Law, regulation and international business

It has been a decade since the ABLF’s first special issue on legal issues affecting international business. That issue featured articles on international environmental protection and the GATT, product liability and data protection in the European Community, the gray market, and some implications of the free trade/fair trade debate. Events of the past decade have confirmed in some respects that the more things change, the more they remain the same. The issues addressed ten years ago are still with us.

The GATT/environment article (1) focused on the tuna/dolphin controversy, and fishing-related issues were highlighted in recent testimony by an assistant secretary of state before the Senate Commerce Committee that “illegal, unreported and unregulated (IUU) ocean fishing has become an increasingly important international challenge.” (2) While noting that “the past decade has witnessed a veritable explosion of new agreements and standards for the conservation and management of fisheries worldwide,” (3) the assistant secretary concluded that “our challenge now is to ensure effective implementation of the full range of these instruments.” (4) The close relationship between collapse of civilizations and “destruction of the environmental resources on which they depended,” coupled with the fact that “a society’s demise may begin only a decade or two after it reaches its peak population, wealth, and power,” (5) demonstrates the importance of international environmental issues and their regulation.

While many of the implications projected for U.S. business in the first issue’s articles on product liability (6) and data protection (7) in the European Community have now been absorbed, the European Union has assumed an even more prominent role in our consciousness. Mainly associated with a common market in the post-World War II period, Europe has spent the past year and a half drafting its first constitution, article one of which states, “Every national of a member state shall be a citizen of the union.” (8) As the EU expands eastward, this will mean “a mega-Europe of 450 million citizens, larger than any population mass except for China and India, and an economy of more than $9 trillion, close to that of the United States.” (9)

Despite recent differences over Iraq and other issues, senior Bush administration officials on the eve of a recent U.S.-European Summit emphasized “a convergence of European and American thinking about the nature of security threats in the 21st century and the nature of a combined, transatlantic U.S.-European response.” (10) Whatever accommodation may be achieved relative to security issues, considerable tension remains in the area of agricultural trade. Having missed a March 31,2003 deadline for agreeing on modalities in the WTO agricultural trade negotiation, (11) USTR Zoellick in testimony before the House Agriculture Committee characterized reform of the EU’s Common Agricultural Policy farm subsidies program as “critical to successful negotiations in the World Trade Organization.” (12)

Perhaps the most visible trade dispute currently between the United States and the European Union is that involving biotech products. The United States filed a suit at the WTO in May 2003 alleging that “the EU moratorium on approvals of new biotech products for planting or import violates the WTO agreement on sanitary and phytosanitary measures, which requires ‘sufficient scientific evidence’ for regulations aimed at protecting human health and the environment.” (13) Consultations between the U.S. and Europe to achieve a resolution of the dispute have fade. (14)

In the meantime, a new global treaty, the Cartagena Protocol on Biosafety, has been ratified and will take effect on September 11

Gray market issues addressed in the first issue (17) also remain with us. Dispersed, global manufacturing and supply chain management are, if anything, even more important now than a decade ago, (18) multiplying the concerns for U.S. licensors of intellectual property rights. Courts in different countries have gone in a variety of directions on the extent of the licensor’s control over distribution of goods manufactured by a licensee. (19) It has been suggested that “the parallel import issue … will probably be ultimately resolved in the context of the GATT.” (20)

Certainly, the TRIPs agreement has advanced the cause of IPR harmonization by establishing “minimum standards of intellectual property protection that must be achieved by all members of the WTO.” (21) TRIPs “is noteworthy in the multilateral trade context in that it obliges governments to take positive action to protect intellectual property rights.” (22) However, built into TRIPs is a tension between countries that are consumers and countries that are producers of IP, “with the majority of the developing countries losing and many developed countries gaining.” (23) The 2001 Doha Ministerial’s agreement allowing drug companies in a country the right to make low-cost generic knock-offs of medicines patented by multinational pharmaceutical corporations for domestic sale (24) gives some hint of future directions, but falls far short of resolving the dilemma of parallel imports.

