such merchandise on domestic producers
of the like product
ii. Distinguish between direct and circumstantial evidence of injury
1. direct: decline in profits, wages, or the ability to raise capital
2. circumstantial: large dumping margin or decline in output,
productivity, or capacity utilization
iii. Cumulation: problem w/ lax causation standards- ITC cumulates importsArt. 3.3 of the Agreement expressly condemns the practice of
cumulatively assessing the impact on a domestic industry of imports that
are the subject of different antidumping petitions. This increases the
probability of finding an injury.
1. absence of an agreement or intent to injure is irrelevant
2. cumulation penalizes a small exporter by grouping it with large
exporters- subject to AD duties that are result of practice of ;large
exporter.
3. this whole thing is unfortunate to LDCs that rely on comparative
advantage. Cumulation is prohibited in the traffic light system.
20
C. Major Changes in AD Code of Uruguay Rd. (GATT Art. VI)
a. GATT wants to acknowledge legitimacy of AD actions while at the same time
prevent them from becoming procedures of protectionism
i. Methodological Rules:
1. Market viability tests: when home market sales are less than 5% of
the sales to the importing country, use the export prices to 3rd
countries as normal value (NV)
2. Sales below cost: if sales at home are below costs, may ignore that
price and use constructed value; below cost sales must be
substantial, 20%+ of total sales.
3. price comparisons: avg foreign market price over time compared
to individual sales prices to the US
ii. Procedural rules:
1. Injury: GATT rules will sanction the use of cumulation (where
injury is determined by assessing collectively the impact of
imports from several countries under investigation).
D. Causation
a. Causation on a case-by-base basis
i. Trend in quantity and market penetration from imports
b. Underselling: mean price of the imports below the that of the competing
domestic good
c. No attempt to adjust the prices for differences in quality, reputation, or the terms
of sale.
NEC vs. Dept. of Commerce & ITC
Facts: P challenged D determination that P’s LTFV supercomputer imports threatened a material injury to the
domestic industry, arguing there was no threat of material injury b/c ks were awarded on a basis other than
price. Cray Research alleged that vectors from Japan were being dumped. ITC concluded that US was
threatened with material injury.
Issue: Does any contribution to material harm caused by LTFV imports constitute sufficient causation to
satisfy the legal std?
Holding: No. A threat of material injury determination requires adequate evidence to show that the threatened
injury is “by reason of” the LTFV imports; that is, LTFV imports must make a material contribution to causing
the threatened injury, not a minimal or tangential contribution. ITC didn’t distinguish b/w LTFV imports and
unrelated negative economic factors
Coalition v. US
Facts: P complained that ITC AD determination was unsupported by the substantial evidence in the record and
contrary to law concerning its finding that imported brake drums from China didn’t materially injure nor
threaten to the domestic brake drum industry. P says ITC didn’t consider evidence of the volume of imports
and their harmful impact on the US industry.
Issue: Did ITC fail to consider the volume of imports and their effect on prices in the US and the impact on the
domestic industry for AD purposes?
Holding: No. In determining material injury, consider (1) volume of imports, (2) effect on prices in US of like
products and (3) impact on domestic producers. Here, ITC did this and concluded that subject import volume
was not significant. Despite increasing volume and penetration, US industry had also increased its production,
shipment, and capacity and its market share remained stable. Despite evidence of underselling, also evidence
that a substantial increase in operating income despite increases in import volume and penetration.
21
E. The MNC, Integrated Int’l Production and US AD Laws
a. Criticisms of US AD Law
1. US petitioner has failed to compete internationally
2. public interest not considered; bad for US consumers
3. may encourage or require oligopolistic behavior
4. AD laws are application of state power on behalf of private
interests which have failed to compete in the market
5. fail to take account of normal business practices
a. no recognition that short-term dumping may be response to
unanticipated market developments, currency fluctuations,
or swings in demand.
6. don’t need them- competition and antitrust laws!
b. Defense of US AD Laws:
1. since must be filed on behalf of an industry, can’t be used for
purely private grievance
2. since must find injury, can’t be b/c of bad business decisions
3. necessary in today’s world economy
4. generally administered fairly, impartially and transparently
compared to other countries AD laws
5. diffusion of decision-making process b/w ITA and ITC- procedural
due process
c. plagued by same procedural criticisms as CVD- usually just threatening AD
means the domestic industry wins!
F. Questions and Comments
a. Defining the relevant market/industry (all computers?, all supercomputers? All
supercomputers capable of vector and scalable?)
i. Domestic producer argues for narrower industry- easier to show injury,
etc… (all supercomputers capable of both vector and scalable computers).
Convince each commissioner on ITC of this.
b. 10 relevant economic factors for finding threat of material injury
c. trade association usually track industry-wide figures; this is why most CVD and
AD cases are initiated either by trade associations or a gov’tal agency
Policy Considerations
 if take predation out of the equation, is dumping bad? Selling in one country for cheaper than others?
Without predation, dumping doesn’t really make sense…
 Antitrust and competition laws should then take care of dumping without predation. There is then no need
for any of these laws. Yet, almost every country now has AD laws!!
 What is the lawyer’s role in this? Files petition with US gov’t- how political is this? Gov’t can pressure
petitioner to withdraw the petition.
 Result of AD petition? AD duty to make imports the same price as domestic goods. Because of the Byrd
amendment, this windfall has been going to the domestic producers (this is soon to be eliminated.)
 AD Act of 1916- treble damages, criminal/civil action; EU/Japan sue under WTO. US claims that this is
really an antitrust law. We lose at WTO. US fails to implement.
22
Problem 8.1: Licensing Exports From the United States: ATMs to China (Don’t really need to know
details!!)
 tension b/w executive and congress is especially pronounced here
 executive has foreign power to make treaties/national security & congress has power to regulate
commerce

