Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc

Chapter 5: INTERNATIONAL TRADE AGREEMENTSAND ORGANIZATIONS

Fundamentals of International Business

Copyright © 2010 Thompson Educational Publishing, Inc.

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CHAPTER 5:

International Trade Agreements and Organizations


Key Terms

trade agreement North American Free

Trade Agreement (NAFTA)

European Union (EU) euro trade organizations World Trade

Organization (WTO)

Asia-Pacific Economic Co-operation (APEC)

Group of Eight (G8) Group of Twenty (G20) Organization for

Economic Co-operation and Development (OECD)

World Bank International Monetary

Fund (IMF)


Chapter Objectives

By the time you finish this chapter, you should be able to:

Compare the characteristics of a multinational corporation participating in global business with those of a Canadian company focused on domestic business

Describe international agreements and organizations that have influenced global business activity

Describe Canada’s involvement in international trade organizations


Globalization and International Trade

Globalization, in an economic context, is the movement of goods, services, technology, investment, ideas, and people throughout the world.

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Positive effects ofglobalization Outsourcing Lower prices Improved human rights Increased productivity Innovation Better jobs Increased capital flow

Negative effects of globalization Lost Canadian jobs Fear of job loss Loss of Canadian productivity Exploitation of cheap labour Increased pollution Unhealthy products Spread of disease Increase in the income gap Influence of multinational

corporations on governments



Companies use three major types of globalization strategies:

1. Global strategy

2. Multidomestic strategy

3. Transnational strategy



Global strategy Regards the world as one big market—all people

want the same product and will respond to marketing in a similar way

Product and marketing are uniform around the world

Takes advantage of economies of scale (proportionate savings gained by producing larger quantities)

Does not respond to individual cultures



Multidomestic strategy Customizes products, services, and marketing for the local

culture—local management is most capable of determining what is best for the local subsidiary

Effective when cultural differences are prominent Less political and exchange-rate risk



Transnational strategy Combines the best elements of the global and

multidomestic strategies Respects needs of local market, while maintaining

efficiencies of a global strategy Manufacturing takes place at least expensive

source, human resources and marketing take place at the local level


Trade Agreements

Trade agreement

An enforceable treaty between two or more countries that involves the movement of goods and services, elimination of trade barriers, establishment of terms of trade, and encouragement of foreign investment.

Agreements may be multilateral (involving three or more parties) or bilateral (involving two countries).


Trade Agreements

The North American Free Trade Agreement (NAFTA) Launched in January 1994 between Canada, the United

States, and Mexico Created world’s largest free trade area Sets rules surrounding movement of goods, services, and

investments across North America Eliminates tariffs and other trade barriers, and promotes

fair competition


Trade Agreements

Advantages of NAFTA Has helped create higher

paying jobs in education, engineering, and banking sectors in Canada

Allows freer flow of goods and services across North America, providing better access to raw materials, talent, capital, and technology

Trade has tripled between the three members since NAFTA’s inception

Disadvantages of NAFTA Manufacturing jobs have been

lost to Mexico, where labour costs are lower

Without tariffs, many Mexican farmers could not compete and lost their livelihoods

Canadian companies sold to foreign investors


Trade Agreements

Tax TreatiesA tax treaty is created to prevent double taxation and tax evasion for people who would pay taxes in Canada and another country. The treaty determines how much tax each country can collect.


Trade Agreements

The European Union (EU)

A trade agreement signed in 1993 that now encompasses twenty-seven countries in Europe and a population of almost half a billion people. It has its own flag, anthem, and currency, and common financial, security, and foreign policies.


Trade Agreements


Trade Agreements

The euroThe European currency unit adoptedby the European Union and used in most EU countries.


Trade Agreements

Advantages of a common currency

Disadvantages of a common currency

Decreased risk of exchange-rate fluctuations

Initial costs of implementation

Price transparency Lack of national control

Elimination of transaction costs Loss of tradition

Increased markets


Trade Organizations

Trade organizations

Groups established to help with the free flow of goods and services. They may be global in scope or national organizations created by individual governments to help domestic companies expand into international markets.




Trade Organizations

World Trade Organization (WTO)An international organization established in 1995 (which now has over 150 member countries) that promotes trade liberalization throughout the world.

The main purposes of the WTO are:

To act as a forum for negotiations To provide a set of rules that have been

negotiated and signed by the governments of member countries

To offer a forum for dispute settlement




Trade Organizations

Asia-Pacific Economic Co-operation (APEC)

A trade organization, created in 1989, that unites twenty-one of the countries surrounding the Pacific Ocean to co-operate on regional trade. Its goals are to foster open and free trade among its members, increase prosperity and economic growth, and develop the Asia-Pacific community.




Trade Organizations

APEC member countries




Trade Organizations

The Group of Eight (G8)A trade organization encompassing the major economies of the world, which meet to discuss macroeconomic issues such as economic growth, trade liberalization, and helping developing countries.

Member Countries: France United States Canada Great Britain

Italy Germany Japan Russia




Trade Organizations

The Group of Twenty (G20)A trade organization established during the economic crisis of the 1990s to provide a discussion forum for the major economies of the world beyond the G8.

The G20 focuses on: Economic and employment growth Elimination of trade barriers Reforming financial institutions and regulations Restructuring global financial organizations


Trade Organizations

Canada’s Place in the G8 and G20 Canada’s GDP and population are low compared

to other G8 and G20 countries Talk of replacing Canada in the G8, and placing it

as a second-tier country in the G20 Would be detrimental to Canada,

as its needs, concerns, and interests would not be given the same consideration as in the past

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Trade Organizations

Organization for Economic Co-operation andDevelopment (OECD)

A trade organization with thirty member countries, established in 1961 to promote the advancement of democracy and market economies.

OECD members have worked together to eliminate bribery, money laundering, and fraud, and to create a code of conduct for multinational companies.


Trade Organizations

The World Bank

An organization with 186 member countries that provides monetary and technical support for developing countries.

Provides loans and grants to assist with education, health, infrastructure, farming, environmental issues, resource management, and other economic concerns.


Trade Organizations

International Monetary Fund (IMF)

An organization whose purpose is to promote financial stability, prevent and solve economic crises, encourage growth, and assuage poverty. It does this by:

Encouraging countries to adopt responsible economic policies

Lending money to emerging and developing countries

Providing technical training in areas such as banking regulations and exchange rate policies


The Role of the UN in International Business

The UN has four main purposes:

1. To keep peace throughout the world

2. To develop friendly relations among nations

3. To work together to help poor people live better lives, to conquer hunger, disease, and illiteracy, and to encourage respect for each other’s rights and freedoms

4. To be a centre for helping nations to achieve these goals


The Role of the UN in International Business

UN is responsible for organizations that influence international business, including the International Labour Organization (ILO), the International Monetary Fund (IMF), and the World Bank

UN devotes resources to improving the standard of living, the unemployment rate, and economic conditions throughout the world

UN Economic and Financial Committee deals with issues such as international trade, globalization, and poverty elimination

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Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc