Chapter 8: International Economic Law

Introduction

One of the areas where international law has begun to develop relatively recently is international economic relations. Trade relations, monetary transactions and investment relations between States, companies and citizens of different nationalities have increased enormously, especially in the last hundred years. Economic relations have now become matters having global implications, which affect not only a limited number of countries but also the general economic balances of the world. Intensifying economic relations have also created different types of international economic relations. Trade, foreign direct investment, economic mergers, business regulations and taxation, international intellectual property rights, transboundary circulation of goods, services, labor and capital, and related international economic investments have emerged. All these led us to regulate such intensive and significant issues which affect our common interests. The rules of international law on economic relations have emerged on the basis of this huge need.

International economic law has been formed mainly through international bilateral and multilateral treaties. There also emerged international institutions which have had a great impact on shaping international economic law, especially within the last 50 years. They have led to the rapid development of international economic law. The International Monetary Fund (IMF), International Bank for Reconstruction and Development (World Bank), the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) became leading formations.

The Concept of International Economic Law

Whenever the state-like structures and their relations are commenced, economic relations between them surely began at the same time in their simplest forms. As can be observed from the artifacts found in the ancient city of Troy, for instance, we see that there are goods traded from the rest of the Anatolian Peninsula and even from the Central Asia. What rules were valid for the purchase, sale and payment of these goods? Did these rules go further to regulate what and when to pay, and to include regulations on what their quality should be and whether the political authority of the time would receive taxes? For centuries, states have made regulations on trade and friendship, customs duties, fair treatment of foreign traders and trade associations. However, the principles that emerged remained rather limited, inapplicable to most of the nations.

In order to comprehend international economic law, we must first remember and understand the concept of international economy and international economics. Only then can we fully understand what kind of relations are regulated by international economic law. The economy is defined very broadly as all activities related to the creation and sharing of wealth (commodities of monetary value). The science of economics is defined as the examination of the activities related to goods or services of monetary value for meeting human needs, either basic or welfare.

International economic law regulates international trade, international economic associations, international private law (law and court selection, enforcement of judicial or administrative decisions), regulations on international business world (prevention of monopolization and unfair competition, environmental protection and product security), international financial regulations (private monetary transfer transactions, direct foreign investment, monetary transactions), economic development, international taxation and international intellectual property rights.

Various definitions are actually proposed by highlighting one or another aspect of international economic law. The most comprehensive and comprehensible definition emphasizes international economic law as a branch of international law that regulates “international economic order”. The definition emerging from this approach can be formulated briefly as: “International economic law is a branch of international law that regulates both the economic relations between States and the cross-border economic relations of non-State entities.” This means that international economic law regulates elements of this order, namely international trade, international investment, international finance and international development issues. Based on this definition, there is a need to explain how international economic law includes national taxes, national subsidies or incentives, anti-monopolization and national regulations on various issues that cannot be considered as “international” or even “relations”.

Basic Principles of International Trade Law

Until the end of the First World War, the principle that dominated international economic relations, particularly in the context of international trade, was the “freedom of trade”. Although it had exceptions, the principle reflected the impact of the British trade understanding. In particular, it can be said that the principle of freedom of trade has gained the value of customary rule, along with the principle of the most-favored nation rule. The First World War and the surrounding conditions it created greatly undermined this traditional understanding. Post-war developments could not compensate this weakness, and the 1919 Treaty of Versailles and similar arrangements led to the strengthening of a more restrained economic understanding. The “Great Depression’ of the 1920s was another factor that weakened international trade. Both the national regulations of the 1930s and the outbreak of the Second World War led to an almost complete abolition of the liberal economic approach, and similarly the principle of freedom of international trade.

