chapter 4 - cross nation coperation and agreements

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*International BusinessEnvironments & Operations14e

Daniels Radebaugh Sullivan

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*Learning ObjectivesTo identify the major characteristics and challenges of the World Trade OrganizationTo discuss the pros and cons of global, bilateral, and regional integrationTo describe the static and dynamic impact of trade agreements on trade and investment flowsTo define different forms of regional economic integrationTo compare and contrast different regional trading groupsTo describe other forms of global cooperation such as the United Nations and OPEC


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*IntroductionEconomic integration the political and monetary agreements among nations and world regions in which preference is given to member countriesBilateral integrationRegional integrationGlobal integration


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*The World Trade OrganizationLearning Objective 1: To identify the major characteristics and challenges of the World Trade Organization


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*The World Trade OrganizationWorld Trade Organization (WTO)The major body for reciprocal trade negotiationsenforcement of trade agreementsGeneral Agreement on Tariffs and Trade (GATT)


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*GATT: Predecessor to the WTOGATTformed in 1947 to abolish quotas and reduce tariffsMost favored nation (MFN) clausetrade without discriminationSucceeded by WTO in 1995


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*What Does The WTO Do?WTOcontinues clause of GATTprovides a mechanism for dispute settlement Doha Roundagricultural subsidiesCriticized for failing to pay enough attention to labor and environmental concernsundermining global diversitybenefitting rich at the expense of the poor


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*The Rise Of Bilateral AgreementsBilateral agreementscan be between two individual countries or can involve one country dealing with a group of other countriesAlso known as Preferential trade agreements (PTAs)Free trade agreements (FTAs)


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*Regional Economic IntegrationRegional trade agreementsintegration confined to a region and involving more than two countriesExamples include European Union (EU)European Free Trade Area (EFTA)North American Free Trade Area (NAFTA)Association of Southeast Asian Nations (ASEAN)Common Market of Eastern and Southern Africa (COMESA)


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*Regional Economic IntegrationMajor types of economic integrationFree trade area no internal tariffsCustoms union no internal tariffs plus common external tariffsCommon market customs union plus factor mobility


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*The Effects Of IntegrationLearning Objective 3: To describe the static and dynamic impact of trade agreements on trade and investment flows


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*The Effects Of IntegrationEffects of regional integration Static effects trade creationtrade diversionDynamic effectsEconomies of scale


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*The European UnionEuropean Union (EU) changed from the European Economic Community to the European Community to the European Unionthe largest and most successful regional trade group in the worldprovides free trade of goods, capital, and peopleuses common external tariffshas a common currency


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*The European UnionEuropean Commission provides political leadership, drafts laws, and runs the various daily programs of the EUCouncil of the EU composed of the heads of state of each member countryEuropean Parliament has legislative power, control over the budget, and is supervisor of executive decisionsEuropean Court of Justice interprets and applies EU treaties


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*The European UnionSingle European Act designed to eliminate the remaining nontariff barriers to trade in EuropeLisbon Treaty strengthens the EUs governance process and improves the ability of the EU to make and implement decisions Treaty of Maastricht fostered political and monetary union in 1992the euro


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*The European UnionCompanies doing business in the EU need to determine where to produce productsdetermine what their entry strategy will bebalance the commonness of the EU with national differences


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*NAFTA The North American Free Trade Agreement (NAFTA) includes Canada, the U.S., and Mexicoinvolves free trade in goods, services, and investmentsincludes countries of different sizes and wealthSome U.S. trade and investment has been diverted to MexicoFree trade arearules of origin


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*NAFTARegional content at least 50% of the net cost of most products must come from the NAFTA regionAdditional provisionsWorkers rightsThe environmentDispute resolution mechanism


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*Regional Economic Integration In The AmericasThere are six major regional economic groups in the AmericasCaribbean Community (CARICOM)Central American Common Market (CACM)Central American Free Trade Agreement (CAFTA DR)Andean Community (CAN)Southern Common Market (MERCOSUR)Latin American Integration Association (LAIA)


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*Regional Economic Integration In AsiaRegional integration in Asia includesthe Association of Southeast Asian Nations (ASEAN)ASEAN Free Trade Areathe Asia Pacific Economic Cooperation (APEC)open regionalism


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*Regional Economic Integration In AfricaSeveral efforts at economic integration existPan Arab Free Trade Area (PAFTA)Arab LeagueGulf Cooperation Council (GCC)African Union (AU)


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*Other Forms Of International CooperationLearning Objective 6:To describe other forms of global cooperation such as the United Nations and OPEC