Finally, the free trade/fair trade tension addressed by the final piece in the first issue (25) appears only slightly closer to resolution now, if at all. There is still a significant divide between the interests of developed and developing countries over many trade issues. For example, in connection with the just-mentioned Doha Ministerial declaration expanding opportunities for producing generic versions of patented pharmaceuticals, it remains the case that millions of people live in developing countries that “do not have factories capable of producing these medicines.” (26) Nor does the declaration “allow them to import such drugs from the handful of developing countries that have thriving generic drug industries….” (27)

More generally, a cynic could point to recent examples (e.g., steel tariffs and agricultural subsidies) of how the U.S. shoves free trade down the throat of every country it meets but practices protectionism itself. (28) Regarding the controversial area of anti-dumping regulation, Professor Bhagwati has written, “Masquerading as ‘fair trade’ rules, these [anti-dumping rules] are used unfairly as protectionists’ favorite tools. While the EU is also a sinner, and the anti-dumping virus has spread far more successfully than SARS, U.S. industry and Congress are the villains with the pitchforks: They are powerful and passionate defenders of these outrageous rules.” (29) The free trade/fair trade debate, it is fair to say, will be around for a long time.

The current special issue, like the first one, deals with a broad variety of issues along the entire spectrum of international business. In organizing the teaching of international business law, a standard text in our discipline has adopted a thematic approach “patterned after the basic market-entry strategies of most firms as they expand into foreign markets: Trade in goods and services, protection and licensing of intellectual property rights, and foreign direct investment.” (30) This approach begins with “trade, which involves the least penetration into the foreign market, and progress[es] to foreign direct investment, which immerses the firm completely in the social, cultural, and legal systems of its host country.” (31) The logic of this approach is that such a progression “also mirrors the life cycle of many firms as they mature and move more aggressively into new foreign markets.” (32) This special issue of the American Business Law Journal explores issues along this entire spectrum, and beyond.

Trade can be looked at from at least a couple of different perspectives: transactional and regulatory. The transactional perspective focuses on how obligations between an exporter and an importer are created through contract, custom and governing law

The first article, by Patricia Pattison and Daniel Herron, explores the impact of the People’s Republic of China’s Uniform Contract Law, enacted in 1999, from a variety of perspectives. China represents characteristics of both a rapidly developing country and a transition economy, with all that implies for the operation of contract law. “Cultural and social influences [also] affect the manner in which contracts are negotiated and drafted.” (35) After comparing China’s Uniform Contract Law to its western counterparts, (36) the article explores connections between Chinese culture and business to help Western businesspeople understand the cultural foundations of Chinese business and law. Especially important to this discussion is the article’s examination of core Chinese philosophical concepts that revolve around relationships and situational specificity, rather than on task accomplishment. (37)

In addition to the transactional aspect of trade is the regulatory side. The big news here since the last special issue, of course, is the development of the World Trade Organization and its ongoing evolution. The GATT Uruguay Round of multilateral trade negotiations, concluded on December 15, 1993, and signed by President Clinton on April 15, 1994, has been described as the “most ambitious” of the Rounds “in terms of the breadth of issues addressed.” (38) In addition to vastly expanding GATT disciplines to new areas of agriculture, services, intellectual property rights and foreign investment, it significantly strengthened the institutional framework for monitoring compliance with the agreement and resolving disputes. (39)

The second article, by Lawrence D. Roberts, traces WTO dispute resolution developments, finding that the process remains bedeviled by delays, problematic enforcement of decisions and inadequate promotion of GATT policy objectives. His article examines the problems that currently hinder adjudication procedures and the prospect for improving the dispute resolution process through a number of structural changes, including further emphasis on formal procedures and stringent enforcement mechanisms that establish incentives designed to conform national interests more closely to the needs of the international community as a whole.

Moving along the spectrum of a firm’s increasing involvement in foreign markets beginning with trade, foreign direct investment (“FDI”) represents the level of greatest penetration, at which the firm is immersed completely in the social, cultural and legal systems of its host country. One of the first things that an enterprise seeking to establish an entity under its control in a host country must decide is the form that FDI should take. Foreign investors are often required to follow local rules directing that investment take a particular form. In many countries, some areas of business activity deemed particularly sensitive or of strategic or national security importance are simply not open to foreign investors, or they may be limited to a minority investment, with a host country enterprise maintaining a majority of the equity and effective managerial control. Foreign investors are often steered toward or limited to joint venture forms of investment. The Uruguay Round’s addition of TRIMs (trade related investment measures) (40) and trade in services (41) to the GATT repertoire provides additional framework for greater harmonization of national policies and local regulation affecting FDI over time.

