Reference no: EM133294813

Question :- Based on the clauses discussed in the lesson notes for international contracts, create a contractual agreement for a fictitious company you may actually establish in the future.

INTERNATIONAL LAW

National Law: that which pertains to a particular nation.

International Law: a body of written and unwritten laws observed by independent nations and governing the acts of individuals as well as states. Derived from treaties, court cases, statues, and customs of various nations applied in national law.

Remedies of Nations: severance of diplomatic relations and boycotts or, as the last resort, war.

...sources of International law: customs, treaties; international organizations that adopt resolutions, declarations, and other behaviors for nations. (U.S. belongs to more than 100 such organizations)

Examples of Multilateral International Org. Participated in by the U.S.:

Customs Cooperation Council: Supervises the interpretation of International codes classifying goods and customs tariffs. C. 1950 ("C" meaning "circa" for around that time).
GATT: Limits tariffs barriers. C. 1947
International Bank for Reconstruction and Development ("World Bank") promotes trade by providing agricultural assistance, transportation and economic assistance. C. 1944
International Center For the Settlement of Investment Disputes: Arbitrates disputes between private investors and world governments. C. 1966
International Civil Aviation Organization: Issues rules for safe and efficient airports and air navigation; part of the United Nations. C. 1947
International Court of Justice (World Court): Decides disputes in accordance with International Law. (meets at the Hague) C. 1922
International Maritime Organization: Promotes cooperation in the areas of government regulation, and technical matters affecting International shipping. C. 1948
International Monetary Fund: Promotes economic growth through International monetary assistance and stability of currency exchange rates. C. 1944
International Telecommunications satellite Organization: Operates International public communications -- satellite systems -- on commercial, nondiscriminatory basis. C. 1964
Permanent Court of Arbitration: Facilitates the settlement of International disputes; has complete jurisdiction over cases it hears. C. 1899
United Nations: Promotes International security, and peace. (Grandson/daughter of League of Nations which disbanded in 1946) C. 1945
World Intellectual Property Organization: Agency of the U.N. which promotes the protection of intellectual property around the world. Established in 1967; became part of the UN in 1974
Legal Principles and Doctrines

Principle of Comity: one nation will defer and respect the judicial decrees of another. Example: Japanese seller and an American buyer. The buyer refuses to pay; Japanese court sues for the American's US assets. U.S. court will recognize the judgment of the Japanese court.

Act of State Doctrine: judicial branch of one country will not exam the validity of public acts committed by a recognized foreign government within the foreign government's territory.

Example: If private property is seized by "expropriation" whereby the foreign country gives just compensation, the Act of State Doctrine prevents lawsuits in U.S. courts. If property is "confiscated," that is, without adequate compensation, then a U.S. court may intervene but this is still fuzzy...

Note: Foreign courts are therefore immunized from U.S. court decisions. Caveat: Property overseas owned by U.S. citizens is subject to the governing countries' legal actions.

Doctrine of Sovereign Immunity: immunizes foreign nations from U.S. court decisions.

Under the Foreign Sovereign Immunities Act (FSIA) acts may, however, be brought against a foreign nation in a U.S. court IF "...a state has waived its immunity...or if the action is based on commercial activity where the state engages in trade carried on within the United States"

Doing International Business...

Foreign Agent: When a U.S. firm employs a foreign firm to act as its representative.

Distribution Agreement: Unlike a foreign agent, the distributor takes title to the goods when they are received. The agreement acts as a contract between a buyer (distributor) and the seller (U.S. co.) setting out terms regarding currency of payment, price, supply availability, etc.

Technology Licensing: Allowing firms exclusive use of your intellectual property. Example: Coca-Cola Bottling allows worldwide use of its formula under strict confidentiality.

International Commercial Contracts

Choice-of-Language Clause: designating the official language of the contract. Clause may allow for ratification in the tongue of the foreign subsidiary, etc.

Choice-of-Forum Clause: Indicates the foreign court which will have jurisdiction. Clause is invalid if: denies one party remedy, is the product of fraud, causes substantial inconvenience to one member of the party, or violates public policy.

Choice-of-Law Clause: A clause providing what nation's or state's law will be used to enforce the contract.

Force Majeure Clause: "impossible or irresistible force" may prevent one party from performing the contract. I.E. an "act of God" stipulation.

Making Payments on International Transactions

Correspondent Banks: Two banks each with accounts at one another facilitating trade in goods and services. At the domestic level, "correspondents" may have agreements allowing for one bank to fund a loan for another if the latter can only lend up to a certain amount. The "correspondent" lends the balance; may also provide deposit and check clearing services.

Letters of Credit: A document where the DRAWER looks to someone else to give the BEARER of the document funds -or other goods- which will be paid for by the DRAWER. For instance, Judy (drawer) makes out a document indicating Yasemin (bearer) can take the note/document to the Bank of Ramon Vasconcellos (the credit agent) and receive payment for the copy of "Mad Magazine #1" Cobb had purchased from Chambers; Vasconcellos is acting based upon the instructions of the drawer.