Setting: ATMI incorporated in DE and subsidiary in France (ATMF). Wants to ship central computer processing
boards for use in ATMs (these have encryption devices). The boards are dual- use products. ATMI gets export
license to China for first 2 years and then ships for the third year while approval is still pending. Had to promise
that boards would not be used for any other purpose and would only be used in China. It later learned (after the 3
shipments) that the Chinese were using the boards in their satellite industry.
Focus of Consideration
 most goods, uses and destinations don’t require export licenses
 Export Administration Act (EAA) and Regulations (EAR)
o Sunset provision- only has a short lifespan and needs to be renewed periodically (exp’d in 1994,
hasn’t been reauthorized- Pres and Congress couldn’t agree on how to renew; but, continues under
IEEPA (Int’l Emergency Economic Powers Act)
 Players
o Dept of Commerce: Bureau of Export Administration (BXA)
o State Dept. (munitions and arms)
 Here, domestic producers want to export but the gov’t is limiting them for national security reasons.
Businesses want gov’t to stay out of it. Since early 1990s, trend toward favoring businesses.
 COCOM: NATO allies + Japan to keep sensitive technology out of the hands of the USSR; disbanded in
1994
 Now, Wassener arrangement: COCOM but weaker; still coordinate, but no duty to inform
 Increasingly, country by country export controls
 US: each export gets an export commodity control number (ECCN); look it up and look the country up to
determine whether you need a license.
 Whether a license is req’d depends on nature of the goods, the destination, the identity of the end user or
ultimate user
 2 basic sets of duties
 obtain the proper type of license
 inform the US gov’t whenever the exported goods are diverted to impermissible uses or
users
 what types of penalties are available to and used by US gov’t against violators who are ordinary executives,
not engaged in spy activities and are not trying to breach security
 effect of US export controls on overseas subsidiaries
Steps:
1. Are the computer boards subject to EAR? Is there a regulation in the CFR
A. ATM Central Computer Circuit Boards from the US
 is China treated differently?
 What is the export classification?
a. Testimony of Reisch: US allows for extensive review of dual use technology exported to China;
only 80% of export licenses to China are approved (less than most other countries including
Russia) and take almost twice as long
b. IBM East Europe/Asia: Russian subsidiary of IBM sold and exported computers to a Russian
buyer in violation of a US export regulation, knowing that it was to be used in nuclear explosive
devices. IBM EE/Asia pled guilty. Went through Germany also.
c. Questions and Comments:
i. What are the steps for ATMI under EAR? Does it need a license? Any exceptions?
1. EAR 732.1: (864)- what is it? Where is it going? Who will receive it? What
will they do with it?
2. 732.2: Steps regarding the Scope of EAR
a. JD of another agency? No
23
Is tech/software publicly available? No? (not clear); doesn’t matter, b/c
even if it is publicly available, b/c it’s encryption software, it is subject
to control!
c. Skip to Steps 7-19 to determine if violating part 736- general
prohibitions (p. 875).
d. Step 7: classification ECCN (5A002; 5D002)- see 738.2 (877);
e. Step 8: reason for control. Then – country (882) commerce country
chart/reason for control- any Xs? X = need a license
f. Step 12, 13, 14: prohibited end users, destinations, embargoes, etc…
g. Step 15: proliferation
h. 17: review orders, terms, conditions- is the importer complying?
Competitors usually tell the gov’t if a company is violating…
i. 18: Gen prohibition 10 says that you can’t proceed if you know a
violation has occurred or is about to occur (this is a problem here b/c
ATMI knows a violation has occurred)
3. We know the (1) we need a license (2) a violation has occurred
4. Exceptions? Part 740- License Exceptions
a. 740.8: Key Management Infrastructure- can export our two ECCN
after US gov’t has done technical review (basically been told how to
decrypt the info); ATMI doesn’t want to do this.
5. before 1979, trading with China was trading with the enemy; now, its in country
group D, which is mostly 2nd world countries
ii. export of boards affected by the foreign availability of equivalent items? (but not
encryption items!)
1. plot
iii. Swedish company found guilty for violating EAA by delivering goods while negotiations
for export license were pending; deliberate, premeditated violations heavily penalized
1. b
iv. criminal and civil penalties for violations/some believe that the sanctions are too lenient;
also administrative denial (blacklisting- don’t let them export). Blacklisting is the worst
sanction. See below.
What Advice do we Give?
 if you don’t have the export license, you can’t export!
 If know a violation has occurred, must report it!! Violate General Prohibition 10.
 ATMI is in trouble for the past violation because condition was violated
b.
B. ATM Central Computers from France: Extraterritoriality (Study this!)
 Branch: offices of a company in different places; all incorporated in the same place and
owned and run directly by parent; b/c it is still a US company, the foreign gov’t will
restrict what it can do under that country’s laws
 Wholly-owned subsidiary: this is a company incorporated under the laws of a foreign
country; it is a foreign company- may have more freedom to operate, different operating
rules; may have liability and tax benefits
 When it comes to the Regulations, which apply to US companies, these definitely apply
to branches, but maybe not to non-US subsidiaries “owned or controlled” by the US
company
 Facts: ATM France is a wholly owned subsidiary of ATMI; circuit boards designed in
the US, but assembled in France
a. RST Foreign Relations Law
i. 402: Bases of JD to proscribe
1. substantial effects within territory
24
2. activities and interests of nationals outside the territory
3. activity outside not by nationals but directed against the security of
the state
ii. 403: Limitations on JD to proscribe
1. must be reasonable
2. relevant factors
3. when 2 states have JD, and their prescriptions are in conflict, each
state has to consider its and the others interests, and the lesser
interest should defer
iii. 414: JD with respect to activities of foreign branches and subsidiaries
1. generally only can regulate if subsidiary is organized under laws of
US
iv. 421: JD to Adjudicate:
1. reasonable
b. Blacklisting and Secondary Boycotts in US Trade Policy
i. Trade blacklists provide incentive for foreign entities to comply with US
regulations
1. Rapid and dramatic consequences of being accused of violating
2. blacklisting has the greatest impact on foreign businesses, more
than formal criminal or civil sanctions
ii. Delft case: night vision tech ends up in Iraq; the people that sent it there
got punished by the US (export controls also apply to re-exports!)
1. What if no affiliation with US company, but you do a lot of
business with US companies (imports, get parts, etc)- does the US
have right to blacklist you?
a. Restatement 403 reasonableness
b. Availability of foreign substitutes- harm to the US
economy for no reason
iii. Dresser and the Trans-Siberian Pipeline: US went after a non-US
subsidiary and the company didn’t want to export the parts; French
disagreed with US regulation against transactions relating to the pipeline
construction and compelled the company to deliver; the US the blacklists
the company. Dresser was caught in the middle of US Regs and French
law; The US has been much criticized b/c weak rel’p b/w French co and
effect on US interests.
c. Toshiba Dispute: sometimes, US regulations look like an attempt to take business
from foreign suppliers and give it to US suppliers.
d. Extraterritoriality and European view
i. View is generally negative, but depends on the nature of the subsidiaries’
rel’p with the foreign state and gov’t, and the nature of its business
1. this policy might make it more difficult for US companies to
acquire foreign subsidiaries
2. indirect threat: threat of bad publicity of parent doesn’t make
subsidiary follow regulation
25
3. indirect: apply US law to officers and directors of foreign
subsidiaries that are USC.
C. Questions and Comments
a. The (3rd) Restatements were adopted after the Dresser decision- would that have
changed the outcome? The Restatement relies on “substantial effects” to
establish extraterriroriality.
b. Was the US trying to control ATMI or ATM France? Probably ATM France.
This distinction makes a difference b/c of the extraterritoriality question;
substantial effects doctrine; best argument- regulating the conduct of a foreign
company 100% under the control of a US company- not really extraterritoriality.
i. In the Dresser case- who had the superior claim to jd? Probably France
1. What about the fact that they already had a K? Could be forced
into bankruptcy for breaching the K (French interest). The gov’t
could buy the goods and then sell them to the buyer that it
prohibited by the US Reg.
c. How to avoid this situation ahead of time? Crafty lawyering…
i. Force majeure clause- act of God will excuse performance, and this
includes acts of the gov’t
1. usually doesn’t work b/c other side won’t sign a K with this clause
2. even if does, may not be enforceable in Court
ii. change subsidiary from wholly owned, separately incorporated into a
branch of ATMI that is not separately inc’d.1. but branch can’t do a lot of things that subsidiary can do
iii. Could the French gov’t order ATM France to fulfill the k if it was made
b/w ATMI (parent) and the Chinese instead of the subsidiary? Probably
not= only thing it solves is not having ATM France in the middle.
iv. What is “owned or controlled”? What if ATMI only owns 49% of ATM
France and the other 51% is owned by another country or France- why
would they follow US law?
d. This is the price for doing cross-border transactions- one of the costs of doing
international business
e. Attempts by other countries to pull this crap on us
i. Example: Arab League Boycott of firms dealing with Israel
Export from France? Our Advice…
 No. Doesn’t matter that China can get it from somewhere else. Never get an exception
based on this.
 COCOM/Wassener attempted to get countries to agree not to export certain technology.
 Attorney has duty to report past violations if she knows they occurred. Attorney can
advise on future transactions, but if doesn’t know for a fact, can cover herself. The client
never tells the truth about this. But, must report right away if know- every day is an
additional violation.
26
Problem 8.2 International Economic Boycotts: Machine Lathes to Cuba and Qatar
Setting: Prentice (US co) has wholly owned Canadian subsidiary (Board has 6 Canadians and 3
US)- usually sold in Canada and NW US; and joint UK venture (Board is 2 US, 7 UK)- usually
sold in EU and Africa.
Cuba orders 3 lathes:
(1) normally mfd. in US; will have to be shipped to UK plant for final assembly and then to
Cuba
a. because the UK is a joint venture, is it subject to the jd of the US? Does Prentice
control the UK firm?
b. 2 of the directors are USC- they are subject to the jd of US laws. They would
have to write a letter formally objecting to the action.
c. What about the argument that the profit that the UK firm would be making is
“trafficking” in confiscated goods?
d. UK blocking statute? Blocking statute says that you cannot comply with the US
law. Canada & Mexico have one; UK had PTI; as response to Helms-Burton,
EU-wide blocking statute.
(2) mfd in Canada and sent directly to Cuba (some tech from US, but all parts and labor
Canadian)
a. probably not allowed for same reason
b. Canadian company should be subject to the jd of the US.
c. Blocking statute- puts company in bad position.
(3) mfd in UK (25% parts US)
a. blocking statute means they can, but US law says that can’t
Considerations: US laws mandate participation in boycott of Cuba (secondary) but prohibit
participation in a secondary boycott of Israel. Most boycotts are implemented under separate
regulatory controls for each particular embargo target.
3 Ways to Boycott a country:
 Primary: A can’t trade with B; these are OK in foeign policy terms and under int’l law
 Secondary: If a company in C trades with B, A will not trade with that company in C;
more questionable. Only enterprises, not whole country.
 Tertiary: Can’t trade with a 3rd party nation’s enterprise if it obtained components from
an enterprise that got them from the boycotted country. C got parts from company in D,
that got them from B, who A is boycotting; A won’t buy from company C.
Authority to Boycott
 Trading with the Enemy Act
 Int’l Emergency Economic Powers Act
o Pres issues exec order- lets treasury do whatever it wants
o OFAC (Treasury)- oversees and administers embargoes and sanctions; write and
enforce the Regulations; very secretive and opaque
 Sometimes, Congress gets mad
o 1996 Helms-Burton (Libertad)
o Iran-Libya Sanctions Act (ILSA)
27

