978-1285427003 Chapter 8 Lecture Note Part 1

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Suggested Additional Assignments

Interview: An Importer

Students should locate a local businessperson who imports goods or sells imported goods. Why does she

choose to deal in imported goods? What advantages do the goods give her over domestic goods? What

problems has she encountered? What advice would she have for an entrepreneur who plans to sell

imported goods?

Research: School Spirit and Child Labor

As noted in the text, some universities are responding to the tragedy of child exploitation by refusing to

license the school logo to any apparel company that uses child labor. Duke University was one of the first,

and other schools soon followed. Other apparel makers have similarly decided to insist on adult-made

goods. Divide the class into groups of three or four students. Each group should be assigned to a college,

university, or clothing brand name. The group’s responsibility is to contact the assigned organization and

track down who makes its apparel and what, if any, steps it has taken to ensure that children do not

manufacture the goods.

Case Study: The Lugubria Convention Center and the Foreign Corrupt

Practices Act

This exercise, which students can either analyze in a memo or discuss in class, gives them a good chance

to apply the Foreign Corrupt Practices Act to a typical contemporary situation. If you have already taught

Chapter 2, Ethics, the exercise also offers an excellent chance to apply that chapter’s checklist. The

checklist question “Is it legal?” raises the Foreign Corrupt Practices Act (FCPA) issues, so the two points

go handily together.

The nation of Lugubria is only five years old. The government plans to invest over $1 billion to build

a resort hotel/convention center in the nation’s capital, Joy. You are a vice-president of GoodNight, Inc.,

which owns eight large hotels and other smaller ones. GoodNight has been aggressively pursuing

Lugubria for the hotel/convention center contract. Many other international companies are competing,

including Sheraton, Club Med, Disney, and ten others. For GoodNight, this would be the largest project

ever, instantly improving the company’s status in the travel industry.

Nosmo King, President of GoodNight and your boss, has handled negotiations with Lugubria but has

had to return home for medical care. He is in a hospital, unable to speak, and will need six months to

recover fully. The CEO, King’s good friend, has appointed you to negotiate.

In Joy you meet privately with Lugubria’s minister of interior. The competition has been narrowed from

thirteen companies to 3, including GoodNight. If the minister gets full cooperation from you, he is

confident he can secure the contract for GoodNight. He thinks that Lugubria is better off doing business

with a smaller company that will commit 100% of its resources to this project, rather than with a

multinational enterprise for which this would be just one of many similar projects.

He mentions two other issues. Six months earlier Nosmo King made a cash payment of $100,000 to the

minister. This was a “confidential expediter fee” (CEF), which he explained is common in Lugubria. The

fee is used to speed up government approval and obtain building permits. Because Lugubria is a new

country, this process can get bogged down, and the CEF is essential. King agreed to make two more CEF

payments of the same size. The minister wants one payment within a week and the final payment as soon

as possible. “At that point, we should complete the deal quickly.” You ask precisely what the money will

be used for. The minister replies “to get audits, investigations, reports; to get a committee to meet. I must

have cash and complete freedom.”

The minister also wants to travel to the United States to see some of your hotels. He wants to take a

three-week trip for that purpose, with the first week to be spent in Venice, where you have no hotels. He

assumes that GoodNight will pay the full cost of the trip for himself and about six others. “Your

competition has assured us we can travel expense-free anywhere in the world for up to a month, with as

many as 15 people.” He expects an answer within a day. If GoodNight does not cooperate, other

companies will.

GoodNight’s CEO has told you to do whatever it takes to get the contract. You are concerned about

the CEF and the free travel. You telephone a friend in London who has done business in Lugubria in

another industry. “I’ve never obtained one contract in Lugubria without a cash payment,” he explains. “It’s

part of their culture. If you don’t pay up, you won’t get the deal. And someone else will pay and they will

get the contract.” He has never heard of the payments causing trouble. “Believe me,” your friend

concludes, “it is more than worth the money.”

What should you do?

Chapter Overview

Chapter Theme

The world is one economy, with every country linked in countless financial ways to almost every other.

Business today often involves international commerce, a trend that will only increase. The text notes that

“a dozen developing countries with a total population ten times that of the United States will account for

40 percent of all export opportunities.” Business people cannot afford to ignore requirements and

principles of international law.

Trade Regulation: The Big Picture

Export Controls

Exporting is shipping goods or services out of a country.

The Export Administration Act of 1985 balances the need for free trade, which is essential in a capitalist

society, with important requirements of national security. The statute permits the federal government to

restrict exports if they endanger national security, harm foreign policy goals, or drain scarce materials.

The Secretary of Commerce makes a Controlled Commodities List of those items that meet any of these

criteria. No one may export any commodity on the list without a license.

The Arms Export Control Act permits the President to create a second list of controlled goods, all related

to military weaponry. Again, no person may export any listed item without a license.

Import Controls

Importing is shipping goods and services into a country.

A tariff is a tax imposed on goods when they enter a country. Tariffs are also called duties.

You Be the Judge: Totes-Isotoner Co. v. United States1

Facts: Isotoner imports gloves for sale in the United States. The U.S. imposes a higher tariff on “men’s”

leather gloves than it does on gloves manufactured “for other persons.” Isotoner argued that this

difference violated the Constitution’s Equal Protection Clause and amounted to illegal gender

discrimination. The lower court dismissed the complaint, and Isotoner appealed.

You Be the Judge: Do differing tariff rates for men’s and women’s gloves amount to illegal gender

discrimination?

Argument for Isotoner: Because the Constitution requires equal protection under the law, the

government must treat people the same. In this instance, the government treats men worse than women –

1 594 F.3d 1346, United States Court of Appeals for the Federal Circuit, 2010.

with the result that men will have to pay more for gloves. This is unacceptable. Surely this Court would

not allow a special tax on yarmulkes or higher tariffs linked to race. Distinctions that disfavor an entire

group of people cannot stand.

Argument for the United States: To be in violation of the Equal Protection Clause, the government must

intend to discriminate. That is not the case here. Tariff rates are set for a variety of reasons. Men’s and

women’s gloves may be made by different companies, in different countries with a different impact on

American industry. Surely the government has the discretion to set different tariff rates for gloves or any

other kind of imported goods.

Holding: The Court sided with the government. More than a discriminatory impact is required for a

finding of a 14th Amendment violation. Isotoner failed to present facts inferring intent to discriminate.

Question: Why did Isotoner sue?

Answer: Isotoner was paying a higher tax on gloves designated as “men’s” gloves than gloves

Question: What was Isotoner’s legal argument?

Question: Why didn’t the Court agree with Isotoner?

Answer: The Court found that there was no facial discrimination, because the tariff on the gloves fell

Valuation. After classifying the imported goods, customs officials impose the appropriate duty ad

valorem, meaning “according to the value of the goods.” In other words, the service must determine the

value of the merchandise before it can tax a percentage of that value.

Additional Case: Avenues in Leather, Inc. v. U.S.2

Facts: Avenues in Leather (Avenues) imported Calcu-Folios, which are 13 inches tall by 11 inches wide

and 1.5 inches deep. They are made of paperboard covered in plastic with a padded handle. It is zippered

on three sides and contains an interior sleeve, several small pockets, a calculator, and three-ring binder.

The Customs Service (Customs) classified the Clacu-Folio under tariff heading 4202, which covers

“trunks, suitcases, vanity cases, attaché cases, briefcases, school satchels, and similar containers.”

Avenues claims the Calcu-Folios should be classified under tariff heading 4820 which covers “binders,

folders, file covers, memorandum pads, letter pads and similar articles.” Heading 4820 imposes a 3%

tariff and heading 4202 imposes a 20% tariff. Avenues sued and the Court of International Trade found for

Avenues. Customs appealed.

Issue: Was the Calcu-Folio properly classified as a briefcase or a binder?

Holding: Judgment affirmed. Avenues testified that the Calcu-Folio was designed as an organizational aid

for taking notes, thus, it is more like a “portfolio” or a flat case designed to hold papers.

