International Business

Chapter Eight

Cross-national Cooperation and

Agreements

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Chapter Objectives• To profile the World Trade Organization • To discuss the pros and cons of global, bilateral,

and regional integration• To describe the static and dynamic effects and

the trade creation and diversion effects of bilateral and regional economic integration

• To define different forms of regional economic integration

• To present different regional trading groups, such as the European Union (EU), the North American Free Trade Agreement (NAFTA), and Asia-Pacific Economic Cooperation (APEC)

• To describe the rationale for and success of commodity agreements

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Economic Integration

Economic integration: an agreement between or amongst nations within an economic bloc to reduce and ultimately remove tariff and nontariff barriers to the free flow of products, capital, and labor across the bloc

Approaches to economic integration include:• global integration via the World Trade Organization• bilateral integration between two countries • regional integration via an economic bloc

Neighboring countries tend to ally with one another because of their proximity, their somewhat similar tastes, the relative ease of establishing channels of distribution, and a willingness to

cooperate with one another for the greater benefit of all parties.

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The General Agreement on Tariffs and Trade (GATT)General Agreement on Tariffs and Trade (GATT):

established by twenty-three signator nations in 1947 as a multilateral agreement whose objective is to liberalize world trade

• Most-favored nation clause (MFN): the fundamental principle of “trade without discrimination,” i.e., each member nation must open its markets equally to every other member nation

• Eight major rounds of negotiations from 1947 to 1994 led to a wide variety of multilateral reductions in both tariff and nontariff barriers.

• The World Trade Organization was created in 1995 for the purpose of institutionalizing the GATT.

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The World Trade Organization (WTO)

World Trade Organization (WTO): a permanent body founded in 1995 to (i) facilitate the development of a free and open international trading system according to the GATT and (ii) adjudicate trade disputes between or amongst member nations

• normal trade relations: replacing the most-favored-nation clause, the principle prohibits any sort of trade discriminationExceptions: – preferential treatment for products of emerging economies – concessions granted to members of economic blocs

• dispute resolution: a clearly defined mechanism for the settlement of disputes [continued]

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The WTO: Decision-making Units

• Ministerial Conference• General Council• Goods Council• Services Council• Council on Trade-related Aspects of

Intellectual Property (TRIPS)Countries may bring charges of unfair trade practices to a WTO panel; accused countries may appeal; WTO rulings are binding. If an offending country fails to comply with a judgment, the rights to compensation and countervailing sanctions will follow.

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GATT/WTO Milestones

• 1947 Havana, Cuba: 23 countries negotiated major reductions in trade barriers that are codified as the General Agreement on Tariffs and Trade

• 1947 Geneva, Switz.: 23 members held first official meeting of the founding nations

• 1949 Annecy, France: 13 members negotiated tariff concessions

• 1951 Torquay, UK: 38 members negotiated tariff reductions and concessions

• 1956 Geneva, Switz.: 26 members negotiated tariff reductions and concessions

• 1960-61 Dillon Round (Geneva, Switz): 26 members negotiated tariff reductions and concessions

[continued]

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• 1964-67 Kennedy Round (Geneva, Switz): 62 members reviewed new trade rules and passed an anti-dumping agreement

• 1973-79 Tokyo Round: 102 members reduced customs duties and nontariff barriers

• 1986-94 Uruguay Round: 123 members expanded negotiations to include trade rules, services, intellectual property, dispute resolution, textiles, and agriculture; World Trade Organization was created

• 1995: World Trade Organization was formally institutionalized

• 2001 Doha Development Agenda: 148+ members continue to meet to resolve contentious issues between developed and developing nations

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Types of Regional Trade Agreements

Agreements that primarily address barriers to trade:• free trade areas: economic blocs in which all barriers

to trade, i.e., tariff and nontariff barriers, are abolished amongst member nations, but each member determines its own external trade barriers beyond the bloc

• customs unions: economic blocs in which all barriers to trade, i.e., tariff and nontariff barriers, are abolished amongst member nations, and common external barriers are levied against non-member countries

A more extensive type of regional trade agreement :• common market: an economic bloc which also

permits the free flow of capital and labor

[continued]