States and municipalities
o Massachusettes- no procurement with Burma/Myanmar
o Supreme Court struck this down b/c of the Supremacy Clause
A. US boycott of Cuba:
 response to nationalization of all US owned property in 1959-60; 10/60 Pres ordered
embargo that continues today;
 Cuban Asset Control Regulations (1960, 1963)- Executive Scheme
o No import, export, asset freeze
o Apply to persons subject to the jd of the US- USC, LPR, person within the US,
branches and subsidiaries of US entities throughout the world (broader than a
“US person”)
o Basically means that you cannot do anything with Cuba!
 1975-foreign subsidiaries of US companies could trade with Cuba under licensing
procedures; this was restricted by the later acts.
 Company charged with its subsidiary violating the Regs may have a mitigating
argument: that the foreign sub, by complying with US law, violates the law of the
country where sub is operating and inc’d.
 Helms-Burton:
o Penalize third country entities that were doing business with Cuba; choke off
foreign investment in Cuba.
o Title I: codifies the Regs- now, these are statutes that cannot be altered by the
President.
o Title III “lawsuits provision” establishes right of action in US courts by US
nationals who have a claim that their property was taken by Cuba and that the
foreign party now charged is “trafficking” in the property. Private right of action.
 S. 6082: If it was a filed claim (notice), can get 3x the total value.
 Trafficking: includes benefiting from the use of; very easy to “traffic” in
these goods.
 Clinton used his waiver authority to defer the implementation of title III.
The ability to sue has never been implemented.
o Title IV requires the US to deny visas to persons who have trafficked in
confiscated property.
 This is in force
 Trafficking defined in Title IV is even broader than in title III
 This is US gov’t action- really annoys our trading partners. This is a
material problem for big MNCs.
 Pres can’t suspend Title IV.
 Problem: applies to children- lots of these people have children in school
in the US.
 Some companies settle to avoid being excluded. Usually, if the parties
settle, party loses its right of action if Title III becomes enforceable.
 Violates NAFTA and WTO; EU went after this at the WTO level.
Probably going to win, unless the US claims national security.
28
a. Canadian view:
i. “US Order” is a blocking statute that blocks the extraterritorial application
of the Cuba Act in Canada
1. Canada will continue to maintain normal trade relations with Cuba
2. goods mfd wholly in Canada or processed from goods wholly
outside the US can be exported by Canadian subsidiaries of US
nationals. Canada will not serve as a conduit.
3. notification of AG of Canada
ii. net effect: Canada corps owned or controlled by US are to ignore the fact
that licenses are no longer issued under the Cuba Regulations and to
continue to trade with Cuba as if a license had been issued.
1. trade as usual
iii. Multinationals- consider form of bus org before beginning to trade with
Cuba
1. avoid direct or indirect American control of entities doing business
with Cuba
b. EU view: don’t like H-B.
i. Force majeure not an exception; with not get you out of a K obligation
with boycotted country
ii. None of the principles of extraterritoriality applied; not justified
1. universality
2. nationality:
3. prohibitive effects: immediate an prohibitive effects within the US
4. protective principle: court may extend jd over acts that threaten its
safety, credit rating or other interests
5. general balancing of interests: ties to state claiming extraterritorial
jd must be stronger the more the interests of other states are
affected
a. only those means that are less harmful to other nations that
are not a direct goal of the boycott
iii. embargo must be proper means to achieve objective end
c. NAFTA and WTO
i. Both allow states to enact measures for national security
1. work as an affirmative defense
ii. notwithstanding, could challenge on three grounds
1. as a violation of int’l law, violate A.102 of NAFTA
2. spirit of NAFTA is to further open trade where not specifically
restricted
3. specific violations of provisions: national treatment, nullification
and impairment; rules on transit of business persons
iii. implied obligation not to interfere with NAFTA party’s trade with nonNAFTA parties?
1. National treatment: even if goods qualify as Canadian under rules
of origin, may conflict with Libertad A.110, which prohibits
29
importation into the US of any product made in Cuba (or with any
origin there)
iv. Libertad unilaterally modifies NAFTA obligations?
1. Goods imported into Cuba from Mexico or Canada
a. If goods transshipped to Cuba thru Mex or Can, US
exporter penalized
b. Goods exported to Mex or Can with expectation that they
will be sold or consumed there, but then are purchased by
Cuba or an agent and shipped to Cuba, the US exporter is
OK
c. Goods partly made in Can or Mex with US components,
additional issues:
i. Who owns the facility in Can or Mex that finishes
the production?
1. goods fully made in 3rd nation but with US
technology, the issue is likely to depend on
the nature of the tech
v. NAFTA requires the parties to grant temp admission to business persons
who are otherwise qualified
1. Section 401 of Libertad requires US to prohibit entry to persons
that have trafficked in confiscated property
2. this may be legal under the laws of nations, but it is illegal under
NAFTA (US gave up some authority when it adopted NAFTA).
B: The Antiboycott Laws of the US




Prentice gave a gov’t agent of Qatar its last two annual reports without knowing of its ulterior boycott
motives. A rep for Prentice visited and was questioned about his ancestry, business associates, views on
the Arab-Israel conflict. A k was signed for 10 lathes. To fulfill the k, Prentice had to obtain parts from
other suppliers. Usually it solicits bids from 2-5 companies. Before it did so, it received an inquiry from
Qatar, wishing to have Prentice certify that none of the companies on the enclosed list would be suppliers.
Prentice responded that it couldn’t complete the request, but that it “understood”. It listed all its potential
suppliers and suggested Qatar stipulate its preferences. Qatar did this, and these are the suppliers Prentice
used. They shipped via a carrier that never stops at an Israeli port.
Arab nations have a boycott against Israel. US responded w/ legislation that attempt to
prohibit US nationals from supporting the boycott.
o It’s a primary, secondary and tertiary boycott.
o US is appalled- we have an antiboycott law. It is illegal to boycott states that are
friendly to the US.
o Not allowed to refuse to do business with someone in conformity with the boycott
or to furnish information
EAA (2407 and 2410); EAR
Who’s boycotted?
o Not American defense industry
o Not companies already established in Arab lands (economic development)
30







Trane v. Baldridge: the gov’t may prohibit any person from intentionally complying with demands from
foreign boycott officials for info through use of a boycott questionnaire.
Facts: Trane and UTC (Ps) did a lot of business with Arab countries. When the League boycotted Israel,
league members began using boycott questionnaires to get info about rel’p to Israel. Both P’s rec’d these
and were concerned that if they didn’t answer they would be blacklisted. This would have adverse
economic consequences for each company, so they challenged the EAA.
Holding: The leg does not prevent the provision of info in normal commercial context. The restriction
only applies if info is furnished for boycott purposes through a questionnaire or otherwise. If P supply
the info, they are in violation ad will be fined.
United States v. Meyer: a person that does an act knowing that such action was req’d or requested for
boycott reasons will be deemed to have acted with intent to comply with an unsanctioned foreign
boycott.
Facts: D, a Mass lawyer, didn’t tell Commerce about a Saudi trademark registration form that had a
“Creed Declaration”, which asked whether this client had a business rel’p w/ Israel. D refused to pay
$5000 civil fine. D’s primary argument was that he lacked the intent necessary to violate the statute and
regulations.
Holding: Info will be deemed as furnished with the requisite intent if the person furnishing the info knows
that it is sought for boycott purposes. D sent the form to Saudi official with full knowledge that it
contained a signed declaration that his client didn’t do business with Israel. This amounts to intentionally
complying with Saudi Arabia’s boycott of Israel. That he had no intent to break the law is does not negate
the fact that he did.
Annual reports okay? Probably
Answering questions about background okay? Probably not. Even if Schmidt is
completely ignorant, responsibility of knowing international laws, ignorance of the law is
no excuse…
Too busy to take on business from Israel? Probably not okay…
Parts- Qatar sends a blacklist; Prentice sends a whitelist – bad.
Probably okay with the shipping- the regs allow you to select ships that don’t stop in
Israel.
Problem 8.3: Questionable Payments to Foreign Officials: Processed Foods in Nigeria
 Foreign Corrupt Practices Act (FCPA) of 1977, amended in 1988 (Omnibus Act)
(removed reason to know), and 1998 (applies to more persons, secure improper
advantage)
o Part of the SEC Act
o Doesn’t prohibit bribes, just payments defined in the Act.
o 2 sections: accounting and antibribery
o Applies to 3 entities: issuers (companies that have issued stock, public
securities), domestic concerns (USC, US entities), and others (don’t have to be
USC, but have to be in the US).
 Accounting provisions: only the issuers
 Antibribery: all three
o In many countries, payoffs, bribes, etc, are ordinary course of business
31
A. Antibribery Provisions and Accounting Provisions:
a. FCPA (Doc Supp 938): 78dd-1
i. Elements of antibribery: Unlawful for (1) officer, director, employee or
agent to (2) use mail or instrument of interstate commerce (3) corruptly (4)
in furtherance of an offer, payment, gift, promise to pay, etc, (5) to foreign
official (6) for the purpose of influencing a decision or induce an act or
secure an improper advantage, or induce him to use his influence for an
act (7) to obtain or retain business.
1. Exception: grease payments for routine gov’t actions
2. 2 Affirmative Defenses: (1) lawful under foreign country’s law or
(2) reasonable expenditure for travel and lodging
b. FCPA 78m(b): Accounting stds- almost always get an accounting violation
when find an antibribery violation. Only applies to issuers.
B. Processed Foods Hypo: Processed officers wined and dined Nigerian officials because
Nigeria had a law against foreign wholly-owned subsidiaries and Processed wanted cocoa
wholly-owned processing plant in Nigeria.
a. First, get the exception? Probably not- not a routine gov’t action.
b. Affirmative defense: not lawful under Nigerian law; probably not reasonable
expenditure for travel and lodging
C. Processed gave campaign contributions to key Nigerian officials: if those running for
reelection aren’t actually making the decisions, didn’t violate the law. Have to actually
bribe the person making the decision to break the law. But, those whose influence
was bought may become agents.
D. Processed agreed to establish housing, recreational facilities, etc, in return for
establishing the wholly owned subsidiary: probably OK b/c going to employees, the
company, not the gov’t officials.
E. After the k agreed, flew 4 foreign officials + wives to NY for signing ceremony and fun.
Was this promised ahead of time? If yes, probably a violation. Also, argue that this was
to retain business- unreasonable expense!
F. Problems clearing customs- cash payments to customs officials to obtain priority
clearance. Probably okay because a “grease payment” to obtain routine gov’t action. But
have to make sure that still go through the customs process, not bypassing it. Routine =
something that was going to happen anyway, just moved ahead in line.
G. $500k consulting fee to sell the plant- going through an agent- did they “know” what was
going to happen to the $$? Reputation of the agent, expressly didn’t want an accounting
of how the $ was used, unusually high fee; maybe the exception would apply, but more
difficult. Probably knew. The consulting fee is a big issue in this area of international
law.
US v. Liebo
An offer, promise to pay, payment or authorization of payment is “corrupt” and prohibited by FCPA, if intended to
induce the recipient to m issue his official position or to influence someone else to. D gave the tiks to Barke right
before 3rd K signed. Evidence of close rel’p b/w Barke and Tiemogo, who played crucial role in k approval. D also
classified the tiks as a “commission payment”. It is reasonable that a jury inferred that Liebo gave the tiks intending
influence. However, the evidence against D is not overwhelming. New evidence that NAPCO’s Pres approved the
charge of airline tiks is strong evidence that D was acting under superior’s direction, ad did not act “corruptly”.
32