The third article, by Robert Rothenberg and Tatyana Melnikova, focuses on several non-corporate forms of doing business in Russia, specifically proprietorships, partnerships and limited partnerships. Russia’s approach to moving from a centrally planned economy toward greater market orientation contrasts significantly with China’s transition, touched upon by Pattison and Herron. (42) This article provides a detailed description, with respect to each of the three business forms analyzed, of the rules regulating creation of the enterprise, operating the enterprise, transferring ownership interests, and terminating the business. For comparative perspective, each of these areas is compared and contrasted with the New York state law for each business form. Accordingly, the article represents a useful case study illuminating the issues that need to be considered by foreign investors in Russia.

The fourth article, by Robert Bird, transcends the international business spectrum, running from trade on the one hand to FDI on the other, by literally going out of this world to explore the regulation of space debris. This article illustrates both the difficulties and the opportunities inherent in the development of law and regulation in less well charted areas. Some parallels may be seen with the regulatory framework which has been evolving over a longer period of time for that other non-boundary limited regime governing the law of the sea. The Law of the Sea Convention represented the culmination of a “long and bitter debate between developing countries and the developed countries” over the disposition of the resources of the sea. (43) Although “the wealthier countries saw it as a measure to redistribute the wealth of nations,” the treaty’s advantages are numerous, clarifying such things as “the right of passage through straits, sovereignty over twelve miles offshore, and control of fishing, oil and gas rights within two hundred miles offshore.” (44)

The article demonstrates how established international norms represented by treaties and principles of international law can be utilized to tackle the space debris problem. Alone, however, they are not enough. In addition, it is necessary to establish cooperation among nations by mobilizing political and scientific interest among experts in the field, focusing on informal sanctions and scientific contacts as bridges for cooperation and development. Just as in the case of the law of the sea, the interests of both developed and developing countries must be accommodated. The article constitutes an interesting case study in harnessing a broad spectrum of international law and policy tools to develop a comprehensive and equitable regime for environmental regulation of space debris.

As the articles in this special issue demonstrate, the issues embraced by international business law are many and complex. They are both substantive and procedural. They are imbued with tensions inherent in the competing interests of developed and developing countries. While the articles touch on only a few of the many legal and regulatory issues affecting international business, each is a thoughtful and thorough treatment of its subject.

In today’s world, the downside of globalization has become ever more apparent since the heady days of the early 1990s when Kenichi Ohmae was articulating the principles of power and strategy in the interlocked economy that would give rise to a “borderless world.” (45) The Asian financial crisis of the late 1990s, following on the heels of the 1992-93 crisis in the European monetary system and the 1994 Mexican peso crisis, (46) and the demonstrations at the 1999 WTO Seattle Ministerial and 2000 World Bank/IMF meeting (47) all underscored the growing anxiety over globalization. The terrorist events of September 11,2001, subsequent wars in Afghanistan and Iraq, and continued unrest in the Middle East have coupled with a sluggish economy to create much uncertainty.

In the process, a Pew Research Center three-year study of world attitudes recently concluded that the U.S. has become “increasingly isolated in the world, compared with the findings in a 44-nation Pew survey last year.” (48) Professors Prahalad and Lieberthal pointed out a few years ago how the world, and the rules of international business, have been changing. Their research explains the transition from the “first wave of market entry in the 1980s,” when “MNCs operated with what might be termed an imperialist mind-set,” (49) to the present time, when many MNCs “are beginning to see that the opportunity that big emerging markets represent will demand a new way of thinking.” (50) Accordingly, this may not be the best time to be dictating how the world should be run under American supervision. It is not clear that the single-minded pursuit of what some have called the “Washington Consensus,” with its core tenets of “deregulation, privatization, ‘openness’ (to foreign investment, to imports), unrestricted movement of capital, and lower taxes” is the best course. (51) A more thoughtful approach, recognizing shifting and evolving political and economic strategic realities in a less ideological way, may be what is called for. There is an old Chinese curse: “May you live in interesting times.” Teachers of international business law, and their analytical approach exemplified by the articles contained in this special issue, should not hesitate to make their contribution in today’s “interesting times.”

