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International Trade and Associated Risks

Introduction

Risks related to international trade present tremendous barriers to its development. Overall, the issue of international trade has been a debated topic since economists and lawmakers had different opinions on the real benefits and limitations of global commerce. Ranging from the increased number of cases of prosecutions for bribery to lawsuits regarding global operations, the large international marketplace is riddled with possible legal issues.

As American businesses became increasingly competitive in the global market, they are now required to have a deeper understanding of legal matters that exist in this context, as mentioned by Pagnattaro, Cahoy, Magid, Reed, and Shedd (2016). As with any system of markets, legal institutions and rules are responsible for promoting beneficial exchanges with the help of establishing a system of legal entitlements and rights or by facilitating compliance with obligations (Waincymer, n.d.). If the inadequacies in complying with legal requirements are too severe, there is a possibility of the productive endeavors being under risk. Among the challenges of international trade, bribery, export controls, expropriation, and nationalization have been identified as the most troubling for businesses; thus, companies should possess enough knowledge about these problems to avoid them and be able to withstand their legal rights on the international arena.

Bribery and Corruption in International Trade

There is no denying that corruption both in emerging economies and developed countries around the globe throws the economic development of international businesses into chaos. Despite the enactment of the Foreign Corrupt Practices Act (aimed at stopping bribery practices from foreign representatives as well as put a taboo on American companies or citizens paying to foreign officials), the international trade practices are still severely challenged by the issue of bribery.

As more and more businesses try to become actively competitive in the global market, companies from different countries start implementing various practices to exceed their competitors. To do this, companies are seeking to explore foreign markets by removing obstacles that exist there. One of the biggest challenges is the existence of corruption, which is growing continuously. Bribery and corruption increase the costs and risks of doing business along with reducing the trust of international investors. Corruption practices raise questions about the level of integrity of business executives that operate in corruption-stricken countries (Shahabuddin, 2002). Furthermore, they eliminate the economic benefits of free trade by causing restructuration investments to firms that pay the largest probes (Shahabuddin, 2002). It is also interesting that companies in those countries where a bribe is accepted tend to increase their investments in countries where corruption is a taboo and is punished by the law.

Different attitudes of different countries regarding corruption are the most challenging aspects of risks associated with international law. According to the study conducted by Baughn, Bodie, Buchanan, and Bixby (2010) that investigated the likelihood of companies from thirty different countries of engaging in corruption, companies were the least likely to resort to corruption in those countries where it was not tolerated. Furthermore, similar findings applied to the investigation of economic development levels as well as the cultural values in countries-suppliers. With regard to organizational cultures, companies that operate in the higher-power countries tend to show a relatively greater likelihood of paying bribes when completing transactions with countries that possess less power in the international arena of commerce (Baughn et al., 2010).

When it comes to the impact of bribery and corruption in international trade, a question of whether they discourage business operations usually comes into place. According to the study conducted by Jong and Bogmans (2011), in general, corruption interferes with international trade while bribes paid to customers potentially increases imports, which is an unpredictable discovery. The effect of bribery is the most prominent in importing countries that do not have an efficient system of customs, which increases waiting times and borders and decreases the dynamics of international trade. Jong and Bogmans (2011) found that the impact of corruption differs between exporting and importing economies, and such a distinction is important for the understanding of how countries deal with this issue in order to enhance their export/import operations. However, the researchers did not make a cohesive conclusion on the effects of corruptions’ unpredictability (Jong & Bogmans, 2011).

Therefore, a conclusion can be made that the functioning of economic institutions in different countries determines whether corruption and bribery would have an impact on trade relations. The opinion that malfunctioning economies have a negative effect on international trade has been supported by empirical evidence (Thede & Gustafson, 2009), and because corruption is tightly connected to institutional quality, the overall influence of corruption on global trade is expected to be rather negative (Thede & Gustafson, 2009). On the other hand, such an impact is not equal to the general opinion that corruption always interferes with international trade, so it is crucial to remember that there is a set of circumstances (e.g. malfunctioning economic institutions) under which bribery and corruption will prevail, as found by Thede and Gustafson (2009). Nevertheless, as a general rule, there are no distinct indicators of corruption motivating economic activities on a global scale.

