Jurisdiction and MNCs in Times of Global Crisis
Updated: Oct 21, 2020
In spreading their business across national borders to maximize profits, the Multi-National Corporation has put itself at the mercy of multiple jurisdictions simultaneously. In a typical global environment MNCs are able to rely on the governments of the nations in which they have a financial stake cooperating to ensure that businesses are not overly burdened by overlapping regulations. When times are good, and there is no significant crisis upsetting the international peace it is in the best interest of governments to cooperate to ensure the success of the MNCs that link their economies. However, when faced with a situation that strains the amity of international relations, MNCs can often become a tool or bargaining chip that each government hopes to use in pursuit of national interest. What effect does the uncertain jurisdiction of states over MNCs and extraterritoriality have when states’ supply chains are threatened and they are competing for limited supplies of goods? This paper aims to address this question through a case study of the US response to the Coronavirus pandemic from late 2019 through early May 2020.
On the surface, it appears to make simple economic sense to move manufacturing operations to another country where labor is quite cheap and material costs are often lower. But the landed costs can be substantial. The supply chain risks, notably logistics risks, that have grown from the complexities of global supply chain management, raise questions as to whether it is really cheaper.[i]
In an increasingly globalized and interconnected world, businesses’ areas of operation are no longer limited to the country or even the geographic region in which they are based. Corporations spread their operations across the globe seeking to maximize the efficiency and profitability of their operations. Among business entities with a global presence, those that derive at least 25% of their revenue from operations outside of their home country, or from investments in foreign enterprises, so-called Multinational Corporations (MNCs) hold an uncertain status in international law. With their administrative home countries geographically separated from the location of a large portion of their business operations, it is often unclear whose jurisdiction these businesses fall under. A business incorporated in the United States that operates several production facilities in the PRC may face situations of conflicting regulation from the US and Chinese governments.
II. Rise of COVID-19
Almost immediately after recognizing that COVID-19 was no longer a Chinese regional issue but had become a global concern that could no longer be ignored, the existing structure of global cooperation quickly deteriorated. States and organizations that had previously shown a willingness to work together towards mutual benefit suddenly saw their supply chains interrupted and their access to key sources of raw materials and equipment heavily restricted. This led to a ‘law of the jungle’ scenario, where individuals, corporations, and governments began violating previously established norms in order to ensure the survival and welfare of their people. Once it became clear that the efforts to stop the spread of COVID-19 were not likely to be successful and focus instead swapped to damage control, states began to batten down the hatches, reef their sails and prepare to weather the storm of unmitigated pandemic spread.
The speed of COVID-19’s rise left many nations unable to sure up their nation’s stocks of the equipment such as ventilators, masks, and gowns essential for proper medical response to the virus. With confirmed patient numbers growing rapidly, new outbreaks happening daily, and supplies dwindling, countries began to prioritize domestic needs over the international obligations that they had previously respected.
III. US Response
This rise in protectionist competition for limited resources is perhaps best illustrated by the United States’ efforts to secure personal protective equipment (PPE) for its citizens. After being made aware of the risk of Coronavirus spreading from its point of origin in Wuhan, China, the Trump administration failed to make adequate preparations for the possibility of an outbreak in the US. Late into March 2020, even after many cases of COVID-19 had started to appear in the US, the official party line of the Trump administration was that the reports of the virus’s severity represented a “hoax” concocted by the Democratic party to derail Trump’s political momentum in a crucial election year. This display of hubris and lack of significant preparation of crisis response capabilities left the US in an unenviable position at the end of March when they surpassed all other countries in total number of confirmed coronavirus cases. This was a crisis situation for the Trump administration and for President Trump specifically, who since the first US case in January had touted the US’s pandemic response efforts and assured the US public that, “We have it totally under control” and “It’s going to be just fine.”
