Environmental Engineering Chapter 8 The Central Bank Iraq Then Issued The

Chapter 8

INTERNATIONAL LAW

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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

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?” of course raises the 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

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

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

2 Unit 1 The Legal Environment

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

Chapter Overview

Chapter Theme

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

principles of international law.

Quotes of the Day

“What affects men sharply about a foreign nation is not so much finding or not finding familiar things; it

Trade Regulation: The Big Picture

Export Controls

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

Import Controls

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 States

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Chapter 8 International Law 3

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

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

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

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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

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

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

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

the items listed in heading 4202.

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

costumes?

Question: I thought the U.S. Customs Service stamped passports and looked in your luggage when

you reenter the U.S. Why is it up to the Customs Service to distinguish between “briefcase” and

“binder?”

Answer: The Customs Service also has the job of classifying merchandise entering the U.S.—that is,

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

Answer: It looked at the good and focused on the “container” aspect of the Calcu-Folio to determine

that its primary purpose was as a container.

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

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

Treaties

General Agreement on Tariffs and Trade (GATT)

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 Products

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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

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AB–1998-4, WTO Appellate Body, 1998.

Chapter 8 International Law 5

(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 Article XX permit the United States to impose environmental restrictions on shrimp

importers?

Holding:

Excerpts from the Appellate Body’s Report:

The [shrimp policy] requires other WTO Members to adopt a regulatory program that is not merely

comparable, but rather essentially the same, as that applied to the United States shrimp trawl vessels. The

effect is to establish a rigid and unbending standard by which United States officials determine whether or

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: That sounds like a worthy environmental goal. What is this dispute about?

certification, that the shrimp were caught using TEDs.

Question: So?

Answer: Other countries—India, Pakistan, Malaysia, and Thailand—objected to these import

Question: Did the WTO panel agree?

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

would be conflicting policies that would impair world trade.

Question: But if the U.S. has more advanced thinking on the protection of sea turtles—or any other

environmental matter—then why can’t it adopt import policies reflecting that thinking? Should it

stand by while sea turtles are driven to extinction?

Answer: This is how the WTO panel responded: “Even assuming that sea turtles were a shared

Question: So what was the WTO panel’s recommendation?

obligations.

Question: What did the U.S. do in response?

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Answer: It appealed the panel’s decision to the WTO Appellate Body.

Question: What happened on appeal?

Question: Why?

Question: Does the WTO not care about environmental issues?

ETHICS: Child Labor

The International Labor Organization estimates that worldwide 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?

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?

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.

Chapter 8 International Law 7

International Sales Agreements

What Law Governs?

Students should note the differences in their treatment of contracts for the sale of goods between the

Letter of Credit

A confirmed, irrevocable letter of credit is an important means of facilitating international sales contracts,

because the seller is assured of payment by a local bank as long as it delivers the specified goods.

Case: Centrifugal Casting Machine Co., Inc. v. American Bank & Trust Co.

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Facts: Centrifugal Casting Machine Co. (CCM) entered into a contract with the State Machinery Trading

Co. (SMTC), an agency of the Iraqi government. CCM agreed to manufacture certain cast iron pipe plant

equipment for $27 million, payment to be made by confirmed irrevocable letter of credit. The Central

Issue: Is CCM entitled to be paid pursuant to the letter of credit?

Holding: Judgment for CCM affirmed. Excerpts from the court’s opinion:

The United States contends on appeal that the freeze of Iraq’s assets furthers national policy to punish Iraq

Two interrelated features of the letter of credit provide it with its unique value in the marketplace and

are of critical importance in our consideration of the United States’s claim here. First, the simple result

[of a letter of credit] is that the issuer [i.e., the bank] substitutes its credit, preferred by the beneficiary, for

that of the account party. Second, the issuer’s obligation to pay on a letter of credit is completely

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966 F.2d 1348, 1992 U.S. App. LEXIS 13089 Tenth Circuit Court of Appeals, 1992

8 Unit 1 The Legal Environment

Because of the nature of a letter of credit, we conclude that Iraq does not have a property interest in the

money CCM received under the letter.

Question: The court states that there are two key features to an irrevocable letter of credit (LOC).

What are they?

Question: What does “underlying commercial transaction” mean?

Answer: “Underlying commercial transaction” refers to the sales contract that the parties made.

Question: Why is it so important that the issuing bank substitute its credit for that of the account

party?