Overview of FCPA:
o SEC set up a voluntary program: if a company were to do its own investigation
and come in and discuss disclosure and stop doing whatever they were doing,
there might be less necessity to bring an enforcement case
FCPA of 1988; two track approach
o Statutory accounting standards
 Applies only to issuers registered under SEC, 1934,
 SEC has primary responsibility for civil enforcement of FCPA accounting
stds, and the penalties
 Justice Dept. responsible for criminal prosections
o Bribery of foreign officials
 Apply to issuers and domestic concerns, and codified separately from SEC
 Congress didn’t intend to prohibit all bribes; permits facilitating and
“grease” payments; only payments made “corruptly” to foreign officials
with the purpose of obtaining or retaining business.
 Ambiguous standard to govern liability for illegal payments by third
parties “who make such payments while knowing or having reason to
know that some or all of the money will be paid as a bribe.
 Chilling effect on legit business transactions
o SEC: civil enforcement of accounting and antibribery for issuers; Justice gets
civil and criminal of antibribery for domestic concerns and criminal of issuers and
domestic concerns.
o Amendments:
 Accounting:
 Clarify reasonable assurance and detail
 Define responsibility of an issuer over accounting practices of a
subsidiary in which it owns a minor share
 No criminal liability, unless done knowingly
 Antibribery
 Clarify types of illegal payments
o For purpose of influenceing or inducing
o Business purpose test- no prohibitions to facilitating or
expediting payment to official, political party, to secure
routine gov’t action by that person.
o Affirmative defense: if a payment is lawful under the
written laws of the foreign country
 Address who should be liable and under what circumstances
o Kept “knowing”, deleted “reason to know” std.
o Head in the sand problem: knowing already encompasses
deliberate ignorance
o Deleted Eckerd Amendment: prevented prosecution of
employees or agents for violating FCPA unless the
domestic concerns or issuers were found to violate the Act.
o OECD Convention: harmonize bribery laws and level the playing field.
 Criminalize bribery of anyone other than purely commercial actor
33


Seize the bribes and proceeds or impose equivalent fines to disincentive
bribery
Not many amendments to US law (FCPA) b/c based on it.
US v. McLean (1984)
Facts: After D was indicted on charges of violating FCPA, the trial court granted D’a motion to dismiss b/c the Act
clearly required that an employer be convicted before the employee could be convicted (Eckerd Amendment).
Issue: To convict an employee under FCPA for acts committed for the benefit of the employer, must the gov’t first
convict the employer?
Holding: Yes. A major objective of this provision is to allow the employee the benefit of the superior resources of
the corporation in presenting a criminal defense. A closely related objective is to prevent the employer from making
the employee the scapegoat.



Two employees fired for refusing to partake in violations of FCPA recovered huge jury
awards.
Corporations usually prefer consent decrees- pay a negotiated fine to avoid public
litigation
Only about a dozen cases under FCPA
Part B: International Law- the OECD Convention
 some states allow payments to foreign officials as a tax deduction (France)
 Bribes added as much as 15% to cost of doing business in some countries
 ICC came up with rules for businesses; OECD rules for gov’ts.
 Transparency International (NGO)
o Impact of corruption on democracy and economic development
o Build broad coalitions against corruption between gov’t and civil society
o TI does not investigate or expose individual cases of corruption; goal is to change
laws and policies to reduce corruption
o TI avoids party politics
 ICC (Business) adopts its own rules to combat bribery and extortion
 Corruption more of a concern for MDCs than LDCs.
 Tope five corrupt (accepting bribes): Nigeria, Pakistan, Kenya, Bangledesh, and China
(Russia is 9). Bangledesh is first in 2002.
 Companies should have FCPA Compliance programs- this is most of what attorneys do
in this area of law.
Problem 8.4 Trade in Services: Section 301 Proceedings, the GATS and U.S. Insurance
Laws
1. The Setting: Metro-Life is not doing so well financially and is involved in the reinsurance
market, like most companies. M-L is having a hard time getting into foreign markets. It files a
301(b) complaint alleging that South Korea and India are unjustifiably, unreasonably and
discriminatorily burdening sales of US insurance in those nations.
 India has a gov’t monopoly and allows no foreign or domestic competition
 S.Korea permits a few foreign firms to sell fire, casualty and life, but not commercial
risk or other insurance
 Are S.K and India in breach of GATS?
 LDCs oppose GATS
34
Part A: Section 301 Proceedings
 Allows us to unilaterally determine that a trade practice is unfair and to retaliate.
 Result of the incompetence of the GATT dispute settlement system. Veto system and
length of the dispute settlement. In 1988, while Urugauy was under way, strengthened
301.
o Transferred authority away from Pres to USTR
o Mandatory vs. discretionary action
 Waiver authority
o Tighter time limits
o Enforcement of foreign actions ads modification or termination of relief
o Expansion of definition of unreasonable: export targeting, persistent denial of
worker’s rights, and denial of market access in the form of gov’t toleration of
cartels.
 Use of 301 has faded since 1995- more issues are covered by WTO and the timeleine of
dispute resolution is faster.
19 USC 2411: Section 301 (Doc Supp. 672)
 Section 301(a): USTR determines that the rights of the US under any trade agreement
(GATT violation), or any act, policy or practice of a foreign country violates a trade
agreement, or is unjustifiable and burdens or restricts US commerce. Triggers
mandatory action.
o Exceptions (mandatory not req’d): if the trade dispute settlement system has
taken care of it, if rights of US not violated, or the practice does not impair
benefits under the trade agreement, or if the foreign country is taking satisfactory
measure or the cure is worse than the disease.
 Section 301(b): USTR determines that (1) the act policy practice of the foreign country
is unreasonable or discriminatory and burdens or restricts US commerce and (2)
action by US is appropriate. Then, USTR shall take appropriate and feasible action.
(discretionary)
 Private petitions or self-initiated. Private parties have to decide 301(a) or (b) from the
outset. A lot depends on the definitions. Section 301(d) (676) definitions.
 Section 304 deals with how USTR determines this. 301(c) is the scope of authority for
the USTR if it finds a violation under 301(a) or (b).
Report of the Panel on US Sections 301-310
 Does Section 304 (action under 301) per se violate the obligations assumed by members
under Article 23 of the DSU?
o Even though the answer is YES, the US is allowed to keep Section 301 b/c in
practice, the US has never violated the Article 23 and acted unilaterally on a case
properly decided by the WTO.
Class notes: Section 301:
 argue that S.Korea’s actions are unreasonable and burden US commerce
o unreasonable(301(b)) is a better argument than unjustifiable (301(a))
 USTR determines if there has been an “offense”; not ITC, ITA
35



Remedies: reach mutually satisfactory solution; go to WTO- a WTO ruling makes the
decision.
o EU challenged Section 301 in WTO: Panel ruled that it was okay, based on the
statement of administrative action (SAA; not legally binding, but “administrative
history”- explains the law). SAA said that 301 was never intended to conflict
with a GATT/WTO panel report, even though it doesn’t really say this. In
practice, the US has never used 301 in violation of GATT/WTO, although in
theory it could.
o 301 was designed to work in the pre-WTO environment when GATT was
ineffective, provided a remedy. Now that WTO is working, the need for Section
301 is hugely reduced- we can actually get a remedy, even though we sometimes
lose.
What’s the best thing for them to do? WTO? Section 301? Probably WTO…
o Super 301 provisions- if a priority practice or country, triggered Section 301
action.
o Difference b/w Section 301 and Super 301: 1988 Act- requires USTR to publish
priority practices and priority countries; if something is on the list, mandatory
action required by USTR.
 Super 301 doesn’t currently exist – no lists
 Section 301 does but not used much anymore.
o Remedy obtained by USTR may have no benefit to the party at all; might
negotiate a separate arrangement.
o Only practical use now is in areas not covered by WTO, or against non-WTO
members.
India has a total monopoly- this is actually better because not discriminating against the
US.
Part B: The GATS and Services
 “services”: things that can be bought and sold but which you cannot drop on your foot
 service industries are usually heavily regulated by gov’t
o some service industries are publicly owned monopolies
 bringing services under GATT regime is likely to interfere with domestic economic
policies and undermine national autonomy
 LDC see all the potential gains from trade in services as going to the DCs.
o Want to protect infant industries
o Potential loss of sovereignty and freedom
o National security interests (dependency)
o Free trade in services might enhance the competitive advantage already enjoyed
by DCs, leaving LDCs permanently dependent.