This failure to make adequate preparations despite being made aware of the potential of COVID-19 to become a global pandemic in late 2019, the US found itself in deep hole of unchecked viral spread and the activation of the Defense Production Act (henceforth DPA) was an attempt by President Trump to claw his way out of that hole. This lack of preparation by the US can be attributed to the fact that “no authority exists for pandemic prevention or response in the case of an outbreak within the United States.”[ii] “The U.S. has no lead agency, no specific plan other than the possibility of quarantines and troop deployment, and no action plan based on a realistic understanding of the nature of a pandemic.”[iii] In fact, in 2016, President Obama created a pandemic response office within the National Security Council (NSC), with the express purpose of filling the above stated leadership gap and coordinating pandemic response between government agencies. As part of the Trump administration’s war on everything tied to the name ‘Obama’ this office was removed from the NSC in 2018, once again leaving the US rudderless in the pandemic storm.
On the domestic front the Trump administration immediately set to work pitting state governments against each other in bidding wars for equipment, seizing stores of PPE held by private enterprises and state agencies, and withholding support from local governments that did not toe the Trump party line. Meanwhile in the international sector, the Trump White House was making use of a law dating to the Korean war known as the DPA to gather additional supplies for the fight against COVID-19. In late March, 3M China (an affiliate of the Michigan, US based 3M) received approval for the export of 10 million N95 respirators to the US. Days later on April 2nd, Trump announced that through executive order he would be directing US manufacturers, 3M in particular, to focus on PPE for US domestic use. The next day, masks from one of 3M’s plants in China which were en route to Germany were sent to the US. About 200,000 masks contracted to be sent to the German police were instead sent to the US, after they were redirected during a cargo transfer on the ground in Thailand. On the same day French officials claimed that shipments of masks bound for France were also diverted to the US after planes were met on their departing tarmacs by individuals offering cash payments far in excess of the original purchase prices. Later Brazilian officials made claims similar to those of the French.
IV. Defense Production Act
The justification used by the US for the seizure of 3M’s foreign assets and the attempt to block them from exporting coronavirus related goods from their US plants was the aforementioned DPA. The DPA was first signed into law in 1950 with the intended purpose of directing US domestic production towards those goods deemed necessary to the war effort. The DPA in its original form contained three major categories of powers granted to the executive branch upon its activation. Firstly it authorized the President to direct production facilities to prioritize “goods or services needed for the national defense to the Government before the contractor fulfilled other contractual obligations.”[iv] Second it allows the president to allocate materials, services and facilities in support of national defense and direct businesses to “use products in inventory to meet the Government's order or to provide products that have been sold by a business within the last two years,”[v] Third it allows the President to control the civilian economy to secure and control the distribution of scarce materials. Put simply, it “gives almost unchecked power to the executive”[vi] to control all aspects of production and distribution logistics in the US “upon such conditions, and to such extents as he shall deem necessary or appropriate to promote the national defense.”[vii]
The DPA was already a powerful piece of legislation used to great extent many times since its creation in 1950, but the scope of its powers grew significantly in the late 90’s and early 2000’s. “In 1994, Congress authorized FEMA to use the Defense Production Act for ‘emergency preparedness activities.’”[viii] and "In 2003, Congress expanded the use of the Defense Production Act to apply to "critical infrastructure protection and restoration”[ix] These expansions to the scope of the DPA allowed for its use in a litany of situations that would not have previously met the more stringent requirements of promoting ‘national defense’. The vague definitions of ‘emergency preparedness activities’ and ‘critical infrastructure’ leave much of the DPAs power up to the interpretation of the very executive leader to whom it grants power, leading former US Senator Phil Gramm to refer to the DPA as, “The most powerful and potentially dangerous American law.”[x]
Since early 2020 pressure had been mounting on the Trump administration to activate the DPA to stimulate US domestic production of PPE and coronavirus treatment supplies. With the signing of EO 13909 on March 18th and EO 13910 five days later on the 23rd, President Trump brought the DPA into force with the vaguely stated purposes of controlling “priorities and allocation of medical resources” and preventing hoarding of supplies respectively. The original justification given by the Trump administration was that the DPA was needed on one hand to crack down on price gouging that was running rampant within the United States, and on the other hand to control the distribution of PPE and other pandemic response materials. Realizing that, “...in a pandemic, the potential breakdown of civil order as well as scarcity of lack of needed resources would present a range of problems that would immediately overwhelm any plans,”[xi] and that, “The intense public scrutiny could limit the willingness of private sector companies to offer assistance during future disasters.” [xii] further action was needed to pressure US manufacturers to devote their efforts to coronavirus response as directed by the US government. It was not until EO 13911 was introduced by President Trump on March 27th that the federal government began to activate provisions of the DPA that grant the federal government far reaching authority to direct domestic production of private enterprises.