Customs argued that Calcu-Folios was more like a “briefcase,” emphasizing the container elements of

the good, and introducing evidence of the marketing of the good for business travel. Customs also argued

that the good can be used to carry non-paper personal and business items.

Heading 4202 contains a list of specific items, and the general phrase “similar articles.” For a good to

be considered a “similar article,” that good must share the same essential purpose as those listed under the

heading.

2 423 F.3d 1326, Court of Appeals for the Federal Circuit, 2006.

Although the Calcu-Folio may be used to carry small items, the internal carrying space is only 1 inch,

making it unsuitable for carrying newspapers, books, and other objects that are normally carried in the

items listed in heading 4202.

The Court agrees with the Court of Internal Trade’s finding that the characteristics of the Calcu-Folio

most closely resemble an article of stationery and fall within heading 4820. While the memo pad is an

item specifically listed under heading 4820, most of the other characteristics of the good pertain to writing

or written documents.

Question: Why did Avenues Leather challenge the Customs Service classification of these costumes?

Answer: Because under the Customs classification Avenues would pay a 20% tariff on the goods. If

Question: How did the Customs Service decide the nature of the Calcu-Folios in this case?

Question: Why didn’t the Court agree with that classification?

Answer: Because the Calcu-Folio was too small to carry anything a briefcase would contain, like a

Duties for Dumping and Subsidizing

Dumping means selling merchandise at one price in the domestic market and at a cheaper, unfair price in

an international market. In the United States, the Commerce Department investigates suspected dumping.

If the Department concludes that the foreign company is selling items at less than fair value, and that this

harms an American industry, it will impose a dumping duty sufficiently high to put the foreign goods back

on fair footing with domestic products.

Subsidized goods are also unfair. This happens when a foreign government permits a company to pay

little or no taxes. This enormous benefit will enable the company to produce cheap products and undersell

competitors. Again, the United States imposes a tariff on subsidized goods, called “countervailing duties.”

Treaties

General Agreement on Tari*s and Trade

The General Agreement on Tariffs and Trade (GATT) created the World Trade Organization (WTO) “to

stimulate international commerce and resolve trade disputes.” The two cases below—actually the same

case at different levels of the WTO dispute-resolution process—demonstrate the principles the WTO

applies to balance the interests of GATT signatories.

Case: United States—Import Prohibition of Certain Shrimp & Shrimp

Products3

Facts: The United States recognizes sea turtles as an endangered species. Studies showed that the greatest

world-wide threat to the turtles came from shrimp fishermen inadvertently catching the animals in their

nets. The federal government responded by requiring any importers to certify that shrimp had been caught

using “Turtle Excluder Devices” (TEDs), which keep the animals out of the nets.

India, Pakistan, Malaysia, and Thailand filed complaints with the WTO, claiming that the United States

had no right to impose its environmental concerns on world trade. The United States argued that Article

XX of the WTO Agreement permitted trade restrictions based on environmental concerns. Article XX

states in part:

3 AB-1998-4, WTO Appellate Body, 1998.

Nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member

of measures:

(b) necessary to protect human, animal or plant life or health;

(g) relating to the conservation of exhaustible natural resources if such measures are made effective in

conjunction with restrictions on domestic production or consumption;

The Dispute Settlement Body declared that the United States had no right to impose its policies on shrimp

importers. The U.S. appealed.

Issue: Did the WTO Agreement permit the United States to impose environmental restrictions on shrimp

importers?

Decision: No. The restrictions discriminated against other WTO members.

Reasoning: To protect sea turtles, the United States requires that its domestic, commercial shrimp trawl

vessels use TEDs. Protecting the environment is a legitimate and noble objective. The United States, like

all other Members of the WTO, has the right to adopt strict standards for its citizens.

However, the United States does not have the right to arbitrarily impose its own standards on other WTO

Member nations. It was requiring foreign countries to adopt the same regulatory program for their shrimp

trawl vessels as it had for its own without taking into consideration the different conditions that may

occur in other countries.

If the United States’ primary objective was to save sea turtles, it should have persuaded other Members to

sign an environmental treaty for their protection. Instead, it tried to achieve this goal in a backdoor

manner.