Two kinds of barriers to trade in services:
o Trade barriers: similar to NTBs that limit trade in goods
o Ownership barriers: because the sale of services often involves the
establishment of a foreign affiliate, lotsa investment-related barriers.
Two consequences in the revolution of data processing:
36
o Transborder data flows (TDFs) make it easier for TNCs to exercise direct control
over foreign subs- leaves the sophisticated processes in DCs and doesn’t help
LDC develop
o Increasing use of automation in DCs, eroding the comparative advantage that
LDCs enjoy in labor
Results of GATS in Financial Services
 2 broad categories covered:
o insurance and insurance-related
o banking and other financial services; these were the touchiest subjects
Section 301 and the WTO:
 in first 2 years of WTO, US filed 22 GATT violation and two non-violation claims
(Japanese Film case)
 Article 23 of the DSU makes unilateral determinations and responses GATT-illegal
 If US loses at the WTO and tries to take unilateral action to seek remedy afterward, this
violates GATT
 Section 301(b)/Unreasonable Cases and the GATT Non-violation Theory
o Unreasonable- don’t have to be brought under GATT:
 Any trade related practice that, although not covered by GATT, that is
regarded by the world trading community as likely to affect any other
country’s effort to trade more freely
 Before Uruguay Rd: services, IPR
 Current: lack of adequate antitrust enforcement and limitations on
FDI
 Any aspect of gov’t commercial policy not yet completely accepted by
the world trading system as linked to trade
 Labor rights
 Any trade-limiting structural practice within a country that is not actually
dictated by a gov’t. Such structural impediments usually arise from the
way business is conducted in the home market
 Distribution systems
 Bribes
 Japanese Auto and Auto Parts Cases
o Non-Violation Nullification: while not GATT-violative, have in fact nullified
US benefits under GATT- can be brought under GATT.
Class notes: GATS and Services: Questions and Comments (764)
 How is trade in services different from trade in goods?
o Services are hard to keep track of, examine and inspect; LDC felt that this
allowed DC to control their country- there is a lot of aspects of services that can
affect the dependency of a country.
o Services is where the $$$ is!
 Trade in Services divides the LDC and DC. Free rider problem- a lot of countries were
coming in with really low commitments. The US decided to come in with an MFN
exception.
o US wouldn’t offer MFN- will offer concessions bilaterally based on reciprocity.
37





o 1993, GATS signed w/o financial services; given 2 years to negotiate a separate
annex. After this time, the US still refused, so the EU took the lead, developed
an interim agreement and pushed to continue negotiations.
o In 1997, situation in Asia made it possible for the US to come in, sign the annex,
and grant MFN in services.
GATS: everyone agrees to MFN and transparency; each country gets to say what it is
including, which will get national treatment and market access. Not as strong as the
GATT, which makes everyone get everything.
o LDCs got phase in times
Now, NGO movement to repeal GATS- jeopardizes health care, education and utilities.
Metro-Life wants to get into S.K. and India
o M-L: we’re offering services and would let you in if you had services to offer
o LDC: we have to protect our infant industries
Does GATS help Metro-Life?
o Not with India, b/c Article 8 allows monopolies.
o S.K.- might violate MFN; but S.K. has an argument: (prudential card) any
country can take prudential measures to protect investors and stability of
financial system. Because M-L is in bad financial situation, S.K. might have a
good argument.
Including the GATS violation in its complaint triggers the mandatory response (301(a));
trade agreement violation- go to WTO. Also probably gets the complaint a little more
attention.
(Deleted IPR and TRIPS)
Chapter 10: Establishing and Operating a Foreign Investment
10.0: The Decision and Ways to Invest Abroad


FI in DC creates fewer problems than in TE (LDC or NME)
Governance
o Home nation: US federal law
 Those laws enacted to deal with domestic issues, like antitrust
 Laws that specifically address foreign policy issues, like antiboycott laws,
FCPA
 Tax, customs laws
o Host nation: most successful, until TRIMS
 1970s- very restrictive; developed operational code to get things done
 2 perspectives:
 LDC already had FDI; viewed the laws as a way to get more
control of MNCs and allow nationals more involvement
 Nonmarkets: just beginning to allow FDI; needed foreign
technology
o Multi-national orgs:
 UN: not very successful
 OECD- guidelines for the conduct of MNEs, develop an MAI
(Multilateral Agreement on Investment)
38



Nondiscrimination and national treatment
Dispute settlement- modeled after NAFTA chapter 11
This was really unpopular- it was defeated; considered the first
major win for anti-globalization.
o International law
 WTO TRIMS: not a lot of substance, but it’s there.
Home Country
 Issues in FDI:
o Nationalization, expropriation
o Change in political regimes
o Host country laws, culture, ownership laws, tariffs, customs valuation
o Exchange rate fluctuations; currency controls (fungibility. Transferability of
profits)
o Unwritten laws (operational codes)
o Home country laws (taxes, antibribery)
o Purpose: sell locally or for exports
 Why do it? Cost-benefit analysis! Benefits outweigh all these costs.
o Cheaper!
o Penetrate new markets; open new markets; take over markets= PROFITS!
o Inducements to locate FDI in a country- can be good for a country, stimulate the
economy.
o Some countries make you locate production there- can’t export there otherwise.
 Regulations make a difference at varying points:
o Entry:
 Restrictions on maximum equity
 Policies to protect the host’s culture
o Operation:
 Gov’t oversight
 Performance requirements
o Withdrawal: repatriate capital, etc
Host Country
 Want FDI, but on their own terms
o Specify the location (areas of high unemployment, rural areas)
o Sector
o Control over management- certain % of domestic managers, % of equity owned
by domestic citizens (2 classes of stocks)
o Extras: education, training, transportation
o Local content requirements and export requirements (need foreign currency,
require export of % of production; BoPayments problems).
o Require technology transfer and R&D located there.
o Require capital sourcing from abroad.
o Can’t repatriate profits- keep the investment there for X years and require
reinvestment of profits.
39

Home country: make them:
o Keep paying taxes here
o Repatriate profits
o Keep R&D in home country
o Move low-wage stuff
o Control where investment takes place- unfriendly regimes
o TAA; Transitional Adjustment Assistance; gov’t should pay for job retraininggov’t could try to make company pay for this.
o Don’t let them export the good to the US
10.1: Risk analysis and the decision to invest: domestic goods inc considers FDI in
transitional and developing nations
Setting: DGI makes household goods (cleaners, room deodorants, etc). wants 15% foreign
production w/in 5 years- not moved to high labor cost areas (DC or NAFTA)
Focus of Consideration
Variations of risks and restrictions
 Risks: threats to investment which may cause a loss of part or all of the invested capital
or technology (i.e., expropriation)
 Restrictions: rules of host nation applicable to FDI
 Law and Regulation of FDI: Eastern and Central Europe
o Trade in goods is based on comparative advantage in immobile factors of
production, capital and labor.
o Theories of foreign investment assume that capital is mobile; foreign trade and
foreign investment are alternative decisions to a firm
o Location advantages: why a firm chooses one nation over another
 Reduce the cost of organizing production in a host country relative to the
costs of exporting the product from the investor’s home country
 Lower wages in foreign countries
o Ownership advantages: why foreign firm can out compete host firm in host
country
 Transaction cost advantages: intangible assets that help a firm out
compete its host-country rivals (superior technology, management and
marketing, i.e., brand name)
 Internalization advantages: combining marketing, mfring and
distribution in a single corporate structure lowers cost and increases
efficiency.
 Risks with FDI
o Ideological hostility: risk to FDI where groups hostile to FDI come into power
(regime changes)
o Nationalism: particularly a threat when host is in economic decline; religious
fundamentalism (Iran, Egypt)
o Changes in industry patterns: changes in industry that change global policy, esp.
ownership patterns (oil industry in the 70s)
40