Question: Why is a confirmed LOC even more attractive to a seller than one that is not confirmed?

Answer: A confirmed LOC offers even greater assurance, because the seller of goods need not rely

Question: Besides doubts about the creditworthiness of the buyer, why else might a seller prefer

payment by LOC?

Answer: Other factors also make international trade risky. Wars, military coups, and simple changes

Question: In the Centrifugal Casting case, what international event made the LOC invaluable to the

seller?

Answer: Because of the Iraqi invasion of Kuwait, President Bush froze Iraqi assets in the United

Question: The court states that “the whole purpose of a letter of credit would be defeated by

examining the merits of the underlying contract.” What does that mean?

Answer: The whole point of an LOC is to assure the seller that it will be paid once it has delivered

Question: I still don’t understand why CCM won this case. An agency of the Iraqi government was

the other contracting party, the contract obligated it to pay CCM, and the U.S. froze domestic Iraqi

assets. Why wasn’t this LOC considered to be an Iraqi asset?

Answer: Precisely because it was an LOC—an obligation independent of the underlying contract

Chapter 8 International Law 9

International Trade Issues

Repatriation of Profits

Repatriation of profits occurs when an investing company pulls its earnings out of a foreign country

and takes them back home.

Expropriation

Many nations, both developed and developing, nationalize property, meaning that they declare the

Sovereign Immunity

Sovereign immunity holds that the courts of one nation lack the jurisdiction (power) to hear suits

against foreign governments. Most nations respect this principle.

Foreign Corrupt Practices Act

“anything of value” to any foreign official in order to influence an official decision.

Case: United States v King

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Facts: Owl Securities and Investments, Ltd. hoped to develop a large port in Limon, Costa Rica.

Issue: Was there sufficient evidence that King had violated the FCPA?

Holding: King’s conviction affirmed. Said the court:

Viewing the evidence in the light most favorable to the verdict, there was ample evidence in the record to

Question: What was King’s claim on appeal?

Question: What elements must the government prove to establish a violation of the FCPA?

Question: How did the government record the conversations introduced at trial?

Question: Why did the court rule the evidence was sufficient to prove King’s guilt?

Answer: As noted above, the court believed there was sufficient evidence of King’s guilt in the tape–

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351 F,3d 859 Eighth Circuit Court of Appeals, 2004

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Extraterritoriality

Extraterritoriality is the power of one nation to impose its laws in other countries

You Be the Judge: Carnero v. Boston Scientific Corporation

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Facts: Boston Scientific (BSC) is an American company with headquarters in Massachusetts, that

manufactures medical equipment. Ruben Carnero began working at a BSC subsidiary in Argentina

(BSA). Carnero’s employment contract stated that he would be paid in pesos, and that Argentine law

BSC argued that SOX did not apply overseas and the District Court agreed. Carnero appealed.

You Be the Judge: Does SOX protect a whistleblower employed overseas by a subsidiary of an

American company?

Holding: No, judgment affirmed. Carnero argues that the whistleblower protection in SOX should apply

Also, there is no provision in SOX for addressing the practical implications of overseas application,

such as interpreters, investigatory powers of a foreign agency, foreign personnel, etc. This also illustrates

Congress’ intent to limit the application of the whistleblower provision.

Question: Why did Cernero claim he was fired?

Question: Who was Carnero’s employer?

Question: If Carnero’s employer was BSA, why did he think American law applied to his firing?

Question: What is a subsidiary?

international subsidiary of BSC.

Question: If BSA is controlled by an American company, why doesn’t SOX apply to Cernero’s

firing?

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433 F.3d 1, First Circuit Court of Appeals, 2006.

Chapter 8 International Law 11

Multiple Choice Questions

1. A letter of credit is issued by a ______________________.

(a) buyer

(b) seller

(c) shipping company

(d) bank

2. Tariffs are a tax on ____________________. Treaties like NAFTA seek to _________________

tariffs.

(a) imports; increase

(b) imports; decrease

(c) exports; increase

(d) exports; decrease

3. The President negotiates a defense agreement with a foreign government. To take effect, the

agreement must be ratified by which of the following?

(a) 2/3 of the House of Representatives

(b) 2/3 of the Senate

(c) The Supreme Court

(d) A and B

(e) A, B, and C

4. Lynn owns a small printing company in Nevada. She makes a contract with a company in France to

print custom children’s books and ship them to France. The contract does not say anything about

which body of law will be used to resolve any disputes that arise. If there is a conflict, which body of

law will actually be applied to the case?

