Week 5 - Economic and Legal Environment of International Trade (Student) PDF

Week 5– Economic and Legal Environment of International Trade Prepared by Dr. Kelvin Pang 12 September 2024 Learning Objectives 1. Define international trade. 2. Explain the rational behind international trade. 3. Discuss the link between international trade and shipping. 4. Discuss the economi...

Week 5– Economic and Legal Environment of International Trade Prepared by Dr. Kelvin Pang 12 September 2024 Learning Objectives 1. Define international trade. 2. Explain the rational behind international trade. 3. Discuss the link between international trade and shipping. 4. Discuss the economic impacts of international trade on shipping. School of Civil and Environmental Engineering Learning Objectives 5. Explain the types of legal system. 6. Understand the Singapore legal system. 7. Explain what is contract law and the elements needed for a valid contract. 8. Discuss the methods for dispute resolution. School of Civil and Environmental Engineering 1. Introduction School of Civil and Environmental Engineering 1.1 What is International Trade School of Civil and Environmental Engineering  LO 1.1 What is International Trade1 “International trade is concerned with exchanging goods or services between different countries” 1. Carried out between two or more countries – subjected to political, social, economic and environmental policies introduced by nations from time to time. 2. Involves different currencies and affects the balance of trade of the countries involved – may produce a favourable result in some countries but is unfavourable to others. School of Civil and Environmental Engineering School of Civil and Environmental Engineering 1.2 Singapore’s International Trade School of Civil and Environmental Engineering Q. Which of the following commodity sections contributed the most, in terms of value, to Singapore’s non-oil domestic exports in 2023? a) Machinery & Transport Equipment b) Food & Live Animals c) Chemicals & Chemical Products d) Manufactured Goods School of Civil and Environmental Engineering  LO 1.3 Why International Trade 2 i. Growing demand in new markets - foreign companies recognise the opportunities in growing markets (E.g., Vietnam) and expand to sell their products in new markets (E.g., Latin America). ii. Demand for foreign products - demand for new products that cannot be supplied by domestic companies. iii. Removal of trade barriers/restrictions - more free trade → more products moved. School of Civil and Environmental Engineering 1.3 Why International Trade iv. Differences in production costs - influenced by costs associated with labour, technology, volume of production, transportation, material and land. E.g., products manufactured in low-cost countries - Vietnam, Bangladesh etc. v. Products/resources can only be utilised where they are found E.g., oil, diamond, iron ore, coal School of Civil and Environmental Engineering 1.3 Why International Trade vi. Changing practices in shipping logistics - containerisation made movement of goods easier, cheaper and more reliable. vii.Improved communications in business - developments in information systems and internet. E.g., Internet of Things (IoT), Augmented Reality (AR), Artificial Intelligence (AI). School of Civil and Environmental Engineering 1.3 Why International Trade viii.Cater to differences in tastes, preferences and consumption patterns of customers in different countries. E.g., (i) culture differences in consumer goods, clothing and foodstuff (ii) seasonal differences (summer and winter) School of Civil and Environmental Engineering 1.4 Link between International Trade and Transport LO 3 School of Civil and Environmental Engineering 1.4 Link between International Trade and Transport 1.4 Link between International Trade and Transport School of Civil and Environmental Engineering 1.4 Link between International Trade and Transport Services supporting international trade 1.5 International Trade Flows 1.5 International Trade Flows 1.5 International Trade Flows School of Civil and Environmental Engineering 1.5 International Trade Flows School of Civil and Environmental Engineering 1.5 International Trade Flows What are the potential impacts to  LO 4 2. Economic Impacts of International Trade on Shipping and Logistics School of Civil and Environmental Engineering 2.1 Infrastructure Development 2.1 Infrastructure Development 2.2 Exchange Rate Risk Refers to “exposure faced by investors or companies that operate across different countries, in regard to unpredictable gains or losses due to changes in value of one currency in relation to another currency.” School of Civil and Environmental Engineering 2.2 Exchange Rate Risk School of Civil and Environmental Engineering 2.2 Exchange Rate Risk School of Civil and Environmental Engineering A SG company concluded a deal on 20 July 2024 to import transport equipment from China for 200,000 Chinese Yuan (RMB). They had until 12 September 2024 to make full payment in RMB. Upon checking the rate on 29th July, it was 1 SGD to 5.40RMB. The company decided to wait until the end of the payment period as they thought that the rate will go higher. 10 days before payment due date, the rate was 1 SGD to 5.44RMB on 2 September. Which rate was more favourable to the company? School of Civil and Environmental Engineering 2.2 Exchange Rate Risk and Shipping School of Civil and Environmental Engineering Discussion Question What is the impact of the currency appreciation/depreciation on maritime firms? School of Civil and Environmental Engineering  2.3 Impact of Oil Prices May 2022 $113.94 What happened to oil prices in 2016 and 2020? Jan 2016 $35.50 Mar 2020 $23.43 2.3.1 Oil Prices Collapse (2016) Why did oil prices fall so dramatically in 2016? - supply for oil driven by political incentives and technology innovation. - largest suppliers of oil in the world are the Organization of the Petroleum Exporting Countries (OPEC) – 40% of oil production, followed by Russia and USA. 2.3.1 Oil Prices Collapse (2016) (i) Political tensions - significant political tensions amongst oil producing giants and high incentive for governments to use price of oil to manipulate each other's economies. E.g. falling price in oil was a way to put economic pressure on Russia for its aggression in Ukraine, also directly related 2.3.1 Oil Prices Collapse (2016) (ii) Technology innovation - largest factor in drop in prices had been the dramatic increase and anticipation of further increase in US shale oil production. - historically, OPEC is very aware that US producers become less profitable as prices drop below $60-70 range. 