Clyde D. Stoltenberg, Professor of Business Law & Director of International Business Programs and East Asian Business Studies, University of Texas-San Antonio.

(1) Don Mayer & David Hoch, International Environmental Protection and the GATT: The Tuna/Dolphin Controversy, 31 AM. BUS. L.J. 187-244 (1993).

(2) Testimony of Assistant Secretary of State John Turner before the Senate Commerce Committee (June 12, 2003), available at http://lists.state.gov/SCRIPTS/ WAUSIAINFO.EXE?A2=ind0306b&L=WF-EASIA&P=RI2875.

(3) These agreements included a 1999 Agreement on the International Dolphin Conservation Program and a 2000 Central and Western Pacific Tuna Convention (the latter not yet in force), Id.

(4) For a recent summary of trends in the impact of environmental regulation on trade, see Larry A. DiMatteo, Kiren Dosanjh, Paul L. Frantz, Peter Bowal & Clyde Stoltenberg, The Doha Declaration and Beyond: Giving a Voice to Non-Trade Concerns Within the WTO Trade Regime, VAND. J. TRANSNAT’L L. 95, 103-19 (2003).

(5) Jared Diamond, The Last Americans Environmental Collapse and the End of Civilization, HARPERS, June 2003, at 43.

(6) Sandra N. Hurd & Frances E. Zollers, Product Liability in the European Community: Implications for United States Business, 31 AM. Bus. L.J. 245-64 (1993).

(7) Robert Boehmer & Todd S. Palmer, The 1992 EC Data Protection Proposal: An Examination of Its Implications for U.S. Business and U.S. Privacy Law, 31 AM. BUS. L.J. 265-311 (1993).

(8) Elaine Sciolino, Seeking Unity, Europe Drafts a Constitution, N.Y. TIMES, June 15, 2003, available at http://www.nytimes.com/2003/06/15 /international/europe/15EURO.html.

(9) Id.

(10) Background Briefing by U.S. Officials on June 25 U.S.-EU Summit (June 23, 2003), available at http://lists.state.gov/SCRIPTS /WA-USAIANFO.EXE?A2=ind0306d&L=WF-EASIA&P=R5278. For a more sober assessment, see William Anthony Hay, A Preliminary Reckoning: Prospects for US-European Relations After Iraq (April 2003), available at http://www.fpri.org/ww/0401.200304.hay.useuropepostiraq.html.

(11) Joint Statement by U.S. Trade Representative Robert Zoellick and Secretary of Agriculture .Man Veneman (March 31, 2003), available at http://lists.state.gov/SCRIPTS/ WA-USIAINFO.EXE?A2=Ind0303e&L=WF-EASIA&P=R4090.

(12) Testimony by USTR Robert Zoellick before the House of Representatives Agriculture Committee (May 21, 2003), available at http://lists.state.gov/SCRIPTS/WA-USIAINFO.EXE? A2=ind0306c&L=WF-EASIA&P=R 15316.

(13) Statement of USTR Spokesman Richard Mills (June 19, 2003), available at http://lists.state.gov/SCRIPTS/ WA-USIAINFO.EXE?A2=ind0306c&L=WF-EASIA&P=R15316.

(14) David Leonhardt, Talks Collapse on U.S. Efforts to Open Europe to Biotech Food, N.Y. TIMES, June 20, 1993, available at http://www.nytimes.com/2003/06/20/international /europe/20TRADE.html.

(15) Andrew Pollack, Trade Pact on Gene Altered Goods to ‘Take Effect in 90 Days, N.Y. TIMES, June 14, 2003, available at http://www.nytimes.com/2003/06 /14/business/14TRAD.html.

(16) Id. The European Parliament recently passed two laws to replace a ban on new biotech foods with rules that would allow genetically modified products if they are labeled. EU Passes Rules on Labeling Biotech Foods, WALL ST. J., July 3, 2003, at A7. However, the U.S. has characterized the rules as “overly burdensome to producers

(17) Paul Lansing & Joseph Gabriella, Clarifying Gray Market Gray Areas, 31 AM.Bus. L. J. 313-37 (1993).

