International Laws and Global Orientations – Part 1
Welcome to the seventh session of the International Socio-Economic Context Course. This class starts the review of the International Law and Global Orientations Chapter that aims for the identification and understanding of the legal concepts that influence the operations of MNCs.
In this session, how different legal systems differ between countries will be explained and the important legal concepts in the international environment will be discussed. This is important because international business must pay attention to the differences when operating in foreign markets not only to avoid the violation of any rule but also to make profit of the eventual benefits available for the operation in the area or industry.
So, by the end of this class you will know how the international legal framework is conformed and why a Manager has to consider the legal consequences of entering a market different from the domestic.
Public and Private Law
As established by Ajami R., & Goddard J. G. (2015), international transactions are complex and tend to be risky. Consequently, disputes of- ten arise between business partners. To the international businessperson, however, the normal recourse to national law is not always available, because host-country laws often discriminate in favor of their citizens. Moreover, there is no international body of law that governs international transactions. Thus, when people refer to the study or the conducting of international law, they are merely referring to the laws that govern the activity of nations in their relationships with one another. These laws collectively are referred to as the public law of nations, which reflects individual countries’ methods for dealing with other nations of the world. Public law is based not only on written law but also on unwritten customs and conventions.
Public law, that is, the manner in which nations interact according to a legal framework, differs from private law. Private law applies not to nation-states but to individuals within those nation-states. These parties enter into agreements called contracts in order to establish a set of rules and regulations regarding their mutual interests and interactions. Their contracts stipulate the terms of their agreements regarding what is to be exchanged, when, where, and for what price in what currency. This private law is still affected, however, by the rules and regulations emanating from public law—overall stipulations regarding permissible behavior between the contracting parties. For example, despite having contracts to the contrary, private citizens may be prohibited by the laws of their countries from buying goods that a nation has barred for importation, because of public policy or national economic goals.
Different legal systems
The legal systems of different countries are based in one of four legal traditions or foundations: civil, common, bureaucratic, and religious law.
Civil law, which traces its origins from ancient Roman law and, more recently, the Napoleonic Code, is practiced in most European nations and the former colonies of those countries. Civil law is a body of law that is written essentially in the form of statutes and is constructed and administered by judicial experts in government. A hybrid of civil law is practiced, for example, in Japan. Under the hybrid systems, government experts are involved in the development of new statutes, but before even being proposed, these potential laws generally achieve political consensus. Law is seldom modified or amended in civil law systems.
Common law, which is practiced in Great Britain and its former colonies, for example, the United States, is more susceptible to challenge, change, and amendment. The common law system is based not on federal administration but on judicial interpretation of the law as well as on customs or usages existing within the nation. Under common law, decisions made by the court are based on preceding judicial judgments (i.e., precedence) rendered by prior courts.
Bureaucratic law, which is practiced in many communist countries as well as dic- tatorships, is law that is set by the country’s current leadership. This law is subject to change rapidly when the regime changes. In the summer of 2003, the citizens of Hong Kong feared that the Chinese government would impose an anti-subversion law on the island, as is in place on the mainland. This law, which could have been used to quell future protests in Hong Kong, contradicted the concept of “one nation, two systems” that has existed between China and Hong Kong since China took over possession of the island from Great Britain in 1997. While the Chinese government eventually backed off on its implementation of an anti-subversion law in Hong Kong, this is an example of how bureaucratic law can suddenly change the operating environment in a formerly open society. The countries that adhere to religious law are primarily Muslim. In these nations, religious law is generally mixed to an extent with other forms of law, such as civil or common law. In some countries, such as Saudi Arabia, religious precepts referred to as the sharia (one translation of which is “way to follow”) govern all behavior and are administered by the government and Islamic judges. A system such as this is also known as a theocracy.
International treaties framework
These legal traditions and systems provide each nation with its own public law and a framework for conducting both its relationships with other countries and its citizens’ relations with private citizens from other nations. This framework, a law of nations, is formalized for individual countries through their agreements, which are developed either individually or within a bloc with other nations. These agreements outline rules and regulations to be observed by the parties with regard to economic and commercial matters. The most important of such accords are treaties; those that are considered less important are called protocols, acts, agreements, or conventions.
These agreements are binding on the parties that enter into them. If there are only two nations involved, the agreement is termed a bilateral treaty; if there are more than two nations involved, the agreement is termed a multilateral treaty. Treaties are entered into primarily to facilitate the conduct of commerce between nations. They determine the rules to be followed, define the rights and obligations of each party, and provide for the enforcement of judgments when the terms of the treaties are violated.
There are many different kinds of treaties entered into by nation-states. The most fundamental provide the basis for conducting business between nations by allowing the citizens of the counterpart country to participate in business activity in the home country through trading, investing, or operating or owning a business. Such treaties, known as treaties of friendship, commerce, and navigation, stipulate fundamental parameters to be observed by citizens within each nation while interacting with those from the other and establish guidelines for doing business across borders. Thus, they address such issues as the entry of people, goods, ships, cargoes, and capital into countries. They also establish guidelines regarding the acquisition of property by foreign nationals, as well as the protection of their own citizens and their property abroad. Similarly, they address flows of resources between countries in the transfer of funds or currencies between the two nations.