Expropriation and Nationalization in International Trade

The second most prominent risk associated with international trade refers to the possibility of expropriation and nationalization in cases when a domestic business tightly involves itself with a foreign country to the extent of locating assets there (Pagnattaro et al., 2016). In the context of international law, expropriation refers to the act of a government taking away privately owned property for the sole purpose of benefiting the public (Investopedia, 2017). When business owners are not paid fairly for their company, the expropriation is considered a confiscation of property. As a rule, the government that expropriates property tends to assume ownership over it; therefore, the process also includes nationalization (Pagnattaro et al., 2016). In the U.S., “eminent domain” established a legal domain for the expropriation of property (Investopedia, 2017).

Expropriation and nationalization of private property present various challenges to businesses because the reasons for them can be disputed. While the U.S. Constitution does not allow the government to seize property for reasons apart from ensuring the public good, the extent of the Constitution’s protection can differ. Moreover, there are some concerns regarding the process of compensation, issues with due process, and the rule of law. It is crucial for laws to have a specific delineation of rights given to the government with regards to property expropriation and efficient due process channels available to the public and businesses in order to have an appeal of proposed expropriations (Pagnattaro et al., 2016). When it comes to compensating businesses for the expropriated property, there are inconsistencies in opinions about whether companies should not only be paid for their private properties but also for the issues associated with relocation.

The negative impact of expropriation on businesses has become an issue of concern for the United Nations Conference on Trade and Development. Also, United Nations has been concerned with indirect expropriations (measures that permanently diminish the economic value of an investment and deprive businesses’ owners of the option of managing property meaningfully) (UNCTAD, 2012). Investors can bring claims about expropriations regarding the conduct attributed by the host State in that the latter engaged with its sovereign capacity, as mentioned in the UNCTAD report (2012).

Another key point discussed by the United Nations is associated with the issue of compensation for expropriation. As a rule, compensation paid for lawful expropriations should be different from reparations paid for unlawful ones; however, in the majority of instances, both types of payments are determined by the association with the fair market value of the property that has been expropriated (UNCTAD, 2012). From the perspective of policy, it could be beneficial to allow including the specific characteristics of the expropriation case when making decisions about how lawful expropriations should be compensated. Such characteristics are especially important in instances of indirect expropriations, which do not usually imply the transfer of economic benefits from a business to a country (UNCTAD, 2012).

Export Controls

Another issue that challenges international trade to a large extent is associated with export controls. Keeping the export of goods under control has been under the protection of Western policies since the WWII (Pagnattaro et al., 2016). European and American regimes of export control are quite complex, unstable, and usually overlapping. Businesses that ship goods, transfer software, or technologies are forced to withstand the pressure of compliance challenges. Currently, the United States system of efforts is now controlled by the Department of State and the Department of Commerce. As mentioned by the U.S. Export Control and Related Border Security Assistance Program, exporters should take into consideration the following three factors that determine the safety of exported goods (Pagnattaro et al., 2016):

  • A customer shows reluctance in providing relevant information about the end-user; offers to pay cash for the shipments of high value; does not have a solid business background, etc.
  • Requests of end-users do not coincide with inventory; the end-user does not provide enough information about the purpose of the exported goods, etc.
  • A shipment is directed to parties that are not connected to the buyer; a transfer followed a suspicious route, etc. (Pagnattaro et al., 2016).