Historically, LOC's have acted as currency between traders of goods and services for they would expedite trade. Think of it like presenting a pickup slip in order to buy merchandise only you must pay for the goods at the same time.

The LOC will require that the Seller (bearer) must present a bill of lading to the Issuer (the someone else) before the goods are released. Bill of lading evidences the transportation of goods.

Special Drawing Rights: Think of this as an "artificial currency" that is based on a weighted average of the value of major world currencies: British Pound Sterling, U.S. Dollar, Japanese Yen, and Euro. The volume of international trade foreign nations engage in equates to the value of SDR's

Some background...because of a scarcity of gold that occurred in the 1960's, there was little around to support international transactions. The industrialized nations-many of whom had currencies backed by gold-decided to create an artificial currency (SDR) which allowed countries to receive "credit quotas" based on the value of its imports and exports. The major central banks of the world (like the Federal Reserve, German Central Bank, etc.) would exchange these units.

Eurodollars: Are monies from U.S. companies (in U.S. dollars) on deposit in foreign banks. It works like this...if ABC Company in the United States deposits $3,500,000 of its dollars at the Royal Bank of Scotland these funds can be used by ABC's foreign subsidiaries, or lent to other European firms. "Why deposit the money outside the U.S.?" you ask. Because interest rates on deposits might pay a little more outside of the U.S. then paid domestically (at the time).

If the Royal Bank of Scotland lends the 3.5 million out in what is now known as "Euro Dollars" then these dollars now act as credit instruments. The monies are ultimately backed by U.S. dollars which, generally, are the most favored world currency. NOTE: WE'RE NOT DISCUSSING "EURO'S." THE EURO IS THE CURRENCY OF THE "EUROPEAN UNION," EURODOLLARS ARE ENTIRELY DIFFERENT!

Bribing Foreign Officials....

Giving gifts in cash or in-kind is generally considered a way of doing international business. BUT......the Foreign Corrupt Practices Act of 1977 reduces the amount of such bribes given to foreign officials. FCPA doesn't prohibit the payment to lesser govt. officials...these payments are considered the "oil for the machine" in order to facilitate transactions. (Think of Indian example in The Commanding Heights...Part II)

FCPA is divided into two parts: Part 1 applies to U.S. companies and their officers, directors, shareholders, and employees. These individuals cannot bribe if the purpose is to get the foreign official to provide business opportunities; Part 2 deals with accountants; all companies must keep records accounted for "accurately and fairly"

Fines: Businesses in violation, 1 million dollars; individuals, such as officers, directors, shareholders, employees, may be fined 10,000.

Protectionism

Regardless of the microeconomic benefits of trade, producers don't want foreign competition and will lobby Congress in hopes of gaining protections. Congressmen will usually follow their constituencies and lobby for such restrictive measures as...

Quotas: Which limit the number of imported goods.

Embargoes: The outright denial of trade with a so-called "rogue" nation ( Examples: Libya, Iran, No. Korea, Cuba.

Tariffs: Which are "taxes" imposed on imports

Most of these have the effect of protecting domestic industry and directly raising prices for consumers. Workers gain (for awhile); producers don't have foreign competition; and politicians get re-elected.

BUT....the loss from not trading -whether it is labor services or consumer goods will not help society in the long run.

Additional concerns...

National Security: Defense related goods like machine tools should not be imported...according to the Pentagon.

Dumping: Selling goods below cost -or lower than their domestic prices- in foreign markets is considered unfair leading to "predatory pricing" schedules.

Infant Industries: Because of high start-up costs, new industry might not be able to gain a strong footing leading to specialization. Consequently, they may require protective measures.

Improving terms of Trade: Attempting to get exporters to sell at "fair" prices resulting in embargoes, tariffs, etc. Can backfire....

Barriers to Trade

Embargo: Prohibition on exports/imports. Senator Joe McCarthy convinced U.S. senate to embargo Soviet furs because it would aid in the fight against communism-of course he represented a fur producing state, Wisconsin-; Reagan attempted to lift the embargo, but to no avail; Carter with the grain embargo in 1980.

Tariff: Taxes on imported goods. Initially used to finance our public sector needs as a nascent country. Still in effect on over 9,000 imported goods. Ex. On cars, 2.5%, while polyester sweaters are 35%.

"Beggar-Thy-Neighbor"Because imports represent reduced aggregate demand and, sometimes, fewer jobs, Congress may seek to impose tariffs on imports believing this as a means to protect American labor.

An excellent example of this is the "Smoot-Hawley" tariff act of 1930 which imposed higher import taxes on European goods. By 1932 tariffs represented 59% of the value of imports. The Europeans in-acted barriers on our goods as well resulting in World trade falling from 60 billion in '28 to 25 billion by '38. ...these actions prolonged the Great Depression.
Voluntary Restraint Agreements: Restrictions on the amount of goods to be sold in a particular market. Unlike quotas these agreements are negotiated by trade ministers and not arbitrarily imposed.