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The Effects of Economic Integration

static effects: the shifting of resources from inefficient to efficient firms as trade barriers fall -trade creation: production shifts from less efficient domestic producers to more efficient regional producers-trade diversion: trade shifts from more efficient external sources to less efficient suppliers within the bloc following the imposition of common external barriers

dynamic effects: the gains from overall market growth, the expansion of production, the realization of greater economies of scale and scope, and the increasingly competitive nature of the market

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The European Union (EU)

The European Union (EU): • represents the most advanced regional

trade and investment bloc in the world today• evolved from the European Coal and Steel

Community to the European Economic Com-munity (EEC) to the European Community (EC) to the European Union (EU)

• has grown from six members in 1951 to twenty-five member nations in 2004

• has been moving toward a single market since the passage of the Single European Act of 1987

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The EU’s Organizational Structure• European Council: designed to lead the EU

[proposes legislation, monitors compliance]

• European Commission: functions as the EU’s draftsman and servant [sets priorities, gives direction, and resolves issues]

• European Parliament: the EU’s sounding board [considers legislation, controls the EU budget, and supervises decisions]

• European Court of Justice: the supreme appeals court for EU law [ensures consistent interpretation and application of EU treaties]

These governance bodies set the parameters under which MNEs must operate within the EU.

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European Union Milestones

1951: Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands signed the Treaty of Paris to establish the European Steel and Coal Community.

1957: The Six signed the Treaty of Rome to establish the European Economic Community (EEC).

1960: The Stockholm Convention established the European Free Trade Association (EFTA).

1962: The Common Agricultural Policy (CAP) was adopted.1966: The EEC became the European Community (EC);

agreement was reached on a value-added tax (VAT).1967: All remaining internal tariffs were abolished, and

common external barriers were imposed.[continued]

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1972: The currency “snake” was established.1979: The European Monetary System came into

effect; the first European Parliament was elected by universal suffrage.

1990: The first phase of European Monetary Union came into effect; Germany was unified.

1993: The Single European Market came into force.1999: The single European currency [EURO] came

into effect.2002: EURO coins and notes entered circulation; all

IS member states ratified the Kyoto Protocol.Source: http://europe.eu.int/abc/history.

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Map 8.1: European Trade and Economic Integration

 

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The Single European Act of 1987• Common Trade and Foreign Policy: The initial focus

of the EU was primarily upon economic integration. In 1993, however, the EU began to formalize common objectives on armed conflicts, human rights, and other international foreign policy issues.

• The Euro. The Treaty of Maastricht of 1992 sought to foster both political and monetary union within the EU. Members that adopted the euro on January 1, 1999, were: Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain; Greece followed on January 1, 2001.

Now one of the most widely traded currencies in the world, the euro has-contributed to price transparency for customers -eased pricing decisions and transaction reconciliations for firms

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Challenges Facing the EU• the transition of economically disparate

entrants into the EU• the unanimous adoption of a new constitution• the resolution of the Common Agricultural

Policy (CAP) with internal constituencies on the one hand and non-members nations on the other

• the harmonization of fiscal, monetary, and commercial policies

The Common Agricultural Policy (CAP) represents a set of rules and mechanisms designed to: - regulate the production, trade, and processing of agricultural products in the EU - provide farmers with a reasonable standard of living and consumers with safe, quality food at fair prices

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2003 Comparative Statistics by Trade Group

BLOC POP. IN MIL. GNI PER CAPITA GNI($US BIL.) ($US)

______________________________________________________________________________________________________________________________________________

EU-15 379.7 $10,116 $26,641EU-25 [+2004 ADMITS] 454.0 $10,544 $23,224

NAFTA 424.9 $12,340 $29,042 Canada 31.6 $ 757 $23,930 Mexico 102.3 $ 637 $ 6,230 USA 291.0 $10,946 $37,610

MERCOSUR 224.0 $ 638 $ 2,848

Source: 2005 World Bank Development Report.