o Contracts made by previous regimes: corruption, illegitimacy; creation of new
state; military regimes; dealing with unrepresentative gov’t increase risks
o Onerous Ks: risks that become to onerous to take b/c of subsequent events
o Reasons for risk: burden on foreign investor to calculate the risks
Limits on FDI
o Total Prohibition in Certain sectors: foreign monopolies; national security;
exploitation of the nation’s important natural resources; infrastructuretransportation, communications, electricity, petrochemicals.
o Reservation of investment to private domestic investors: protectionism and
lobbying power of domestic industries; GATT requires national treatment- offer
same investment opportunities to foreigners that you do to nationals
o Foreign investment allowed: may be limited to joint ventures and possibly only
a minority interest
 Equity percentage limits: can depend on how the nation perceives the
investment, such as technology and whether FDI is viewed as inherently
evil; often adopt max ownership of 49%
 Counsel must learn the reasons the host nation will waive restrictive
equity limitations (favorable factors): operational code
 Technology
 Plant location in less developed areas
 Education opportunities
 Locate R&D there
 Balance imports and exports
 Sourcing capital from abroad
o Reasons for accepting equity restrictions:
 If investment in place when gov’t dictates conversion to joint venture or
withdrawal, may be less costly to do JV
 If market has good long-term prospects, and the JV laws are transitory,
may be good to accept them and invest
 If host offers attractive incentives
o Retroactive effect of equity limits: problems of expropriation when force a FDI
already in place to convert to JV
o Limitations on Management: foreign management equal to foreign equity
o Performance requirements: % local content; use of local labor; export
requirements
o Limitations on Acquisitions: often prohibited for emotional reasons- replacement
of a domestic company with a foreign one
Joint Int’l Bus Ventures in Developing countries
o Factors that divorce the degree of control and management exercised by the
various partners from the size of equities holdings
 Principal shareholder can exert control even w/o majority interest
 Degree of activity of various partners
 De facto control by minority foreign corp.
 Technical control
 Right of veto
 Representation in management bodies
41


WTO & TRIMS
o Prohibits member from applying any TRIM that is inconsistent with the
provisions of Article III or Article XI of GATT 1994.
 National treatment (A.3)
 Quantitative restrictions (A.11)
 Must use dispute settlement body; not used often. 2001, EU&US vs.
India.
o Incomplete agreement
o Illustrative List in the Annex
o Exceptions: LDCs for balance of payments problems, substantial transition
periods for compliance
o Committee on TRIMS is formally responsible for monitoring the use of TRIMS;
o Reporting requirement: members of WTO are responsible for reporting their
use of a TRIM and agree to phase it out.
Questions
o Minimize risks by choosing stable countries or countries that are moving toward
less restrictions; alter form or amount of investment; make friends with the gov’t;
acquire company already well-established.
o IS DGI going to welcome or unwelcome in LDCs?
 Cleaners aren’t really in demand in these areas
 But, this might be good, b/c the host gov’t might not care that much.
 May be able to avoid env’l stds, labor stds.
o Joint Venture: can be good- more restricted investment (safer), have locals with
connections; can be bad- don’t want locals to have any control.
Part B: The Unwritten Law: Operational Code
Gordon: Governance of MNC by third world nations; Edge of Discouragement
 United Nations pronouncements are set so high that they would discourage FDI: Aspirational
Declarations; important b/c they disclose current sentiments and possible future law
 Public Code: written laws of the host nation that directly or indirectly govern FDI; updated periodically as
elements of the operational code become too cumbersome
 Operational Code: not written and not publicly disclosed or written but not publicly available or
discoverable
o Always somewhat at variance w/ public code, but can’t deviate too much
o Waivers: PC directly conflicts w/ OC, but official waive the PC
o Routine exceptions to PC
 Small dependent nations try to maintain a small gap in variance b/w OC and PC
 OC applies to MNC differently according to their levels of power to demand leniency; allows the host to
unequally treat MNCs
 BUT- b/c it is hidden, can be used to get things dome when public pressure has created restrictive public
codes.
 How do companies deal with this? Hire local counsel! (Think: antibribery problems).
 Operational code can help- when a country has very restrictive FDI laws, OC can operate under the radar
to get investments in anyway.
42
10.2 Choices Upon the Formation of the Foreign Investment: “Greenfields” Investment,
Merger, or Privitization; Branch or Subsidiary: DGI Invests in Europe

Branch or Subsidiary?
o Branch:
 Inc’d in home country (US) (no independent juridical stauts)
 Complete control by US(*)
 Int’l experience: more –
 Liability for debts: parent liable
 How long to set up: longer
 Disclosure: more
 PR/mkting: Germany- less popular
o Subsidiary
 Inc’d in host country (Germany)
 Control depends (can be a lot, but not complete
 Int’l experience: need less - get local help
 Liability for debts: sub liable (*)
 Shorter time to set up. (*)
 Disclosure: less (*)
 PR/mkting: Germany- more popular (*)

If they choose subsidiary: which form of entity (GmbH, AG);
o GmbH: limited liability company (small, medium sized, closely held; lots more of these)
 Size (150): small (*)
 # of incorporators/shareholders: an have 1 or a few (*)
 Worker’s issues: fewer (*)
 Less rigid rules (*)
o AG: stock society (large, publicly traded; fewer of these)
 Size (150): large
 # of incorporators/shareholders: need alot
 Worker’s issues: more
 More Rigid rules
o Pick the GmbH!

Greenfields investment: go into a country and invest in setting up a new corporation (a
subsidiary)
Alternative: acquire a German company (can be better for companies with less
international experience; already established, have expertise there…)
EU Law on Mergers
o Merger Taskforce: in charge of reviewing mergers that had a big impact in the
EU
Will DGI have to report to the EU Merger Taskforce?
o Threshold: combined worldwide turnover of US$6b or Community-wide
turnover combined of $300m.
o Ex- McDonnel-Douglas merger had to be cleared by the Merger Taskforce b/c of
volume of world wide turnover.
o Unlikely that DGI has to report to the Merger Taskforce
o Germany is going to have to review it; or the member state where the company is
incorporated.



43



Worker Participation in the EU; what will DGI have to do?
o US
 Government: not much say; not a lot of union people elected to office,
but they do lobby and endorse.
 Industry/company level: unions- confrontation/collective bargaining (not
part of management)
o Germany
 Government: members of worker’s groups sit on gov’t committees and
are members of gov’t bodies.
 Enterprise: Industry/company level: supervisory boards and
codetermination (workers and shareholders); applies to all corporations
regularly employing more than 2000 employees.
 Plant level: Works Council: workers have a say in the day-to-day
operations (social and personnel matters); decides whether to fire
someone, where to invest profits; no threshold size.
 These things make it really hard to get a job because basically once
you’re hired, it’s impossible to fire you. Germany has a very high
unemployment rate b/c companies are hesitant to hire.
o How could DGI get out of this? This is a lot of trouble. Set up a branch to avoid
having a work’s council. If not incorporated in the country, don’t have to
have these structures.
European Company: Societas Europeae
o Took a really long time to get this done: Worker’s rights issues held the whole
thing up.
o EU Regulation (direct effect; becomes the law in every member state) and
Directive (implemented through member states legislation; this can result in
different forms in different states)
o Member states wanted to do SE through a regulation. Couldn’t afford to have
variation in the legislation.
o Why not do this the way the US did, with a model form?
 More variation among EU member states than among the US states
o What does this mean for worker’s rights?
 If didn’t have them before, don’t have to get them.
 If had them before, have to keep them.
Privatization of Eastvian Business (Poland)
o Transfer of control of an entity from the state to private hands
o Why privatize?
 Efficiency
 Encourage foreign investment (brings in hard currency)
 Raises revenue/pay down debt/save gov’t $
 Infrastructure
 Progress argument – reputation (more first world)
 Helps consumers
 Clean up/environment
 Bring in technology
 Ideology change/regime change
44
o Hurdles:
 Particular business
 Legal infrastructure- no laws, no regulatory bodies
o Claims, litigation; env’t
o Choice of law
 Valuation/Knowledge
 Labor
 Env’t
 Systemic
 New market economy/transition
 Legal infrastructure
 Labor issues
 Stability/political risk
 Foreign investment law/nationalist preferences
 Environmental issues
o Does DGI have to wait for POLSK to be listed as for sale? Probably not.
o Want to ask the President for consent to own more than 10% shares; what
criteria? Convince that this is good for the country, important interest for the
state.
o Can DGI help with the valuation process? The law is silent on this issue. DGI
could get an independent person to valuate. Law being silent on the issue might
actually be a good thing here.
o Debts: Minister of Privatization can assume, free of charge, some of the debts.
o Art. 23.I: 3 ways to to transfer from state-private. Auction (no); Publiclyannounced offer (eh…); Negotiation on basis of public invitation (best- do it
behind closed doors).
10.7: Foreign Investmnet in NAFTA: Drill-Bit of the US in Mexicao and Munson of
Canada in the US
Drill-Bit wants a wholly-owned subsidiary in Mexico- right now, working through a licensee;
wholly-owned means they keep more profits.
Part A: Mexican foreign investment law and NAFTA chapter 11.
 Mexico wanted to attract more investment from Canada and the US.
 NAFTA chapter 11: Section A is the substantive provisions; these are comprehensive,
especially since it was negotiated during Uruguay Rd.
 1105- grounds for dispute is any violation of int’l law (this was probably unintended)
 1110: expropriation: most cases are brought under this
 Section B: dispute settlement between an investor and a state; all 3 NAFTA parties have
already submitted to personal jd of binding arb; has to be a violation of investment
provision (Part A).
 Turns out the definition of expropriation has been interpreted broadly, making a lot of
cases. Lots of claims of environmental regulation as expropriation.
45







