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Political and Legal Factors Affecting the Impact of International Trade


Political and Legal Factors Affecting the Impact of International Trade


In international business, it is crucial for business managers to comprehend and be

fully aware of their political and legal environments and how these environments can impact

their businesses. Therefore, international and local business managers need to understand the

meaning of international law and the manner in which it applies to their immediate business

environments. International law can simply be defined as the principles and rules that nations,

sovereign states, and such other entities that have been granted international personality

consider binding upon themselves (Von Glahn, & Taulbee, 2015). Two interesting

characteristics of international law emerge following this definition. The first characteristic is

that individual nations are the determinants of their laws and the impact of the international

law is only to the extent that the individual nation is willing to relinquish its rights. The

second characteristic revolves around the fact that there lacks an adequate international

administrative and judicial body or framework of law that can form the basis for an

international and comprehensive legal system.

The international business and environment are also subject to political orders

structured by governments both at home and in the host nations. Home and host governments

can apply different measures to deal with disapproved entities or parties. For instance, home

governments can implement disciplinary measures to such parties such as withdrawing their

export guarantee covers or imposing a restriction in the granting of their export license. The

host nation may, on the other hand, take measures such as expropriation, operating

restrictions, infringement on ownership controls, and taxation.

Research Background

Using a variety of mechanisms, governments have historically played the principal

role in determining international trade decision-making processes. There are several cultural,

social, economic, and political reasons that support government interventions in international

trade. One of these reasons involves the protection of specific industries and jobs. About

national security issues, some industries can be perceived as vital and crucial components

such as the telecommunications and defense industries. For instance, government concerns

may arise regarding the owners of ports within the country’s boundaries. Exports and imports

may be adversely affected due to national security concerns regarding the flow of advanced

technological information leaving the country and finding its way to potentially threatening


Businesses in democracies comprehend that most of the democratic rules that are

present and being practiced can withstand the changes in governments. If changes occur in

democratic governments, they are usually a reflection of changes in the economic

environments as opposed to changes in the main government players. This differs with

authoritarian governments where democratic principles are regarded simply as either a token

process or are not in effect. One outstanding example is China, which is characterized by

limited individual rights amid its strong communist government. However, China has

recently pursued a new approach in trying to balance out the degree to which the state

manages and plans the national economy. As much as the government retains the ultimate

controlling force, there has been an increased emergence in private businesses. Against the

backdrop of a communist government, China has successfully combined private investments

with state interventions towards the development of a robust market-driven economy.

Problem Statement

Political and legal decision-making processes involve similarities and differences in

their approach and nature. They both have driving forces that motivate the processes and

structures that define their eventual outcomes. For instance, political factors are driven by the

political structure being practiced in the particular country such as capitalism,


authoritarianism, or totalitarianism. These structures largely determine the relationships

between governments and related entities or individuals. On the other hand, legal factors

comprise of internationally accepted principles and standards that oversee the international

business activities of companies and organizations. An impartial comparison between the two

factors suggests that despite their overarching similarities and differences, further studies into

the legal dimension can profoundly assist governments and other entities in shaping and

configuring their political outfit towards achieving a more integrative and synchronized

global environment.

Research Questions

It is evident that the legal concerns that surround a multinational corporation in any

country are almost similar when taken into account using the internationally accepted

principles and standards that govern business activities. This brings into the picture the tussle

between political factors that affect an international business enterprise and the associated

legal factors that shape the structure of international trade. The paper intends to answer the

following research questions:

 How much emphasis should be directed towards addressing the legal factors?

 Unlike the political factors that can be assessed by the respective governments,

is it possible to oversee and supervise the accurate implementation of legally

recognized laws affecting international trade?

 What concerns in the political and legal environment revolve around

expropriation threats, movement of equity, recourse, taxation, property rights,

and institutional environments?

 What are the main issues that all businesses engaged in internal trade should

be aware of and fully acquaint themselves to make accurate assessments and


Research Feasibility

Trade in most cases is used by governments as a disciplinary measure if the other

country is deemed as economically or politically repressive. By examining what constitutes

the tussle between legal and political concerns affecting international trade, trade may be

bolstered by governments as a reward for political support on international matters. Among

other regulatory measures, the imposition of government taxes assists in protecting

consumers from illegal factors and exploitation and promotes economic growth. In the

process of managing a company, it is imperative that business managers acquaint themselves

comprehensively with the regulatory measures, legal factors, and regional tax measures that

determine the manner in which the business is affected. Taking into account the regional

economic analysis is an additional measure that can assist businesses to adapt to the legal

issues within the business environment effectively. This paper seeks to accurately identify the

business legal and political environment that is fundamental and crucial in determining the

success of any business entity in a country.

