International Trade and Finance Law

International Trade and Finance Law

The question for any international trade is the guarantee of payment to be received by the seller. In natural course, the items to or services sold are first received by the buyer and then only the payments are sent. In the case of any individual country, there are laws within the country to ensure that the payments are made by the buyer, but in the international scene, the differences between different countries may cause difficulties. The procedure that is now adopted is to follow certain procedures that have been set up under the auspices of United Nations. The international procedures have to be competed with a national procedure for a country for us to understand the comparative position. For this purpose, the position of United States has been used.

Analysis:

For determining procedures of setting up standards for bills of exchanges, which form the basic mechanisms for payment of any trade or commerce, a United Nations Convention on International Bills of exchange and International Promissory Notes was set up. The concerned work was done over fifteen years by the United Nations Commission on International Trade Law -- UNCITRAL. This was adopted by the General Assembly of the United Nations, after being recommended by the Sixth Legal Committee on 9 December 1988. The matter proceeded in steps and UNCITRAL first consulted with the International Institute for the Unification of Private Law -- UNIDROIT as that organization had previously addressed the subject of unification of law regarding negotiable instruments. This required UNIDROIT to first prepare a report on the chances of extending the unification of the law regarding bills of exchange and checks. (UNCITRAL Convention on International Bills of Exchange and International Promissory Notes)

These are obviously the only methods through which the payments could be made. For this purpose, there were three methods of unification. The first method was to increase the then acceptance of the Geneva Convention which had been established in 1930 and 1931. Since this was not universally acceptable, there were also thoughts of revising them to meet the standards that were acceptable to countries following the Anglo-American system. The third possibility was that if none of these worked out, then a new negotiable instruments law was to be established. There were discussions on the subject, and the method that was felt to have the greatest chances of success was to create a new law for negotiable instruments. The group felt that revision of the law would not make the law acceptable to the common law states. (UNCITRAL Convention on International Bills of Exchange and International Promissory Notes)

It is important to now understand why so many discussions and approvals were required. The primary reason is that prior to 1964, the value of currencies were defined in relation to gold, but at present there is no such relationship and it depends on the definition given by the government of the concerned country. This leads to rapid changes in values of currencies and thus most of International trade has to be defined n terms of currencies that are relatively stable or in terms of American dollars which functions almost like a base currency for all international transactions. This is also the reason why it has been comparatively easy for the government of United States to maintain a steady value of its currency, and why the several countries of the world with a large stock of surpluses in International trade are being compelled to store them in other countries which have a more stable type of currency. Examples can be given like that of China, and also that of the Arab countries. However, the stock of international currency is of no use for the seller who must get hold of local currency in order to be able to pay off his suppliers.

Now let us look at the situation in United States. Here negotiable instruments are controlled by the state statutory laws, and the basis of these is Article 3 of Uniform Commercial Code or UCC. There are some modifications for every state but that is the basic law governing negotiable instruments. According to the definition given in UCC a negotiable is an unconditioned writing that promises or gives the order for payment of a fixed sum of money. Naturally, in United States we are talking about all payments in dollars, whereas in the International sphere, there is no specific currency that has to be dealt in. In the international sphere the promise to pay may be in any currency, and further to that the payment is also subject to the conditions of that currency at that time, and the banker through whom the promise to pay has been made. However for all international trade, finance is an integral part of dealings. Again, so far as the United States is concerned, there are two types of methods of payment. The first is a draft that orders a payment to be made and this may also be a check. This can be issued only if the dealings are on cash and carry basis. (Negotiable instruments law: An overview)

There are also notes which are instruments that only promise payment at a future date. Even when a bank issues a certificate of deposit, it is issuing a note. These notes are also issued in business transactions to finance the movement of goods as they are required for collection and distribution of loans. All notes are however not negotiable and must meet the requirements under Article 3 to be considered negotiable. These are however not direct money, other types of payment orders which are governed under Article 4A and also called fund transfers or also securities governed by Article 8 or investment securities. Apart from this, there is the rule of derivative title and that is applicable in most transactions and these do not permit an owner of any property to transfer rights in property that is more than his own rights.

When an instrument is negotiable, then this rule is suspended, and a good faith purchaser can get the rights to the goods irrespective of any defects or flaws as he is not aware of the defects at the time of purchase. In Article 3 there are warranties provided for protections of parties which are involved in transactions involving negotiable instruments. For secured transactions, there may be use of negotiable instruments but are generally covered by Article 9 of the uniform code. There are some difficulties here and there is a conflict in the legal position between different articles. So far as international transactions are concerned, the predominance would have been of the international law, but United States had not ratified the treaty even by 1994. (Negotiable instruments law: An overview) This is the difficulty for finance in international trade as there are differences between countries regarding the position of the country.