In order to achieve effective implementation of an export control system, a State is required to show the national commitment to a business endeavor. First, such a commitment should be demonstrated by making political decisions of adhering to the international norms of nonproliferation (Resource on Strategic Trade Management and Export Controls, n.d.). Second, a country should create a legal authority of controlling the export of specific goods and technologies (namely, dual-use or defense-related). According to the Resource on Strategic Trade Management and Export Controls (n.d.), the authority of a country should adhere to the legal principles of Comprehensive Controls, Implementing Directives, Interagency Coordination, International Cooperation, Enforcement Power and Penalties, and Protection against governmental dissemination of sensitive business information (para. 6). Third, a county is required to make changes in regulations in order to support laws and policies regarding export control. Such changes should align with the international norms and standards, which must be readily available to exporters (Resource on Strategic Trade Management and Export Controls, n.d.). Lastly, appropriate measures of enforcement should be integrated into the system of export controls. Preventive enforcement is one such measure that should be associated with procedures of export license applications (Resource on Strategic Trade Management and Export Controls, n.d.).

Other Challenges of International Trade

The challenges and benefits of international trade have been concerning for both policymakers and economists of the modern world. While legal issues such as bribery, export controls, and risks of expropriation were identified as the most challenging, maximizing the gains from international trade is a problem that concerns most developed or developing economies. States that take part in international trade relations usually try to efficiently utilize various opportunities that come from the exchange of services and goods with partners (Economywatch, 2010). In times of globalization, the sphere of international trade plays a significant role in establishing legal, political, economic, and social stability between the developed or developing countries around the globe. With the openness to international trade becoming the cornerstone of relationships between countries, a problem of solidarity on all levels has gained tremendous importance, especially in the legal sphere.

Along with globalization and economic liberalization, the area of international trade caused the emergence of challenges faced by both developed and developing countries. One of the key challenges relevant to the context of “backward economies: pertains to the macroeconomic policies being disproportionate for utilizing the benefits of global trade (Economywatch, 2010). Only in the case when the benefits of international trade are evenly distributed across society, economies can acquire real gains. While domestic business is associated with the factors of production at a regional level (Economywatch, 2010). International trade requires countries to be more flexible with regard to modern technologies, services, and goods. On the other hand, countries are forced to use the emerging economies efficiently in order to use the gains from international trade to their advantage.

Conclusions

International trade involves operations that can positively impact the world economy; however, with the tremendous benefits come challenges, especially in the legal sphere. The analysis of the problems have shown that bribery, expropriation, export controls, and the stability of relationships between developing and developed countries have the greatest impact on the effectiveness of international trade relations. Among them, pressures of bribery and corruption are the most concerning since their impact can vary from one country to another, leading the instability of trade relationships between economies and the misunderstandings between businesses that have different views on the nature and the quality of international trade processes.

Expropriation also raises more questions than gives answers since there are inconsistencies in how businesses are being compensated for either lawful or unlawful seizures of their private property. The process of expropriation presents businesses with tremendous challenges: there are inconveniences with regards to relocation, unfairness in the amount of money paid to companies, and other issues. Despite the fact that the primary legal matters of international trade have already been identified, the problem of how they can be eliminated to enhance the gains from the commerce relationships between countries.

References

Baughn, C., Bodie, N., Bucharan, M., & Bixby, M. (2010). Bribery in international business transactions. Journal of Business Ethics, 92(1), 15-32.

Economywatch. (2010). Challenges before international trade – Challenges for international trade, trade barriers. Web.

Investopedia. (2017). Expropriation. Web.

Jong, E., & Bogmans, C. (2011). Does corruption discourage international trade? European Journal of Political Economy, 27(2), 385-398.

Pagnattaro, M., Cahoy, D., Magid, J., Reed, O., & Shedd, P. (2016). The legal and regulatory environment of business (17th ed.). New York, NY: McGraw-Hill.

Resource on Strategic Trade Management and Export Controls. (n.d.). Overview of U.S. export control system. Web.

Shahabuddin, S. (2002). The causes and consequences of bribery in international business. International Journal of Management, 19(2), 1-10.

Thede, S., & Gustafson, N. (2009). International trade and the role of corruption. Web.

UNCTAD. (2012). Expropriation: UNCTAD series on issues in international investment agreements II. Web.

Waincymer, J. (n.d.). Legal issues in trade and investment. Web.