(a) Nevada law

(b) French law

(c) The Convention on the International Sale of Goods

(d) None of the above

5. Countervailing duties are imposed when…

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(a) dumping occurs

(b) goods are unreasonably subsidized

(c) both A and B

(d) none of the above

Essay Questions

1. Arnold Mandel exported certain high-technology electronic equipment. Later, he was in court arguing

that the equipment he shipped should not have been on the Department of Commerce’s Commodity

Control List. What items may be on that list, and why does Mandel care?

Answer: The only items that the federal government may place on the list are exports that would (1)

2. You Be the Judge: WRITING PROBLEM Continental Illinois National Bank issued an

irrevocable letter of credit on behalf of Bill’s Coal Co. for $805,000, with the Allied Fidelity

Insurance Co. as beneficiary. Bill’s Coal Co. then went bankrupt. Allied then presented to Continental

documents that were complete and conformed to the letter of credit. Continental refused to pay. Since

Bill’s Coal was bankrupt, there was no way Continental would collect once it had paid on the letter.

Allied filed suit. Who should win? Argument for Allied Fidelity: An irrevocable letter of credit

serves one purpose: to assure the seller that it will be paid if it performs the contract. Allied has met

its obligation. The company furnished documents demonstrating compliance with the agreement.

Continental must pay. Continental’s duty to pay is an independent obligation, unrelated to the status

of Bill’s Coal. The bank issued this letter knowing the rules of the game and expecting to make a

profit. It is time for Continental to honor its word. Argument for Continental Bank: In this

transaction, the bank was merely a middleman, helping to facilitate payment of a contract. Allied has

fulfilled its obligations under the contract, and we understand the company’s desire to be paid.

Regrettably, Bill’s Coal is bankrupt. No one is going to be paid on this deal. Allied should have

researched Bill’s financial status more thoroughly before entering into the agreement. While we

sympathize with Allied’s dilemma, it has only itself to blame and cannot expect the bank to act as

some sort of insurance company for a deal gone awry.

Answer: Allied. The whole point of a letter of credit is that the issuer (Continental Bank) is making

3. Jean–François, a French wine exporter, sues Bobby Joe, a Texas importer, claiming that Bobby Joe

owes him $2 million for wine. Jean-François takes the witness stand to describe how the contract was

created. Where is the trial taking place?

Chapter 8 International Law 13

4. The Kyrgyz Republic is one of the new nations that broke away from the old Soviet Union. In

September 1994, the government of Kyrgyzstan made two independent announcements: (1) it was

abolishing all taxes on repatriation; (2) the government was resigning and would shortly be replaced.

Explain the significance of these announcements for an American company considering a major

investment in Kyrgyzstan.

Answer: The announcement of the end of repatriation profits is good news. It means that for the first

5. The Instituto de Auxilios y Viviendas is a government agency of the Dominican Republic. Dr. Marion

Fernandez, the general administrator of the Instituto and Secretary of the Republic, sought a loan for

the Instituto. She requested that Charles Meadows, an American citizen, secure the Instituto a bank

loan of $12 million. If he obtained a loan on favorable terms, he would receive a fee of $240,000.

Meadows secured a loan on satisfactory terms, which the Instituto accepted. He then sought his fee,

but the Instituto and the Dominican government refused to pay. He sued the government in United

States District Court. The Dominican government claimed immunity. Comment.

Answer: The Dominican government is claiming sovereign immunity. As a general rule, all

sovereign governments are immune from suit in a United States court. But there are exceptions. The

Discussion Questions

1. The United States consistently imports much more than it exports. The annual gap is consistently

several hundred billion dollars. Does this concern you? If so, what should be done about it? If not,

why not?

2. Does the Foreign Corrupt Practice Act seem sensible? Is fighting corruption the right thing to do, or

does the statute place American companies at an unacceptable competitive disadvantage?

3. Generally speaking, should the United States pass laws that seek to control behavior outside the

country? Or, when in Rome, should our companies and subsidiaries be allowed to do as the Romans

do?

14 Unit 1 The Legal Environment

4. Do you favor free trade agreements like NAFTA? Do you believe that free trade benefits everyone in

the long run, or are you more concerned that American jobs may be lost?

5. Imagine that you read an article that reports the maker of your favorite brand of clothing uses child

labor in its overseas factories. Being realistic, would you avoid buying that kind of clothing in the

future? Why or why not?