V. DPA & Extraterritoriality
While those who fear government overreach into the business sector, may find President Trump’s order for companies like 3M to allocate goods at their domestic facilities exclusively for US internal use unpalatable, it is undeniably a legal authority granted to him by the provisions of the DPA. What is less clear however is the legality of US action against 3M overseas assets and particularly the alleged cases of US redirecting PPE from Chinese manufacturing plants to the US. In the one case, these were masks made in China, located in Thailand, and bound for Germany. These goods had no tie to the US except for the fact that the manufacturer’s (3M China) parent company is headquartered in the US. The legality of this case is not as clear cut as the Trump administration would like the world to believe and it may simply amount to, as German State Minister of the Interior of Berlin Adreas Geisal put it, ‘an act of modern piracy’.
There is not a clear-cut answer to where the jurisdiction lies to control the actions of MNCs with operations in multiple nations. Even in cases involving worker exploitation, slave labor and gross violations of human rights by MNCs and their affiliates it is often difficult to establish a clear path of jurisdiction to try the cases. "MNC has transcended national legal systems and ignored the feeble international system to make the imposition of human rights norms nearly impossible.”[xiii] This unclear jurisdiction is due to MNCs status as extraterritorial entities operating outside the borders of their country of incorporation. Extraterritoriality encompasses, “the immunities enjoyed by foreign states or international organizations and their official representatives from the jurisdiction of the country in which they are present.”[xiv] Put simply it is the concept that certain persons and entities are subject to laws depending on their nationality, not their location. This grants them significant protections from the local laws outside their home countries. This concept has traditionally been applied to diplomats, military installations and ships in transit, but more modern interpretations of extraterritoriality include MNCs among those protected by extraterritorial rights.
Extraterritoriality has also been used in the opposite direction to justify the application of domestic laws in foreign territories. There is legal precedent in the form of cases like that of Filartiga v. Pena-Irala, in which US courts asserted their right to try cases of exceptional violations of human rights and other infractions recognized by the law of nations outside of US territory.[xv] The Filartiga case involved the kidnapping and torture of a lawyer in Paraguay in retaliation for the political stances of one of his clients. [xvi] At face value the Filartiga case does not hold direct applicability to the case of US actions against the overseas activity of MNCs, but what it represents is the revival of antiquated US statutes to justify modern legal action and establishes that “courts must interpret international law not as it was in 1789, but as it has evolved and exists among the nations today."[xvii] The DPA has nowhere near the years under its belt that the Alien Tort Act had when it was revived for Filartiga v. Pena-Irala, but if revisions and expansions like those passed in 1994 and 2003 are continuously tacked onto the DPA it is easy to envision a future where it is as antiquated as the ATS and still used to justify US international overreach.
