Question

1. Explain illegal payments under the FCPA, giving at least one specific example from an FCPA case. Are there any exceptions? Discuss advantages and disadvantages of this law in terms of US companies doing business abroad.

2. Give one specific example of an advantage, and a disadvantage, of the NAFTA regional free trade agreement. Discuss the effect of NAFTA on the US/Texas economy, both pro and con. Discuss update recommendations regarding this treaty.

3. Give an example of dumping, and explain why it is illegal. Is it good or bad for the US consumer?

4. Discuss the recent move toward the implementation of tariffs in international trade. Why are they being imposed, what is the effect on the US consumer and US businesses?

Answer 1

The Foreign Corrupt Practices Act (FCPA) was passed in 1977 by the United States Congress to curb bribery and corruption in international transaction. The Act makes it unlawful for U.S. persons and certain classes of foreign entities to make payment to foreign officials for the purpose of helping them obtain or retain business. Agents caught bribing foreign officials can be fined, as can the company they work for. They will be required to give up any profits made from the corrupt deal as well as pay a huge penalty. For example, Cognizant Technology Solutions Corporation was charged for bribing an Indian government official and violating the Foreign Corrupt Practices Act (FCPA). The company will have to pay $25 million to settle these charges ( $19 million in prejudgment interest and a penalty of $6 million). Two of the company’s former executives were charged for their roles in facilitating these payments that ran into millions of dollars.

However, an exception exists for bribery provisions under the FCPA. Specifically, there’s an FCPA facilitation payment exception which companies may be able to claim if the payments made are for a good reason. A facilitation payment is usually made to cover licensing or fees related to the project which makes it different from a bribe because they are not a payment to gain a contract.

However, this potential loophole can be used to cover up actual violations, making this a rather tricky area. To ensure that this provision is not misused, anyone making a facilitation payment needs to follow strict procedures to ensure that it won’t be mistaken for a bribe.

The Act gives US companies an important tool to fight corruption abroad. It has also been effective in reducing bribery for foreign countries,and has made billions of dollars in fines. Enforcement of FCPA, has introduced a measure of certainty into foreign business contracts, costs and operations that improve efficiency and competitive advantage of US firms. Moreover, it helps in building a good reputation and brand value for these firms, which is important while conducting business abroad.

A disadvantage of the FCPA can be the perception that it stifles free trade and reduces the competitive advantage for US firms. It creates an unlevel playing field putting US firms at a disadvantage. Moreover, the FCPA requires US firms not only to monitor their own business practices but also audit the business practices of their foreign partners. This increases costs for US firms who have to spend more on monitoring and ensuring compliance with the FCPA. Lots of firms find it prohibitive to comply with the strict provisions of the Act and feel it hurts their profits.

2) NAFTA has more than tripled trade between Canada, Mexico, and the United States after its enactment. The reduction/elimination of tariffs has greatly helped in boosting trade among the three countries. Moreover, it has led to an increase in the economic output of member countries. Expert estimates put the increase in U.S. growth by as much as 0.5 percent a year. A major disadvantage of the trade agreement was that it led to job losses in the manufacturing industries in California, New York, Michigan, and Texas. Other sectors that were impacted were-automotive, textile, computer, and electrical appliance industries.

The metal and apparel industries in Texas grew by 13 percent within just one year after the creation of NAFTA due to flourishing exports to Mexico. However, when US jobs were lost, Texan manufacturing industry was one of the hardest hit.

Some updated recommendations regarding this treaty-

1. NAFTA should include a fair and enforceable dispute-resolution mechanism.
2. Improve the work conditions and the standard of living of the people involved.
3. Encourage cooperation to foster innovation.
4. Increase the levels of quality and productivity for better efficiency.
5. Support information publication and sharing, make relevant data public, and conduct joint studies.

3)  In international trade, dumping happens when a country exports a product and sells it at a lower than normal price in the foreign market while selling the same product at the normal price in the exporter's domestic market. This is a form of international discriminatory pricing strategy. It can be termed illegal if the foreign country can prove how its domestic producers were adversely affected by the actions of the country dumping in their market. The exporting firm gains an unfair advantage by selling its exports cheaply and thus secures market share quickly by hurting/destroying the competition.

The US consumers would face temporary advantages if they're being dumped upon since they pay lower prices for those commodities.

4)  The implementation of tariffs in international trade by the recent authorities is seen as a move to encourage consumers to buy American/domestic products. A protectionist regime is pro-domestic producers but not necessarily pro-consumers or free trade. Imposing tariffs is a way of stopping transfers of American technology and intellectual property to trading partners and protecting domestic jobs. In theory, these policies will make US-made products cheaper than imported ones, and encourage consumers to buy American. The idea is they would boost local businesses and support the national economy but at the same time it could hurt US consumers since imports will now become more expensive.