ECONOMICS, POLITICAL, AND LEGAL SYSTEMS

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ECONOMICS, POLITICAL, AND LEGAL SYSTEMS

• Brief review of
• International economics
• Trade policy
• The political environment
• Legal systems
• The California Win-Win Project

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VERY BRIEF REVIEW OF ECONOMICS

• Exchange rates
• Floating (supply and demand)
• fixed
• Trade balances and their impact on exchange rates
• Measuring country wealth
• gross domestic product
• purchase parity vs. nominal

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Demand for Currency Depends On

• Trade deficit (demand for foreign currency to
  fund this) or trade surplus (demand for countrys
  currency)
• Interest rates Higher interest rates (real)
  attract foreign investors (especially for
  stable U.S. bonds and equities)
• Inflation Reduces the attractiveness of holding
  the currency

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Nominal vs. Purchase Parity Adjusted
GNPsExamples (2004)
Source World Bank http//siteresources.worldban
k.org/DATASTATISTICS/Resources/GNIPC.pdf
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Cautions on Interpreting Per Capita Figures

• Averages are not very meaningful!
• Regional variations
• Socio-economic differences
• Comparison to U.S. dollar and U.S. costs is
  arbitrary

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Obstacles to Trade Protectionism

• Differing interests of consumers and
  manufacturers
• Benefits of trade tend to be more diffused than
  benefits to specific groups of protectionism

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Approaches to Protectionism

• Tariffs
• Quotas
• Voluntary export restrictions
• Subsidies to domestic producers/exporters
• Non-tariff barriers
• legal obstacles
• differential treatment

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U.S. Protectionism--justified or not...

• Defense industry
• Agricultural products--e.g., beef, sugar
• Textiles
• Automobiles (voluntary import restrictions)
• Steel

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Justifications for Protectionism

• Protect infant industry
• Resist unfair or inappropriate competition
• Protect home market (ensure that product can be
  produced domestically)--defense
• Intervene into temporary imbalance
• Maintain domestic living standards
• Preserve jobs
• Bargaining power/retaliation (Super-301 provision
  in U.S.)

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Effects of Protectionism

• Reduced competition ---gt inflation
• More tariffs
• Weaken balance of payments (have to pay more in
  own currency)
• Reduce choice to consumers
• May induce global trade wars (vicious cycle)

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THE POLITICAL AND LEGAL ENVIRONMENTS

• Political history and stability
• Political relations between countries --impact on
  business
• Legal differences between countries
• Extra-territorial application of laws

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The Legal Environment

• Which laws apply when doing business between
  countries?
• contractual specifications
• treaties
• extra-territorial applications of laws
• compulsion as a defense

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Some Political Risks

• Confiscation, expropriation, and domestication
• Economic risks
• Exchange controls
• Local content requirements
• Import restrictions
• Tax controls
• Price controls
• Labor problems

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Development of Legal Systems

• Laws on the books vs. laws enforced
  (transparency)
• Japan Administrative guidance
• The ability to sue--a blessing or a curse?
• Means of litigation
• Implications for contract initiation and
  enforcement
• Evolving nature of legal systems

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Approaches to Law

• Common law (U.S., Britain, and many English
  speaking countries)
• Code law (much of Europe and Louisiana)
• Islamic law
• Socialist based law
• Asian laws

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Common Law

• Gradually evolved in British courts, settling
  issues as they arose
• Emphasis on precedent
• Recognized by U.S. Constitution
• Standards
• criminal Innocent until proven guilty
• civil Preponderance of evidence

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Code (Napoleonic) Law

• Law governed by explicit statutory codes--match
  codes to issues as well as possible
• Somewhat different standards in contracts --what
  constitutes an act of God canceling contractual
  obligations?
• Criminal law Guilty until proven innocent but
  difficult to bring to trial

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Islamic Law

• Note that different varieties exist
• Traditions of Islamic countries are not all tied
  to Islamic religion per se
• Purpose of promoting justice
• assets are thought to be held in trust
• interest is frowned upon
• Much wider scope than Western law Sharia the
  way

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Socialist Law

• Basis for law in China, former Soviet Republics,
  and countries influenced by Communist allies
• Based on the view that the government owns
  productive resources ---gt
• contract and intellectual property laws are
  typically not well developed
• Legal scholars from the West are helping to reform

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Asian Law

• Based on compromise and accommodation
• Less emphasis on abstract principles
• Less emphasis on consistent application across
  circumstances
• Emphasis on informal resolution

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U.S. Laws of Interest to firms with U.S.
Involvement

• Anti-trust
• Foreign Corrupt Influences
• Anti-boycott laws
• Trading With the Enemy