IBT Week 10 Legal and Regulatory Environment of International Business PDF

IBT WEEK 10 Legal and Regulatory Environment of International Business DONESA, RAVEN BSA-3 International law is primarily governed by customs, treaties, and organizations that influence how laws are understood, interpreted, and enforced around the world. Since there is not a central court to enfor...

IBT WEEK 10 Legal and Regulatory Environment of International Business DONESA, RAVEN BSA-3 International law is primarily governed by customs, treaties, and organizations that influence how laws are understood, interpreted, and enforced around the world. Since there is not a central court to enforce international law, each country utilizes its own courts to settle disputes. Collective action, reciprocity, and shaming are three examples of non-legislative methods that influence trade when enacted against nations that violate international law. Primary Sources of International Law International customs, treaties, and organizations are the primary sources of international law (Clarkson, Miller, & Cross, 2018, p. 439). These three components work together to guide how nations understand, define, and interpret international laws that govern global business affairs. International Customs Customs are general practices between nations that guide their business relationships. According to the Statute of the International Court of Justice, international customs are “accepted as law”. While customary international law (CIL) is not written, nor does it require ratification to become binding, CIL nonetheless provides guidelines for how nations conduct business affairs (Bradley & Gulati, 2010, p. 204). One example of a custom is the international protection of ambassadors. For thousands of years, ambassadors have been protected while serving diplomatic missions. For this reason, countries protect foreign ambassadors with the understanding that any harm caused to ambassadors would be a violation of international law. International Treaties Treaties and other agreements between nations are authorized and ratified by the countries that acknowledge their legality. There are two different types of agreements: bilateral, which is formed by two nations; and multilateral, which is formed by several nations. The Peru-United States Trade Promotion Agreement is an example of a bilateral agreement. It was signed in 2006, ratified by Peru the same year, and ratified by the United States in 2007. This bilateral agreement is considered beneficial to the United States because it improves access to Peruvian goods, while promoting security and democracy in the South American country. The North American Free Trade Agreement, or NAFTA, is an example of a multilateral agreement. It was ratified in 1994, when Mexico joined the previous trade agreement between the United States and Canada. In September 2018, the Trump administration successfully completed re-negotiations with Mexico and Canada that lasted over one year. Among other aims, these negotiations worked to increase auto industry wages for workers in Mexico and modify pharmaceutical regulations with Canada. International Organizations International organizations are comprised of officials who represent member nations that have established a treaty to oversee shared interests, including trade and commerce. The U.S. participates in more than 120 bilateral and multilateral organizations around the world. International organizations adopt resolutions that standardize behavior and create uniform rules related to trade and commerce. Two of the most significant international organizations established in the twentieth century that significantly impact U.S. trade and commerce are the United Nations and the European Union. United Nations The United Nations (UN) was created as a multilateral treaty in 1945. The UN’s organizational goals include maintaining global peace and security, promoting economic and social cooperation, and protecting human rights, especially related to women and children (Cheeseman, 2016, p. 905). The UN General Assembly includes representatives from each member nation. As of 2018, the UN acknowledges 195 sovereign states, with all but two participating as full members. These two, Palestine and the Vatican City, are classified as “observer states.” Six additional countries are not UN members, but are recognized as a country by at least one UN member country: Abkhazia, Kosovo, Northern Cypress, South Ossetia, Taiwan, and Western Sahara. Sources of International Law One of the most important governing documents for international law is the United Nations Convention on Contracts for the International Sale of Goods (CISG), which was established in 1980. This law governs contracts of countries that have ratified it as the priority contract for trade. By January 2018, 84 countries had adopted CISG, including the countries that account for more than two-thirds of all global trade. Those countries include the United States, Canada, China, Japan, Mexico, Argentina, Brazil, and most European countries. The CISG is enforced whenever international transactions occur without the presence of written contracts to govern those transactions. There are limits to the CISG, however, as the CISG does not apply to consumer sales or contracts for services (Clarkson, Miller, & Cross, 2018, p. 376). International Principles and Doctrines There are three significant principles that help establish and enforce international law: the Principle of Comity, the Act of State Doctrine, and the Doctrine of Sovereign Immunity. The Principle of Comity states that nations will defer to the laws and decrees of other nations when those laws are consistent with their own, essentially upholding reciprocity between nations with similar laws. For example, a U.S. court will most likely uphold a business contract as valid even if it was drafted in England, since the United Kingdom’s legal procedures are consistent with U.S. procedures (Cross & Miller, 2018, p. 216). The Act of State Doctrine is a law applicable in England and the United States. It states that these two nations will not pass legal judgement on public acts committed by a recognized government if those acts occur within that government’s own territory (Cross & Miller, 2018, p. 216). For example, the United States will not file a lawsuit against Petrobras, a Brazilian oil company, alleging price fixing, since the act of pricing oil occurs in Brazil, which is a nation that holds control over its own natural resources. The