Towards the end of the war, the purpose of the United Nations Conference on Money and Finance, held at Bretton Woods between July 1st and July 22nd, 1944, was to lay down the foundations of a new and appropriate international economic order. The backbone of this system, which has been called “Bretton Woods System” for many years, is composed of some principles and international institutions established to ensure the implementation of these principles. The aim here is to increase international trade and thus increase prosperity and development by reducing the problems arising from the difference in value between currencies. This system continued until the early 1970s when US President Richard M. Nixon announced that the US dollar was temporarily removed from indexing to gold. Particularly after 1973, countries began to choose to index their currencies to another currency or a basket of currencies of their choice, or to free them altogether and to determine the value of their money relative to other national currencies by market conditions. In the implementation of the system established with the Bretton Woods approach, it was intended to establish certain institutions. GATT, IMF and World Bank were the leading institutions. It will now be useful to examine the principles and institutions of this system which, until recently, was almost the only system in international trade and still has a significant impact today.

International Monetary Fund (IMF)

The IMF was established officially in December 1945, when 29 countries ratified the treaty on the basis of decisions taken at Bretton Woods. It actually started working on 1 March 1947. The main objectives of this institution are to increase international monetary cooperation, to maintain financial stability, to support the increase of international trade, to increase employment, to support development and to reduce poverty in the world.

The World Bank

The International Bank for Reconstruction and Development, or commonly known as the World Bank, was founded in 1944 by the decisions taken at Bretton Woods. It was in fact officially established in December 1945, when 29 countries ratified the treaty. It officially commenced its work on March 1st, 1947. The World Bank is a kind of a cooperative, as many members have jointly established it with capital participation. The number is today 189 countries, in other words, the shareholders. The Bank is composed of 5 different sub-units which are separated in terms of their purposes and functions. This makes the Bank a “World Bank Group”, as sometimes called. The Bank, which has contributed greatly to the rebuilding of Europe after the Second World War, focuses today on “poverty reduction” and “helping developing countries”. Two goals are declared as follows:

• To minimize as much as possible the number of extremely poor population trying to live at US $ 1.90 or less a day,
• To increase the income of the 40% of the world’s low-income group to ensure welfare spread.

The General Agreement on Tariffs and Trade (GATT)

GATT was negotiated among 23 States in Geneva in September 1947. One of the aims of the system was to establish a permanent international trade organization. However, the United States opposed this idea of a permanent organization on the grounds that it would impose restrictions on its national sovereignty over trade. The originally intended World Trade Organization would be established in 1994. The GATT negotiators, USA specifically, supported the establishment of a free international trade system based on the principle of “the most-favored nation principle”. The barriers to international trade would be largely removed by the principle of the most-favored nation principle, which envisaged the granting of bilateral trade advantages to all GATT participating States. However, some states, Britain being the leading one, opposed the idea of such a degree of freedom.

Between 1947 and 1994, GATT developed both institutionally and expanded in terms of purpose and membership. During these years, eight separate rounds of multilateral trade negotiations were held and concluded within the GATT system. The first six rounds (including the Kennedy Round of 1963-67) focused almost exclusively on tariffs (tax and quantity arrangements). In the 1973-79 Tokyo Round, for the first time, new rules and policies to reduce non-tariff trade barriers were discussed. The GATT treaty was quite a general one with 38 articles. It was detailed with some annexes. The Treaty contained many key articles preventing protectionism, as well as many exceptions. The 1986-1994 Uruguay Round was the most comprehensive and complex negotiation, because the issue in the agenda was the transition to a world trade system. Its successful results include the establishment of the World Trade Organization and the expansion of regulatory powers in trade and services, intellectual property and investment in the agricultural and textile sectors. In this way, the process based on long years of negotiations within the institutional framework has created a continuous and stable international trade system.

World Trade Organization (WTO)

The GATT agreement was a very important beginning for a continuous international trade structure. Upon this start, the aforementioned negotiations were carried out, and the World Trade Organization was established in 1994, if not immediately. This process, which was initially designed as a temporary one, continued for 47 years until 1994. Negotiations under the GATT enabled both the adoption of new liberalizing rules on international trade, as well as the establishment of the WTO, which would enable it to continue in a more institutionalized framework.