Other barriers...

Production Standards

Licensing restrictions

In sum, the drift worldwide is to eliminate trade barriers and restrictions on trade. Global competition is ultimately utilizing comparative advantage theory as a means of enhancing international standard of living goals. The question posed: At what cost do we adopt such measures?

Global Agreements.

In 1944, those nations that looked as if they were going to win the war (WWII) had a meeting known as the "Bretton Woods Conference." At Bretton Woods a system of "fixed exchange rates" was established. With this fixed exchange system a set price at which one currency could purchase another was adopted. The conference also established the International Bank for Reconstruction and Development (the World Bank). Originally, this agency provided credit for the rebuilding of Asia and Europe after WWII. Today we refer to it as the "World Bank." Lastly, Bretton Woods gave us the International Monetary Fund (IMF) which focuses on lowering tariffs and trade barriers. The IMF also provides debt restructuring and advisory services for countries attempting to improve their financial status.

General Agreement on Tariffs and Trade (GATT): Started in '47 as pledge by 23 nations to reduce tariffs. Several GATT "rounds" have taken place since then expanding to 117 nations! Since its inception, GATT has resulted in reducing average tariffs from 40% to around 4%!

GATT created the World Trade Organization (WTO) to enforce free trade rules.

North American Free Trade Agreement (NAFTA): Treaty among Canada, Mexico, and the U.S. that effectively abolishes trade barriers on all goods/services. Both of the two Bush Administrations and the Clinton Administration have actively pushed NAFTA, wanting to include central and Southern hemispheric countries.

European Union (EU): Promotes inter-country mobility of workers and capital while pushing for lower trade barriers; has also created the EURO as a standardized means of currency.

International Monetary Fund: A "bank for the world" whereby countries contribute funds to "bail-out" cash strapped nations; sometimes resented by debtor nations due to the "conditions" made by IMF for loan funding. Example: Argentina and Brazil had to adopt austerity measures that weren't always well received by their populations.

Finally, "y'all" should be aware of the "Balance of Payments Acct." which describes the dollar amount of payments and receipts vis-B-vis the rest of the world for one year (most countries have a balance of payments). The media often bandies about how the U.S. not only suffers from a budget deficit but a trade deficit as well, and they're correct. (If you didn't know, a budget deficit is where we spend more -domestically- then what we take in; trade deficit means we import more then we sell abroad-export) What is not mentioned, however, when addressing the trade deficit are the other factors influencing our balance of payments.

Within the balance of payments there are the following accounts: trade, service, current, net capital, and overall account We should analyze each in detail to obtain an accurate measure of our economic status relative to the "globe."

Trade Account: Sometimes referred to as "net trade," it indicates the amount of durable goods (cars, machines, etc.) we've exported or imported. If there are more exports, we have a trade surplus; if more imports, a deficit.

Service Account: Now this is the stuff we don't hear much about...financial services, intangibles, and military aid we EXPORT are accounted for here. In other words, the value of what banks and brokerage firms, computer software designs, and military hardware make up the Service Acct.; here we have a surplus...

Current Account: This is merely the summation of the Trade and Service Accts. If one is larger and negative, like trade, and the other positive, the net affect is negative and vice-versa.

Capital Account: This account provides data on the inflow and outflow of capital goods. Exporting of long term capital, meaning the amount of U.S. investment in foreign countries, minus the amount of imported long term capital-the amount of foreign direct investment in the U.S., is set against the difference of stock and bond investments in the U.S. and abroad. A mathematical example might help in this case...

Part A.

Capital Account = Export of Long Term Capital

Less: Import of Long Term Capital

Equals: Surplus/Deficit

Part B

Export of Portfolio Capital (amount of $ in foreign stocks and bonds)

Less: Import of Portfolio Capital (amount of foreign money invested in U.S. stocks and bonds)

Equals: Surplus/Deficit.

Take the amount of Surplus/Deficit from Part A offsetting Part B, and "voila" you have the amount for the capital account.

Overall Account: The net of everything!

"So what, Ramon! Why did you just take us through this mathematical morass?"

Calm down...because this gives us a better understanding of what really comprises the balance of payments, not the "trade deficit" alone. Often when we hear about deficits in trade it is made to sound as if the "sky is falling," and it isn't always the case.

Yes we import goods, but we have surpluses in other areas such as in services. More foreign investment (capital) isn't necessarily a bad thing because that investment usually goes into U.S. Treasuries which contributes to lower long-term interest rates (take my Econ 1 class for more on this subject...).

The moral of the story: a positive -or negative- in one component of the Balance of Payments may not necessarily be a good or a bad thing. Overall, we must look at the state of the economy in order to get a broader indication of societal wealth.