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*Other Forms Of International CooperationThe United Nations (UN)established in 1945promotes peace and securityUNCTADhelps developing countries participate in international tradeNongovernmental Organizations (NGOs)private, nonprofit institutions that are independent of the government


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*Commodities And The World Economy Commodities raw materials or primary products that enter into trade Many commodity agreements exist todiscuss issuesdisseminate informationimprove product safetyOPEC


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*Organization Of The Petroleum Exporting Countries OPEC producer cartel that relies on quotas to influence pricesestablishes production quotas for member countriesSaudi Arabiaproduces about 42% of the worlds crude and18% of its natural gasDownside of high prices incentive to invest in non-OPEC countriesbalancing social, political, and economic objectives


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*The Future: Regional Integration And The WTO Will regional integration be the wave of the future, or will the WTO become the focus of global economic integration? The answer is that regional integration might actually help the WTO achieve its goals.

Regionalism can lead to liberalization of issues not covered by the WTORegionalism is more flexible


Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall8-*

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*International Business Environments and Operations 14e by Daniels, Radebaugh, and Sullivan

*Chapter 8: Cross National Cooperation and Agreements*The Learning Objectives for this chapter areTo identify the major characteristics and challenges of the World Trade OrganizationTo discuss the pros and cons of global, bilateral, and regional integrationTo describe the static and dynamic impact of trade agreements on trade and investment flowsTo define different forms of regional economic integrationTo compare and contrast different regional trading groupsTo describe other forms of global cooperation such as the United Nations and OPEC *Trade groups influence the strategies of multinational companies so its important to understand economic integration and its scope. The are three types of economic integration.At the bilateral level two countries decide to cooperate more closely. At the regional level, a group of countries located in the same geographic area cooperate. At the global level, countries from all over the world cooperate through the World Trade Organization. *Learning Objective 1: To identify the major characteristics and challenges of the World Trade Organization.

*The World Trade Organization, or WTO, encompasses and extends the General Agreement on Tariffs and Trade, also known as GATT. *The GATT was formed by 23 countries in 1947 as mechanism for negotiating the reduction and elimination of trade barriers and for agreeing on the conduct of international trade. The central tenet of GATT was the MFN clause that required members to open their markets equally to all other members. *The WTO, which has 153 members, follows the MFN principle of GATT and strives to provide a better means of mediating trade disputes and of enforcing agreements. The WTO does make some exceptions to the MFN principle. For example, developing countries manufactured products have been given preferential treatment over those from industrial countries, concessions granted to members within a regional trading alliance, such as the EU, have not been extended to countries outside the alliance, and countries are permitted to raise barriers against member countries which they feel are trading unfairly.The most recent set of negotiations for the WTO began in 2001 in Doha, Qatar. The Doha Round, which focuses on giving a boost to developing nations, has been challenging and has stalled numerous times. One of the major sources of tension involves agricultural subsidies. The WTO has been the subject of much criticism in the past. *Learning Objective 2: To discuss the pros and cons of global, bilateral, and regional integration.*Countries are increasingly willing to sidestep the multilateral system and engage in bilateral agreements in order to achieve their objectives. *Regional trade agreements or RTAs, also known preferential trade agreements, give member countries special treatment. They began to emerge after World War II when nations saw the benefits of cooperation and larger market sizes.*Learning Objective 4: To define different forms of regional economic integration.*The major types if economic integration are the free trade area, the customs union, and the common market.*Learning Objective 3: To describe the static and dynamic impact of trade agreements on trade and investment flows.

*Regional economic integration has social, cultural, political, and economic effects.The static effects of integration are the shifting of resources from inefficient to efficient companies as trade barriers fall. Static effects can develop when there is trade creation or trade diversion. Trade creation occurs when production shifts to more efficient producers for reasons of comparative advantage, while trade diversion occurs when trade shifts to countries in the group at the expense of trade with countries not in the group.Static effects improve the efficiency of resource allocation and affect both production and consumption.Dynamic effects of integration are the overall growth in the market and the impact on a company caused by expanding production and by the companys ability to achieve greater economies of scale.Economies of scale occur when the average cost per unit falls as the number of units produced rises. Keep in mind that regional economic integration allows for specialization and trade based on comparative advantage.

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*This Figure shows the impact of free trade agreements.

