The Laws of International Commerce Are Subject to Increasing Harmonisation - Essay Example

The laws of international commerce Are to increasing harmonisation Table of Contents Attempts at Harmonisation in the Past........................................................................................... 3 Fast-Forward to the Last Century................................................................................................... 5 Harmonisation within the EU......................................................................................................... 6 International harmonization proceeds along a different path: China............................................. 9 Regional Trade Harmonisation: NAFTA......................................................................................11 Trade between Developing Nations.............................................................................................14 Whither Harmonisation in the Future?........................................................................................ 16 International commerce law has a ‘self-correcting’ mechanism which allows companies of different nationalities to conduct business with one another across differences in language, culture and business practices. The central thesis of this paper is that international laws have made it easier to foster international trade, and that this trend will continue into the future. Attempts at Harmonization in the Past If one looks back to the end of the middle Ages, one sees a gradual opening of inter-European markets due to the comparative advantages of some producers, and improving security on the roads which allowed traders to travel more or less safely to yearly or quarterly trade fairs. One can trace the establishment of trade fairs, from the Frankfurt Book Fair to the Antwerp Cloth Fair, to the 1200’s to 1400’s, at which time producers and buyers would meet on a regular basis to exchange goods for currency or promissory notes. This safe passage was ensured by the increasing influence of kings and rulers, who were able to tame warring factions and create a system of tolls, laws and enforcement which did not exist during the Dark Ages. Although it was expensive to take a trade route (the Rhine, for example, had over 40 toll stations), the benefit of security outweighed the cost for those who had high-value goods and ready markets in other areas. Trade posed some specific problems which required harmonisation relatively early on. A couple of examples will suffice to explain how these problems arose, and how they were solved. If a trader, for example, were to go to the Frankfurt Book Fair in the Spring of 1450, he might want to find books for his patrons and residents of his home area (say, Tuscany and the de Medici’s). The trader, fearing the dangers of robbery on the roads, or perhaps just lacking the resources, does not take gold with him on the long, arduous journey from Tuscany to Frankfurt. Rather, he brings along letters of introduction from his patrons. In some cases, if the trader was rich enough or well-known, he could trade ‘on his reputation.’ In either case, when he arrived at the Book Fair, he brought documents with him. If our Tuscan trader visits a stall of, say, a Stuttgart bookmaker and decides to buy a few of his books, the bookmaker would like to be paid. Since the trader didn’t have gold or silver with him, he offered to pay the bookmaker with a promissory note. This method of payment led to a series of questions: (1) how do I (the Stuttgart bookmaker) know that this person is who he says he is? And (2) what assurances do I have that the Tuscan trader will repay the note? The first issue—verifying who the person was, was accomplished by a notary public. His job was to ensure that the Tuscan trader was, in fact, a Tuscan trader of some reputation. The notary’s position, whether in Tuscany or Frankfurt, was established by the King or local authorities as a man of good standing who could certify that documents were genuine. The Frankfurt notary, if he does not personally know the Tuscan trader, may certify documents notarized by someone of standing in Tuscany. The second area—the promissory note—also assumed official and legal standing. In an era when carrying gold or silver was heavy and dangerous, the notes themselves became currency. Thus the Stuttgart bookmaker may use the note from the Tuscan trader as a method of payment, or as backing for notes which he writes. Some of the great trading houses, such as the Fuggers and the de Medicis, depended on their reputation to back the value of these notes. Fast-Forward to the Last Century It’s difficult for one to project oneself back to the pre-Schengen, pre-European Union times in Europe, when passports, export/import documents and duties separated individual European countries. International trade has been governed since the 1800’s by “Conventions,” which are general agreements reached by member nations on the rules of trade. The UN has taken some of the function of incorporating rules of trade, starting in the 1950’s. The European Union has also incorporated rules for international trade into its overall conventions. In particular, the EU’s adherence to the Vienna Convention of the 1950’s is an attempt to harmonise trade rules within the now 27 countries of the European Union in such a way that EU member states can conduct business outside the EU in an identical and cohesive way. Pre-EU, each country would establish its own rules of trade within the European continent. Because international trade required that both parties agree to a common set of rules, the rules of each of the countries would have to hew to the Conventions in order to assure that the key questions were answered, such as: 1. How do we get paid? 2. Who is responsible for tariffs, duties and inspections? 3. What is the recourse in case of goods damaged in shipment? 4. In case of dispute, which nation’s rules shall apply? Each of these questions would be answered in “Terms and Conditions” of the contract, which in turn would refer to the Conventions as superseding local law where possible. Of the four conditions listed above, the most important was the requirement of jurisdictional rules in case of dispute. The significant differences between countries, and the natural advantage of choosing the buyer’s or seller’s home country, meant that significant advantages could accrue to one side or another in trades, and introduced an element of risk and uncertainty in the trading relationship. Harmonisation within the EU The EU in Brussels has two main tasks related to trade: harmonise trade within the 27 member states, and create a common set of rules and laws which are observed by all its countries when trading with companies and individuals outside the EU. Harmonisation within the EU is guaranteed on two levels: (1) a gradual harmonisation which is negotiated in part before the accession of a new EU member to the Union, in order to ensure that the incumbent EU members are not harmed unduly over the short-term by import of goods into politically sensitive sectors, and (2) a gradual breakdown in non-tariff barriers to trade within the EU. The EU commission in Brussels has issued a series of harmonisation decrees in an attempt to homogenise laws across the Continent. An example of this would be the harmonisation of laws applicable to civil liability (EU). This harmonisation decree, issued in mid-2007, spells out the law which is applicable to non-contractual obligations as referred to in the “Rome II” treaty, which was agreed in the 1990’s, and follows the “Rome I” treaty agreed within the EU in the 1980’s. The preamble to this harmonisation decree illustrates the overall harmonisation goals of the EU, and some of the reasoning behind it: The aim is to ensure that courts in all the Member States apply the same law in the event of cross-border disputes in matters of tort/delict, thus facilitating the mutual recognition of court decisions in the European Union. The rules that have been adopted make it possible to strike a proper balance between the interests of the various parties involved in a cross-border dispute and to designate a law which is closely connected with the situation. The European Union administration is wise to base its harmonization decrees on previous conventions, dating back to the Vienna Conventions of the 1950’s and even the 1800’s. This ensures that many of the contracts written between companies and individuals, whether inside the EU or in other countries, will not come into conflict with EU policy. The Rome II agreement, according to the EU Commission, “completed” the “Community harmonization of the rules of private international law of civil and commercial obligations. (EU)” The EU’s drive to political and economic harmonisation has moved both forward and backward over the past five years. The European Union has accepted 12 new members, but various exclusions have prevented the full economic melding of the new countries with the ‘old’ EU countries. In particular, some protected agricultural goods have been excluded from free trade agreements. The free movement of labourers from country to country was agreed, but delayed for several years in most countries. The UK, Sweden and Eire were the only countries, for example, which allowed free movement of new Hungarian, Polish and Czech workers into their country immediately upon their accession to the EU. Other countries chose “opt-outs,” which delayed implementation of free movement to 2009 or 2011. This was due to particularly strong opposition in major European countries with significant unemployment problems, chiefly France and Germany. That left the UK and Sweden to absorb massive numbers of immigrants. By some estimates, over 600,000 Poles moved to the UK and 60,000 to Eire in the three years after Poland’s accession to the EU. One is left to speculate on the future of harmonisation in the EU, both within EU borders and with the outside world. The agenda of member countries is significantly different: France and Germany are joined by the Scandinavian countries as having poor productivity in their agricultural sector. France is the largest recipient of European Union agricultural aid, and as such encourages the EU to maintain high non-tariff and tariff barriers to the important of non-EU foodstuffs. Politicians in countries with heavy agricultural subsidies use a number of legal dodges, such as protests against genetically modified foods (which lost in the WTO’s court twice) in order to protect their own farmers. Oddly, the UK is one of the most productive agricultural countries in the EU, which means that the English receive relatively little in the way of EU subsidies. The non-tariff barriers which are extended outside the EU correspond to old tariff and colonial ties with specific countries. France insisted in the early 1990’s, for example, that banana imports from its former colonies in Africa and the Caribbean receive preferable treatment, while applying quotas and high tariffs on the import of cheaper—and higher-quality—banana imports from Central America. In that specific case, Germany, which was the EU’s largest consumer of bananas, saw both a price increase and a quality decrease in order to support its EU neighbour’s political policies. No nation is clear of agricultural protectionism and subsidisation, although Europe is by far the most egregious violator of agricultural subsidisation in the world (Economist). Americans subsidise sugar beets and corn, while the Japanese support local rice production (with a cost in the home market 5 times higher than the world market price). But Europe’s farmers, on average, earn 40% of their income from subsidies, with this amount climbing to nearly 80% for particularly inefficient countries, such as Germany and Finland (and Switzerland, which pursues equally ruinous policies). While most developed countries pursue these development policies, the Third World suffers the consequences. Lack of harmonisation and subsidy battles mean that surpluses are accumulated due to local farmer subsidies and the governments’ willingness to buy them. Governments then ‘dump’ their acquired food on the world, chiefly in poorer countries. As a result, poor countries’ farmers are hurt twice: they are unable to export their agricultural products to countries which, in a free market, would purchase them. And they suffer from the local market effects of below market-value sales of competing products in their domestic market. The result is that lack of harmonisation leads to poverty in third world countries, and subsidies in wealthy ones. International harmonization proceeds along a different path: China The World Trade Organisation (WTO) was created in 1995 in order to increase harmonisation of world trade conditions and break down tariff and non-tariff barriers to trade. Not all nations belonged to the WTO upon its founding; most notably, China was not accepted into the WTO until 2002, and only after China agreed to make a number of changes to its laws and tariffs in order to allow its accession to the world body. The WTO’s role in harmonisation is primarily to propose reductions in barriers, to provide a forum at which nations around the world can discuss trade concerns, and to act as an adjudicator for trade disputes between member nations, with no recourse to other international courts once the decision is handed down. China’s path towards harmonisation in the global WTO structure is instructive. It existed nearly independent of the rest of the outside world until 1977, at which point the Cultural Revolution ended and the nation began to look outwards. As in the European reconstruction after World War II, China erected fairly massive tariff and non-tariff barriers aimed at preventing imports of non-Chinese goods, and simultaneously passing a joint venture law in 1981 to encourage the investment of expertise and money from outside firms in the Chinese market. Automobiles were one area where China was especially bereft of expertise and the ability to produce automobiles. China’s tariff barriers of over 200% prevented import of all but the least expensive Japanese autos, whilst in signed joint venture agreements with Volkswagen, Jeep (later Renault) and General Motors in order to create Chinese majority-owned facilities in their country. An attempt to harmonise Chinese joint venture law with other countries, and to learn from several failed experiences during the 1980’s, led to a new joint venture law in 1993, which encouraged foreign companies through their ability to own a majority of the joint venture, in return for a larger foreseen investment and technology exchange than in the previous decade. China was forced to harmonise its joint venture and investment laws from 1981 to 1993 in order to attract investment. It then harmonised its stock exchange law according to the world-leading Hong Kong stock market disclosure and protection standards in its new Shanghai and Shenzhen stock exchanges, opened in 1993 and 1994 respectively. Chinese officials, anxious to accelerate their economic development, agreed with the United States, Japan and Europe to join the WTO in 2000, after nearly five years of negotiations. From a fairly un-harmonic position in 1977, China had managed to create ownership, investment, joint venture and disclosure laws in harmony with international standards. The agreed-upon accession to WTO gave China only two years after the formal signing of the agreement, and 7 years after China began