Political And Legal Factors

7/27/2019 Political And Legal Factors

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The legal/political aspect is very important in global marketing. "International law"can be defined as rules and principles that states and nations consider bindingupon themselves. This raises two interesting characteristics of international law.The first is that "law" belongs to individual nations and international law onlyexists to the degree that individual nations are willing to relinquish their rights.

The second is the lack of an adequate international judicial and administrativeframework or a body of law which would form the basis of a truly comprehensiveinternational legal system.

The international business is also subject to political decrees made bygovernments both in "home" and "host" countries. Home governments can applypressure not to deal with disapproved parties. These measures may take therefusal to grant an export licence, or withdrawal of export guarantee cover. Thehost government may take measures like taxation, ownership controls, operatingrestrictions or expropriation.

Chapter Objectives

The objectives of this chapter are:

To give an understanding of the major factors which must be considered in thelegal/political environment when planning to market globally

To describe the "Terms of Access" and show the importance of these as vitalelements of facilitating trade

To give, in detail, a description of the main elements of the latest GATT Round

To show the importance of legal/political aspects in global marketing.

Laws, rules, and standards

All agricultural exports operate within an institutional environment, which is madeup of a set of political, social and legal ground rules. These ground rules form thelaws of all production, exchange and distribution and give rise to certainexpectations and assurances about the actions of others, and give order and

stability to the means of doing business. The most important rules in any systemare those defining, allocating and enforcing property rights, and rules andconventions defining allowable and non-allowable forms of cooperation andcompetition (standards, rules of contract, fair trading etc). Well defined andenforced systems regarding property rights are essential. Articulated ownershipand rights to use, trade and alter assets is vital to market development, since thisassigns to individuals the right to benefits and losses in production and marketingactivities.

Rules and conventions specifying entry conditions and boundaries oncooperative and competitive policies also facilitate exchange and coordination.

The establishment and enforcement of standards can reduce transaction costs byincreasing the available information to buyers and consumers. Standards may



include basic weights, measures, quality grades and contract forms. Qualitystandards may be mandatory or voluntary and minimum or multiple grades.These standards help where trade is at a distance. The EU has a strict set of standards regarding horticultural products for example, including hygiene, qualityand certificates of origin.

Licensing also facilitates marketing agencies and producers by reducingtransaction costs. This occurs when the criteria for licensing revolves aroundasset holdings, financial solvency and so on. Performance standards are built into maintain the licensing agreement.

Increasingly, consumer and trading bodies like the EU are enforcing thedisclosure of more and more information. Particularly, these efforts revolvearound packaging, labelling and information, for example, pesticides used onhorticultural produce. As this trend to disclosure of information grows, along withthe phenomenon of product liability, regulations regarding certain tests or

inspection of products, handling and processing procedures may be enforced. Somay ingredient and nutrition information. This is becoming an increasinglyimportant issue as food products become more complex and varied. One of theproblems with this noble effort to inform the consumer is that producers may losetheir competitive differentiation advantage through divulging information tocompetitors.

The EU has gone to extraordinary lengths to inform the consumer, issuingdirectives on product descriptions and pricing. For example the EU directive onthe pricing of cabbages runs to hundreds of pages and, what constitutes"chocolate" and a "sausage" to name but two products, is quite revealing. (seechapter on Product Decisions). The following case proves the point2.

The EU is also very strict, as is the USA, on food additives or flavour substitutes.It is particularly so for any substance which may have long term harmful effects.The EU produces "E numbers" standards for product additives and artificialcolorants or flavourings.

Issues

Most issues in the legal/political environment centre around the following:-

i) "Institutional environment" - made up of political, social and legal ground ruleswithin which the global marketer must operate.

ii) Property rights - patents, trademarks.

iii) Taxation - what taxation schemes will be faced abroad?

iv) Recourse - possibility and length of action with the possibility of imagedamaging necessitating arbitration.

v) Movement of equity and expropriation threats - often necessitating protocols or

the signing of trade frameworking agreements.



Efforts to regulate the international legal system include individual country efforts,like the USA International Trade Commission and the GATT system. The GATTsystem is a set of norms and procedures which member governments haveaccepted to create order and predictability in international trade relations.

The political environment

Checks can be made on the legal/political system as to its ideology, nationalism,stability and international relations.

Ideology: A country's ideological leaning may be capitalism, socialism, a mixtureor other form. In the last years remarkable changes have been taking place in theideologies of many countries. The most dramatic example has been the collapseof the communist USSR and Eastern Europe and its replacement with market led

policies and ideologies. Similarly, many African countries are abandoning their centrist leanings in favour of market led economies, for example, Zimbabwe andTanzania.

Nationalism: Much was said about nationalism in the previous section. Whilst,primarily a phenomenon of the developing countries, Yugoslavia has shown it isnot entirely so. Nationalism can lead to expropriation of foreign held assets.

Stability: Changes in regime, violence and cultural divisions based on languageor other factors can lead to a very uncertain environment in which to conductbusiness. The current uncertainty in Liberia and Rwanda, the violence of Somalia

and Yugoslavia increase the risk and diminish the confidence of doing businessin these countries.

International relations: In general international relations have improved over thelast twenty years. The development of GATT, NATO and the EU have gone along way to reduce the element of "foreigness".

Expropriation

Expropriation is an extreme form of political action. It may occur for a number of reasons, including the desire to retain national assets, as a "hostage" situation in

international disputes, for example the seizure of Union Carbide's assets after theBhopal disaster in India. Other government activity, which affects capitalinvestment includes joint venturing insistence and repatriation of funds."Partnering" remains widespread (inward investment in tandem with a domesticcompany) as does restrictions on repatriation of funds. In Zimbabwe, for example, HJ Heinz, the multinational food agent, has entered into partnershipwith Olivine industries. Over time, even if initially the investment is not favourable,the Government may relax its conditions as it sees the benefits.

If expropriation is a real possibility then the investor should seek to minimise riskby:



i) relatively rapid depreciation of assets and repatriation of funds by manipulatedtransfer prices

ii) establish a local supply infrastructure so that any adverse action damages thehost economy

iii) raise as much investment capital in the country as possible

iv) retain control of critical inputs and minimise local stocks of these.

However these measures may increase the risk of expropriation or reduce thepotential success of the venture.

Incentives

Many countries try to reduce perceived risk by promoting inward investment

through the provision of tax breaks, free ports, enterprise zones etc., which arenot tied as in partnering. The key is to look at what the disadvantages are. If thegovernment mainly wishes to attract the mobile investor, or overcome say poor local skills, one has to assess what would happen if the scheme was withdrawnonce the capital had been committed. Similarly if viability depends on incentivesrather than real return on investment, the question is, is the venture really worthit?

Assessing political vulnerability

Political vulnerability should be assessed by using a systematic checklist. Such a

checklist should include the following:

The firm's own country's relations with other countries Sensitivity of the product or industry

Size and location of operation - the bigger the more vulnerable Visibility of firm - is it high profile say via advertising? Host country's political situation Company behaviour - is it a good corporate citizen? Contribution to host country, for example, employment

Localisation of operations Subsidiary dependence.

Depending on the answers to these checkpoints, the amount of risk, real or perceived, can be assessed and fed into the investment discussion.

Marketing implications

Political factors give rise to a number of marketing implications. These include thefollowing:

Is the product ever subject to political debate regarding, say, adequacy of supply, for example, oil? Is the product a critical input for other industries, for example, cement? Is the product socially or politically sensitive, for example, food?



Is the product of national defence significance? Is the product taking a disproportional amount of capital repayment? Is the product leading to the locus of control being held outside of the hostcountry?

Again, the answers to these questions will enable the marketer to assess thedegree to which the product being marketed has to be priced and resourced, soas to either avoid or reduce the risk of expropriation or other political reactions.

The legal environment

As indicated in the introduction to this section, the international legal framework issomewhat confused. Most controls or regulations revolve around export andimport controls, transfer pricing, taxes, regulation of corrupt practices, embargoed

nations, antitrust, expropriation and distribution of equity, patents andtrademarks. The following touches on a number of these issues and in particular the import/export regulations (terms of access).

International law

To many, the supreme body is the International Court of Justice, situated in TheHague, Holland. Here a number of international disputes may be taken for ultimate adjudication. However, a series of other bodies and legislation exists.

a) FCN (Friendship, Commerce and Navigation) and Tax Treaties primarily US

based and concerned with giving protection of trading rights and avoiding doubletaxation.

b) IMF and GATT already discussed in the previous section and concerned withmember nations international trade restrictions and dumping.

c) UNCITRAL (UN) international trade law commission set up with the intent toprovide a uniform commercial code for the whole world, particularly internationalsales and payments, commercial arbitration and shipping legislation. Works withinternational chambers of commerce and Governments.

d) ISO (International Standards Organisation) often works with ILO, WHO etc.and contains technical committees working on uniform standards.

e) Patents and trademarks there is no such thing as international patent. Themost important patent agreement is the International Convention for theProtection of Industrial Property, first signed in 1983 and now honoured by 45countries. The treaty provides that if a filee files in a signatory country within oneyear of the first filing, the filee will be afforded the date of the first filing for prioritypurposes.

A patent cooperation treaty (PCT) and a European Patent Convention are also in

effect. The PCT has 39 countries including the USA, Japan and Brazil. The EU



convention covers 15 countries and gives patent protection in all 15 if signified inone.

f) Air transport is covered mainly by IATA (International Air Transport Authority),ICAA (International Civil Aviation Authority) and ITU (International

Telecommunication Company).

g) Codes of conduct, like those in the OECP, are not technical law but important.Member countries produce guidelines for multinational enterprises coveringaspects of general policy, disclosure of information, competition, financing,taxation, employment and industrial relations.

h) Recourse arbitration is an attempt to reduce disputes by consultation. Some of the most widely used are the International Chamber of Commerce, the American Arbitration Association, the London Court of Arbitration and the Liverpool CottonExchange.

Marketing implications

The implications of international law on marketing operations are legion. Theprinciple ones are as follows:

Product decisions - physical, chemical, safety, performance, packaging,labelling, warranty

Pricing decisions - price controls, resale price maintenance, price freezes, valueadded systems and taxation

Distribution - contracts for agents and distribution, physical distribution,insurance

Promotion - advertising codes of practice, product restriction, sales promotionand,

Market research - collection, storage and transmission of data.

Other areas affected are obviously in currency and payments but these will bedealt with in later sections.

Terms of access

One particular area where legal/political effects are felt by international marketersis in the terms of access, so the rest of this section will be given over to adiscussion of these. The phrase "terms of access" refers to all the conditions thatapply to the importation of goods from a foreign country. The major instrumentscovered by this phrase include import duties, import restrictions or quotas, foreignexchange regulations and preference arrangements.

Tariff systems



Tariff systems provide either a single rate of duty for each item applicable to allcountries, or two or more rates, applicable to different countries or groups of countries. Tariffs are usually grouped into two classifications:

Single-column tariff: The single-column tariff is the simplest type of tariff and

consists of a schedule of duties in which the rate applies to imports from allcountries on the same basis.

Two-column tariff: Under the two-column tariff, the initial single column of dutiesis supplemented by a second column of "conventional" duties which showreduced rates agreed through tariff negotiations with other countries. Theconventional rates, for example those agreed upon by "convention", are suppliedto all countries enjoying MFN (most favoured nation) treatment within theframework of GATT. Under GATT, nations agree to apply their most favourabletariff or lowest tariff rate to all nations who are signatories to GATT, with somesubstantial exceptions.

Preferential tariff

A preferential tariff is a reduced tariff rate applied to imports from certaincountries. GATT prohibits the use of preferential tariffs with the major exceptionsof historical preference schemes, such as the British Commonwealth preferencesand similar arrangements that existed before the GATT convention; preferenceschemes that are part of a formal economic integration treaty, such as free-tradeareas or common markets; and the granting of preferential access to industrialcountry markets to companies based in less-developed countries.

Types of duty

Customs duties are of two different types. They are calculated either as a specificamount per unit or specific duty, or as a percentage of the value of the goods or ad valorem, or as a combination of both of these methods.

Ad valorem duties: This duty is expressed as a percentage of the value of goods. The definition of customs value varies from country to country. Thereforean exporter is well advised to secure information about the valuation practicesapplied to his product in the country of destination. A uniform basis for thevaluation of goods for customs purposes was elaborated by the CustomsCooperation Council in Brussels and was adopted in 1953. In countries adheringto the Brussels convention on customs valuation, the customs value is landedCIF cost at the port of entry. This cost should reflect the arm's-length price of thegoods at the time the duty becomes payable. Major trading nations that are notmembers of the Brussels convention on customs valuation are the USA andCanada, which use FOB costs as the basis of valuation, and Japan, which usesCIF value.

Specific duties: These duties are expressed as a specific amount of currencyper unit of weight, volume, length or number of other units of measurements; for example, fifty US cents per pound, one dollar per pair, twenty-five cents per square yard. Specific duties are usually expressed in the currency of the

importing country, but there are exceptions, particularly in countries that haveexperienced sustained inflation. In the Chilean tariff, rates are given in gold pesos



and, therefore, must be multiplied by an established conversion factor to obtainthe corresponding amount of escudos.

Alternative duties: In this case both ad valorem and specific duties are set out inthe custom tariff for a given product. Normally, the applicable rate is the one that

yields the higher amount of duty, although there are cases where the lower isspecified.

Compound or mixed duties: These duties provide for specific plus ad valoremrates to be levied on the same articles.

Anti-dumping dunes: The term dumping refers to the sale of a product at aprice lower than that normally charged in a domestic market or country of origin.To offset the impact of dumping, most countries have introduced legislationproviding for the imposition of antidumping duties if injury is caused to domesticproducers. Such duties take the form of special additional import charges

designed to cover the difference between the export price and the "normal" price,which usually refers to the price paid by consumers in the exporting countries. Anti-dumping duties are almost invariably applied to articles that are produced inthe importing country.

Other import charges

Variable import levies: Several countries, including Sweden and the EuropeanUnion, apply a system of variable import levies to their imports of variousagricultural products. The objective of these levies is to raise the price of imported products to the domestic price level.

Temporary import surcharges: Temporary surcharges have been introducedfrom time to time by certain countries, such as the UK and the USA, to provideadditional protection for local industry and, in particular, in response to balance of payments deficits.

Compensatory import taxes: In theory these taxes correspond with variousinternational taxes, such as value-added taxes and sales taxes. Such "border taxadjustments" must not, according to GATT, amount to additional protection for domestic producers or to a subsidy for exports. In practice, one of the major taxinequities today is the fact that manufacturers in value-added tax (VAT) countriesdo not pay a value added tax on sales to non-VAT countries such as the USAwhile USA manufacturers who pay income taxes in the USA must also pay VATtaxes on sales in VAT countries. For example, EU imposition of a tax on importedhorticultural products.

Adaptation to meet local requirements: The impact of adaptation to conform tolocal safety and other requirements can be crippling. For example, a Jaguar car made in the UK and sold in Japan would be three times its UK value. Analternative approach to the Japanese market would be to begin with theJapanese customer to identify the customer's wants and needs and to design aproduct for that market or to adapt the design to a world design that would fit theneeds and wants in both the domestic and the Japanese markets. The

implementation of such a program would involve major marketing investments bythe Jaguar Motor Company in establishing distribution, advertising and



promotion, training and developing organisations to market the car in Japan. Itwould also involve significant expenditures in designing the car to appeal to theneeds of the Japanese customer.

The Kennedy Round and the General Agreement on Tariffs and Trade

(GATT)

A major development of the 1960s was a series of agreements negotiated in the1963-67 period, popularly known as the "Kennedy Round". During thesenegotiations, tariff concessions on nonagricultural products by the four largestindustrial participants -the USA, the UK, Japan, and the EEC - averaged slightlymore than 35 percent and covered about $20 billion of trade. On agriculturalproducts, excluding grains, the average reduction by the major industrialcountries amounted to about 20 percent and affected about one-half of thedutiable imports. Tariff reductions under the agreement took place in five equalinstalments. The first was concluded on January 1, 1968 and the last on January

1, 1972. Over 60 thousand items were involved, representing approximately $40billion in world trade annually.

At the conclusion of the Kennedy Round negotiations, tariffs on dutiablenonagricultural products averaged 9.9 percent in the USA, 8.6 percent in theEEC, 10.8 percent in the UK and 10.7 percent in Japan.

A second "Tokyo Round" of trade negotiations was undertaken by the 97 nationGATT in the 1970s. The target in these negotiations, which were still under wayin 1979, was to achieve another 35 percent tariff reduction.

The latest GATT round, the so called Uruguay Round, was long held up over subsidy wranglings between the EU and the USA. However in early 1994, anagreement was concluded, but is yet to be ratified by all signatories.

When the European Union and the USA agreed to bury their differences(primarily over subsidies and trade in television and films) on Tuesday 14December 1992, the way was cleared for the signing of the eighth General Agreement on Tariffs and Trade (GATT) in April 1994 in Morocco, only two daysbefore the deadline. Whilst only 20 countries took part in the first round signed inGeneva in 1947, the current round boasts 116 participants. After failing to meettwo deadlines in 1990 and 1991, many thought the Uruguay round would never be concluded. However, completion of the North American Free Trade Agreement (NAFTA) and the hints of the development of a similar trading block inthe Asian-Pacific Region (APEC), helped focus the minds of the negotiators.

The principal aim in the early days of GATT was to cut tariffs and to this endaverage tariffs have fallen from almost 40% to 4.7% and now it will be as little as3% if the Uruguay round succeeds. GATT has, over the years, gradually goneinto other areas. The Kennedy Round introduced rules against dumping exports,the Tokyo Round made it harder for countries to manipulate technical standards,import licences and customs regulations in order to keep imports out. GATTbasically stands to defuse trade tension between countries and smaller countriesenjoy better access to larger countries' markets through GATT than they could if

they had negotiated by themselves.



The new package, which covers ten times the value of the previous seven GATTRounds put together, touches on more than four billion Sterling Pounds worth of International Trade, nearly twenty times the size of UK's annual budget.Economists reckon that the Uruguay Round will add about $270 billion to worldincome within a decade and boost global trade by more than 12%. The deal also

creates a powerful international bureaucracy, the World Trade Organisation(WTO) to police world trade and act as a bulwark against a return to theeconomic protectionism which proceeded war in the 1930s. But not all countrieswill gain. Africa will be a net loser, with Nigeria down by $1,0 billion. Other fearsare that Africa will lose out on agricultural prices but textiles will get a boast.

Summary

Probably, the most important "Environmental variables" are the political and legal

aspects. Laws regarding property rights and regulations regarding permissableand non permissable forms of cooperation and competition are possibly thegreatest challenge facing multinational marketers when attempting to crossinternational boundaries.

Individual country policies, terms of access, tariff and non tariff barriers, and rulesand regulations regarding standards of quality, quantity and so on, are so vitalthat often expert help is required to deal with them.

The new GATT Round, operational from 1995 and effected by the newlyconstituted World Trade Organisation, is one of the most far reaching trade

agreements to date and proposes to boost world trade considerably over the nextdecade.

Business Environment:

Businesses operate in an external environment in which as well ascompetition from rivals businesses have to take account of legal, political,social and economic influences. A SLEPT (Social, Legal, Economic, Political, Technological) analysis is oftencarried out by business planners which enables them to develop moreinformed strategies (i.e. long term plans).

Social factors - relate to change is society and social structures. Changes inthe structure of the population, and in consumer lifestyles and behaviour affect buying patterns.Legal factors - relate to changes in laws and regulations. Businesses mustbe careful to keep within the law and to anticipate ways in which changes inlaws will affect the way they must behave.Economic factors - relate to changes in the wider economy. A growingeconomy provides greater opportunities for businesses to make profits, sobusinesses welcome rising living standards.Political factors - relate to ways in which changes in government andgovernment policy can influence business.Technological factors - provide opportunities for businesses to adopt newbreakthroughs, innovations, and inventions to cut costs and develop new



products. A business producing confectionery like Cadbury Schweppes examinesSLEPT factors in designing new products. For example, social factors that itneeds to be aware of include changing patterns of eating. Today manyconsumers like to eat 'on the go' so bite sized chocolate treats are in great

demand to top up consumers energy supplies. Legal factors to be kept an eyeon include European Union regulations about the content of products that canbe advertised as chocolate. Economic factors relate to changes in livingstandards and how these affect consumptions patterns.Technological change is particularly important today, for example, thedevelopment of new technologies that have enabled variations on chocolatebars to be produced in an ice cream format. Political changes are closely tiedup with economic ones and relate to changing governmental influence. For example, a change from a Labour to a Conservative government would effecttaxation policies which would impact on the cost of chocolate production.Environmental scanning - is the process whereby businesses examine the

external environment to identify key structural changes in the world aroundthem which affect demand and supply conditions for their products.

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Political And Legal Factors