International Laws and Global Orientations – Part 2
Welcome to the eighth session of the International Socio-Economic Context Course. This class continues 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, the different areas of concern of MNC will be presented to distinguish their nature, scope and application implications. Also, to identify the types of conflicts that might occur in the business environment.
So, by the end of this class you will be able to identify the several kinds of legal concerns in commercial terms and how they function particularly in the USA which is closely linked to the Mexican legal system.
Areas of concern to MNC
One area in which nations use their legal systems to affect international commerce is trade law. One aspect of this legal jurisdiction is the granting of licenses allowing US concerns to export goods. Through the issuing of such licenses, national governments control how and to what degree national resources will be allocated to foreign users through the export of commodities, services, and technology. Other methods of controlling trade are the imposition of tariffs in the form of customs duties on imports and exports, and nontariff barriers that slow exchanges of goods and services by increasing the complexities of international commerce.
In addition to these controls on trade and international trading agreement participation under the World Trade Organization (WTO), the United States also has specific trade laws designed to protect US citizens from the unfair trade practices of other nations, including subsidies and pricing practices with countervailing and antidumping laws.
Countervailing duty law is designed to provide for the imposition of tariffs to equalize prices of imports that are low because of subsidies provided by home governments to encourage trade. These subsidies can include financial help from a government, such as loans with special interest rates; providing input goods, raw materials, or services at preferential rates; forgiveness of debt; and assuming costs of industry manufacturing, production, or distribution.
Before countervailing duties are levied, many legal steps must be taken. The legal pro- ceedings follow two paths: determination of injury to an industry or firm, and findings that imported goods have been subsidized. In the first situation, the US government, through the efforts of the International Trade Commission (ITC), must decide that the existing or potential domestic industry has been injured by the practices of foreign exporters. Proceedings can be initiated by the government itself or through the petition of private parties (usually the injured industry). If the country concerned is a member of a regional trade area (such as NAFTA), then the proceedings are typically officiated by the tribunal associated with the regional trade agreement. If the aggrieved parties are more than two, the WTO would typically administer the complaint and render a verdict.
After an action is initiated and a case is brought before the ITC, efforts are mounted along the second path to determine whether or not the goods being imported into the United States are subsidized. If it is found that prima facie subsidization exists, sales of those goods by the foreign interest are suspended in the United States, and the party must post a bond for the amount of the estimated subsidy. Within seventy-five days after a determination is made, the administering authority makes a final decision regarding the existence and the amount of the subsidy.
Following the finding of a subsidy, the ITC makes its final determination of injury. If both authorities rule affirmatively regarding subsidies and injury, then a countervailing duty is levied on goods brought into the United States in the amount of the subsidization. The conduct of such cases is a lengthy, arduous, and expensive process that involves many teams of lawyers representing the domestic industry and the countries in question. For example, the softwood lumber dispute between the United States and Canada ran for more than two decades under the auspices of the NAFTA tribunal.
US antidumping laws also protect American industries and companies against the un- fair practices of parties in other nations as they relate to pricing practices, specifically, predatory pricing. Through such a practice, a foreign competitor attempts to capture a large share of a target market by cutting prices below those charged locally. Once such a share is attained and domestic competition is eliminated, the exporter can freely raise prices to prior or even higher levels. This practice is considered predatory if the seller is charging a price that does not reflect the fair value of the goods and is counterbalanced by higher prices charged in domestic or other markets.
The legal process of imposing duties on such dumped goods is similar to that in countervailing duty cases. The initiation of the case is the same, and the ITC is charged with determining both preliminary and final findings of injury to the domestic industry. Meanwhile, the administrative agency attempts to determine whether or not the goods are being sold for less than their fair market value. If the final findings of both deter- minations are affirmative, dumping duties equal to the amount of actual fair market value above the price charged in the US market are assessed on the foreign goods in question. The duty remains in effect only as long as and to the extent that the dumping practice continues.
One special area of legal concern for practitioners of international business is the appli- cation of antitrust laws by the United States to the activities of those engaging in inter- national commerce. US antitrust laws are based on free-market economic principles of competition. Thus, antitrust laws in the United States were enacted to prevent businesses from engaging in anticompetitive activities and to challenge the growth of monopoly power in industries.