Tax treaties allow for countries to establish criteria for determining which country has jurisdiction over income earned, how double taxation is to be avoided, and how the countries can cooperate to reduce the evasion of taxes by each other’s citizenry.
Legal Concept Relating to International Business
Even casual examination of international law requires the definition of the concept of sovereignty, which is the principle that individual nations have absolute power over the governing of their populaces and the activities that occur within their borders. To be considered a sovereign entity, a nation must be independent, have a permanent population and well-defined boundaries, possess a working economy and government, and have the capacity to conduct foreign relations. To be sovereign and conduct relations with other nations, the country must be recognized as such by those other nations. Recognition is the official political action taken by the countries of the world to accept the status of a country as a legal entity and a full-fledged member of the political and economic system of the world. One example of a nation not recognized as sovereign is Northern Cyprus, which Turkish-Cypriots have occupied since 1974 and which is officially recognized as a nation only by the Republic of Turkey.
Sovereignty has been in the news lately in two ways. Firstly, protesters claim that increased globalization entails a surrender of sovereign rights to the global marketplace. Secondly, the EU sovereign debt crisis exposed the flaws of sovereign entities being managed by one central bank and one currency.
Sovereignty implies that a nation can impose laws and restrictions, levy taxes, and cir- cumscribe business activities. A manifestation of this sovereign power is the doctrine of sovereign immunity, which is the principle that a sovereign state enjoys immunity from being held under the jurisdiction of local courts when it is party to a suit unless the state itself consents to be a party to that suit. Therefore, courts have no jurisdiction to hear claims against a sovereign nation.
In an attempt to clarify this situation, the United States passed the Foreign Sovereign Immunity Act (FSIA) in 1977. This law stipulated that, in the eyes of the United States, a foreign nation waives its right to sovereign immunity when it or its agency engages in a commercial activity. The FSIA focuses on the nature and the purpose of commercial activity undertaken and covers business activities that take place in the United States, are performed in the United States but involve activities elsewhere, or have a direct effect on the United States, even if performed outside the country’s borders.
Act of State
belongings have been taken by the state in public actions. This doctrine holds that sovereign nations can act within their proper scope in confiscating these assets. To be an act of state, however, the activity must satisfy several conditions. It must be an exercise of foreign power, conducted within a country’s own territory, with a degree of consequence calculated to affect a foreign investor or party, and it must be an action that is taken by the state in the public interest.
Because acts of state are considered to be within the rights of sovereign entities, judi- cial bodies in other countries have no standing to consider the legality of such actions. The biggest issue in these actions arises in regard to foreign owners being compensated adequately for the loss of these assets. Although international law and convention require that owners be paid appropriately for their confiscated or nationalized assets, the definition of “appropriate” varies according to each party’s opinion and judgment. This problem is a major concern when investments are expropriated by developing nations, especially because some of these countries have repudiated the classical principles of compensation for expropriation, citing the country’s overriding development goals.
Extraterritoriality refers to the application of one country’s laws to activities outside its borders. Such a transnational reach across borders comes into play when a government seeks to restrict, limit, or direct business activities, such as monopolistic practices, the collection of taxes, or allowable payments for corrupt practices. The United States, in particular, attempts to extend its regulatory and legal reach across national borders in all these areas, although it is not always successful. One such attempt by the United States began in the early 1980s, when President Ronald Reagan decided to impose economic sanctions on the Soviet Union to protest Soviet pressure on Polish officials to impose martial law and crack down on leaders of the Solidarity trade union.
The sanctions prohibited American companies and their foreign subsidiaries and affiliates using US licenses from selling equipment or technology to the Soviet Union for the transmis- sion or refining of oil and gas. The sanctions, targeted at the Soviet Union’s construction of a 2,600-mile natural gas pipeline from Siberia to Western Europe, raised a storm of controversy in the United States and Europe. At the center of the controversy were technological licenses issued by General Electric to foreign affiliates in Scotland, France, Italy, and Germany, which the US government forced General Electric to cancel. Protests by the licensees were made on the grounds that the sanctions violated international legal principles of the sanctity of valid contracts between parties and on the impropriety of the US attempt to use extraterritoriality. When licensees appealed to their national governments, European leaders rejected the sanc- tions out of hand, arguing that President Reagan had no right to extend US laws beyond US territory, and instructed the licensees to continue their operation.
In this session, an introduction to international legal concepts was provided. Firstly, the difference between private and public areas of law was established as a way to understand that commercial aspects might be of both indoles.
In second place, the different types of origin of law were explained to comprehend that historical tradition have implications in the current application of Law and they coexist in the global business world.
Finally, some theoretical concepts important for international business were explained in preparation for the following lessons which intend to prepare the business professional for the operation in international markets of any firm, MNC or not.
- Ajami R., & Goddard J. G. (2015). International Business: Theory and Practice. Routledge (244-249)
- The Business Professor (February 8th, 2015). Public Law and Private Law.