principles of international law for business. international economic law business and policy and international law in business environment pdf free download
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Published Date:17-07-2017
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UNIT – I The purpose of introducing this subject is to give an overview about the legal environment and the intricacies involved in international trade. Law is defined as a set of rules established by a government to regulate the conduct of individuals and groups in a society. These rules are legal obligations imposed on citizens and enforced by the Sovereign. It is the duty of citizens to obey these rules and those who violate them are liable for punitive action. One of the major reasons for the development of law was to give protection to individuals, to society, and to property. Law is not limited to regulating relationships between individuals or between individuals and their society but also be used as a positive force to promote worthwhile social goals. In fact, in our consumer-oriented society law touches every aspect of business life. Therefore, it is imperative to know what Business Law is. Business law is that part of the law which deals with mercantile transactions of mercantile people. One of the reasons for studying business law is to learn to predict what the law will be in the conduct of businesses both at the national and international level. Understanding business law will enhance the ability to take right decisions without violating rules framed by the government. The following brief introduction helps the students to get acquaintance with Business Law. INTERNATIONAL LAWS FOR BUSINESS Business today is truly international. International trade has existed since times immemorial. There are findings to indicate that international trade existed as long back as 2000 B. C. With increasing complexities and volumes in international trade, an urgent need for a uniform code for regulating these transactions was keenly felt. The importance of international trade and a uniform code is more keenly felt in present day economy where domestic and foreign politics play their influencing role in conducting transnational business. International Law for business aims at providing the regulations required for execution of international transactions involving more than one nation. Every country has its own set of laws for regulating business. Therefore, it is apparent that every international business transaction has to comply with provisions of both domestic as well as international law. In order to ensure performance of the transaction(s), parties enter into treaties/agreement. These treaties are framed according to general practice and customs. The most significant aspect of international law is jurisdiction. Though it is not important for students to go for a detailed study of business law in each country, understanding the structure of the legal system in different countries helps in making a good comparative study. Why do we need Law? One should keep in mind that the base for law is a dispute. The judgment of a decided case becomes a referral point - known as a precedent. The reason behind this reference is to facilitate uniformity in deciding similar cases. It may be noted that precedents may be overruled if the judgment pronounced earlier is found to be erroneous. To enable students to have a better view of the legal structure, a discussion on the legal system existing in five economically important countries like Canada, Germany, Saudi Arabia, Japan and China would be fruitful. Canada, the second largest country in the world framed its own constitution in l982 by the act of British Parliament. It has a bicameral parliament - House of Commons and a Senate. Canada follows the principle of legislative supremacy, giving importance to precedents. Cases, statutes, customs and royal prerogative are the sources of Canadian law. The judges for federal and provincial courts are selected by Governor-General of Canada. The legal system of Canada is primarily based on the common law tradition. By and large, the regulatory framework is uniformly applicable throughout Canada with the exception of the province of Quebec. Quebec has been given special rights to preserve its culture, language and governing institutions. Germany, the largest European country, follows the civil law tradition. Of all the civil codes, the German Civil Code has had the widest influence in the development of laws in other countries like China, Japan and many Eastern and Central European countries. With the unification of the erstwhile two German nations, the political authority is divided between the federal government and the states. Matters of utmost importance like defence, foreign affairs, currency, nationality and intellectual property are exclusively looked into by the federal government. The Chancellor, the most powerful political figure, makes public policy and appoints heads of state. There is marked difference in the manner cases are resolved and the judiciary system that exists in Germany as compared to other countries. Two important codes play a significant role. They are the German Civil Code and the German Commercial Code. The civil code has 2300 sections divided into five parts with the first two covering legal and contractual obligations. The commercial code sets rules for doing business in Germany. Saudi Arabia, an Islamic country, has a legal system that follows the Sharia –commandments of Prophet Mohammad. Unlike other countries, Saudi Arabian government has only two wings - the executive and judicial, and the King is the supreme authority. The regulations approved by the King are published in the