Under Mexican foreign investment law (Supp. P. 1067), can Drill-Bit get wholly owned
sub?
o Mexico might say no b/c the drill-bits might be used to extract petrochemicals
(reserved to the state; 49% ownership cap).
o D-B could argue that this will create a lot of jobs, bring in technology.
o This is going to bring in a lot of money (dollahs!)
What if they acquire an existing company?
o Article 9: need Commission approval if acquire and will own over 49%.
Registry: Article 32: pretty much any company doing bsiness in Mexico must register.
Calvo Clause: Argentinean idea – investing in LA country, and something happens,
foreign company shouldn’t get preferential treatment with their own laws by getting their
gov’t to act on their behalf. Forces that company to proceed under the Latin American
country’s juridical system. Foreigner treated the same as nationals. All LA countries
got together and decided to enforce Calvo clause.
Mexico has given up some Calvo clause rights under NAFTA because can take Mexican
gov’t to binding arbitration.
Does Mexico’s law comply with NAFTA chapter 11?
o Drafted at same time as NAFTA to please US and Canada, so YES!
o 1106: Performance Requirements- not allowed
Applicable Rules: ICSID part of the World Bank (both Parties have to be members);
UNCITRAL rules can also apply
o Only the US has submitted to ICSID, so all cases come under the ICSID
Additional Facility Rule (only one country needs to be a Party). Procedural rules.
Have to have it in a country that is a party to the New York Convention (which
all 3 are).
o Substantive rules: NAFTA law.
Part B: Munson of Canada in the US and the Exon-Florio Law
Facts: Munson wants to invest in the US, buy Techco.
 Exon-Florio: restricts foreign investment in the US for “national security” reasons.
Have to file with the CFIUS, who makes a determination and recommendation to the
President.
 Techco is a defense contractor. Would purchase of them affect national security?
o Yes- airplanes always affect national security
o No- this is Canada
 State ownership- makes a difference b/c triggers mandatory investigation.
 CFIUS Process:
o CFIUS gets 30 days to decide whether to investigate; 45 days to investigate and
recommend to the President, who has 15 days to act (suspend merger or seek
divestiture)
o Most cases pass
o Companies use this as an anti-takeover device; stalling tactic to get a better offer
or avoid foreign takeover.
 This probably falls within the WTO’s national security exception.
 NAFTA has the same thing. All trade agreements have national security exceptions.
46

Munson is selling to France, who is selling to other countries. How is this a problem to
Techco?
o Anti-boycott laws. Might make Munson not want to acquire Techco to avoid US
laws.
Dispute Settlement: In Commercial Setting (Business to Business)
 Level of actors in each country
o Government
o Private parties
 WTO DSU and AB is strictly gov’t to gov’t
 NAFTA has more variety:
o gov’t to gov’t (ch. 20) (choice of forum with WTO; usually choose WTO b/c can
get other countries to join them and avoid a direct trade confrontation),
o effectively a private party to gov’t even though it is actually a gov’t to gov’t binational panbel system to review AD and CVD determinations; gov’t must
initiate review at NAFTA if the party requests it; why? b/c avoids the impression
of bias; still apply the national std of review and law, but applied more evenhandedly. (ch. 19)
o chapter 11: investor-state binding arbitration.
 Now, private party to private party- this is most of what’s going on (commercial disputes)
o Litigation in home country
o Arbitration
 Level of dispute settlement; formality
o Mediation/conciliation- private parties get together with a mediator that keeps
them negotiating (has no binding power)
o Arbitration: panels; more formal than mediation b/c can impose a decision; more
flexible b/c can set up any rules/procedures you want.
o Litigation: some countries require the use of their national courts; some cultural
biases toward one model or the other (Japan – more mediation, Germany more
litigious)
o Should really put all this stuff in the K beforehand
 Usually the choice is between forms of arbitration and litigation
 Choice of law and choice of forum are separate but both are required
 Arbitration:
o Pros:
 If want an ongoing business rel’p
 Work out compromises/ win-win
 Confidentiality/save face
 Expertise
 No forum shopping
 No local bias- pick where you do it
 More enforceable? New York Convention.
 No public policy considerations
 Speed
 No appeal?
47
o Cons:





Ltd discovery
Bad for more than 2 parties/2 contracts
More expensive
Less enforceable?
No appeal?
Problem 11.1: Resolution of International Disputes: Televisions Everywhere
 Gerneral overview of civil procedure
o Personal JD
o SMJD
o FNC
 Balance public and private interests (Piper Aircraft)
 Third Contract:
o Camelot is a Canadian co that makes TVs
o Lancelot is a wholly-owned subsidiary inc’d in Deleware with PPB in Mass.
o Lancelot makes a deal with Fabrique Breton, a gov’t-state trading company
 Lancelot has to delivery the TVs FOB France
 Lancelot pays import tariffs
 Specific delivery date
 1 port with 1 customs officer (NTB)
o Lancelot’s gonna have a problem b/c probably not going to be able to make the
delivery in time.
 Can they be sued in France?
 Can they sue/be sued in the US/Canada (Camelot)?
 How to avoid this?
o What are the chances of getting to Lancelot/Camelot with personal JD in US?
 They are present in the US, but
 Argue FNC- show adequate alternative forum; the only place they want to
go less than the US is France, which would be the alternate forum.
o Go to ICJ?
 Only state-state
 Can get State dept to take up your cause and represent you at the ICJ
 Becomes the gov’t case- they get full control over the claim and
they receive the award, which they may or may not give to you.
 The rule is that a private party cannot sue a state- the exception is
that a state can waive its immunity in a treaty (NAFTA chapter 11)
o What else can Lancelot do?
 Could get USTR to take this to WTO and claim that it’s an NTB.
 Get the gov’t to try to handle this diplomatically; political negotiation much more likely than getting the gov’t to take the case to ICJ or WTO.
 Can Camelot do anything? Camelot is the owner, they’re the one being injured – let
Canada take care of this…
o Canada wants to go after France
48



