MBA 713 - Chapter 10

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MBA 713 - Chapter 10

Text of MBA 713 - Chapter 10

International Cooperation Among Nations

Chapter 10Copyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 1International Cooperation Among NationsCooperative agreements form a major part of the economic environment in which international businesses operate. To be successful, international businesspeople must understand these agreements and use them to create business opportunities for their firms and counteract their competitors. Of particular importance is the growth of regional trading blocs, such as the Mercosur Accord and NAFTA, which are designed to reduce trade barriers among their members. By far the boldest of these regional economic integration efforts is that of the European Union (EU).

1Learning ObjectivesLearn why the GATT and the WTO are important to international businessExamine economic integration among cooperating countriesAnalyze business opportunities created by the EUs internal marketDescribe the other major trading blocs in todays world economyCopyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 2This chapters learning objectives include the following:Explaining the importance of the GATT and the WTO to international business. Contrasting the different forms of economic integration among cooperating countries. Analyzing the opportunities for international businesses created by completion of the EUs internal market. Describing the other major trading blocs in todays world economy.

2The General Agreement on Tariffs and Trade and the World Trade OrganizationCopyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 3To ensure that the postWorld War II international peace would not be threatened by trade wars, representatives of the leading trading nations met in Havana, Cuba, in 1947 to create the International Trade Organization (ITO). The ITOs mission was to promote trade; however, the organization never came into being. Instead its mission was taken over by the General Agreement on Tariffs and Trade (GATT), which had been developed as part of the preparations for the Havana conference. The GATT provided a forum for trade ministers to discuss policies and problems of common concern. In January 1995, it was replaced by the World Trade Organization, which adopted the GATTs mission.

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Promote Global TradeCopyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 4The Goal of GATTThe GATTs goal was to promote a free and competitive international trading environment benefiting efficient producers, an objective supported by many multinational corporations (MNEs). The GATT accomplished this by sponsoring multilateral negotiations to reduce tariffs, quotas, and other nontariff barriers. 4GATT Negotiating RoundsCopyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 5RoundDatesParticipantsAvg. Tariff CutGeneva19472335%Annecy194913NATorquay1950 19513825%Geneva195626NADillon1960 196245NAKennedy1964 19676235%Tokyo1973 19799933%Uruguay1986 199411736%Because high tariffs were initially the most serious impediment to world trade, the GATT first focused on reducing the general level of tariff protection. It sponsored a series of eight negotiating rounds, generally named after the location where each round of negotiations began during its lifetime. The cumulative effect of the GATTs eight rounds was a substantial reduction in tariffs. These tariff reductions have contributed to dramatic growth in world trade since the end of World War II.

5The MFN PrincipleCopyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 6Overcome Discrimination in TradeApplies to All GATT Member CountriesTo help international businesses compete in world markets regardless of their nationality, the GATT sought to ensure that international trade was conducted on a nondiscriminatory basis. This was accomplished through use of the most favored nation (MFN) principle, which requires that any preferential treatment granted to one country must be extended to all countries. Under GATT rules, all members were required to utilize the MFN principle in dealing with other members. However, there are two important exceptions. First, members may lower tariffs to developing countries without lowering them for more developed countries. Such reduced rates offered to developing countries are known as the generalized system of preferences (GSP). The second exception is for comprehensive trade agreements that promote economic integration, such as the EU and NAFTA.

6World Trade OrganizationCopyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 7Promote International TradeReduce Trade BarriersResolve Trade DisputesThe final round of GATT negotiations began in Uruguay in 1986. Ratified by GATT members in 1994, the Uruguay Round agreement took effect in 1995. Uruguay Round participants also agreed to create the World Trade Organization (WTO). They established its initial agenda and granted it more power to attack trade barriers than the GATT had possessed.Headquartered in Geneva, Switzerland, the WTO includes 153 member and 30 observer countries. Members are required to open their markets to international trade and to follow the WTOs rules. The WTO has three primary goals:Promote trade flows by encouraging nations to adopt nondiscriminatory, predictable trade policies. Reduce remaining trade barriers through multilateral negotiations. Establish impartial procedures for resolving trade disputes among members.

7The WTO and GATTCopyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 8OrganizationMandateEnforcement PowerThe WTOThe GATTBroaderNarrowerGreaterLesserWhile it was designed to build on and expand the successes of the GATT, the WTO differs from the GATT in two important dimensions:First, the GATT focused on promoting trade in goods. The WTOs mandate also includes trade in services, international intellectual property protection, and trade-related investment. Second, the WTOs enforcement powers are much stronger than those enacted under the GATT.8Additional WTO ChallengesThe General Agreement on Trade in Services (GATS)Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)Trade-Related Investment Measures Agreement (TRIM)Enforcement of WTO DecisionsCopyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 9Another challenge facing the WTO is reducing barriers to trade in services. The Uruguay Round developed The General Agreement on Trade in Services (GATS). This agreement advances principles under which such trade should be conducted. The Uruguay Round agreement enacted the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). It includes measures to strengthen intellectual property rights of entrepreneurs, artists, and inventors. However, many believe that theft of intellectual property has increased, due to lax enforcement by governments that are unwilling to keep their Uruguay Round commitments. The Trade-Related Investment Measures Agreement (TRIMS) is a first step toward eliminating national regulations on FDI that may distort or restrict trade. The TRIMS agreement affects trade-balancing rules, foreign-exchange access, and domestic sales requirements. Enforcement of WTO Decisions is also a challenge. A country failing to live up to the WTO agreement may have a complaint filed against it. If a WTO panel finds the country in violation of the rules, the country will be asked to eliminate the trade barrier. If the country refuses, the complaining country can impose off-setting trade barriers on the offending country. 9

Summary of DiscussionCopyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 10This section focused on The General Agreement on Tariffs and Trade and the World Trade Organization. The discussion began with the goal of the GATT, and then reviewed GATT negotiating rounds and the MFN principle. After the World Trade Organization was introduced, the discussion covered the differences between the WTO and GATT, and examined challenges faced by the WTO. The next section will focus on Regional Economic Integration.

10Regional Economic IntegrationCopyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 11Regional alliances to promote liberalization of international trade are an important feature of the postWorld War II international landscape. More than 200 such agreements are in existence, although not all have had much practical impact. The past decade in particular has seen a rise in the number of trading blocs, as countries seek to integrate their economies more closely in order to open new markets for their firms and lower prices for their consumers.

11Copyright 2013 Pearson Education, Inc. publishing as Prentice HallChapter 10 - 12Economic IntegrationHighLowFree Trade AreaCustoms UnionCommon MarketEconomic UnionPolitical UnionEconomic IntegrationThis graphic represents the five forms of regional economic integration, starting at the bottom with the least integrated form. A free trade area eliminates trade barriers among its members; however, each member establishes its own trade policies against nonmembers. As a result, they are vulnerable to trade deflection, in which nonmembers reroute exports to the member nation with the lowest external trade barriers. To counter this problem, most free trade agreements specify rules of origin, which detail how a good is classified as a member good or a nonmember good. A customs union eliminates internal trade barriers among its members and adopts common external trade policies toward nonmembers. The uniform treatment of products from nonmember countries minimizes the trade deflection problem. A common market eliminates internal trade barriers among members and adopts a common external