official gazette. There are agencies to assist in regulating the administration of the Kingdom. The most important among them are the Supreme Commission on Labor Disputes, the Commissioner for the Settlement of Commercial Disputes and Board of Grievances. A well regulated country, Saudi Arabia strongly abides by the Holy Quran. As such students will note that unlike common law systems, charging of interest is prohibited among many other things. Dispute resolution normally results in damages or recession. Despite the difference in the regulatory structure, the importance of Saudi Arabia in present day economy is continually growing. Japan, is perhaps the only example of 'real development' in almost all areas. Japan which was battered and ravaged during the World War II, is now among the most advanced counties of the world. A look at its legal system shows traces of the Tokugawa period influence of the German Civil Code and the American influence. Right from the early days, Japanese gave much importance to the Confucian system where the head of the family/village was the deciding authority. His word was rarely contested. The process of industrialization in the nineteenth century saw Japan draw up a Civil Code based on the German Civil Code This however, underwent a drastic change after the Second World War when the American influence separated the church and state and introduced a parliamentary system with a duly elected Prime Minister and a bicameral legislature. Despite, the American influence Japanese have a different outlook in matters of international trade. All contracts have the regular clauses. Yet, the Japanese treat an international transaction as an opportunity to develop personal ties and business relationships. They look for flexibility, amicable settlement of disputes and performance of contract in good faith. China has for many hundreds of years been known for the superior quality of goods it produces and its ancient medical practice. Thus, international trade has been an integral part of Chinese economy. Very much like the Japanese Confucian attitude, the Chinese have deep faith in behaving in an honorable and ethical manner. Until recently, the attitude of Chinese towards practitioners of law has been discerning. Primarily because it has gone through a lawless period during the Cultural Revolution known as 'Dark Ages' in 1966 and the second revolution which started in 1976 with the death of Mao Zedong's. Today, China has a large, complex system of agencies, the most important among them being Ministry-of Foreign Economic Relations and Trade which renders guidance in matters related to foreign trade. The governing statute for foreign trade is Foreign Economic Contract Law (FECL). According to FECL all contracts should be in writing, must express the real intent of the parties who must have legal contractual capacity and the contract should not violate law or public policy. Before resorting to arbitration, Chinese prefer to settle disputes out of court through friendly consultations, which again reflects their reliance on traditional value of honorable and ethical behavior. European Community - The aftermath of the Second World War set the world leaders to think of a united Europe to achieve economic alliance and compatible political and legal setup. Thus, started the European community. The first step towards this was, building a common market between France and Germany for coal and steel through the European Coal and Steel Community (ECSC). The success of this led to signing of a number of treaties like the EURATOM, European Economic Community (EEC) and the Maastricht Treaty, all directed towards political and economic unity. To simplify the administration of ECSC, EURATOM and EEC, a merger treaty was subsequently signed. The European community has a well organized administrative set-up comprising of council of ministers, parliament, commission, courts of justice and auditors, and advisory committees. These community institutions have developed substantive laws- which prevail over individual country laws and create rights in individuals and businesses which are to be protected by national courts. INTERNATIONAL TRADE - LEGAL FRAMEWORK We have looked briefly into the various laws prevalent in different countries. Let us now concentrate on what will be the scenario if two or more nations wish to have trade relationships and the various regulations that one has to follow. GATT: The General Agreement on Tariffs and Trade popularly known as GATT attempts to promote multilateral fair trade and reduce trade barriers. Members of GATT reduce trade barriers by granting 'Most Favored Nation' (MFN) status and charging the lowest applicable tariff rates for imports from MFN. GATT provides for promotion of fair trade by prohibiting 'dumping' and 'unfair subsidies, bounties and grants'. Lack of adaptability of GATT, to regulate world trade has resulted in nations entering into a direct trade relationship like the North American Free Trade Agreement for example. In other cases some developed nations have come forward to help the less-developed countries by permitting duty free imports of certain items under the Generalized System of Preferences. Regulation of Imports and Exports Tariff or duty which is levied on imports is one of the important sources of income for a country. Tariff is levied based on the classification of products, its value which usually is the transaction value and its place of origin. The rate of duty levied on imported goods has significant impact on the domestic market for that product. To safeguard domestic interests some countries may resort to imposition of non-tariff barriers like adherence to strict quality standards in order to ensure safety to