its efforts to join the WTO, to harmonise the rest of its economy. The primary efforts in China towards harmonisation during the 1995 to 2000 period were to create a more open set of stock market rules, and to reform its accounting standards to correspond to International GAAP (generally-accepted accounting principles) standards (Economist). China’s evolution to modern accepted standards proceeded quickly, despite the fact that the country did not have an infrastructure of accounting expertise since the time of its weak republic in the 1920’s. From 2000 to 2002, China then reduced its tariff and non-tariff barriers to agreed-upon levels with the WTO. As with European countries, some sectors received on-going high tariff barriers after 2002, but many manufacturing sectors saw tariffs drop significantly, from a level of 25% in 1998 to an average of 10% in 2002. Auto tariffs eventually disappeared by 2006. Service tariffs and non-tariff barriers have proven more difficult, as in many other OECD countries. For this reason, China’s attempts at harmonisation have not been completely successful to date. Regional Trade Harmonisation: NAFTA The United States is the largest trader in the world. Although its trade is substantial with Japan and Far East Asia, as well as Europe, the majority of trade is performed within its continent, with Mexico and Canada. The NAFTA accords of 1992 were put in place for different reasons in the three countries. The United States wanted to help Mexico to grow its internal economy in order to accept more American exports, enable further building out of the maquiladora structure, and give the stream of Mexicans emigrating to the United States stronger economic reasons to stay on their side of the border. Mexico saw a reduction in protectionism as a chance to bring its countrymen into the first world. By 1994, it was clear that the United States and other OECD countries were choosing their manufacturing sites based on costs of production. NAFTA represented a way for Mexico to pursue a privileged position with the United States and Canada, and better compete with burgeoning Asian manufacturers that competed in its back yard. Canada had already developed a robust export market in the United States with several ‘mini’ NAFTA-like agreements, most notably in automobile manufacturing. These relationships were codified in their bilateral agreement in 1988. This sector gave Detroit access to good, and less expensive, Canadian workers, while it gave Canada a standing trade surplus with the United States. The NAFTA accords gave Canada better access to the Mexican market, and extended the fairly open agreements that Canada had already pursued with success with the United States. NAFTA’s results have been spectacular for all three countries. It is difficult to pin an exact effect on each country, but Mexico’s rise must be in large part attributed to its growing economic relationship with the US and Canada. Mexico’s income per capita has grown from less than $1,000 per head in the mid 1980’s to over $7,000 per head in 2006 (Economist), a level higher than newer EU members, such as Poland or Romania. This compares to $41,000 for the average American (per capita), which means that the ratio between the US and Mexican is 6:1, as compared to the average ratio in Europe between the Brit and Polish citizen (at $36K and $6K respectively) is the same 6:1 ratio. One could argue that the improvement in the terms of trade for both newly-emerging EU member countries and for newly-emerging Mexico are roughly similar, both in intent and results. NAFTA is set to expand from its North American roots. Chile, South America’s richest nation per capita, and a strong advocate of conservative trade policies, joined NAFTA in a novel way; while it is not a formal NAFTA member, it negotiated three bilateral agreements which extend most of the privileges of NAFTA to Chile and the NAFTA countries, essentially including Chile as a fourth member of the group. NAFTA’s effects have been a matter of political debate in all three countries. Each country has chosen specific areas to contest against its NAFTA partners. In Mexico, for example, there has been extreme resistance to opening up the Mexican petroleum industry to outside investment or even contractor participation, despite Pemex (the Mexican national oil company) being unable to fund new exploration to the extent it judges necessary. The United States has chosen to delay the implementation of free movement of Mexican lorries on US roads, due mainly to strong resistance from the Teamster’s Union. Canada has chosen to fight the United States on fishing and lumber exports and imports. In short, just as in the European Union, each country has been fighting battles with their free-trade partners in order to satisfy particularly sensitive issues on their domestic fronts. The primary goals of the NAFTA accords are more similar to the earlier goals of the Common Market. That is, NAFTA does not seek political union, but rather a reduction in the tariff and non-tariff barriers to movement of goods and services. NAFTA vehemently does not push for free movement of workers across borders, nor does it dictate