Barcelona Traction Case: Belgium decided to sue Spain in ICJ over
what it had done to Barcelona Traction, a company incorporated in
Canada, 85% owned by Belgians and operating in Spain.
 Cananda company- but Canada had no real stake in the wrongs
done by Spain
 Spain argued that the Belgians couldn’t sue – this is a Canadian
company – they won!
 Rule: corporation has the nationality of the state where it’s
incorporated.
 Canada would argue that Lancelot’s a wholly-owned
 Or, if don’t allow Canada to bring, Lancelot has no remedy b/c US
won’t bring it.
 All of the action happened in Canada- product was mfrd there
 Barcelona Traction is not good law anymore- it’s outdated (1917).
What about using foreign courts? Couple choices
o Sue in the US
o Sue in France: France treats procedures in a foreign jurisdiction as a waiver of
French jurisdiction.
Bottom Line: Agree to all of this ahead of time!
o Dispute Settlement Clause
 Arbitration or litigation?
 Camelot or Lancelot?
 Camelot wants to use Lancelot because of liability issues; maybe
to use US courts
 Fabrique Breton- want French courts, French law, French jd…; or,
arbitration. Might lose sovereignty argument because acting in
commercial capacity, so might be better off in arbitration.
o Fabrique will probably win b/c it is the buyer and usually sovereigns will only
agree to contracts governed by their law.
o Middle ground – arbitration.
11.3: Extraterritorial Jurisdiction and Discovery: Antitrust, Air Travel and the North
Atlantic
Setting: Skylow is DE corp. w/ low airfare from NY-London and soon LA-London. 4
competitors (2 US and 2 UK) meet and decide to match any price offered by Skylow and to
contact Skylow’s bankers and plane mfrs. Sky brings antitrust suit for treble damages in federal
district court. Claims violating Sherman Act.
 One British D: ignored complaint, $1m default against it trebled to $3m.
 Other 3 Ds: denied allegations and seek to avoid discovery of documents relating to the
mtg in London and any depositions of the execs.
 Other British D: wants protection under UK Protection of Trading Interests Act of 1980.
Focus of Consideration: application of US antitrust laws to foreign-based corps. Differing
perspectives of US and UK on issues of extraterritoriality.
49
A. Antitrust Law in the US
a. Private Ps can bring antitrust cases
b. Treble damages, contingency fees
c. Lots of pretrial discovery
d. Focus on relevant market, the product and the geographic scope of the effect
e. 3 Federal Laws that matter:
i. Sherman Act (1890);
1. S1: prohibits restraints on trade (rule of reason)
2. S2: prohibits monopolization (intent, actions, and dangerous
probability of success – harder std.)
3. S7: allows extraterritorial application if have direct, substantial and
reasonably foreseeable effect on US commerce.
ii. Clayton Act (1914) – only applies to commodities (goods, not services)
iii. FTC Act: unfair methods of competition – covers everything in (i) and
(ii), but it is enforced not by private parties, but by the FTC.
B. Sherman Act
a. S1 – Every contract, combination or conspiracy in restraint of trade among
several states is illegal.
 Agreements in restraint of trade or foreign commerce between parties.
 RULE OF REASON TEST – whether the restraint is reasonable – does the
agreement produce PRO-competition consequences?
 Mergers and joint ventures are always the rule of reason test
b. S2 – Every person who shall monopolize or attempt to monopolize or combine or
conspire with other persons to monopolize is guilty of felony
 STANDARD – whether company willfully sought a monopoly
 Need intent, actions, and dangerous probablility of success.
 Covers AD laws; predatory pricing [pricing where S loses money typically to
drive other producers out of the market – no competition , can restrict output and
raise prices]
c. S7: extraterritorial application of Sherman Act
i. Accepts that you can do so only in certain circumstances: must have
direct, substantial and reasonably foreseeable effect on US commerce.
ii. application to foreign company: effects test
C. EC and US Extraterritoriality: Activism and Cooperation
a. Alcoa test (1945, weight of SC decision): “effects test”: US has jd over wholly
foreign conduct, as well as other conduct, if that conduct has an effect in the US
that was intended.
b. Timberlane (1976, 9th Cir.): “jurisdictional rule of reason”: balancing
numerous factors (see FN 54 on p. 1235). Followed by 3rd, 5th, 10th Cirs.
i. This is the test usually employed!!
1. Comity factors in
50
c. 3rd RST: follows Timberlane-like approach (1987); see FN 57 on 1235 for
factors.
d. 1982 Foreign Trade Antitrust Improvements Act (FTAIA): challenged conduct in
export commerce or wholly foreign conduct must have a “direct, substantial and
reasonably foreseeable” effect on US domestic commerce or on the trade of a
person involved in export commerce.
i. Basically says what’s in S7 of Sherman Act.
e. Hartford Fire Insurance and “International Comity”:
i. SC: Decline to exercise jd based on comity only if a “true conflict” exists:
does not exist where a person subject to regulation by 2 nations can
comply with the laws of both.
1. True conflict stuff not that important!
ii. Comity: sovereigns should respect each others’ sovereignty! Usually
interest-balancing.
D. UK Protection of Trading Interests Act of 1980: Britain’s Response to US
Extraterritorial Antitrust Enforcement
a. Impetus was Westinghouse uranium cartel case; Westinghouse sought the
production of 1000s of foreign documents. UK court gave effect to the discovery
requests under the Hague Convention, but resented doing so.
b. Three important effects of Westinghouse
i. Treble damages threaten survival of industries critical to the well-being of
foreign nations
1. purpose of the damages in the Sherman Act questioned
ii. Outside the US, not much pre-trial discovery, and this case seemed
abusive in that regard.
1. national security considerations in disclosure of information
relating to the case
iii. b/c antitrust Ds are jointly and severally liable, defaulting foreign D’s may
be liable for satisfying a disproportionate amount of the judgment.
E. The Protection of Trading Interests Act of 1980 (PTIA) (UK): essentially to “block”
compliance by UK persons with US discovery procedures and application of US antitrust
laws; won’t enforce those judgments.
a. Restricts ability to depose witnesses
b. Restricts ability to attain documents
c. Clawback: won’t enforce multiple damages; if get treble damages, will only
enforce the original damages.
F. US, Common Market and International Antitrust: A Comparative Guide
a. Particular issues of foreign discovery in antitrust cases:
i. Extent to which docs located outside the US must be produced
1. General Rule: US can only get docs when has personal JD
over the person or corporation (minimum contacts applies)
2. The test for subs and parents is control, not location of the
docs.
a. Subs in US of a foreign parent can be basis of compelling
discovery of foreign parent’s docs.
51
ii. Conditions under which subpoena may compel a non-party alien to
comply: only if a citizen or resident of the US or a foreign non-resident
only if can be served with process in a US judicial district (minimum
contacts)
iii. foreign nondisclosure laws/limitations on discovery
1. applying the forum’s procedural laws vs. international comity
2. failure to produce docs is excused where there is a good faith
inability to comply with discovery order, as opposed to willfulness,
bad faith or fault.
3. Where inability is based on a foreign law, 2 conditions to proving
good faith:
a. The party or witness must not itself encourage or induce
foreign law prohibition
b. Party or witness must make a good faith effort to have
foreign authorities modify or waive the prohibition.
G. Societe Nationale v. US: The Hague Convention does not preempt or replace the FRCP,
but is rather a permissive supplement to be used, not necessarily even as a first resort,
but to facilitate pretrial discovery when the court deems it is appropriate. Decide case by
case whether to use Hague Convention.
H. US-Australian Antitrust Cooperation Agreement
a. Foreign states don’t like the private nature of antitrust actions and the fact that
they can result in treble damages. Agreements b/w gov’ts on the same issue could
be ignored for purposes of private action. Australia wanted to change this
b. Article 6: when private antitrust suits relate to the subject of prior gov’t
consultations, the Aust gov’t may request the US gov’t to “participate in the
litigation.”
c. The US shall in the event of such request, report to the court on the substance and
outcome of the consultations.
d. But, if US is reluctant to intervene or plaintiff thinks a Justice Dept report could
be damaging, the report might not help the foreign gov’t case.
I. EC and US Extraterritoriality:
a. EC “antitrust” laws: do not assert jd over commerce with foreign nations;
challenged conduct “may affect trade b/c Member states” – satisfied where
the effect is direct or indirect, actual or potential.
i. Treaty of Rome:
1. A.85 and 86: prohibit anticompetitive effect within the EU, or that
affects trade b/w member states; can be direct or indirect, actual or
potential
ii. Effect must be appreciable, which is less than substantial, more than de
minimis.
b. Wood Pulp Case: jd exists over firms outside the Community if they
“implement” a price-fixing agreement reached outside the Community by selling
to purchasers within the community.
i. Decisive factor: place where the challenged conduct was implemented,
not the place where its effect was felt.
52
c. International Comity: Commission believes this is a matter of prosecutorial
discretion, and not a legal prerequisite to the exercise of jd
d. US/EC Antitrust Cooperation Agreement
i. Positive comity: if one of the parties believes that its “important interests”
are being affected adversely by anticompetitive activities occurring w/in
the territory of the other Party that violate that party’s competition laws,
the affected P may request that the other P initiate enforcement activities.
J. Questions and Comments: Skylow
a. Why does the US do extraterritorial application of antitrust? To protect our
consumers and producers.
b. Why are other countries so against this? Antitrust isn’t very useful in smaller
countries, can bankrupt companies; private party right of action is very foreign to
other countries, especially b/c of contingency fees and discovery. Seems
excessive.
c. Skylow files a private antitrust suit alleging S1 and S2 against 4 defendants.
Apply Sherman Act extraterritorially?
i. Does the anticompetitive behavior have a direct, substantial and
reasonably foreseeable effect on US commerce?
1. Probably. Could argue that this is per se unreasonable – the
meeting plus the actions undertaken might amount to per se. This
gives basis for extraterritorial application.
d. Does the US have enough interest vis a vis the UK to support this case? Should it
take jd?
i. Yes- anticompetitive behavior hurts consumers; the law is useless if it
can’t apply extraterritorially; using it for a US-UK route – the companies
are present here;
ii. No – sovereignty/comity; treble damages are unfair; national security
related to discovery by private parties; use that country’s antitrust laws.
e. Skylow files suit in US and all the good documents are in UK – how/what can
they get?
i. Discovery is based on control, not location. US parent has control over
UK subsidiary/branch.
1. US branch/subsidiary- can they get control of UK parent’s
documents?
2. Have to make a good faith effort to get the docs.
ii. If UK companies want to use the blocking law to avoid discovery – if they
run to the gov’t for protection, this is probably in bad faith.
1. Comity argument comes in: but, no win situation.
2. US companies want the UK companies to produce the docs b/c
otherwise they are jointly and severally liable for all damages.
f. Letters rogatory procedure: letter of request to court of another jurisdiction
asking them to enforce a discovery request according to their rules of procedure.
i. Societe Nationale: case by case determination of when to use Hague
Convention.
53
1. Here, waste of $$ to use Hague and Letters Rogatory because of
the UK blocking statute.
g. Is UK going to get out of hot water using the blocking statute?
i. It’ll help with the damages and with avoiding discovery
h. Skylow wins $1m, trebled to $3m; what if UK won’t enforce judgment? Can they
get at the assets in the US?
i. If Skylow files with EU Commission (A.85 and 86) – can it do this? If not b/w
Member States, have to get the EU to prosecute themselves.

Review
Exam format: do 2 out of 3 multipart questions- straightforward, if it’s a topic that she
didn’t like or was confusing, don’t worry about it.
o Don’t study Customs Valuation, Intellectual Property or Export Licensing!!
(Rules of origin only very generally!)
54