Now let us look at the other method of paying and that is through checking accounts in banks. Here the difficulties come from the fact that banks are of various types, and may have been established by national or state chartered banks, or even savings associations. The method of operation and regulation is controlled by the laws under which they were established. The definition of the rights between the two parties involved in the operation of the bank account for payment of dues is covered by Article 4 of the UCC. This again has different parts and the first of these cover the general provisions and definitions. The second covers the actions of the first bank, or the bank which receives the check as also other banks which deal with the check but do not process it or make payment of the check. The third part covers the actions of the bank that is being responsible for paying of the check or the payer bank. The fourth part covers the relationship between the payer bank and the customers that it serves. The fifth part covers documentary drafts. (Banking: An overview)

These are checks or other types of drafts which can be paid only if some required papers are first being presented to the payer of the draft. On top of this, if a check comes through the Federal Reserve System, then regulation J. Of the Federal Reserve is brought into action. There are regulations like one called CC which controls the availability of funds in the account of a depositor and this rule controls the non-payment of a check due to lack of funds. There is also the Expedited Funds Availability Act which limits the period that the depository bank can delay even before it makes the amount of the check available to the party for withdrawal. There is also further elaboration on this aspect through Subpart B of regulation CC. On top of everything, so far as the banking act is concerned, checks are to be viewed as negotiable instruments. (Banking: An overview) These are simple actions like paying a local check and there are many more factors to be considered while finance laws are considered for international trade.

In the case of United States, Article 9 of the Uniform Commercial Code provides for practically all types of security agreements for owned property that are both for own use as also for commercial purposes. This type of agreements includes fixtures which mean personal property that is attached to the property, and the ready example can be a water heater. This does not include other liens taken on the property like the lien of a mechanic are not covered by this act, but are covered by the individual laws that govern them. There is also a statute of frauds and that requires a security agreement to be in writing for it to be valid, unless the property has been pledged for getting the loan. This sort of a pledge takes place when the borrowing party shifts the collateral to the lender of money in exchange for the loan that he has been given. The reason for making a security agreement perfect is to make the lender gain precedence about the collateral over any other party. For this purpose, generally a public notice is required. (Secured transaction law: An overview) This also covers most of the commercial transactions in different forms. (UCC: Uniform commercial code)

One of these statements under section 9-310 is that "When a person in the ordinary course of his business furnishes services or materials with respect to goods subject to a security interest, a lien upon goods in the possession of such person given by statute or rule of law for such materials or services takes priority over a perfected security interest unless the lien is statutory and the statute expressly provides otherwise." (9-310. Priority of Certain Liens Arising by Operation of Law) There are also laws which protect the rights of the lender to receive interest that is due to him and the concerned clause is article 9-203. (9-203. Attachment and Enforceability of Security Interest; Proceeds: Formal Requisites) In short, it can be seen that ensuring payment from the parties is not easy and that is the reason why most international trade is insured. This will make sure that the exporter will at least get some money for his goods if not the totality. Even the efforts that have been made by United Nations have not been accepted by all countries, and that makes the situation even more complex.

The most difficult reason for International trade to take place is the interest that politicians take in the matter. Let us look at the recent summit of Americas that has just ended in Argentina. It is clear that there are a lot of opportunities for business which is held back by political views. At the first point, the American President did not object to the direct request from Chavez of Venezuela that Argentina build a nuclear reactor in Venezuela for energy production. Within a period of one day, Stephen Hadley, the national security advisor mentioned directly that Chavez has asked a number of countries to build the nuclear reactor in Venezuela but was not being able to get it. Clearly this is an instance where trade opportunities are being sacrificed for political advantage. This attempt of gaining political advantage was also seen in certain other areas. This was causing a lot of difficulties to the efforts to come to a consensus required for the final communique to be issued at the end of the summit. (Troubles follow Bush to Argentine summit)

One of the main issues of dispute was regarding job creation and the representatives of USA had suggested that the communique take care of "the 96 million people who live in extreme poverty" in Latin America and the Caribbean, subsisting on $1 a day or less. This was being opposed by Venezuela who said that it will agree to the inclusion of that statement if it also included another phrase saying "while in the United States there are 37 million poor." (Troubles follow Bush to Argentine summit) There was the highest amount of differences regarding free trade which is supposed to be the key for economic growth in the entire region. There were efforts by United States for issuing a statement for resumption of negotiations in the talks for establishment of free trade, but this was being opposed from the major countries of South America - Brazil, Argentina and Venezuela. At the same time, there is an "anti-summit" going on. This is being led by a Nobel Prize winner, Adolfo Perez Esquivel and Diego Maradona, the idol for soccer. Chavez has a role to play in both the summit and the anti-summit. (Troubles follow Bush to Argentine summit) It is clear that international trade is not given the level of importance that it deserves and this is probably the reason for the financial difficulties that it faces.