specific work rules, both of which are goals within the EU (with the vehement opposition of the UK, Denmark and several other EU states). NAFTA countries continue to inhibit free movement of people (formally), whereby Mexico and Canada do not easily accept US workers, and vice versa. Attempts to include other countries under the NAFTA umbrella have met a series of political concerns in each of the member countries. The largest economic powers in Latin America (besides Mexico) include Brazil, Argentina and Venezuela. Each of these countries has not, for political reasons, wished to take down trade barriers and allow import of manufactured goods. At the same time, the US has attempted to coddle its agricultural producers by keeping out non-US goods. US concern extends to Argentinian beef, Brazilian corn and soybeans, and Mexican produce across a large number of agricultural products. Thus political issues in non-NAFTA and NAFTA countries have made it difficult to proceed on a widening of the NAFTA infrastructure. There are two exceptions: Costa Rica has joined in a similar way to Chile, while Peru is set to join NAFTA as well with some limits to the free trade status of that country with the North American countries. Agricultural commerce between the countries is growing: Mexico’s agricultural exports have increased over 9 percent per year between 1994 and 2001, which suggests that bilateral agricultural agreements have lowered some barriers to lower-cost Mexican goods (Deere). Trade between Developing Nations The growth of “second-tier” countries has been a boon for harmonisation around the world. Although China’s GDP is still relatively paltry-less than Germany’s or France’s GDP, despite their vastly superior population—its growth rate suggests that its GDP will surpass that of Japan by 2015 and the United States by around 2020. Brazil’s large population and burgeoning agricultural and factory production has made it a regional power within Latin America, and a preferred manufacturing site for Japanese and European countries. India’s even-faster rise (from a lower starting point) suggests that, if present trends continue, it will be one of the top six economies in the world in the next twenty years. Thus the old nostrums of globalisation and harmonisation—the “rich” countries benefit from trade, while the “poor” countries are best advised to protect their markets from others through tariffs and barriers—may no longer be true. The Doha round of GATT talks, generally accepted to have failed so far, has a series of strange bedfellows encouraging moves to freer trade and harmonisation on a broad array of fronts. India and Brazil, both former protectionist flag-bearers, are now pushing on each of the regional trading blocs to open their doors and allow freer movement of goods and services. Conclusion: Whither Harmonisation in the Future? One could argue that further harmonisation is inevitable. This author generally agrees with that assertion, based on secular and demographic trends: 1. There is a growing acceptance amongst up-and-coming countries around the world that free trade and harmonisation benefit those countries and their citizens. 2. The advent of the internet and more sophisticated logistical solutions has led to a true shrinking of the world. Transaction costs and transparency are now on a new level, which allow for much easier (and less costly) movement of goods and services from one country to another. One only need look at the trend to outsourcing help desk calls or software programming to far-off India or closer-by Eire in order to judge the changes in communication technology and how they have changed the terms of trade. 3. Partly as a result of the first two points, the world is growing richer at an increasing rate. According to the Economist, the global economy grew at 3.6% per year, compounded and post-inflation, from 1995 to 2006 (Economist). This rate of growth has been broad-based, and particularly touched on the nearly 50% of people in the world who had not benefited from economic progress in the past1 and bringing them into the commercial economy. One has some reason to be pessimistic. As the European Union has grown in size, the willingness to accept lowering of trade barriers, and to push greater harmonisation, has diminished. The main reasons for this may be the highly-visible industries in Europe which have suffered as a result of harmonisation, with the beneficial effects being more diffuse and less politically obvious. One can point to a NAFTA backlash in all member countries, where a significant minority of each population is clamouring for a reduction in free trade rules between those countries. One can also posit that free trade is only harmonising on a regional, rather than a global basis, as NAFTA, the EU and East Asian trading blocs supplant the failed Doha round of the GATT talks, and countries look for regional solutions as the global system has faltered. The harmonisation of global trade should nevertheless continue, bolstered by the general recognition around the world that free trade is to everyone’s advantage. Bibliography Deere, CL. 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