Doctrine of Sovereign Immunity, which was introduced in the previous section, states that foreign nations are immune from U.S. jurisdiction when certain circumstances are applied. However, there are exceptions to this law. If a foreign country conducts commercial business activity in the United States and an entity in the United States files a lawsuit against the foreign business, then the foreign state is not immune from U.S. jurisdiction (Cross & Miller, 2018, p. 216). International Law Enforcement One of the most important considerations for international business is understanding that companies operating in foreign nations are subject to the laws of those nations (Cross & Miller, 2018, p. 212). Common law systems operate independently by developing their own rules that govern areas of business law, such as torts and contracts. The United States has a common law system. One-third of all people in the world live in nations in which common law is practiced. Civil law systems base their legislation on Roman civil law, which utilizes statutory codes as the primary source of law (p. 212). Impact on International Trade There are three international law enforcement methods that can radically impact trade: collective action, reciprocity, and shaming. Collective action occurs when businesses work collectively to strengthen their resources and achieve a shared goal. In February 2018, the UN Conference on Trade and Development Secretary-General argued that collective action can be one of the most effective methods for protecting international trade in the current global climate. Due to recent trade restructuring from the United States and the United Kingdom (pending its withdrawal from the EU), collective action was promoted as a way to “harness energy that will not fragment the [international trade] system” (UNCTAD, 2018). By leveraging nations to defend “rules-based multilateral trading systems as a force for creating inclusive prosperity,” the Secretary-General promoted collective action as the primary way to assure continued international peace and economic viability for generations to come. Reciprocity is central to international trade and at the core of CIL. It happens most commonly in international business exchanges as countries lower import duties, or other trade barriers, in exchange for mutual arrangements extended by the other country. Reciprocity can be beneficial to the nations involved, or it can be punitive. In 2016, presidential candidate Donald Trump campaigned for an international trade climate that would produce fairer options for the United States. Since his inauguration, he has increasingly pressured the global community by imposing taxes on imports from Canada, China, the EU, and Mexico, each of which has retaliated in reciprocity. In 2018, China accused the United States of launching the “largest trade war in economic history,” of which the final global impacts remain largely unknown (BBC, 2018). Shaming is a deliberate attempt to negatively impact a state, regime, or governmental leader’s reputation by publicizing and targeting violations of international laws, including customary norms, treaty breaches, and violations of organizational expectations (Gopalan & Fuller, 2014, p. 75). However, shaming is not viewed as particularly effective without more concrete measures to accompany it (Klymak, 2017). Legal issues in international businesses If you plan on expanding your business internationally, you must consider some potential legal issues that might arise. Some of the top legal issues to take note of are: Employment laws -It is vital to have employment contracts that correctly outline the team’s roles and responsibilities. This should be made in accordance with the jurisdiction that the employee is operating in. Usually, anyone working on a salary is considered an employee. Therefore, ensure that the following are correctly provided to them: 1. Minimum employment rights, such as sick pay and holiday pay 2. Right to join trade unions 3. National minimum wage 4. Employer pension contributions Company share options – Providing this option to employees allows them to own shares in the company they are working in. This option could be provided to the employees as part of the remuneration package or as an additional motivation for performance and growth. Commonly, providing such options provides tax benefits to both the employer and the employee. Therefore, check the relevant laws applicable in your jurisdiction and consider providing these options to your employees. Tax obligations – Proper tax structuring advice may help you minimise your corporate tax obligations and clarify your responsibilities under the global transfer pricing rules. Additionally, the existence of double taxation avoidance agreements (DTAA) between the source country and the residence country also affects the taxes applicable to you. Therefore, ensure that you complete proper research on the local laws of the specific jurisdiction. Incorporation and company structure The organisational structures for international business can also be in the form of branches, especially for countries where the legal owners of the business are not permanent residents or citizens. Usually, tax benefits through double-tax treaties are provided to such entities to encourage more investment in the country. Most international businesses worldwide are limited liability companies, and a few are partnerships or branches. This is because the financial liabilities and legal status are the same for beneficial shareholders, ensuring that the voting and investment power in the company remains constant. Contract: Incorporation agreement An incorporation agreement, or pre-incorporation agreement, is used by international businesses while they take steps to incorporate themselves in specific jurisdictions. The agreement helps prevent misunderstandings concerning the roles and responsibilities of the parties involved in the incorporating entity. Some of the common aspects to be included in this agreement are the company’s name, purpose and structure, names of directors, share distribution, salaries of directors, etc. Labour and employment laws Since international businesses have overseas operations, it especially becomes vital to have a basic understanding of international labour and employment laws. International labour law protects employees, governments and trade unions operating within the workplace. While each country might have its rules and regulations, the main aim is to protect