Literature Review

Globalization can also be viewed in terms of production, where businesses and

companies can easily outsource services and goods from other nations. It is a common

perception by most business managers that international business definitions purely apply

only to businesses. According to Sturgeon (2013), international business can be defined as a

situation where the movement, distribution, or production of services and goods transcends

across country borders. Greater opportunities are created for international businesses through

the shift towards an integrated and more interdependent global economy. Globalization can

be experienced by international markets where there is a significant change in customer

preferences and where barriers to trade are falling.


However, the reality is that the definitions of international business encompass a wide

range of professional and personal activities since the world has transcended simple industrial

productions contained within limited parameters or country borders. International business

involves two or more nations that are actively engaged in a wide range of cross-border

exchanges and business activities relating to resources, services, and goods. Such exchanges

can go beyond monetary transactions of services and goods to involve international transfers

of several other resources such as contractual liabilities or assets, intellectual property, or


Contractual liabilities or assets can involve execution of complex financial

instruments, provision of future services to foreign customers, or the right of using selected

foreign assets while intellectual property may involve brand trademarks, copyrights, or

patents. International business may comprise of single companies acting as exporters or

importers to large multinational corporations with thousands of employees conducting

businesses around the globe in several countries. This wider scope of international business

also includes activities by nonprofits such as political favors, corporate social responsibilities,

or triple bottom lines as well as activities by profit-making organizations that have cross-

border transactions.

The study of political systems is complex and extensive. A political system is the

system of government and politics in a country that governs attitudes, institutions,

regulations, and a complete set of rules. The key differentiators of political systems lie within

the philosophy of each system regarding the role of the government, rights of the individual,

as well as rights of the group. The policies that govern the business environment and local

economy are extensively influenced by the philosophies of each political system. There are

several types of governments, each consisting of multiple variations. However, all these types

of governments revolve around two outstanding extremes that contain different political


At one end of the extreme backed up by its political philosophy is totalitarianism that

contends that a strong central government should be the focus and machinery that dictates

and controls every aspect of an individual’s life. At the other extreme is anarchism that

presupposes the contrary and contends that public government is both unwanted and

unnecessary and that political activities should be controlled by individuals. In reality, neither

extreme can be envisaged to exist in its purest form. Therefore, the majority of countries have

combined both extremes into a suitable and favorable balance that is often a reflection of the

religion, culture, and history of that particular country. This combination is known as

pluralism, which argues that in a well-functioning political system, both private and public

goods are important.

As much as the political structure of the majority of countries is pluralistic, they may

tend to lean on one extreme more than the other. Governments across the globe exercise

different levels of controls about the daily lives of its citizens. As much as authoritarianism

and totalitarianism may be treated as synonymous by the vast majority of people, there is a

distinct difference. In authoritarian governments, all control is centralized in the hands of a

small selected group of leaders or in one particular strong leader who assumes full authority.

Authoritarian leaders are not democratically elected, and as such, they do not owe the

country’s people any form of social, economic, or political accountability (Boix & Svolik,


Totalitarianism, on the other hand, is a more extreme type of authoritarianism and

takes place when a distinct type of ideology such as communism motivates the authoritarian

leadership. The ideology in totalitarianism is what controls or influences the people and not

just a single party or person. Authoritarian leaders tend to lack any guiding philosophies and

use more of corruption and fear to maintain control. The most common form of government

in the world today is democracy. The derivation of power in democratic government is

obtained through either elected representatives or direct referendums.

There are some practical and theoretical variations in democracy, some of which

provide more freedoms and better representations for their citizens than others. It is

imperative that businesses focus on the manner in which the economy of the country, as well

as particular industries and firms, are affected by the political system in place in their

country. Companies need to examine the balance to determine the manner in which their

businesses will be affected by the regulations, rules, and policies in place. Companies can

also assess the political stability and risk that exists in a country depending on the degree of

entry and exit freedoms present in conjunction with the duration of time that the company

expects to operate in the domiciled country.

As much as there is no country that is purely exempt from risk, some countries

provide or offer much more secure business environments than others. A key attraction to

foreign investments in any country is the political stability being maintained in that country.

It is important for businesses to evaluate if a country believes in heavy industrial

interventions, government controls, or free markets. An additional business consideration

includes the perception of the country about capitalism. The overall perception of capitalism

is that it can be regarded as an economic system where private enterprises or individuals

control or own the means of production (Gilpin, 2016).

Conversely, planned economies involve state agencies or governments controlling and

directing the economy including all production decision-making processes. In the

management of their economies, democratic governments that historically supported

authoritarian and capitalist regimes tended to employ state-controlled approaches. High levels

of political stability can be witnessed in developed and well-established democracies such as


the United States, Australia, Japan, Western Europe, and Canada. As much as there are

functioning democracies in Latin America and Asian countries, the stability of their trade and

economic policies is greatly influenced by their democratic stages of development, which is

susceptible to fluctuations emanating from changes in government.

Legal systems are mainly affected by the economic and political ideologies that define

countries. Three types of legal systems are practiced by multinationals and international

businesses in successfully conducting international trade practices. These include theocratic

or religious laws, civil laws, and common law practices. The majority of countries have a

hybrid legal system that combines these systems in international and domestic trade practices.

Common law is essentially based on precedence and traditions. Judges have the discretion to

interpret the law in common law cases, and the judicial rulings that they make can set

precedence for other courts to apply in cases with similar characteristics (Burnham, 2016).

The most extensive and universal legal system is civil law. It focuses on the manner in

which the law is applied to particular facts using a detailed set of laws that comprise a code.

The theocratic or religious law is essentially based on the guidelines contained in the

particular religion. Sharia or Islamic law is the most widely known and mentioned example

of religious law. It governs a number of Islamic communities and nations throughout the

globe in addition to being the religious law system that is most widely and internationally

accepted. Other additional religious law systems include the Christian Canon system that is

extensively observed in the Vatican City and the Jewish Halacha. However, these additional

religious systems are not practiced at national levels in any country in the world unlike Sharia

or Islamic law that is practiced nationally by some North African and oil-producing countries.

The most evident and direct impact on businesses around the world can be seen in Islamic


Regarding perceiving and defining this law as a legal system, Islamic law is more

attuned to the moral concepts as opposed to commercial ideologies. For instance, businesses

operating under the Islamic law are directly affected by the concept of interest that is

contained in the law. According to this law, it is inappropriate for banks or other financial

institutions to benefit from interest earned in the course of business. Consequently, entire sets

of strategies and financial products that stimulate profits or interest have been generated by

businesses and companies operating under this law because they have the options of

classifying their profits as other financial instruments.

Importance of the Study

Constant and intense challenges are faced by international managers that require them

to have a comprehensive understanding and proper training of the foreign environment. The

management of the business in a foreign country demands that managers are well equipped to

deal with the vast majority of environmental and cultural differences. In this regard, it is

imperative that international managers must continuously scrutinize the technological,

economic, sociocultural, legal, and political environments.

Some laws have been created by the American federal government that concerns the

regulation of the activities involving American businesses that are engaged in international

trade. Nevertheless, these laws may differ substantially with the laws of other nations

concerning the same. In this case, it is incumbent upon the business or firm carrying out

business activities in the host country to fully comprehend the laws of the host nation and the

manner in which they may affect the operations or profitability of the particular business. The

international law asserts that all business activities being carried out within a country’s

borders must conform to the laws of the land in conjunction with the international and

accepted principles regarding such business activities.


For instance, it is a criminal offense in the U.S. to either bribe or accepts a bribe under

any circumstances. However, this may not be the case in other countries where accepting

payoffs or bribes may be considered or regarded a common business practice. Furthermore,

the degree of strictness involving patents and copyrights may differ across the globe causing

some countries to overlook these laws thereby transgressing the laws associated with the

particular product according to laws governing the production of such goods at their

homelands or host nations. Therefore, it is of paramount importance that international

business managers can adequately and accurately assess the manner in which legal factors

affect other vital political and economic elements affecting their businesses and evaluate how

these factors can be synchronized towards the overall improvement of international trade


Methodology and Research Design

This paper will employ a critical analysis approach in establishing the legal and

political factors that affect the impact of international trade. To establish and identify the

independent and dependent variables between political factors and legal factors affecting the

impact of international trade, the paper will begin with defining international law and its

various determinants. The relationship between international business and international law

will be underscored in the introductory part followed by a definition of international business.

The paper will then delve into critically analyzing the political and legal systems affecting

international trade.

Each system will be critically examined within the fundamental subsets that constitute

the major determinants of the political and legal systems. Before giving an insight on the

legal and political factors affecting international trade, the paper will highlight the importance

of the study and the correlation between these two factors. A discussion involving the two

factors will then be presented comparing between the effects of political factors and the

impact of legal factors. The discussion will include a comparative analysis establishing that

these two factors are interrelated in their effects on international trade. The paper will then

give recommendations particularly on bolstering the legal factors that seemingly lack an

authoritative oversight and supervisory mechanism that if appropriately implemented can

serve as a fundamental pillar to all other factors including the political, sociocultural,

technological, and economic variables affecting international trade.



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Institutions, commitment, and power-sharing in dictatorships. The Journal of

Politics, 75(2), 300-316.

Burnham, W. (2016). Introduction to the law and legal system of the United States. West

Academic Publishing.

Gilpin, R. (2016). The political economy of international relations. Princeton University


Sturgeon, T. J. (2013). Global Value Chains and Economic Globalization. Massachusetts

Institute of Technology.

Von Glahn, G., & Taulbee, J. L. (2015). Law among nations: an introduction to public

international law. London: Routledge.