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The North American Free Trade Agreement (NAFTA)• was preceded by the Canada-U.S. Free

Trade Agreement of 1989 • incorporates Canada, Mexico, and the

United States into a regional trade bloc • became effective on January 1, 1994• addresses free trade in good and services

and investment rules• claims a total GNI that is greater than that

of the 25-member EU• phases in over a period of 15 years

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NAFTA specifies:

• market access via the elimination of tariff and nontariff barriers

• the harmonization of trade rules• the liberalization of restrictions on services

and foreign investment• the enforcement of intellectual property

rights• a dispute settlement process • regional labor laws and standards • strengthened environmental standards

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Regional Economic Integration in North America

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Regional Economic Integration in the Americas: Central AmericaThe two major blocs in Central America are:

• Caribbean Community and Common Market (CARICOM)

[Costa Rica, El Salvador, Guatemala, Nicaragua]

• Central American Common Market (CACM) [Comprised of 14 member nations]

The post-WWII strategy of using import substitution to resolve balance-of-payments problems was doomed in many Latin American nations because of the small size of many of their national markets. Economic cooperation is needed to enlarge potential market size.

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Map 8.2: Economic Integration in Central America and the

Caribbean

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Regional Economic Integration in the Americas: South AmericaThe two major blocs in South America are:

• Southern Common Market (MERCOSUR)[Comprised of Brazil, Argentina, Paraguay, and

Uruguay, MERCOSUR generates 80 percent of South America’s

GNI and has signed free trade agreements with Bolivia and Chile.] • Andean Community (CAN)

[Bolivia, Columbia, Ecuador, Peru, Venezuela]

The 12-member Latin American Integration Association (LAIA) encompasses the countries of MERCOSUR and the Andean Community plus Mexico and Cuba.

Regional integration in Latin America has not been particularly successful because many countries rely more on the

U.S. for trade than on members of their own groups.

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Map 8.3: Latin American Economic Integration

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Regional Economic Integration in Asia: ASEAN

The Association of Southeast Asian Nations (ASEAN) – was first organized in 1967 – is now comprised of Brunei, Cambodia,

Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam

– formed the ASEAN Free Trade Area (AFTA) on January 1, 1993, for the purpose of cutting tariffs on inter-regional trade to a maximum of 5% by 2008

ASEAN holds great promise for market and investment opportunities because of its large market size.

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Regional Economic Integration in Asia: APEC

Asia Pacific Economic Cooperation (APEC): – was founded in 1989 to promote multilateral

economic cooperation in trade and investment amongst 21 countries bordering the Pacific Rim on either the east or the west

– is committed to achieving free and open trade in the region by 2010 for the industrial nations and by 2020 for the remaining member countries

– includes more than half of the world’s population and approximately 60 percent of the world’s GNI

APEC’s progress is hampered by the number of members, the geographic distances between nations, and its lack of a binding

treaty.

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Map 8.4: The Association of Southeast Asian Nations

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Regional Economic Integration in Africa

Regional trade groups in Africa that are registered with the WTO include:

• Southern Africa Development Community (SADC)• Common Market for Eastern and Southern Africa

(COMESA)• Economic and Monetary Community of Central Africa• West African Economic and Monetary Union

(WAEMU)

With the notable exception of South Africa, markets are small, and many nations rely more on trade links with former colonial powers than with each other.

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Map 8.5: Regional Economic Integration in Africa

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Commodity Agreementscommodity agreement: a form of economic

cooperation designed to stabilize the price and supply of primary commodities through the use of buffer stocks and/or quota systems

• producers’ alliances: exclusive membership agreements between or amongst producing countries (a cartel)- Organization of Oil Exporting Countries (OPEC): a producer cartel whose members include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela

• international commodity control agreements (ICCAs): agreements between or amongst producing and consuming countries - International Cocoa Organization (ICO) - International Sugar Organization (ISO)

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Implications/Conclusions

• The effects of regional economic integration can be economic, cultural, and/or political in nature.

• Regional (as opposed to global) economic integration occurs because of the greater ease of promoting cooperation on a smaller scale.

• Member states must determine the degree of national sovereignty they are willing to surrender in order to capture the benefits of economic integration.

[continued]

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• A common market goes further than free trade areas and customs unions by permitting the free flow of capital and labor and possibly harmonizing commercial, monetary, and fiscal policies and establishing a common currency plus a supranational political structure dedicated to dealing with common economic issues.

• Commodity agreements exist to help developing countries stabilize prices, supplies, and hence their export earnings.