Although the United States’ policy serves a legitimate environmental objective, its application constitutes

arbitrary and unjustifiable discrimination between Members of the WTO.

Question: What is the U.S. trying to protect?

Answer: Sea turtles. Sea turtles are on the United States’ list of endangered species. The greatest

Question: Is there a legal basis for U.S. import restrictions?

Answer: The U.S. relies on Article XX of the WTO Agreement. It provides, in essence, that a WTO

Question: Did the WTO panel agree with the U.S. import restrictions?

Answer: No. It noted that if the U.S. could unilaterally impose import restrictions to protect sea

Question: What happened on appeal?

Question: Why?

Answer: Because it ruled that the U.S. could not unilaterally impose an economic embargo to force

Question: Does the WTO not care about environmental issues?

Answer: Environmentalists were not happy with this ruling, but the WTO has to consider the

interests of many stakeholders: rich nations, developing nations, shared world resources, subsistence

ETHICS: Child Labor

The International Labor Organization estimates that world-wide there are 250 million child laborers under

the age of 15. Some are as young as 7 or 8 years old. Some receive a pittance, working long hours in

hideous conditions, while others are slaves, paid nothing at all. Is it ethical to import merchandise

manufactured by child labor?

If students believe it is ethical to import such merchandise, ask them:

Are there limits on what children can be forced to do?

Should manufacturers be allowed to employ 10-year-olds? 8-year-olds? 6-year-olds?

Should factories be permitted to pay subsistence wages, or no wages at all?

If students believe that there should be some limits to child labor practices, what should the United

States government do about importing products that violate the standards? What should consumers

do?

If students believe it is not ethical to import such merchandise, ask them:

Does the United States have a right to impose its “morality” in a part of the world where poverty is

overwhelming?

Isn’t an impoverished village in a developing nation better off with a few factories, even if they use

child labor, than it would be with no industry at all?

If local officials require factories to hire only adults, won’t the cost of the goods increase so much that

manufacturers will relocate to countries that don’t require adult labor? What does that solve?

Additional Case: John Roe I, et al. v. Bridgestone Corporation, et al.4

Facts: Liberian rubber plantation workers, both adults and children, brought action against a

multinational corporation and other related defendants, alleging forced labor, forced child labor, poor

working conditions, and low wages.

Plaintiffs are adults and children who work on a rubber plantation in the West African nation of Liberia.

Based on allegations of forced labor, forced child labor, poor working conditions, and low wages,

plaintiffs seek damages from the Japanese, American, and Liberian companies and two individuals that

own and control the plantation. Plaintiffs seek relief in the federal courts of the United

States. Their twelve-count Complaint asserts claims under international law pursuant to the Alien Tort

Statute, 28 U.S.C. § 1350, inter alia.

The Complaint alleges that Firestone agreed to pay local chiefs to deliver able-bodied workers to the

Plantation, and that the local chiefs conscripted workers at gunpoint. According to the

Complaint, plaintiffs and most other current workers on the Plantation are third or fourth generation

descendants of those original workers, and these plaintiffs have rarely if ever left the Plantation.

Plaintiffs allege that the defendants are actively encouraging parents to require children as young as six,

seven, and ten years old to work full-time at heavy and dangerous jobs on defendants’ plantation tapping

raw latex from rubber trees.

Defendants filed motions to dismiss for failure to state a claim.

Issue: The question is whether the alleged violations are sufficiently specific, universal, and obligatory

norms of international law.

Holdings: The District Court held that child workers stated a claim under ATS. Motions granted in part

and denied in part. As applied to the alleged working conditions for these young children, international

law is sufficiently specific, universal, and obligatory to permit relief under the Alien Tort Statute.5

Excerpts from the decision:

4 492 F.Supp.2d 988, United States District Court, S.D. Indiana.

Whatever one’s initial reaction is to the broad phrase “child labor,” reflection shows that national

and international norms accommodate a host of different situations and balance competing values

and policies. What are the relevant age limits, for which types of work? How does access to

education affect the appropriate policies? What does one say to a parent who insists that a child

work so that the family has enough to eat? It is not always easy to state just which practices under

the label “child labor” are the subjects of an international consensus.