health and environment. Quotas and embargoes are the other forms of non-tariff barriers. On the other hand, countries wanting to promote exports may extend technical, market, and financial assistance and tax benefits to the exporters. To check undue assistance, GATT imposes countervailing duties on exports supported by unfair subsidies. The United States regulates its exports under the Export Administration Act of 1979. The primary objective being to protect its economy in case of short supply, to protect national security and to further its foreign policy objectives. The US has a complex regulatory structure for both imports and exports which includes the anti-boycott regulations. Global Business Enterprises Let us now look at another important aspect of international law relating to international or global business organizations. International business organizations often known as Multinational Enterprises (MNE) are organizations having business entities in two or more countries. These entities are so interlinked that one exercises significant influence over the other. MNE can adopt different channels for doing business. It may choose to do business either through its own firm or through agents and distributors. In the case of an agent and principal relationship, depending upon the country in which the agent would be operating, the terms and conditions are decided. Some countries provide for protective measures to safeguard against unfair termination of the agency. Distributors on the other hand buy goods for the purpose of selling them and offering after-sales and warranty services. Unlike in agency contracts, distributors cannot bind the manufacturer with their acts. Distributorship contracts are normally for a fairly lengthy period as they involve large investment on part of the distributor. Licensing of technology is another form of doing global business. Licensing agreement may: (i) permit manufacture of patented, trademarked or copyrighted product, or (ii) be a franchise arrangement. MNE may also choose to carry-on business ion different countries by investing directly. This investment can be either by acquiring an existing company, opening a branch, establishing branches or starting a joint venture. Regulation of Global Competition: Competition may make businesses to resort to unfair, restrictive and monopolistic trade practices. Many developed as well as developing countries have adopted regulations to prevent such malpractices. For instance, the US has enacted antitrust laws – Sherman Act and Clayton Act. The European Community through Articles 85 and 86 of the Treaty of Rome also attempts at regulating unfair business competition. Japan too has antimonopoly law to prohibit unreasonable trade practices and abuse of dominant market power. Regulations have also been passed to check hostile acquisitions and strategic alliances. Protecting Business Property Rights Inventions, creations, technological advancements when protected take the form of copyrights, patients, trademarks or trade secrets. These intellectual properties are assets of business enterprises, as they are essential for the success of businesses. Hence, the need to encourage their growth and also provide legal protection against misuse, theft, etc. Copyright law gives authors and artists the right to control the reproduction and performance of their work(s). The period of protection varies in each country. By and large, protection is granted to authors for theirs life plus 50 years, and for photographic and works of applied art for25 years. Patents provide exclusive right to manufacture or use an invention for a specific period of tine. Patent laws are primarily territorial. However, there are a couple of international agreements to provide patent protection like the European Patent Convention and the Patent Co-operation Treaty. Lack of a universally accepted patent law hinders introduction of a product on a global basis. Trademark is any work, name, symbol, or device or any combination thereof adopted and used by manufacturer or merchant to identify his goods and distinguish them from those manufactured or sold by others. Apart from protecting their intellectual property rights, business enterprises are faced with a more complex problem of dealing with piracy and counterfeit goods. Pirators and counterfeiters cause great harm as they deprive the owner of the protected work his share of royalty, the authorized dealer his profit and the buyer of quality product. The US government through an amendment of the Trade Act of 1974, attempts to counteract such practices under Section 301 of the said act. Another problem faced by business enterprises is the gray market, where legitimate goods are marketed through unauthorized channels. Protecting intellectual property rights do not prevent governments from expropriating such property for public use. The criteria for such expropriation should be that these properties are taken for public use and a ‗just‘ compensation is paid for their acquisition. The MNE as world citizen Merely by their size, MNE have an edge over other corporations. Their ability to access capital helps in developing countries. They also possess the powers to exploit natural and human resources, demolish local economies and corrupting and controlling political figures. The United Nations Commission on Trade and Development (UNCTAD) has been making efforts for evolving a code of conduct for MNE to ensure their positive influence on the economy and avoid economic menace like the collapse of the Bank of Credit and Commerce International (BCCI) .the organization for Economic Co-operation and Development (OECD), has set guidelines to protect corporations in its member countries from MNE abruptly. Following the Bhopal disaster, varies governments have through treaties and conventions sought to adopt policies to reduce various polluting activities and protecting environment. Thus ‗International Law for Business‘ covers a whole gamut of business aspects with an international perspective. CONTRACTS After having discussed about the general legal framework prevailing in the international business scenario, let us now discuss the other aspects involved in international business laws, viz., Contract - legal provisions; payments terms; international sales agreements; rights and duties of agents and distributors. Legal Provisions: Contracts are an integral part of business and assume significance in case of transactions for sale of goods between two or more countries. Different contract laws in each country necessitated formulation of a uniform international law - for contracts. Thus, in 1988, the United Nations Convention on Contracts for the International Sale of Goods (CISG) came into force with l0 nations endorsing it. The CISG is organized in four parts. Part I (Articles I to 13) contains the Convention's general provisions, including rules on the scope of its applications and rules of interpretation. Part II (Articles 14 to 24) governs the formation of contracts. Part III (Articles 25 to 88) governs the rights and obligations of buyers and sellers. Part IV (Articles 89 to l0l) contains provisions for the ratification and the entry into force of convention. The essentials of a valid contract are that there should be an offer and acceptance and consideration. Utmost care is required to be taken while drafting the contract for incorporating the terms and conditions. This is important as a single contract can be incorporated in more than one way in case of any ambiguity. To ensure uniformity in international contracts, certain common terms relating to price, delivery, title, insurance like FOB, CIF, C&F, FAS, etc., have come into use. These are known as Incoterms. These are used in contracts involving sale of goods. It is reiterated that the term ‗contract‘ is not restricted only to sale of goods. There are contracts for setting up ventures, mergers and acquisitions and for transfer of intellectual property. In order to ensure performance of contracts and provide for remedy in case of dispute, CISG also provides a resolution mechanism. Generally, the choice of forum and enforcement clauses is included in a contract, so as to define the area of jurisdiction in case of a dispute. Letters of Credit Naturally, a contract for sale of goods involves purchase of goods for consideration .which is often money, and the mode of payment is an important clause in a contract. With today's dynamic market transactions across countries, Letters of Credit" (LOC) is considered to be one of the safest mode of payment. (LOC is an instrument issued by a bank or other person at the request of an account party that obliges the issuer to pay to a beneficiary a sum of money within a certain period of time upon the beneficiary's presentation of documents specified by the account Payee) There is another use for LOC in America and Japan. It is the "standby Letters of Credit". In these two countries, banks are not permitted to engage in insurance activities. Standby LOC are more like insurance policies, performance bonds or repayment guarantees. Despite the inbuilt safety-net, frauds do take place in the transactions because the LOC requires payment to be made against presentation of documents and since banks are under no obligation to scrutinize the underlying transaction, the buyer may be defrauded. Two cases - United Bank Ltd. vs. Cambridge Sporting Goods Corporation and ltek Corporation vs. First National Bank of Boston make an interesting reading. Transport and Insurance A contract is incomplete unless the parties have decided on the mode of transport to be utilized for transporting the goods and the extent of risk coverage. Sales contracts involving transportation customarily contain trade terms like FOB and CIF. Transportation may be either by air or ship. When shipped, the parties to a contract may adopt the provisions of the Carrier of Goods by Sea Act (COGSA) to adjust their liability. One of the important shipping documents is the 'Ocean Bill of Lading' which is a contract between the carrier and the shipper. It serves as a receipt for the goods and also as a negotiable document of title. Where goods are transported by air, the documentation is called an 'Air Waybill'. An air waybill performs the same functions as a bill of lading, except that it is generally non-negotiable. A bill of lading or an air waybill is among the many documents to be submitted to the banks for obtaining Payment under a LOC. Most contracts also have an insurance clause to minimize risk of loss or damage during transit. PAYMENT TERMS: 1) Letter of Credit A document issued by a bank (issuing bank) stating its commitment to pay someone a stated amount of money on behalf of a buyer so long as the seller meets very specific terms and conditions. Letters of credit are more formally called documentary letters of credit. Before payment, the bank responsible for making payment on behalf of the buyer verifies that all documents are exactly as required by the letter of credit. If an United States exporter is unfamiliar with the credit risk of the foreign bank, or if there is concern about the political or economic risk associated with the country in which the bank is located, it is advised that a letter of credit issued by a foreign bank be "confirmed" by a U.S. bank. This means that the U.S. bank adds its pledge to pay to that of the foreign bank. Letters of credit that are not confirmed are called "advised" letters