(18) Joan Magretta, Fast, Global and Entrepreneurial: Supply Chain Management, Hong Kong Style–An Interview

Once upon a time, products had distinct national identities. Regardless of how many inter-national borders they crossed, their country of origin … was never in doubt. Products were manufactured in one place because economies of scale necessitated a central location. But, in the emerging high-value economy, quantities can be produced efficiently in many different locations and combined in all sorts of ways to serve customer needs in many places…. What’s traded between nations is less often finished goods than specialized research, design, fabrication, management, marketing, advertising, consulting, financial and legal services, as well as components and materials.

Robert Reich, The Myth of ‘Made in the U.S.A.’, WALL ST. J., July 5, 1991, at A6.

(19) See RICHARD SCHAFFER, BEVERLEY EARLE & FILIBERTO AGUSTI, INTERNATIONAL BUSINESS LAW AND ITS ENVIRONMENT 533-35 (5th ed. 2002).

(20) Id. at 534.

(21) Bernard Hoekman, Services and Intellectual Property Rights, in THE NEW GATT–IMPLICATIONS FOR THE UNITED STATES 84, 100 (Susan M. Collins & Barry P. Bosworth eds. 1994).

(22) Id.

(23) Id. at 112.

(24) Celia W. Dugger, A Catch-22 on Drugs for the World’s Poor, N.Y. TIMES, Nov. 16, 2001, at W1.

(25) Clyde D. Stoltenberg, International Trade Law and Regulation in the Context of the Free Trade/Fair Trade Debate: A Review-Essay, 31 AM. BUS. L.J. 339-64 (1993).

(26) Dugger, supra note 24, at W1.

(27) Id.

(28) E.g., President Bush’s imposition of steep new tariffs on steel imports from Europe, East Asia and Brazil in response to domestic political pressure. William Finnegan, The Economics of Empire–Notes on the Washington Consensus, HARPER’S, May 2003, at 49.

Even more hypocritical, and economically painful, to dozens of countries in Africa and Latin America has been the latest round of U.S. farm subsidies, which may total as much as $180 billion over the next decade. Most of that windfall goes directly to big agricultural corporations (all of them big political contributors). These subsidies effectively close American markets to many poor-country food producers (we also have tariff barriers in place, just in case), while allowing U.S. exporters to flood foreign markets with cheap food, often putting poor-country farmers out of business. Global trade rules, as codified in the W.T.O.’s Agriculture Agreement, do allow countries to make direct payments to their farmers. But only rich countries, for obvious reasons, have that option. This is one of the many ways that the “level playing field” extolled by free traders does not look level from the Global South.

Id. at 49-50.

(29) Jagdish Bhagwati, The Caravan to Cancun, WALL ST. J., July 2, 2003, at A10.

(30) SCHAFFER et al., supra note 19, at xxxiii.

(31) Id.

(32) Id.

(33) See id., chapters 4-7.

(34) Developing countries “have long faced three related problems in their business rrelationships with the wealthier industrialized nations:”

1) “They often do not have a cadre of trained professionals … to help their governments in contract negotiations,” which poses “a negotiating and bargaining disadvantage in dealing with experienced representatives of Western multinational corporations.” Id. at 108.

2) They “have often found themselves in desperate need of hard currency to fund their socioeconomic development programs,” thereby reducing their “economic bargaining power … in carrying out contract negotiations.” Id.

3) “[I]n the past many developing countries simply did not have the sophisticated legal system for dealing with contract disputes.” Id. at 109.

Despite the transitions on which many socialist countries have embarked toward more market-driven economies, “socialist principles and central economic planning remain influential in many countries.” Id.

As a result, “socialist contract law serves primarily to protect national interests, to achieve state goals for the production and distribution of goods to individuals, and to regulate foreign trade contracts with outside companies.” Id.

(35) Id. at 142.

(36) Both the Uniform Commercial Code and the United Nations Convention on Contracts for the International Sale of Goods.