The key source of international child labor standards for present purposes is ILO Convention 182,

the 1999 Convention Concerning the Prohibition and Immediate Elimination of the Worst Forms

of Child Labor, which the United States, Liberia, and Japan have all ratified. The importance of

the line-drawing is evident in that very title. ILO Convention 182 does not seek to outlaw child

labor as such, but only its “worst forms.” Those worst forms include slavery and forced or

compulsory labor, prostitution and production of pornography, and drug trafficking. The worst

forms also include “work which, by its nature or the circumstances in which it is carried out, is

likely to harm the health, safety or morals of children.”

Giving plaintiffs the benefit of their factual allegations, the Complaint states that defendants are

actively encouraging—even tacitly requiring—the employment of six, seven, and ten year old

children. Giving plaintiffs the benefit of their factual allegations, the defendants are actively

encouraging that these very young children perform back-breaking and hazardous work that

exposes them to dangerous chemicals and tools. The work, plaintiffs allege, also keeps those

children out of the Firestone schools. The court understands that defendants deny the allegations,

but defendants have chosen to file a motion that requires the court to accept those allegations as

true, at least for now.

The circumstances alleged here include at least some practices that could therefore fall within the

“worst forms of child labor” addressed in ILO Convention 182.

At least some of the practices alleged with regard to the labor of very young children at the

Firestone Plantation in Liberia may violate specific, universal, and obligatory standards of

international law, such that Count Two should not be dismissed on the pleadings.

Plaintiffs may state a claim for relief under the ATS. Defendants’ motion to dismiss is denied as to Count

Two.

Question: What is your reaction to the phrase “child labor?”

Question: Based on the court’s statement that there are global competing values and policies,

should there be an international policy precisely defining “child labor?”

Additional Case: John Doe I Individually and on behalf of Proposed

Class Members; John Doe II, Individually and on behalf of Proposed Class

5 See International Labour Organization [“ILO”], Worst Forms of Child Labour Convention (No. 182), June 17, 1999, 38 I.L.M.

1207, available at http://www.ilo. org/ilolex/english/convdisp 1 /htm (last visited June 25, 2007), Docket No. 2–85, Exhibit D

(hereinafter “ILO Convention 182”).

Members; John Doe III, Individually and on behalf of Proposed Class

Members; Global Exchange v. Nestle, S.A. et al.6

Facts: “Forced labor” is defined by International Labour Organization Forced Labor Convention of 1930

as:

all work or service which is exacted from any person under the menace of any penalty and for which the

said person has not offered himself voluntarily.

Forced labor, as so defined, violates international law as required for claim under Alien Tort Statute.7

Additionally, it is clear that the phrase “child labor” constitutes a violation of an international law norm

that is specific, universal, and well-defined. It is not always easy to state just which practices under the

label “child labor” are the subjects of an international consensus.

The plaintiffs in the present case allege that they were forced to work “cutting, gathering, and drying”

cocoa beans for twelve to fourteen hours a day, six days a week. The plaintiffs were between twelve and

fourteen years old at the time they first began working at the farms.

Holding: Defendants failed to dispute the adequacy of these allegations; therefore, the Court assumes for

present purposes that Plaintiffs’ allegations establish violations of universal, well-defined international

law norms prohibiting child labor. In other words, use of forced labor and child labor, as alleged here,

violates international law.

Question: How has Defendants’ failure to respond to the forced labor and child labor allegations

affected this case?

Answer: Defendants have essentially failed to address this issue. Because of that, the court enters a

Regional Agreements: NAFTA and the European Union

In 1993, the United States, Canada, and Mexico signed the North American Free Trade Agreement

(NAFTA). The principal goal was to eliminate almost all trade barriers between the three nations.

Twenty-seven countries belong to the European Union (EU), including Great Britain, Germany, France,

Italy and Spain as well as Latvia and Slovakia. The EU is one of the world’s most powerful associations,

with a population of nearly half a billion people. Its sophisticated legal system sets Union-wide standards

for tariffs, dumping, subsidies, antitrust, transportation, and many other issues. Most, but not all, of the

EU countries have adopted a common currency, the Euro. During the next decade the union will focus on

further economic integration and effective coordination of foreign policy.

