The Importance of International Law to International Traders - Coursework Example

? The Importance of International Law to International Traders Topic: Critically consider the importance of international law to international traders. International traders in commodities, equities, bonds, and other goods or services employ a number of different strategies to maximize their return on investment. One of the oldest forms of international trading is arbitrage, the discovery of lower prices in one market and profitable resale opportunities in other environments globally. For traders of commodities which require physical transportation and delivery to other markets, international agreements will apply to the transaction as well as to import taxes and duties. Increasingly international trade organizations such as the WTO and bilateral free-trade agreements such as those in place with the United States and E.U. can significantly shape and alter the economic environment in a way that financial planners must identify and manage for investment clients with advance preparation. The importance of international law to traders in this context of financial investment services and commodities trading particularly cannot be understated, as it is a direct aspect of risk management operations that form a part of due diligence in any overseas investment strategy. Financial planners and traders must identify the risk elements that international law governs as a variable in estimating the success and expected returns of a project in order to successfully manage investment services for clients in the contemporary era of globalization. The history behind the WTO, bank frameworks, and financial regulation are all chief matters of international aspects of business law which affect trade. The application of international law to trading activity of commodities, equities, and bonds globally is a specialized field and different in many ways from the sectors of international law which govern trade, commerce, and other forms of business development activity. For example, international traders generally have little worry over the application of labour or environmental law to their activities globally, as these are related to the general commercial operations of a business and not the trading activity particularly. Traders find their business operations most significantly impacted in the import and export process when the goods involved are passing through an international border. Most nations do not tax transit cargo that passes through sea and air ports, however most nations do tax and regulate imports and exports domestically through the application of international law and accepted practice. In order for a trader or financial planner to understand the requirements and how they apply differently from country to country, the GATT Agreements, or General Agreements on Tariffs and Trade, begun in international negotiations at the end of the Second World War and birth of the United Nations, are the most important references for international trade. The GATT Agreements stand as the most comprehensive and accepted standards of international trade laws among nations as negotiated directly through their envoys and representatives. Therefore, international traders and financial planners who require the complete country-by-country listing of trade and tariff requirements as established in international law should base their investigation in the publications of the GATT Agreements, or General Agreements on Tariffs and Trade, and the World Trade Organization (WTO), the modern descendent of the International Trade Organization (ITO). DZ Cass has written about the GATT and ITO/WTO systemization of international trade law in his essay, The 'Constitutionalization' of International Trade Law: Judicial Norm-generation as the Engine of Constitutional Development in International Trade (Cass, 2001). In the articles, Cass suggests that the GATT Agreements and further negotiations of the WTO represent a process of creating a type of constitution for international trade where nothing but the chaos and conflicting interests of sovereign nation-states and their armies existed before. If one considers the complexity of approaching the totality of bilateral agreements and conflicting standards of trade and taxation, then it is clear where international arbitrage as a business practice began historically. The GATT Agreements and WTO negotiations have consolidated and integrated these diverse aspects of the world economic system and international law into a cohesive set of standards that can be referenced and agreed on between nations. Andreas F. Lowenfeld writes in International Economic Law about the history of the WTO and the economic negotiations that went into the formation of its charter. In many ways the General Agreement on Tariffs and Trade has been a continual process of negotiation between nation-states since its foundation. (Lowenfield, 2003). The process of constitutionalization in international trade law is in many ways preferable for the trader than uncertainty, but it may lessen the opportunity for arbitrage opportunities through increased standardization and free trade accords. That the WTO negotiation process may not be democratic or transparent is of generally less concern to the international trader than the reduction of uncertainty that the agreements provide. Nevertheless, traders have to be cautious and careful when investing abroad due to the social unrest fuelled by poverty that many claim the WTO also assists in perpetuating. In Developing Countries in the GATT/WTO Legal System by Robert E. Hudec, the author illustrates how the issues related to social and economic development in the GATT and WTO accords can be a factor for international traders to consider also in risk management or advance planning for operations. (Hudec, 1987). The constitutionalization of international trade law through the WTO and GATT Agreements cannot be underestimated in importance when it comes to financial planning, investment analysis, or trading in international stocks and bonds. Commodities trading conducted while working in management positions for large corporate groups, government interests and investment banks are all an examples of the potential application of this specialization of international law for individuals fluent in the legal background. The constitutionalization of international law in the GATT accords opens up the specialized interest in international price arbitrage in commodities, equities, and bond trading, but these transactions are governed by increasingly more regulation introduced following the financial crisis of the 2007-8 period. These new regulations growing out of negotiations in Basel regulate the speculation that traders employed by TBTF national banks may engage in and increase the depository holding requirements of the financial firms. This is an excellent example from contemporary events that illustrates the manner in which international law will limit trading activity in the financial sector. The impact of this on stock prices in companies such as Goldman Sachs, JP Morgan, Bank of America, and other TBTF banks in the U.S., U.K., and E.U. fluctuated greatly based upon uncertainty related to the Basel accord regulations that would affect the industry. International traders need to monitor these developments currently in order to manage long and short investments in equities, bonds, and other securities. Failure to anticipate a change in regulations such as these could have devastating effects on a stock portfolio if banks profitable previously through their leveraged trading activities are forced to curtail business operations or sell profitable divisions due to these types of changes in international regulatory law. Jonathan Ward writes in The New Basel Accord and Developing Countries: Problems and Alternatives about the Basel Accord framework and the effect these requirements have on international trading, particularly to banks, investment banks, and hedge funds (Ward, 2002). Developments in international law at this level are closely monitored by Wall Street stock and bond traders for any change in regulation that could affect banking activity. In the period following the economic problems arising from the sub-prime mortgage meltdown, banks lost significant value in stock value when changes in the Basel Accords regulating how TBTF entities were regulated were modified. The increasing of capital limit reserve requirements on investment banks internationally through this process had a significant effect on bank valuations in publicly traded companies, but more important for traders was the period of uncertainty before the final decisions were reached. As Jeffry M. Netter and Annette B. Poulsen write in Operational Risk in Financial Service Providers and the Proposed Basel Capital Accord: An Overview, the new regulations include provisions for operational risk within the standards of regulation for the industry (Netter and Poulsen, 2003). This potentially could change the business model for TBTF banks that include many disparate elements in a financial conglomerate or investment banks that are highly leveraged in trading stocks, bonds, and derivates like the Lehman Brothers. As noted by the reaction of the hedge fund and financial services industry, the Basel Accords will significantly influence global trading activity by TBTF banks and other business groups such as insurance companies in order to prevent another financial meltdown as that which occurred with Lehman Brothers and AIG. The Basel Accords will further limit the trading in commodities, bonds, and equities internationally by some organizations, namely big banks and corporations in the financial services sector, potentially allowing them to be outmanoeuvred in trades by smaller, less-regulated financial firms internationally. This type of designing of business services to take advantage of arbitrage opportunities internationally is not new, but related to the very fundamental basis of capitalism and its history. Thus, one can legitimately ask the question as to whether the type of regulation provided by the GATT Agreements and the Basel Accords is helpful or harmful to global economic development and whether it operates fairly for all interested parties and sectors of society. Further, it is important to view the limited participation in the representation to the negotiations of these accords to be a fundamental flaw in their application, for they are neither democratically constructed nor transparent, and there is no popular election of negotiators and delegates to WTO conferences internationally, despite the binding nature of the agreements as law internationally. That developing countries and advanced economic powers would be represented differently in GATT and WTO negotiations is not surprising, for it is also the de facto means of operation in most global governance bodies and institutions. However, for those concerned with social justice as it applies to economics and trade internationally, there is some room for criticism and reform in the GATT / WTO structure to make what will become binding international law more transparent in the way that it is negotiated. Few expect that international trade and tariff negotiations will become the venue of popular democratic expression; however, neither is it perceived as in the interests of society to advance it as such. Nevertheless, there are social and development issues that relate distinctly to global trade in emerging nations that are governed by these accords that need to be taken into consideration by financial planners and risk managers when engaging in business activity abroad. While insurance is one way to make certain that all risks are covered, the insurance premium itself represents a cost of doing business that must be factored into the accounting. Related to accounting is the variation in income tax rates across different countries and jurisdictions which many traders take advantage of to reduce the costs of operation in a practice known as tax arbitrage. Knowledge of the variation between tax rates and the local business law required for incorporation can be used to incorporate tax shelters and business registered in offshore locations that shelter a business from taxation. Many Wall Street hedge fund traders have opted to manage operations from Caribbean locations because of the immense savings on capital gains tax that they can leverage by being a registered business in a tax haven. The practice of tax arbitrage is technically no different from any other type of business savings activity following the “rent seeking” theory of Tullock. Nevertheless, the practice of moving a business to an offshore tax haven is another example of how international law can be used in a situation for purposes of arbitrage. Risk managers and international traders in the financial services community, corporate management, or government operations leading development projects must consider the social justice aspects of international law, as it affects communities and whole nations in their aspirations for freedom and happiness in civil affairs. Failure to attend to the social dimensions of international law related to commerce and trade, such as that at the WTO and GATT negotiations increase the risk for unexpected turnovers or changes in the fabric of the system, as seen in recent unrest in Egypt and other countries burdened by economic and development problems along with undemocratic national decision-making. However, for risk management and trading internationally in commodities, equities, bonds, and other goods or services, the GATT Agreements and particularly the Basel Accords are important to understand in detail in order to not only know the requirements of commerce in each country, but also the greater international social and political context in which the agreements are constructed internationally. In summary, the World Trade Organization and GATT accords are the most important references for international business law and their scope and application represent over 60 years of negotiations between nations. This process has not always been one that has been transparent, and developing nations have opposed some of the policies implemented on grounds of national sovereignty violations. International traders need to recognize risk that comes from geo-political situations, and base their understanding of global trade requirements and regulation in the GATT accords and other agreements such as the Basel accords. International traders may also practice various forms of arbitrage based on the variation in customs, tariffs, and duties internationally, but as the GATT accords and WTO represent a process of “constitutionalization” in international law and more nations adopt free trade agreements the opportunities for these deals fade. Replacing them are newer forms of arbitrage such as that relating to tax law. Traders of stocks, bonds, and equities closely monitor changes in these agreements for the impact that they may have on the business model of publicly traded companies, as in the example of the banking regulations, capital reserve requirements, and the Basel accords. Thus, it is the WTO, banking frameworks, and financial regulation that all play a part in international business with respect to trade law. BIBLIOGRAPHY Busch, ML & Reinhardt E (2000-2001). Bargaining in the shadow of the law: early settlement in GATT/WTO disputes. Online. Available: . Last accessed 22nd Feb 2011. Cass, DZ (2001). The 'constitutionalization' of international trade law: judicial norm-generation as the engine of constitutional development in international trade. Online. Available: . Correa CM (2000). Intellectual property rights, the WTO, and developing countries: the TRIPS agreement and policy options. Online. Available: . Hudec, RE(1987). Developing countries in the GATT/WTO legal system. Washington, DC: Rowman & Littlefield. Online. Available: . Lauterpacht H (2000). The function of law in the international community. Online. Available: . Licht AN (1998). Regulatory arbitrage for real: international securities regulation in a world of interacting securities markets. Online. Available: . Lowenfeld, AF (2003). International economic law. UK: Oxford University Press. Online. Available: . Netter, JM and Poulsen AB (2003). Operational risk in financial service providers and the proposed Basel accord: an overview. Online. Available: . Rosenbloom DH (2000). The international tax arbitrage and the international tax system. Online. Available: . Ward, Jonathan (2002). The new Basel accord and developing countries: problems and alternatives. Online. Available: . Read More