The United States is noted in the international legal community for strict enforcement of these laws and for transnational application of these restrictions. The United States attempts to enforce antitrust statutes through the use of extraterritoriality and the imposition of its laws on the activities of US business concerns in other nations. US justification for such activity is that the United States rightly has extraterritorial reach if the action being disputed or acted against has the effect of materially affecting commerce in the United States.
The two main US laws covering the antitrust area are the Sherman Act and the Clayton Act. The Sherman Act was instituted in 1890 with the goal of preserving competition in both US domestic and export markets. It prohibits anticompetitive or monopolistic activities by business entities. Some such anticompetitive practices are trust-building, agreements to fix prices or allocate markets by industry participants, and agreements to engage in monopolistic activities in the United States or with foreign nations.
The antitrust purview was extended by the adoption of the Clayton Act of 1914, which prohibits the acquisition of the stock or assets of another firm if the effect of that acquisi- tion is the reduction of competition within the industry or the creation of a monopoly. This law has been interpreted by US courts to affect activity in international markets, because it requires only that the effect of the acquisition or merger be felt in the US market; there are no geographic constraints as to the physical locale where these acquisitions were made. Thus, the statute would cover horizontal mergers between industry competitors, vertical mergers between producers and suppliers or distributors, and mergers that have the effect of eliminating potential competition in markets.
The Webb-Pomerene Act of 1918 allows some American firms to seek exemptions from the application of these antitrust laws if they join together to gain access to foreign markets by exporting their goods. Under the Webb-Pomerene Act, firms are given specific exemptions from antitrust law and are allowed to join together to agree on prices and market allocations if such activity does not have the effect of reducing competition within the United States. Similarly, in 1982 Congress passed the Export Trading Company Act, which provided some guidance for these companies to facilitate international trade by acting as middlemen between potential buyers and sellers of export goods. Frequently, these export-trading companies (ETCs) trade simultaneously in products that compete against each other and represent competing firms. The purpose of the 1982 law was to provide an exemption from antitrust law so that US firms could combine resources in pursuing these export activities, as long as competitiveness in domestic US trade remained unaffected.
Over the years, antitrust legislation similar to the United States laws has been passed in the European Union, United Kingdom, Australia, China, India, and elsewhere. While there are some differences in the various international laws, most are similar in spirit to the legislation passed in the United States.
Foreign Corrupt Practices
In the 1970s questions about and interest in unethical behavior mushroomed as the events of Watergate unfolded. This interest was magnified by revelations that the Lockheed aerospace firm had made enormous payoffs to Japanese premier Kakui Tanaka for his help obtaining security contracts. It appeared also that other firms in such industries as construction, arms, aerospace, and pharmaceuticals routinely made payments to facili- tate contract awards, sales orders, or project clearance by foreign regulatory agencies. In response to these revelations, the Foreign Corrupt Practices Act (FCPA) was enacted in 1977 to deal with payments abroad.
The FCPA contains three major provisions regarding the payment of bribes and payoffs. First, it sets standards for accounting for all businesses, so that enterprises keep accurate books and records and maintain internal controls on their accounting procedures and systems. Second, it prohibits the use of corrupt business practices, such as making gifts, payments, or even offers of payments to foreign officials, political parties, or political candidates, if the purpose of the payments is to get the recipient to act (or not act) in the interests of the firm and its business dealings. Third, it establishes sanctions or punish- ments for such behavior. For example, violation of the corrupt practices sections of the act could result in fines of up to US$2 million for criminal cases.
Under the terms of the act, the word “corrupt” is used to denote activity in which it is clear that the payment or offer is being made with the purpose of inducing a public official to use his or her power wrongly in providing business for a firm or in obtaining special legislative or regulatory treatment for a company. The act also differentiates between bribes and payments made to facilitate international business by exempting payments made to minor officials in foreign bureaucracies. These payments, often called “grease,” are routinely paid to smooth the path of business for international firms. For example, a payment may provide for faster service or red-tape clearance. These payments are con- sidered a legitimate cost of doing business but must be accounted for appropriately. There are those who oppose making such payments illegal and defend them as being a reasonable cost of doing business, especially in foreign environments with different cultural patterns, values, and mores. They criticize the law for being expensive in its compliance and reporting requirements and cite difficulties in making the necessary distinctions be- tween facilitative payments and customary business expenses, such as entertainment of potential customers. These critics also believe that the law has worked to the detriment of American business by causing the loss of enormous volumes of business, especially to firms from other countries in which such payments are considered routine and ordinary operational costs.