The World Trade Organization is the only global organization charged with the cross-country international trade and trade-related rules. New rules are constantly drafted and approved through international agreements, which are negotiated among the member States of the Organization. The aim of the Organization was to make international trade as smooth, predictable and free as possible. We may summarize the WTO roles as:

• A forum in which States negotiate trade agreements,
• It is a center where States try to solve commercial disputes,
• It is an institution that operates the trade rules.

Foreign Direct Investment

Foreign direct investment, or sometimes referred to as international direct investment, means establishing a business or doing business by a person or a company in a foreign country through transferring the capital for commercial purposes. Establishing or doing business in a foreign country may take various forms. The first is to establish a new business by providing the initial capital,

i.e. transferring it. Another form is to participate in an existing domestic firm and increase its capital to become a partner in an existing business. In both cases, starting a business or doing business can bring technology, knowledge and control to a certain extent of foreign investors. Foreign direct investments do not include transfer of capital of a foreign firm to obtain government investment assets in another State or to obtain existing stocks of publicly traded firms or similar portfolio investments. Such transfers are referred to as indirect capital investments.

Legal Principles: Some customary principles regarding foreign direct investment emerged from treaties. It is still important to identify them since these principles have binding effects on all countries irrespective of these contracts.

The first such principle is that the acceptance of the foreign investors into the country is within the national sovereignty. Nowadays, if a State is not a party to a bilateral contract or convention providing otherwise, a State can decide whether or not to accept foreign capital or investors.

The second principle is that the “diplomatic protection” granted to States by international law also applies to foreign direct investors. On behalf of a person or company whose rights are allegedly infringed, the State of which they are a national may take legal and/or political initiatives based on the principle of diplomatic protection. Therefore, individuals and companies are able to continue to benefit from the protection of their own State to a certain extent in their activities abroad.

Thirdly, a foreign investor who has once been accepted into the country, property and related rights is under legal protection. Especially in the late 19th century, the principle of “national sovereignty” and the principle of “protection of citizen” conflicted with respect to foreign direct investment. Capitalexporting countries advocated the principle of protecting citizens, the host countries, however, tried to prioritize their national interests against foreigners. Despite the conflict, the principle of respect for foreigners’ right to property is firmly established.

Apart from these three basic principles mentioned above, some more principles are included in bilateral and multilateral treaties. One of the principles which gained the value of customary rule as they are frequently included in international bilateral or multilateral agreements is that the State is obliged to treat each and every foreign investor in a fair and equal manner.

Another principle provides the obligation to provide full protection and security to foreign investors through State institutions and legislation. Although treaties vary in scope of this principle, property rights are under legal and administrative protection. The money or similar valuable assets are transferable as much as possible by the right holders.

Economic Development

A significant number of new independent States emerged within a relatively short period of time with the end of colonialism. More than 70 new independent States emerged from 1945 to the 1980s (Fabry, 2010). A large part of them were administratively weak and underdeveloped. However, as they were many in number and became members of the UN General Assembly, their priorities and policies began to dominate both the UN and world politics. Gradually, efforts have been made in favor of them and many complex international arrangements have been made in various areas. Most of these efforts and arrangements were carried out within the UN framework. They focused on a wide range of areas, from national law and administrative issues to the economy, trade, environmental protection and education. Some of these efforts and related regulations have become legally binding conventions, while some stayed unbinding.

According to Article 1, paragraph 3 of the UN Charter, one of the main aims of the UN is to achieve international cooperation in the solution of economic, social, cultural and humanitarian problems. Within the UN structure, particularly the economically underdeveloped and newly independent states, they have made efforts to accelerate their development by using the mechanisms of the UN, which has already responsibilities for this. Developed countries, which would benefit from the further development of developing states, also supported these efforts at varying extent.

Legal Principles: The first of the principles that have gained customary value through rapid and intensive development process is the principle of the “right to development”. It is actually one of the two basic principles of international economic law. This right is stated in Article 22, paragraph 1 of the African Charter on the Rights of the People and Peoples (1981) as “All peoples shall have the right to their economic, social and cultural development with due regard to their freedom and identity and in the equal enjoyment of the common heritage of mankind.” In the UN Declaration on the Right to Development (1986), “The right to development is an inalienable human right by virtue of which every human person and all peoples are entitled to participate in, contribute to, and enjoy economic, social, cultural and political development, in which all human rights and fundamental freedoms can be fully realized”

Another fundamental principle of international development emerged as a result of international efforts is the principle that States are obliged to cooperate for international development. As a result of this obligation arising from the provisions of Article 3, paragraph 1 of the UN Treaty and form the provisions of Articles 55 and 56, States have to cooperate with other States and with relevant international institutions to solve economic, social, cultural and humanitarian problems.

Another principle of international development is the principle of preferential treatment in favor of developing countries. This principle, which actually means discrimination in favor of developing countries in economic relations, aims to eliminate existing injustices, as article 19 of the Charter of Economic Rights and Duties of States stipulates.

The fourth principle concerning international development is that less developed countries have a right to receive international development assistance and benefit from the preferential systems according to their basic needs. The provision of preferential treatment in many areas such as trade, investment, resources, oceans, and repositioning of the industry is embedded in many bilateral and multilateral agreements.

International Economic Sanctions

Apart from the sanctions imposed by the States against each other, sanctions have been imposed on States or governments that violate international law by the Security Council resolutions within the UN System. During the Cold War Era, the UN Security Council adopted sanctions against minority white governments in Rhodesia and South Africa. The Security Council decided sanctions against the Libyan administration in the1980s and 1990s, Iraq in 1990, members of the military junta administration in Haiti from 199394, UNITA in 2000s and Iran due to its nuclear program. In addition to the UN Security Council resolutions, the US and the European Union have also taken and implemented sanctions against Iran, mostly after 2011. Understanding the legal framework of sanctions has become even more important today, simply because economic sanctions tend to expand in frequency, scope and kind. In particular, with the increasing intensity of sanctions, referred to as “smart sanctions”, the Security Council or States take and implement sanctions that affect a particular area or economy of a state, or even a particular company or person of a State.

States frequently use these methods since there is no single and superior political authority in the international legal order to ensure those who violate the law comply with the law. Retorsion , reprisal and sanctions are the prominent actions in the counter-measures or ways of coercion . Retorsion can be defined as the response of a State to lawful or unlawful and damaging acts of another State by lawful and counteracting the interests of the other party. Reprisal or retaliatio n can be defined as the response of a State to an unlawful act by unlawful actions that would harm the State performing the action. Although retorsion and reprisal can be distinguished from each other, it is however difficult to distinguish these two acts from sanctions , as sanctions are much wider and general and therefore include the others. Nevertheless, it is possible to examine all similar actions under the title of sanction, especially within the legal framework established by the UN Charter. Today, the economic sanctions in interstate relations have increased both technically and in terms of scope and intensity, leading to the formation of some rules which are seen as within international economic law. According to Article 41 of the UN Charter: “The Security Council may decide what measures not involving the use of armed force are to be employed to give effect to its decisions, and it may call upon the Members of the United Nations to apply such measures. These may include complete or partial interruption of economic relations and of rail, sea, air, postal, telegraphic, radio, and other means of communication, and the severance of diplomatic relations.”

Apart from these economic sanctions that can be applied in accordance with the UN system, a state has the right to impose a wide range of economic sanctions on other State or states to the extent that it is legal. Coercive economic measures may be taken against any legal or illegal action of the other State to force the State in question to act in a specific direction. However, this right is not an absolute right and is limited by the relevant rules of international law. Economic sanctions should not be contrary to the obligations arising from the multilateral or bilateral agreements to which the States concerned are parties.

Recently, “smart sanctions” are taken either by UN Security Council resolutions or by states. These sanctions are aimed at affecting a certain region of a State or a certain area of its economy or even a certain company or person of a State.