(37) There is a significant literature on the role of relationships–guanxi–in Chinese organizations. While the practice of guanxi has the capacity to further all the positive aspects of Confucian belief systems, it has also been associated with corruption. For a comprehensive analysis, see SOCIAL CONNECTIONS IN CHINA: INSTITUTIONS, CULTURE, AND THE CHANGING NATURE OF GUANXI (Thomas Gold, Doug Guthrie & David Wank eds., 2002).

(38) Susan M. Collins & Barry P. Bosworth, Introduction, in THE NEW GATT, supra note 21, at 1.

(39) Id. at 1-2. Professor Jackson summarized the evolution of a reasonably sophisticated process for settling GATT disputes as follows:

The original GATT treaty contained very little on this, although it did specifically provide (in articles XXII and XXIII) for consultation, and then submittal of issues to the GATT contracting parties. As time went on, however, the practice began to evolve more toward a “rule oriented” system. For example, in the late 1950s the practice introduced a “panel” of individuals to make determinations and findings and recommend them to the contracting parties. Before that, disputes had been considered in much broader working parties comprising representatives of governments.

In the Uruguay Round 1994 text, there is a major new area concerning dispute settlement procedures, the “Understanding on Rules and Procedures Governing the Settlement of Disputes.” The new text solves many of the issues that have plagued the GATT dispute settlement system, although not all of them.

–It establishes a unified dispute settlement system for all parts of the GATT/WTO system, including the new subjects of services and intellectual property. Thus controversies over which procedure to use will not occur.

–It reaffirms the fight of a complaining government to have a panel process initiated, preventing blocking at that stage.

–It ingeniously establishes a new appellate procedure that will substitute for some of the council approval process of a panel report and overcome blocking. Thus a panel report will automatically be deemed adopted by the council unless it is appealed by one of the parties to the dispute. If appealed, the dispute will go to an appellate panel. After the appellate body has ruled, its report will go to the council, but in this case it will be deemed adopted unless there is a consensus against adoption, and presumably that negative consensus can be defeated by any major objector. Thus the presumption is reversed, compared with the previous procedures, and the result of the procedure is that the appellate report will in virtually every case come into force as a matter of international law.

John H. Jackson, The World Trade Organization, Dispute Settlement, and Codes of Conduct, in THE NEW GATT, supra note 21, at 69-70.

(40) See SCHAFFER et al., supra note 19, at 352-53.

(41) Id. at 343-47

(42) See ECONOMIES IN TRANSITION: COMPARING ASIA AND EASTERN EUROPE (Wing Thye Woo, Stephen Parker & Jeffrey D. Sacks eds., 1997).

(43) SCHAFFER et al., supra note 19, at 49.

(44) Id.

(45) See generally KENICHI OHMAE, THE BORDERLESS WORLD: POWER AND STRATEGY IN THE INTERLINKED ECONOMY (1990).

(46) See MORRIS GOLDSTEIN, THE ASIAN FINANCIAL CRISIS: CAUSES, CURES, AND SYSTEMIC IMPLICATIONS 1 (1998).

(47) See, e.g., Helene Cooper, Bob Davis & Greg Hitt, Up in Smoke.” WTO’s Failure in Bid to Launch Trade Talks Emboldens Protestors, WALL ST. J., Dec. 6, 1999, at A1

(48) Susan Page, Survey: World Support for U.S. at new low, USA TODAY, June 3, 2003, available at http://www.usatoday.com/news/washington/2003-06-03-pew_x.htm.

(49) They assumed that the big emerging markets were new markets for their old products. They foresaw a bonanza in incremental sales for their existing products or the chance to squeeze profits out of their sunset technologies. Further, the corporate center was seen as the sole locus of product and process innovation. Many multinationals did not consciously look at emerging markets as sources of technical and managerial talent for their global operations. As a result of this imperialist mindset, multinationals have achieved only limited success in those markets.

C.K. Prahalad & Kenneth Lieberthal, The End of Corporate Imperialism, HAR. BUS. REV., July-Aug. 1998, at 69-70.

(50) Success will require more than simply developing greater cultural sensitivity. The more we understand the nature of these markets, the more we believe that multinationals will have to rethink and reconfigure every element of their business models.

Id. at 70.

(51) See generally Finnegan, supra note 28.