The position of the United States and its laws regarding these payments differs from that of many other countries of the world, where such practices as making payoffs and paying bribes are considered ordinary costs of doing business in international settings. In Germany, for example, such payments have historically been considered customary and have been accounted for as tax-deductible special expenses, just as they have been in the United Kingdom. Similarly, France and Japan have no restrictions on making such pay- ments to facilitate the development of business. The question remains, however, whether these allowances for such payments put French, Japanese, German, and British firms at a competitive advantage over American firms.
An area of particular interest for sovereign nations that affects international firms and their operations is that of taxation. Tax procedures and policies can have significant ef- fects on the well-being and health of firms. They can discourage growth, investment, and the pursuit of profits by being onerous, or they can stimulate economic development and growth by providing incentives for firms and individuals. Taxation policies and laws differ around the world; rates vary considerably, as do types of taxes. Some countries, for example, allow for a lower tax on capital gains than on regular gains, to provide incentives for long-term savings and investment, while others tax all gains at the same rate.
In general, income taxes are a form of progressive taxation; that is, the larger one’s income, the higher the tax rate. European countries levy a value-added tax (VAT) only on the value that is added to products as they progress from raw materials to consumer goods. The VAT has the benefits of being relatively easy to collect and administer as well as being easily raised or lowered according to the country’s economic needs, but it has the disadvantage of not being progressive. Consequently, both low- and high-income members of society are taxed at the same rate because their total tax obligations may differ only according to their purchases, not according to their levels of income.
Taxes are levied not only to produce income or revenue for nations but also to affect public policy. For example, some taxes are intended to discourage the consumption of certain items. These so-called sin taxes (or excise taxes) are often levied on such goods as alcoholic beverages and tobacco products. Other tax policies provide incentives for firms to engage in particular activities. One such incentive in the United States encour- ages export activities by providing tax breaks for companies exporting as foreign sales corporations.
Countries differ greatly in the focus, provisions, regulations, levels of compliance, and enforcement of their tax policies. These differences can lead to significant problems for the multinational firm conducting business across the boundaries of different tax- ing authorities that vary in their determination of who is taxed on what property, what income, and at what rate. The question then becomes to which taxing authority must multinational firms or employees of that multinational firm remit taxes. The solution is one that recognizes both the concept that all sovereign nations have the authority to tax and the concept that corporations and individuals should be spared from having undue or double tax liabilities.
In consequence, nations around the world enter into tax treaties that generally provide for credits in the home country for taxes paid in the host country by corporations or indi- viduals. Thus, the entity is not taxed twice on the same income or property. For example, the United States taxes personal income not according to the residence or site where the income was earned but according to the nationality of the taxpayer. Therefore, expatri- ates working abroad are liable for taxes on income earned in those foreign settings. Tax law, however, provides a break for these individuals by allowing them exemptions from taxes for housing allowances for foreign residences and income tax relief on a portion of their income earned abroad, since they pay taxes in foreign jurisdictions.
Tax conventions or treaties between nations define the basis for taxation, such as the site of the official residence of a firm or person or the location of operations for that firm. The agreements also define what constitutes taxable income and provide for the mutual exchange of information and assistance to increase compliance with and enforcement of tax laws in order to decrease tax evasion.
In this session, the analysis of the constitution of the international legal framework was continued. It was considered the different interest areas of the USA legal system which is similar to some other nations and also relevant since the commercial importance of that nation.
By differentiating the several concerns of potential conflicts it is evident that the knowledge and operation according to the Law is essential when running an international business.
So, the comprehension of any legal system takes time and effort but is unavoidable when trying to gain a permanent and competitive position in foreign markets.
- Ajami R., & Goddard J. G. (2015). International Business: Theory and Practice. Routledge (249-254)
- Gordon, J. (September 26th, 2021). Legal Risks and Considerations in International Business – Explained. The Business Professor.