business-related operations. Most laws are created through the rules mentioned in the International Labour Organization, the World Trade Organization, and the European Union. These organizations are also helpful in assisting businesses and helping them remain compliant with the labour law specifics in countries. Therefore, it becomes important to become aware of these standards to ensure you provide adequate working conditions, health and safety at work, and have a proper mechanism for communication and participation for the employees. Contract: employment agreement An employment agreement is a legal statement of record that helps become the link between the business and the employees, especially those located overseas locations. The agreement includes all the key terms and conditions between the employee and the business. Further, important negotiation points, such as salary, vacation rights, benefits, sick leaves, termination, confidentiality requirements, notice period, and other important conditions related to employment, are made clear for both parties beforehand. Rights to intellectual property (IPR) International businesses often find it difficult to protect their intellectual property (IP) while conducting business overseas. This is mainly due to the lack of information related to IP. Common knowledge is that IP registered in one country is not protected in another, considering the territorial nature of IP rights. Therefore, it becomes important to register any patents, trademarks, design rights, or copyrights in every country in that you want to sell your products. Some simple ways you can use to protect your IP are: Working with a specialised in-county attorney who is well aware of the target country’s guidelines Register your IP in the target country Therefore, you have the option of either applying in each country and following the respective procedures for the registration of your IP. Or do you have the international route for the registration of your IP? The World Intellectual Property Organization (WIPO) administers the Madrid, Hague, and PCT Systems, which conduct the international registration of trademarks,designs, and patents. Therefore, you can start by conducting a Freedom to Operate (FTO) search to ensure that you are not infringing anybody’s patents, designs, or trademarks. Thereafter, you can go to the respective websites of Madrid, Hague and PCT systems and register your IP on the platforms. Contract: Intellectual property licensing agreement Once the international business has obtained protection for its IP, the business can license its IP by entering into an IP licensing agreement. This helps business manufacture and sell their products in foreign jurisdictions without expending their resources to manufacture, market, or distribute their goods. While the revenues would be shared between the licensed authority and the business, it becomes a safe investment to enter a new market since the licensed entity is much more aware of the local territories and the best marketing strategies for that particular country. Ultimately, it is the duty of the licensor to properly enforce the license agreement and ensure that the licensee is using the IP per the agreed terms. What Is a Trade Sanction? Trade sanctions are legal restrictions on trade with a country. Trade sanctions are a subcategory of economic sanctions, which are economic penalties imposed on a country to accomplish policy goals beyond the sanctioned economic activity. Understanding Trade Sanctions Trade sanctions can be used to punish a particular policy or to increase its costs and encourage a change in behavior. Sanctions may be unilateral, imposed by a single country, or multilateral if agreed by multiple nations. Sanctions may be also be adopted by international organizations such as the United Nations Security Council. Trade Sanction Mechanisms The most common types of trade sanctions are non-tariff barriers (NTBs) and embargoes. Non-tariff barriers may include export licensing regimes or outright export and import bans for specified products and services. Quotas and tariffs are not typically deployed as sanctions, though they can be altered or maintained as part of a sanctions regime. Asset freezes and seizures are part of the broader economic sanctions toolbox and can certainly hinder trade, but are not a trade sanction specifically, Embargoes An embargo is the most severe trade sanction, as a general prohibition of most trade with the sanctioned country. For example, the U.S. maintains trade embargoes against Cuba, Iran, North Korea, Syria, and Russian-occupied Crimea in Ukraine, barring all imports and exports without a license authorization from the U.S. government. Export Restrictions Export restrictions, including licensing requirements and outright bans, typically target advanced technology transfers to government or private trade partners in a sanctioned country. They often target industries implicated in the actions under sanction and others considered particularly valuable to the sanctioned country. For example, in response to Russia's invasion of Ukraine, the U.S. government in February 2022 restricted U.S. exports to Russia as well as third-party exports using U.S. technology in semiconductors, telecommunication, encryption security, lasers, sensors, navigation, avionics, and maritime technologies. Import Restrictions Import restrictions and outright bans target the import of products or services from the sanctioned country. Proposals to ban imports of Russian crude oil in response to Russia's invasion of Ukraine shook global energy markets in March 2022. Standing European Union bans on imports of Syrian weapons and Somali charcoal have attracted less attention.10 Tariffs and Quotas Because tariffs and quotas limit trade but don't ban it entirely, they are more often used to curb trade flows out of economic motivations (such as encouraging domestic employment, for example) rather the for reasons of foreign policy. U.S. use of tariffs as a foreign policy tool expanded dramatically during the Trump administration. Western leadership in global trade and advanced technologies makes trade sanctions an attractive policy alternative to the use of force in international disputes. The effectiveness of trade sanctions depends on how widely they are adopted by the sanctioned country's trading partners, and the degree to which they target its most valuable industries and leadership. The effectiveness of sanctions also depends on the responses of the sanctioned country.