The coronavirus pandemic has opened the world’s eyes to the undeniable fact that the relations, resources, and technologies that we depend upon for modern life cannot protect us from a sudden and unexpected global disaster. There are some predictions that the global response to COVID-19 will become the defining point in time marking the start of a new era, much in the same way that the Black Plague divided European history:
European history can be divided into two periods. Pre-plague history was characterized by Church domination and the complete lack of individual rights; the Black Death marked the end of the Dark Ages. The post-plague history began with questioning all of the old assumptions, the development of nation states, personal enlightenment (The Age of Reason, or Age of Enlightenment) and political, social and religious freedom.[xviii]
The plague took the better part of a year to spread throughout Europe and Asia. Due to the increased interconnectedness of 21st Century globalized society as compared to the 14th century, COVID-19 was able spread to all corners of the globe in a matter of months showing that “a single individual with a contagious disease spread by airborne contact, not yet showing symptoms, could easily spread an incurable plague-like disease throughout the world within 24 hours.”[xix] Some experts are predicting that we are currently living in the time period that will become the dividing line between the pre and post coronavirus eras, that society has been irreversibly altered such that there is no chance of returning to any sort of status quo.
Considering the events of 2020, it is still uncertain if history truly will be divided into the pre- and post-COVID eras. If this truly is a historical dividing point, one of the issues that must surely be addressed in the post-COVID era is the status of jurisdiction over MNCs and their overseas operations. Do MNCs possess any level of extraterritorial rights? Are they subject to the laws of their country of origin, their country of operation, or both? What rights does the government in an MNC’s country of incorporation have to apply laws to the MNC’s overseas operations? Whether or not the US acted as was claimed by Germany and France, the fact that the responses to the alleged US seizure of goods ranged from “perfectly legal” to “modern day piracy” and that there are not clear cut, universally accepted answers to the above questions is cause for concern. MNCs and the products they produce are essential for modern life, but with supply chains for essential goods spanning dozens of nations, all it takes is one greedy actor along the chain to cut everyone downstream off from the supplies they need. The US has shown the most willingness to extend its political arm far beyond its borders, but in the case of a future crisis that puts every nation on alert, many more governments may be willing to forgo the jus cogens of international relations. When supply chains of essential goods are threatened, even the most well-disposed nations are not immune to protectionist tendencies. Without clear-cut international norms detailing how various nations’ laws apply to MNCs, and a transnational authority to enforce said norms, what is left is a situation where ‘might makes right’ and the only rule in a crisis situation is take as much as you can as fast as you can.
[i] Lynch, Gary. Single Point of Failure. John Wiley & Sons, 2009.
[ii] Thomsett, 2010.
[iii] Thomsett, 2010.
[iv] Littlejohn, J. Michael. “Using All the King’s Horses for Homeland Security: Implementing the Defense Production Act for Disaster Relief and Critical Infrastructure Protection.” Public Contract Law Journal, 36(1), 2006, pp. 1–21.
[vi] US H.R Rep. No. 108-56, 2001, p. 12.
[vii] 50 U.S.C. app. § 2071 (2)
[viii] Thomsett, Michael C. “Global Supply Chain Risk Management: Viewing the Past to Manage Today’s Risk from a Historical Perspectives.” IHART, 13, 2010, pp. 49–55.
[x] Sen. Gramm, Phil, California Energy Crisis and Use of the Defense Production Act:: Hearing Before the Committee on Banking, Housing, and Urban Affairs, US Senate, 107th Cong., 2001.
[xi] Thomsett, 2010.
[xii] US H.Rep No. 109-377, 2006.
[xiii] Aguirre, Daniel (2004) "Multinational Corporations and the Realisation of Economic, Social and Cultural Rights," California Western International Law Journal: 35(1), Article 3.
[xiv] “Extraterritoriality,” Encyclopedia Britannica, www.britannica.com/topic/extraterritoriality. Accessed 30 July 2020.
[xv] Olah, F.. “Mnc liability for international human rights violations under the alien tort claims act: review & analysis of the fundamental jurisprudence and look at aiding abetting liability under the act” QLR, 25(4), 2007, p. 755.
[xvi] Ibid, p. 756.
[xviii] Thomsett, 2010.