14. International Law
International law is primarily governed by customs, treaties, and organizations that influence how laws are understood, interpreted, and enforced around the world. Since there is not a central court to enforce international law, each country utilizes its own courts to settle disputes. Collective action, reciprocity, and shaming are three examples of non-legislative methods that influence trade when enacted against nations that violate international law.
The two main sources of international law are: customary international law and treaties. It is important for all companies to understand the laws that apply to their activities so they can avoid criminal and civil liability.
Customary International Law
A custom is a widely accepted way of doing something. Before treaties and conventions started to become common during the 1900s, custom was the primary way international law was created. Customary international law is a body of international rules that has become binding through the pattern of consistent, long-standing behavior through a sense of legal obligation. For example, granting diplomatic immunity to visiting heads of state is customary international law. Historically, customary international law governed the rules of war, treatment of prisoners of war, and human rights. After World War II, many areas of customary law became the basis for UN Conventions. While customary international law still exists, the modern trend is to reduce legal obligations to writing and have nations expressly agree to their terms.
A treaty is an agreement between two or more nations governed by international law. In essence, a treaty is a contract between sovereign nations. A bilateral treaty is an agreement between two nations. A multilateral treaty is an agreement between three or more nations. A convention is a multilateral treaty on a specific issue that concerns issues of worldwide importance, such as human rights, property rights, and international trade rules. For businesses, one of the most important conventions is the UN Convention on Contracts for the International Sale of Goods (CISG). This convention sets the global standard for international trade.
A treaty is adopted when the parties agree to its final form, which is generally signaled by signing the treaty. Signing a treaty does not bind the parties to the treaty but signifies agreement in principle with the terms and conditions of the document. In order for a treaty to be binding, it needs to be ratified by the nations’ governments. A treaty enters into force when it becomes legally binding on the parties. This may be a specific date identified in the treaty or when a threshold (a specified number) of states have ratified the instrument. Although many treaties may impact businesses, a few are particularly important to international trade such as the following:
General Agreement on Tariffs and Trade (GATT)
The General Agreement on Tariffs and Trade (GATT) is a multilateral treaty to promote international
trade by reducing or eliminating trade barriers, such as tariffs and quotas, between the member nations. GATT has been negotiated on and off since the 1940s as nations have sought to grow their economies through global commerce. In 1995, GATT members created the World Trade Organization (WTO) to stimulate international commerce and resolve trade disputes.
GATT and WTO are founded on three principles:
- Free trade. The major purpose of the treaty is to reduce trade barriers to increase global trade.
- Most Favored Nation Status. Member nations agree to treat every other member nation equally. If one nation receives a special discount on customs duties, then the discount must be extended to all other member nations.
- National Treatment. Member nations agree to treat imported goods the same as domestic ones after they have entered the nation. In other words, members cannot discriminate against foreign goods by imposing additional taxes after being subject to import taxes and duties. The WTO resolves trade disputes between member nations and has the power to impose trade sanctions for non-compliance with GATT. If a member nation refuses to comply with a WTO ruling, affected members may retaliate by imposing punitive tariffs or other sanctions.
For example, in the famous “banana battle,” the US and four Latin American nations filed a complaint with the WTO alleging that the European Union (EU) placed unfair restrictions on imported bananas and showed favoritism to their former colonies by buying bananas from them in violation of GATT. The WTO agreed and granted the US and the Latin American nations the right to impose sanctions on EU imports to their nations. The banana battle ended in 2009 after 20 years of trade restrictions.
United Nations Convention on Contracts for the International Sale of Goods (CISG)
One of the most important governing documents for international law is the United Nations Convention on Contracts for the International Sale of Goods (CISG), which was established in 1980. This convention governs contractual arrangements between countries that have ratified the CISG as the priority contract for trade. As of 2022, 95 countries have ratified the CISG, including the countries that account for more than two-thirds of all global trade. Those countries include the United States, Canada, China, Japan, Mexico, Argentina, Brazil, and most European countries. The CISG is enforced whenever international transactions occur without the presence of written contracts to govern those transactions. There are limits to the CISG, however, as the CISG does not apply to consumer sales or contracts for services (Clarkson, Miller, & Cross, 2018, p. 376).
The CISG promotes international trade by making sales law uniform and predictable across international boundaries. The US and most of its trading partners (except the United Kingdom) have adopted CISG, which results in the convention governing over two-thirds of the world’s trade. Some of its provisions include:
- CISG applies to contracts for the sale of commercial goods between merchants. It does not apply to the sale of goods to consumers for personal use.
- CISG applies automatically to contracts between parties located in different signatory nations. The convention does not depend on nationality; it depends on location.
- Contract parties can opt out. Parties can contract to be governed by a nation’s laws instead of CISG but they must expressly state their intention to not be bound by CISG.
- CISG does not require a written contract.
- CISG requires parties to negotiate in good faith and to modify contracts in the case of unforeseen circumstances.
- A buyer can avoid payment only after giving the seller notice and an opportunity to remedy the problem.
Regional Trade Agreements (RTA’s)
Regional trade agreements are reciprocal, advantageous accords developed to promote international commerce by reducing trade barriers among member nations that are located near each other. One of the most famous is the European Union (EU) but more than half of international trade is covered by regional trade agreements throughout the world. The largest RTA to date is the Regional Comprehensive Economic Partnership (RCEP) which includes 15 countries comprised of 2.2 billion people (30% of global population) and 30% of global GDP. The RCEP agreement was signed on November 15, 2020 and entered into force on January 1, 2022.
RTA’s typically create new opportunities for businesses because they lower the costs associated with importing and exporting within the region. The World Trade Organization (WTO) website on RTA’s is located here: