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Emerging Markets and International Legal Standards

In addition to the laws of the emerging market you’re investing in, you may have to be concerned about international laws and standards, which can affect the value of your direct investment or the competitive situation for the issues of any stocks or bonds you buy.

Judging jurisdiction

In most cases, the laws of the country where a company is headquartered apply. The tricky part is that a company may not be incorporated where you think it is. Many managers in emerging markets have moved their official headquarters to a country with friendlier tax laws or a more stable legal climate.

In addition to knowing the country in which a company has its official headquarters, you should also know whether the country’s court system allows appeal to a court outside of the country. If a company that you’re invested in is involved in a complicated case, it may be able to appeal the decision of the local courts to a high court outside of the country. In the emerging markets of Europe, cases may be appealed to the European Court of Justice, based in Luxembourg. A handful of former British colonies, including the frontier markets of Jamaica and Mauritius, allow cases to be appealed to the British Privy Council in London.

Treaties for trading

No emerging market exists in a vacuum. Trade agreements usually specify a system for working out the disputes that arise between businesses. These agreements can simplify border crossing, eliminate tariffs, and even allow for work privileges among signing nations. They help emerging markets expand into new territories, so they’re an important driver of growth. The most notable trade agreements that include emerging markets are

  • The Treaty of the European Union, which formed the EU

  • The North American Free Trade Agreement (NAFTA) among Canada, the United States, and Mexico

  • The Association of Southeast Asian Nations (ASEAN), which now includes China and India along with ten other countries

  • The Economic and Monetary Community of Central Africa (CEMAC)

  • The treaties under the World Trade Organization, which apply to 153 different nations of all sizes

These treaties affect trade rules among member nations and set up rules for adjudicating violations of them. They may supersede the local laws.

World Trade Organization

The World Trade Organization (WTO) is a pretty big deal in world trade circles and one of its functions is settling trade disputes. The WTO administers the different trade agreements that countries enter into, especially the Uruguay Round of negotiations that modified the General Agreement on Tariffs and Trade (GATT). The organization provides a forum for representatives of the world’s governments to negotiate and to set the rules for trade. When disputes arise, the WTO works with the parties to reach a settlement. Countries, not businesses, bring cases, although the issues may be specific to a small number of companies or industries.

International Court of Justice

In order to help solve some of the knotty problems between nations, the United Nations has a branch called the International Court of Justice, located in The Hague, the Netherlands. It’s called the ICJ for short, although sometimes people talk about The Hague when they mean the court rather than the town.

Two countries can take their disagreements to the ICJ for a ruling. The idea is that they’ll do this rather than go to war. A country can’t sue a company there, nor can a company sue another country. However, many of the cases heard at the ICJ have commercial implications.

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