of credit. The local Department of Commerce district office or an international banker will help exporters determine whether a confirmed or advised letter of credit is appropriate for a particular transaction. Types of Letter of Credit Irrevocable (unconfirmed) - A letter of credit that cannot be amended or cancelled without prior mutual consent of all parties to the credit. Such a letter of credit guarantees payment by the bank to the seller/exporter so long as all the terms and conditions of the credit have been met. This is the most popular form of letter of credit. Revocable (confirmed) - A letter of credit that can be cancelled or altered by the drawee (buyer) after it has been issued by the drawee's bank. Revocable letter of credits are rarely used because of security concerns. Transferable- A letter of credit that can be redirected at the sellers request. These are used when an export broker is involved. Once all conditions on the letter of credit are met, the broker's bank receives the payment, takes out his commission, and completes the transaction as negotiated. Sight - A letter of credit that requires payment to be made upon presentation of documents. Time Draft- A letter of credit that states payment is due within a certain time (usually 30, 60, 90, or 180 days). Changes made to a letter of credit are called amendments. The fees charged by the banks involved in amending the letter of credit may be paid either by the buyer or the seller, but the letter of credit should specify which party is responsible. Since changes are costly and time-consuming, every effort should be made to get the letter of credit right the first time. An exporter is usually not paid until the advising or confirming bank receives the funds from the issuing bank. To expedite the receipt of funds, wire transfers may be used. Bank practices vary, however, and the exporter may be able to receive funds by discounting the letter of credit at the bank, which involves paying a fee to the bank for this service. Exporters should consult with their international bankers about bank policy on these issues. Payment and Risks with Letter of Credits: Time of Goods Risk to Risk to Payment Available to Exporter Importer Importer Irrevocable At sight of After Risk lies with None presentation Payment United States of documents confirming to issuing bank bank; or specified number of days after acceptance by issuing bank Revocable Same as After Risk lies with None Confirmed payment foreign issuing bank and economic conditions of issuing bank Sight When After Risk lies with Assured shipment is payment local shipment is made confirming made, but bank relies on exporter to ship goods described in the documents Time Draft At maturity Usually Risk lies with Assured of draft, may before local shipment is or may not be payment confirming made, but discounted bank relies on exporter to ship goods described in the documents Red Clause A percentage After See The of total payment irrevocable percentage of amount and revocable payment in before advance is at shipment. total risk. Balance is Balance same same as type as type of of L/C L/C Revolving Variable Variable See None Letter of irrevocable Credit and revocable Standby At time Usually Delay in None Letter of shipment is before payment. Credit received payment Also see irrevocable Back-to-back Same as After None None irrevocable payment Transferable Same as After Same as None irrevocable payment irrevocable Assignment Same as After Same as None of Proceeds irrevocable payment irrevocable 2) Cash in Advance (CIA) Usually used only for small purchases and when the goods are built to order. 3) Draft (or bill of exchange) An unconditional order in writing from one person (the drawer) to another (the drawee), directing the drawee to pay a specified amount to a named drawer at a fixed or determinable future date. May be date, sight, or time draft. 4) Credit cards Used mainly in transactions where the dollar value of the items sold is low and shipment is to be made directly to the end user. 5) Open Account The exporter bills the customer, who is expected to pay under agreed terms at a future date. Some of the largest firms abroad make purchases only on an open account, which is a convenient method of payment if the buyer is well established and has demonstrated a long and favorable payment record. 6) Consignment Sales Exporter delivers goods to an agent under agreement that the agent sell the merchandise for the account of the exporter. The agent sells the goods for commission and remits the net proceeds to the exporter. 7) Counter trade/barter Sale of goods or services that are paid for in whole or in part by the transfer of goods or services from a foreign country. Payment Problems The best solution to a payment problem is to negotiate directly with the customer. If negotiations fail and the sum involved is large enough to warrant the effort, obtain the assistance of your bank, legal counsel, and other qualified experts. If both parties can agree to take their dispute to an arbitration agency, this step is faster and less costly than legal action. The International Chamber of Commerce handles the majority of international arbitrations and is usually acceptable to foreign companies because it is not affiliated with any single country. For more information on these issues, contact the U.S. Council for International Business, American National Committee of the ICC, 212-354- 4480; American Arbitration Association, 212-484-4000; Trade Remedy Assistance Office International Trade Commission, 202-205-2200. Risk Factors Influencing Payment Terms: Letter of Credit Cash on Open Account Documents Customer New Established Established Relationship Type of Order Custom Production Production Political Situation Unstable Stable Strong Economic Unstable Stable Strong Situation Competition No Yes Yes Volatility of Price Yes No No Changing Downwards for Buyer Cash Flow Yes Adjustable Adjustable Timing and Needs Payment Terms A list of things to consider when determining the best price for your product overseas. Terms of Sale Terms in international business transactions often sound similar to those used in domestic business, but they frequently have very different meanings. For this reason, the exporter must know the terms before preparing a quotation or a pro forma invoice. Preparing Quotes for International Buyers While a sales contract that spells out the details of a transaction is warranted for larger, more complex deals, a quotation in the form of a Proforma Invoice may be sufficient for smaller transactions. Learn how to prepare Pro forma invoices and the information they should contain and more about how to prepare quotes. Proper pricing, complete and accurate quotations, choosing the terms of the sale, and selecting the payment method are four critical elements in selling a product or service overseas. Of the four, pricing can be the most problematic, even for an experienced exporter. Pricing Considerations The price considerations listed below will help an exporter determine the best price for the product overseas.  At what price should the firm sell its product in the foreign market?  What type of market positioning (customer perception) does the company want to convey from its pricing structure?  Does the export price reflect the product's quality?  Is the price competitive?  Should the firm pursue market penetration or market-skimming pricing objectives abroad?  What type of discount (trade, cash, quantity) and allowances (advertising, trade-off) should the firm offer its foreign customers?  Should prices differ by market segment?  What should the firm do about product line pricing?  What pricing options are available if the firm's costs increase or decrease? Is the demand in the foreign market elastic or inelastic?  Are the prices going to be viewed by the foreign government as reasonable or exploitative?  Do the foreign country's antidumping laws pose a problem? As in the domestic market, the price at which a product or service is sold directly determines a firm's revenues. It is essential that a firm's market research include an evaluation of all of the variables that may affect the price range for the product or service. If a firm's price is too high, the product or service will not sell. If the price is too low, export activities may not be sufficiently profitable or may actually create a net loss. The traditional components of determining proper pricing are costs, market demand, and competition. Each of these must be compared with the firm's objective in entering the foreign market. An analysis of each component from an export perspective may result in export prices that are different from domestic prices. It is also very important that the exporter take into account additional costs that are typically borne by the importer. They include tariffs, customs fees, currency fluctuation transaction costs and value-added taxes (VATs). These additional costs can add substantially to the final price paid by the importer, sometimes resulting in a total of more than double the U.S. domestic price. Foreign Market Objectives An important aspect of a company's pricing analysis is determining market objectives. For example, is the company attempting to penetrate a new market, looking for long-term market growth, or looking for an outlet for surplus production or outmoded products? Many firms view the foreign market as a secondary market and consequently have lower expectations regarding market share and sales volume. This naturally affects pricing decisions. Marketing and pricing objectives may be general or tailored to particular foreign markets. For example, marketing objectives for sales to a developing nation where per capita income may be one tenth of that in the United States are necessarily different from the objectives for Europe or Japan. Costs The computation of the actual cost of producing a product and bringing it to market is the core element in determining if exporting is financially viable. Many new exporters calculate their export price by the cost-plus method. In the cost-plus method of calculation, the exporter starts with the domestic manufacturing cost and adds administration, research and development, overhead, freight forwarding, distributor margins, customs charges, and profit. The effect of this pricing approach may be that the export price escalates into an uncompetitive range. It clearly shows that if an export product has the same ex-factory price as the domestic product; its final consumer price is considerably higher once exporting costs are included. Marginal cost pricing is a more competitive method of pricing a product for market entry. This method considers the direct, out-of-pocket expenses of producing and selling products for export as a floor beneath which prices cannot be set without incurring a loss. For example, additional costs may occur due to product modification for the export market that accommodates different sizes, electrical systems, or labels. On the other hand, costs may decrease if the export products are stripped-down versions or made without increasing the fixed costs of domestic production. Other costs should be assessed for domestic and export products according to how much benefit each product receives from such expenditures. Additional costs often associated with export sales include:  Market research and credit checks;  Business travel;

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