Additional Case: U.S. v. Ford Motor Company8

Facts: This case arises out of a dispute regarding regulations promulgated by the Government in implementing

the North American Free Trade Agreement (NAFTA), entered into by the United States, Mexico, and Canada

on December 17, 1992.9

In 1996, Ford imported thousands of automotive products from a Mexican company, Coclisa, S.A. de C.V.

(Coclisa), through the El Paso, Texas Port of Entry. At the time of entry, Ford claimed preferential tax

treatment for these imported goods. The preferential tax treatment claim was based on Coclisa’s NAFTA

6 748 F.Supp.2d 1057, United States District Court, C.D. California.

7 28 U.S.C.A. §1350.

8 516 F.Supp.2d 770, United States District Court, W.D. Texas.

9 See 19 U.S.C.A. § 3301, et seq. (West 2005 & Supp.2007).

Certificates of Origin, which certified that the goods originated in a NAFTA country. The NAFTA Certificates

of Origin at issue were prepared and completed by Ford employees who were acting as agents of Coclisa.

In 2001, United States Customs and Border Protection (“Customs”) served Ford with an administrative

summons demanding production of documents relating to the imported products. Ford responded to the

summons by filing written objections and refused to produce the records claiming that Customs sought records

that do not constitute “entry records” as defined by 19 U.S.C. § 1509(a)(1)(A).

Asserting its authority, Customs issued a monetary penalty against Ford in the amount of $41,931,997, for

Ford’s refusal to turn over the records at issue. Subsequently, Ford petitioned for the amount to be remitted or

substantially reduced. In 2005, Customs administratively mitigated the fine to a lesser amount of

$21,642,481.70. Ford has not paid the penalty.

The Government filed charges for failing to comply with the summons for records relating to the entry of

certain merchandise into the United States. The Government contends that Ford was required to produce the

records in compliance with the summons and that Ford’s refusal authorized Customs to impose and collect the

monetary penalty. Importer moved to dismiss.

Issue: Was Ford subject to administrative fines for failing to produce entry records to support its NAFTA

certificate of origin claims?

Holding: The District Court judge held that importer was subject to administrative fines for failing to produce

records supporting its NAFTA certificate of origin claims. Motion denied.

Ford argues that Customs sought records that do not qualify as “entry records,” and, therefore, the Government

lacks authority to impose and enforce the fine for Ford’s refusal to comply with the summons.

The Government counters that the records at issue qualify as “supporting documents” to the NAFTA

Certificates of Origin, and are expressly defined as entry records. The Court finds Ford’s arguments

unconvincing. It is undisputed that the NAFTA Certificate of Origin is an entry record.

That information is critically important, as without it, a NAFTA Certificate of Origin could not be prepared for

the merchandise. In turn, the imported goods would not qualify for the NAFTA preferential tax treatment. It is

self-evident that the records at issue qualify as supporting documents to the NAFTA Certificates of Origin.

Additionally, §181.12(a) strengthens a finding that supporting documents are to be deemed entry records. Not

only must the exporter keep the NAFTA Certificates of Origin, but they are expressly required to maintain “all

other records relating to the origin of a good” for NAFTA preferential tax treatment. Although this language is

not identical to the “and supporting records” language, both describe the same substantive information.

Ultimately, this information would qualify imported products for NAFTA preferential tax treatment. Therefore,

the Court is of the opinion that the records at issue do constitute “entry records,” and the exporter’s duty to

maintain entry records is in addition to Ford’s record-keeping requirement.

As noted above, any NAFTA importer must tender a written declaration as to the origination of the goods. Any

imported good will be denied preferential tax treatment without certification of its origin, including origin of

its component parts. The Court determines that as Customs sought entry records, Ford’s refusal to produce the

records at issue authorized the imposition of the monetary penalty in this case. The Court is of the opinion that

Ford’s Motion to Dismiss must be denied.