*Learning Objective 5: To compare and contrast different regional trading groups.*Its much easier to form regional trading groups than larger ones. One of the most comprehensive and successful regional groups is the European Union which began as a free trade agreement and has since expanded to become a common market that has abolished restrictions on factor mobility and harmonized national, political, economic, and social policies. The EU has 27 members some of which have joined forces on the blocs common currency, the euro. *This Map shows the members of the European Union and other important groups.The EU has expanded several times over the years to reach its current 27 members.

*Companies need to understand the political environment in the European Union. It has many governing bodies including the European Commission, the Council of the European Union, the European Parliament, the European Court of Justice, and the European Central Bank.

*The Single European Act was designed to eliminate the remaining nontariff barriers to trade in Europe.In 1992, the members of the EU signed the Treaty of Maastricht in part to establish a monetary union.The decision to move to a common currency, the euro, in Europe has eliminated currency as a barrier to trade for member countries.The euro Is a common currency in Europe. Is administered by the European Central Bank. Was established on January 1,1999. Resulted in new bank notes in 2002. Does not include the United Kingdom, Denmark, Sweden, or eight of the new entrants to the EU.

*Multinationals need to understand how the EU can influence their corporate strategy. For example, should they produce in a central location and incur the cost and time to move products from country to country? Should they acquire a local company as a way to get into the market? What do the different growth rates across member countries mean? *The North American Free Trade Area, or NAFTA, went into effect in 1994, and is the largest bilateral trade agreement in the world. Its designed to eliminate tariff barriers and liberalize investment opportunities and trade in services. Today, the U.S. is Mexicos and Canadas largest trading partner.Under the rules of origin provision of NAFTA, goods and services must originate in North America to get access to lower tariffs.

*NAFTA lays out various regional content rules that must be met in order to qualify for preferential treatment. In particular, for a product to be considered North American in terms of country of origin, at least 50 percent of the value of most products must be from North America. NAFTA also addresses several other areas, notably workers rights and the environment. The agreement, for example, includes certain labor standards such as the right to unionize as well as upgraded environmental standards in Mexico. Since NAFTA was signed, trade and investment have increased significantly. In fact, many companies look at it as one big regional market, and have been able to take advantage of trade agreements each country has with other nations as well. Moreover, demand in Mexico continues to rise, thanks in part to the creation of new jobs in the country, and more competitive companies. Keep in mind though, that challenges remain. One key issue today is illegal immigration.

*There are six major regional groups in the Americas. The success of each group varies. CARICOM is modeling its agreement after the EU. MERCOSUR is at the customs union level. The Andean Community, while one of the oldest regional economic groups, has yet to successfully achieve its goals. Similarly, the Latin American Integration Association is still struggling to achieve its objectives.*This Map shows the countries belonging to CACM, CARICOM, and CAFTA-DR.

*This Map shows the members of CAN, MERCOSUR, and LAIA.

*ASEAN is the fourth largest free trade area in the world. While the ASEAN free trade area has been very successful, other efforts in the region have not. APEC for example, has had less success in achieving its goals. The group is not only large and geographically distant, it also lacks a treaty. However, because it generates such a large percentage of the worlds output and merchandise trade, its potential is large. A key goal for the bloc is to establish open regionalism whereby member countries decide whether to apply trade liberalization to non-APEC countries on an unconditional MFN basis or on a reciprocal FTA basis. *This Map shows the members of ASEAN.

*The large number of nations combined with the regions three monetary unions and five regional trade associations make things complex when it comes to economic integration in Africa. Several African trade groups have been established, however, they rely more on their former colonial powers and other developed markets for trade than they do on each other. *This Map shows efforts at economic integration in Africa.

*Learning Objective 6: To describe other forms of global cooperation such as the United Nations and OPEC.*Other forms of cooperation can also influence the strategies of multinationals.The United Nations focuses on economic development, antiterrorism, and humanitarian movements. One organization in the UN is the United Nations Conference on Trade and Development, or UNCTAD. NGOs like the Red Cross and Doctors without Borders focus on humanitarian issues, while others like Africa Now and Save the Children focus on workers rights. *Developing countries frequently rely on commodity exports for the hard currency they need for economic development. If commodity prices arent stable, then earnings arent stable either. To try to ensure greater stability in commodity prices, various agreements have been established. Most havent been very successful, but one, OPEC, has been. *OPEC has been successful in terms of attempting to stabilize supply and price, but member countries often cheat in order to produce more revenues, and outside events like the civil war in Libya can interfere with the groups objectives. *Will regional integration be the wave of the future, or will the WTO become the focus of global economic integration? The answer is that regional integration might actually help the WTO achieve its goals.*

chapter 4 - cross nation coperation and agreements

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