The legal/political aspect is very important in global marketing.

"International law" can be

defined as rules and principles that states and nations consider binding upon themselves.
This raises two interesting characteristics of international law. The first is that "law" belongs
to individual nations and international law only exists to the degree that individual nations are
willing to relinquish their rights. The second is the lack of an adequate international judicial
and administrative framework or a body of law which would form the basis of a truly
comprehensive international legal system.

The international business is also subject to political decrees made by governments both in
"home" and "host" countries. Home governments can apply pressure not to deal with
disapproved parties. These measures may take the refusal to grant an export licence, or
withdrawal of export guarantee cover. The host government may take measures like
taxation, ownership controls, operating restrictions or expropriation.

Chapter Objectives
The objectives of this chapter are:

 To give an understanding of the major factors which must be considered in the

legal/political environment when planning to market globally

 To describe the "Terms of Access" and show the importance of these as vital elements 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.

Structure Of The Chapter

The chapter begins by looking at the major factors which the marketer must consider in
assessing vulnerability to the legal/political environment. It then goes on to describe in detail
the major elements of the legal environment and Terms of Access, including both tariff and
non tariff barriers. A major section of the chapter is devoted to the main provisions of the
new GATT Round (1995) and an assessment of its impact on the global marketer.

Laws, rules, and standards

All agricultural exports operate within an institutional environment, which is made up of a set
of political, social and legal ground rules. These ground rules form the laws of all production,
exchange and distribution and give rise to certain expectations and assurances about the
actions of others, and give order and stability to the means of doing business. The most
important rules in any system are those defining, allocating and enforcing property rights,
and rules and conventions defining allowable and non-allowable forms of cooperation and
competition (standards, rules of contract, fair trading etc). Well defined and enforced
systems regarding property rights are essential. Articulated ownership and rights to use,
trade and alter assets is vital to market development, since this assigns to individuals the
right to benefits and losses in production and marketing activities.

Rules and conventions specifying entry conditions and boundaries on cooperative and
competitive policies also facilitate exchange and coordination. The establishment and
enforcement of standards can reduce transaction costs by increasing the available
information to buyers and consumers. Standards may include basic weights, measures,
quality grades and contract forms. Quality standards 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,
quality and certificates of origin.

Licensing also facilitates marketing agencies and producers by reducing transaction costs.
This occurs when the criteria for licensing revolves around asset holdings, financial solvency
and so on. Performance standards are built in to maintain the licensing agreement.

Increasingly, consumer and trading bodies like the EU are enforcing the disclosure of more
and more information. Particularly, these efforts revolve around packaging, labelling and
information, for example, pesticides used on horticultural produce. As this trend to disclosure
of information grows, along with the phenomenon of product liability, regulations regarding
certain tests or inspection of products, handling and processing procedures may be
enforced. So may ingredient and nutrition information. This is becoming an increasingly
important issue as food products become more complex and varied. One of the problems
with this noble effort to inform the consumer is that producers may lose their competitive
differentiation advantage through divulging information to competitors.

The EU has gone to extraordinary lengths to inform the consumer, issuing directives on
product descriptions and pricing. For example the EU directive on the pricing of cabbages
runs to hundreds of pages and, what constitutes "chocolate" and a "sausage" to name but
two products, is quite revealing. (see chapter 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 artificial colorants 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 rules within 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 image damaging
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 GATT system is a set of
norms and procedures which member governments have accepted to create order and
predictability in international trade relations.

Case 4.1 When Is Chocolate Not Chocolate?

Sometime this year the European Union will have to decide at what point chocolate stops being
chocolate. As defined by a 1973 European Commission directive, chocolate can only contain cocoa
butter, cocoa solids, sugar and, in the case of milk chocolate, milk.

But Britain, Ireland and Denmark as well as new EU members Austria Finland and Sweden are
exempted from the directive and allow manufacturers to use cocoa-butter equivalents (CBEs) such as
palm oil in making chocolate.

Now, as the EU brings its policies into line, it is considering whether to allow up to 5 percent CBEs in
chocolate manufacturing.

Chocolate producers stand to profit from relaxed standards, especially if the price of cocoa were to
soar.

But the ingredients are less likely to be as much a sticking point as the labelling issue.

"What is to stop the chocolate industry from putting pressure on the EU to allow 10 percent or even
complete substitution of cocoa butter and still call the remaining product chocolate?" said Gerrit
Ribbink of the Netherlands Development Organisation (SNV) in The Hague. It's misleading to the
consumer to use other ingredients and still slick to the name chocolate."

A British consumer spokesman said Britain, which is keen on keeping its current practice of using up to
5 percent CBEs, would oppose new laws that would change labelling standards.

"The UK would say the products are still called chocolate", he said.

For cocoa - producing countries, the packaging issue is secondary to the fear that an increase in the
use of CBEs will lead to a drop in the demand for cocoa.

In a statement last October, the 13-nation Cocoa Producers' Alliance, which produces more than 90
percent of the world's cocoa, urged the European Union not to enact the proposals.

SNV estimated that if the EU allowed CBEs in chocolate, demand for cocoa could drop by anywhere
between 100 000 and 200 000 tonnes. affecting up to 10 percent of world cocoa production.

What scares producers even more is that American chocolate manufacturers could lobby the US Food
and Drug Administration (FDA) to follow the EU's example, and this could cut demand even further.

The three basic principles are:

i) nondiscrimination - each member country must treat the trade of all other member
countries equally

ii) open markets which are encouraged by GATT through a prohibition of all forms of
protection except customs tariffs, and

iii) fair trade which prohibits export subsidies on manufactured products and limits the use of
export subsidies on primary products.

None of these principles is fully realized, simply because it is impossible to "police" all
sovereign governments and dictate what is or is not tariff or non tariff discriminating. The
need to systematically evaluate the legal/political environment cannot be overemphasized.
This can be done by reference to the appropriate embassy or government agency or via
magazines like "Foreign Affairs" and even by reference to a domestic agency in the host
country.

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 mixture or other

form. In the last years remarkable changes have been taking place in the ideologies of many
countries. The most dramatic example has been the collapse of 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 and Tanzania.

Nationalism: Much was said about nationalism in the previous section. Whilst, primarily a
phenomenon of the developing countries, Yugoslavia has shown it is not entirely so.
Nationalism can lead to expropriation of foreign held assets.

Stability: Changes in regime, violence and cultural divisions based on language or other
factors can lead to a very uncertain environment in which to conduct business. The current
uncertainty in Liberia and Rwanda, the violence of Somalia and Yugoslavia increase the risk
and diminish the confidence of doing business in these countries.

International relations: In general international relations have improved over the last twenty
years. The development of GATT, NATO and the EU have gone a long 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 the Bhopal disaster in
India. Other government activity, which affects capital investment includes joint venturing
insistence and repatriation of funds. "Partnering" remains widespread (inward investment in
tandem with a domestic company) as does restrictions on repatriation of funds. In
Zimbabwe, for example, HJ Heinz, the multinational food agent, has entered into partnership
with 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 risk by:

i) relatively rapid depreciation of assets and repatriation of funds by manipulated transfer

prices

ii) establish a local supply infrastructure so that any adverse action damages the host
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 the potential
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 are not tied as in partnering.
The key is to look at what the disadvantages are. If the government mainly wishes to attract
the mobile investor, or overcome say poor local skills, one has to assess what would happen
if the scheme was withdrawn once the capital had been committed. Similarly if viability
depends on incentives rather than real return on investment, the question is, is the venture
really worth it?

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 the following:

 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 host country?

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