2.3.1 Oil Prices Collapse (2016) 2.3.2 Oil Prices Collapse (2020) What was the impact on shipping and logistics? 2.3.3 Oil Prices Surge (2022) What happened in February 2022? 2.4 Trade Wars “A trade war is an economic conflict often resulting from extreme protectionism in which states raise or create tariffs or other trade barriers against each other in response to trade barriers created by the other party.” 2.4 Trade Wars 2.4 Trade Wars 2.4 Trade Wars On May 14, U.S. Trade Representative Katherine Tai released a review report on the Section 301 tariffs imposed on China and issued a statement indicating that President Joe Biden had directed her to take further action. This includes imposing additional tariffs of 25 percent to 100 percent on strategic products from China, such as electric vehicles, solar cells, and medical supplies. Subsequently, the White House announced new tariffs on $18 billion worth of Chinese imports. After a period of noticeable easing, China-U.S. relations seem to be becoming tense again. However, given the scope and scale of these new tariffs, along with the Biden administration’s strategic considerations, there is little need to worry about a new trade war between the United States and China this year – even factoring in potential Chinese countermeasures. But next year remains uncertain. First, the newly announced tariffs have been long anticipated and involve a relatively modest total amount. Biden has decided to maintain existing tariffs on over $300 billion worth of Chinese goods. The newly No China-US Trade War This Year, But Uncertainty Ahead in 2025 – added The tariffs affect goods valued at $18 billion, Diplomat indicating a limited impact. 3. Legal Environment School of Civil and Environmental Engineering 3.1 Law and Business Every business decision and activity involve legal implications. Why do businesspeople need basic legal knowledge? → avoid creating basic legal problems. → minimize cost and time for consulting lawyers on basic issues. → better position to protect self interests. School of Civil and Environmental Engineering  LO 3.2 Types of Legal System 5 Legal syste m Commo theocra n law tic law civil law School of Civil and Environmental Engineering 3.2.1 Common Law System evolves in England over hundred of years. Based on: i. Transition – country’s legal history ii. Precedent – past court cases iii. Custom – ways laws are applied in specified situations. Judges have power to interpret the law on these basis. New interpretation sets a precedent that may be followed in future. Laws may be altered, clarified, or amended as new precedents arise. School of Civil and Environmental Engineering 3.2.2 Civil Law Based on a detailed set of laws organized into codes. Judges relied on detailed codes (statues) to apply the law. Less adversarial than common law system. School of Civil and Environmental Engineering 3.2.3 Theocratic Law Based on religious teachings. Basic foundations cannot be changed as they’re enshrined in the holy books. E.g., Saudi Arabia, Afghanistan, Iran and Vatican City. School of Civil and Environmental Engineering  LO 3.3 Singapore Legal System 6 School of Civil and Environmental Engineering 3.3 Singapore Legal System School of Civil and Environmental Engineering 3.3 Singapore Legal System Adopt common law system. Singapore’s sources of law: 1. Civil – judge can interpret statue but cannot change. E.g., Employment Act states that “no contract of service as an employee is enforceable against a person below 18 years of age…” 2. Common law – doctrine of precedent. School of Civil and Environmental Engineering 3.3 Singapore Which rules Legal System If Singapore ratify conventions / rules governing international governing trade matters, businesses carriage of operating in Singapore goods by sea must abide. has Singapore applied? School of Civil and Environmental Engineering  LO 3.4 Contract Law 7 Governs contract creation, enforcement and problem resolution. A contract: i. Specifies conditions of an exchange; ii. Rights and obligations of the parties involved; and iii. Lay down remedies of breaches. Common law less specific than civil law. School of Civil and Environmental Engineering 3.4 Contract Law Differences under common and civil law. Common Law Civil Law Very detailed contracts Contractual issues with contingencies clearly covered spelt out comprehensively in civil code More expensive Less expensive Greater flexibility for Lack of flexibility parties to spell out rights and obligations Resolving disputes can be Judges follow School of Civil and Environmental Engineering 3.4.1 Singapore Contract Law Largely based on common law of contract in England. “A contract is essentially an agreement between two or more parties, the terms of which affect their respective rights and obligations which are enforceable at law.” Whether parties have reached agreement, or a meeting of minds, is objectively ascertained from the facts. School of Civil and Environmental Engineering  Case Example “I’m sorry for crashing On inspecting “How about his damage, into your car. Can I $2300? “$2000 seems offer $2000 in That’s the “Hmm too little, how compensation and best that I … about $2500”? let’s not claim our can go.” $2300 insurance?” sound s alright.” School of Civil and Environmental Engineering 3.4.2 Elements for a Valid Contract These four Offer elements must be present to make a contract Elemen Intention to Create ts of valid. Acceptan Valid Legal ce Contrac Relations t Considerati on School of Civil and Environmental Engineering Offer and Acceptance School of Civil and Environmental Engineering Offer “An offer is a promise, or other expression of willingness by the ‘offeror’ to be bounded upon unqualified acceptance by an ‘offeree’.” Acceptance of an offer results in a valid contract. Offer may be terminated by withdrawal at any time prior to its acceptance – must include communication of the withdrawal. Rejection of an offer includes making of a counter- offer or a variation of the original terms. School of Civil and Environmental Engineering Acceptance For a contract to be valid, offeree has to accept the offer. Acceptance must be on same terms as the offer. Must be communicated appropriately and deemed reasonable. School of Civil and Environmental Engineering Case Example Facts: Before his flight was about to depart, Sean saw Jason’s email that he was willing to offer $25 million for one of the vessels that he owns. Sean intends to accept but decides to wait until he arrives at his destination to communicate his acceptance. Upon arrival, when he switched on his mobile phone, he received an email from Jason that he decided to withdraw the offer. Question: Can Sean sue Jason? School of Civil and Environmental Engineering Consideration It is what one party agree to do in return for the other’s promise. E.g., If A signs a contract to buy a car from B for $5,000, A’s consideration is the $5,000 and B’s consideration is the car. Consideration must be sufficient but need not be adequate (i.e., market value). School of Civil and Environmental Engineering  Case Example “I’m sorry for crashing What’s the consideratio into your car. Can I n here in offer $2000 in this case? compensation and let’s not claim our insurance?” School of Civil and Environmental Engineering Intention to Create Legal Relations “parties must intend to enter into a legally binding arrangement in which the rights and obligations of the agreement are enforceable.” Do two people discussing a business deal over a drink in a bar/pub constitutes intention? → “Parties in a domestic or social arrangements are generally presumed not to intend legal consequences.” School of Civil and Environmental Engineering 3.4.3 Variation of Contract After contract is created, terms of the contract could be changed under these situations. 1. Contract itself allows for variation. - many uncertainties affecting business transactions. - parties should agree on terms that could be changed after contract is in effect. 2. If contract does not provide for variations, both parties must agree to the changes. School of Civil and Environmental Engineering  LO 3.5 Methods of Dispute Resolution 8 Methods of Dispute Resolution Arbitratio Mediatio Negotiati Litigation n n on School of Civil and Environmental Engineering 3.5.1 Litigation Resolving disputes in the court of law. Advantages - verdict is legally binding. - do not need consent of other party to commence litigation. Disadvantages - high cost. - time consuming. - tends to create a win-lose situation. - no more privacy. - difficult to enforce judgement on parties not based in Singapore. School of Civil and Environmental Engineering 3.5.2 Arbitration Solution is legally binding. Relatively cheaper than litigation but more costly than mediation. Parties can choose arbitrator as long as all agreed. Privacy intact. Not necessary to engage lawyers. Relatively easier to enforce, e.g., Singapore, US, Japan. In Singapore → Singapore International Arbitration Centre. School of Civil and Environmental Engineering 3.5.3 Mediation Goal – reach an amicable solution. All parties must be agreeable. Suitable when parties have genuine desire to find mutually acceptable solution to problems. Advantages: - relatively cheaper than litigation. - settlement can be reached faster than litigation. - privacy intact. - not adversarial, amicable in nature, and moving towards win-win situation. - mediator don’t decide who is right or wrong. School of Civil and Environmental Engineering 3.5.3 Mediation Disadvantages - If solution cannot be reached more time is wasted to embark on other methods of resolution. Two mediation organization in Singapore – Singapore Mediation Centre – Primary Dispute Resolution Mediation Centre School of Civil and Environmental Engineering 3.5.4 Negotiation Cheapest and fastest way to resolve dispute. Not adversarial in nature and dispute can be resolved amicable (hopefully!). School of Civil and Environmental Engineering 3.6 Contracts Covering International Trade Various issues that need to be addressed in an international business contract: → which country’s law to apply when dispute arises? → where should the dispute be resolved? → how should the dispute be resolved? → Sales terms? E.g., price, quality, description, currency used → Transport terms? E.g., Incoterms, carriage arrangement, payment etc. → Payment terms? E.g., methods, credit terms, currency and time of payment, etc. School of Civil and Environmental Engineering  3.6 Contracts Covering International Trade Sell er Buy er School of Civil and Environmental Engineering Key Words/Terms International trade Offer Derived demand Acceptance Infrastructure Consideration Exchange rate risk Intention to create Oil prices legal relations Trade wars Litigation Common law Arbitration Civil law Mediation Theocratic law Negotiation Contract law School of Civil and Environmental Engineering Next Week Conventions governing carriage of goods by sea. Define and discuss the importance of a bill of lading. Discuss the different types of bill of lading. Overview of shipping law in Singapore. School of Civil and Environmental Engineering