International Trade and the Rule of Law - Jean-yves De Cara

• Publication year: 2007

International Trade and The Rule of Law

The Sixth Annual John E. James Distinguished Lecture

Walter F. George School of Law Mercer University Macon, Georgia September 12, 2006by Jean-Yves de Cara^*

If the Merchant of Venice had executed contracts with bankers of Florence instead of sending his wealth East and West (India, Tripolis, etc.), he would still have engaged himself in international trade. The Doge of Venice would have called—as he did—a lawyer from Padua to explain the law. That was the time of a world of cities.

Today, wood pulp producers from Georgia trade in Europe; a pool of international investors gather to build a dam in China; a French company builds a tramway in Jerusalem; and when an Indian investor based in the United Kingdom offers a takeover bid on a French company, the protest of the French authorities, as well as the French decree restricting foreign investments, may be regarded as a breach of European Community ("EC") and international law.

Now that we have gone from a world of cities to a worldwide city, or a "global village," the global market needs, just as well, the rule of law. Is that all very new?

International trade goes far back in history, and commercial treaties or contracts can be traced to Ancient Egypt and the merchant law of the eleventh century. For example, in 1417 a most favored nation clause could be found in a treaty between Burgundy and England.¹

Our present globalization is not new either.

The first instance of Globalization began with the great discovery of the Americas when the Spaniards sailed over and extended European values, rules, and diseases to the South American countries.²

The second instance of globalization occurred under British rule through the doctrine of "laissez-faire" and with the improvement of communication and transportation. With cotton mills and businesses, English law spread over India, and today, for that very reason, a lawyer may refer to an unfair competition case involving Calvin Klein that was decided by the Calcutta High Court in order to show that a foreign company has goodwill in the United Kingdom. The same happened with French law in other parts of the world.³ Freedom of trade ended with the First World War, the major crisis of the thirties, and World War II.

The third instance of globalization, which has its supporters and opponents, favors the rich powers more than it helps the new entrants. We have not yet reached free access and total transparency, but the criticisms do not go so much to the Western model, which people would not want. Conversely, globalization shows other people throughout the world, through the media and the Internet, a kind of social and economic model that is attractive and promising, one which they would like to achieve immediately. However, their political, economic, and social means do not allow these poor countries to reach such a level of development right now. They need to be patient, and this may create frustration. When India—a founding member—and China or other developing countries apply to accede to the World Trade Organization ("WTO"), it is not because they are naive or because they fear major industrial countries. They can oppose, and they have opposed, the rich countries in that context, as shown in the Cancun World Trade Conference in 2003. They probably have no illusion of the possibility of a spontaneous expansion of wealth through capitalism, but they know now, keeping in mind the nineteenth century experience and the disasters created by socialism, that protectionism is not the proper way to prosperity. Therefore, they search for a convenient way to accede to market, trade, investments, and therefore, development.

This global market supposes the existence or the adoption of common legal principles and rules. The role of law in international trade is quite obvious. It organizes imports and exports, financial transactions, and movement of traders across borders.

Moreover, it has been pointed out by the Conference on Security and Cooperation in Europe in 1990 that "societies based on the rule of law are prerequisites for . . . the lasting of peace, security, justice and cooperation." So, if we agree with Montesquieu that "peace is the natural effect of trade,"⁴ then the rule of law should extend to international trade.

If we apply the criteria defined by A. V. Dicey, the nineteenth century English constitutional lawyer, that the core of "rule of law" is an autonomous legal order: "Under rule of law, the authority of law does not depend so much on law's instrumental capabilities, but on its degree of autonomy, that is, the degree to which law is distinct and separate from other normative structures."⁵

As an autonomous legal order, rule of law means first, according to Dicey, a certain limitation or constraint on discretionary powers of governments, and it supposes supremacy of law, which requires both individuals and governments to be subject to known and standing laws. Second, rule of law requires a certain kind of equality in the law. Laws should be general and not made in respect of particular persons. Third, rule of law implies some sort of formal or procedural justice, which covers fairness, transparency, and consistency of the rules of decision and procedure.

Does the rule of law apply to economic matters?

Economic historians⁶ have shown that the rise and development of the Western World and of liberal democratic nation-states is mainly due to the transformation of the relations between political powers (mainly royal power or princedoms but also aristocratic or merchant republics) and individuals and businesses. Early on, states distanced themselves from commercial activities and the rules that governed the relations between the states, and economic agents instead constituted the seed of the rule of law in trade matters: this was the origin of market economy.

How did the rule of law extend to international trade?

It is quite obvious that at some stage international trade is and has been ruled by law. Law served as an instrument of national-states to organize imports and exports, financial relations, and movement of traders across the borders. But the existence of the rule of law in this field supposes that the three characteristics of an autonomous legal order should exist in order to achieve three functions.

First, the rule of law regulates the economic behavior of economic agents in order to create and maintain a stable and fair competitive environment, to protect property rights, and to enforce contracts. Second, the rule of law regulates and limits discretionary interventions of the states in economic and commercial activities. Third, the rule of law regulates the relations between states in order to allow them to operate in a fair and open multilateral trading system for the benefit and welfare of their peoples, as stated in the WTO Marrakesh Declaration of 1994.

However, how can these conditions be satisfied? How can a "credible commitment" of governments be established in an international community where states are still sovereign? How may the rule of law be made effective and efficient in international trade? That is the question I would like to try to answer by developing two points: (1) The rule of law allows the development of international trade and (2) international trade allows the expansion of the rule of law.

I. THE RULE OF LAW ALLOWS THE DEVELOPMENT OF INTERNATIONAL TRADE

Trade supposes the existence of predictable and enforceable law. In the international context, where sovereign states dominate, trade is based on (A) domestic law and (B) international law.

A. International Trade is Based on Domestic Law

Municipal legislation and regulation go a long way in reflecting the concern of the states over the liberal laissez faire basis of international commercial transactions. It is not so much the courts that concern the states—judges tend to construe contract terms to express and protect the will of the parties, not only as to the object of the contract, but also as to the choice of applicable law. Legislative intervention, which is a more formal and direct intrusion, tends to achieve two functions with regard to international trade: (1) plugging the failures of the market and (2) ensuring public policy.

1. National Legislation Attempts to Correct or Fill the Gaps in the Market in Economic, Social, and Legal Terms. First, the state regulates external trade in the sense that it supervises the flow of products and services to and from the country. These rules cover the control of exchanges, foreign investments, customs, taxes, as well as statistics.

Second, social regulation focuses on the failure of the market in providing sufficient information concerning the quality of the goods or services, or on optimal standards in relation to the health and protection of plants or animals. Social regulation may also concern consumer protection. Economic regulation has a similar purpose: the market operators may affect economic interests in the state. For instance, national regulation tends to counteract the destructive monopolistic tendencies of enterprises (competition law) or to protect industrial and commercial property rights.

Third, municipal law provides a legal framework for transactions. As the Permanent International Court of Justice ruled, "Any contract which is not a contract between States in their capacity as subjects of international law is based on the municipal law of some country."⁷

There may, however, be competing laws to apply. But in order to avoid a disarticulated contract, the proper law of the contract should be determined. This is expressed in the Rome Convention on the Law Applicable to Contractual Obligations of 1980: "A contract shall be governed by the law chosen by the parties," and if no applicable law has been chosen, it "shall be governed by the law of the country with which it is most closely connected."⁸

Nevertheless, there is room in national...