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International Business
Environments & Operations

15e

Daniels ● Radebaugh ● Sullivan

International Business Environments and Operations 15e by Daniels, Radebaugh, and Sullivan

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Chapter 7

Cross-National Cooperation and Agreements

Chapter 7: Cross National Cooperation and Agreements

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Learning Objectives

Discuss the three major approaches to economic integration
Identify the major characteristics and challenges of the World Trade Organization
Discuss the pros and cons of global (the WTO), bilateral, and regional integration
Identify how the different approaches to economic integration can be a free trade agreement, a customs union, or a common market

The Learning Objectives for this chapter are

To identify the major characteristics and challenges of the World Trade Organization
To discuss the pros and cons of global, bilateral, and regional integration
To describe the static and dynamic impact of trade agreements on trade and investment flows
To define different forms of regional economic integration
To compare and contrast different regional trading groups
To describe other forms of global cooperation such as the United Nations and OPEC

Learning Objectives

Describe the static and dynamic impact of trade agreements on trade and investment flows
Compare and contrast different regional trading groups
Describe other forms of global cooperation such as the United Nations and OPEC

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Introduction

Economic integration
the political and monetary agreements among nations and world regions in which preference is given to member countries
Bilateral integration
Regional integration
Global integration

Trade groups influence the strategies of multinational companies so it’s 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.

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The World Trade Organization

Learning Objective:

Identify the major characteristics and challenges of the World Trade Organization

Learning Objective : To identify the major characteristics and challenges of the World Trade Organization.

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The World Trade Organization

World Trade Organization (WTO)
The major body for
reciprocal trade negotiations
enforcement of trade agreements
General Agreement on Tariffs and Trade (GATT)

The World Trade Organization, or WTO, encompasses and extends the General Agreement on Tariffs and Trade, also known as GATT.

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GATT: Predecessor to the WTO

GATT
formed in 1947 to abolish quotas and reduce tariffs
Most favored nation (MFN) clause
trade without discrimination
Succeeded by WTO in 1995

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.

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What Does The WTO Do?

WTO
continues the MFN clause of GATT
provides a mechanism for dispute settlement
Doha Round

agricultural subsidies

Criticized for
failing to pay enough attention to labor and environmental concerns
undermining global diversity
benefitting rich at the expense of the poor

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.

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The Rise Of
Bilateral Agreements

Learning Objective:

Discuss the pros and cons of global, bilateral, and regional integration

Learning Objective : To discuss the pros and cons of global, bilateral, and regional integration.

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The Rise Of
Bilateral Agreements

Bilateral agreements
can be between two individual countries or can involve one country dealing with a group of other countries
Also known as
Preferential trade agreements (PTAs)
Free trade agreements (FTAs)

Countries are increasingly willing to sidestep the multilateral system and engage in bilateral agreements in order to achieve their objectives.

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Regional Economic Integration

Regional trade agreements
integration confined to a region and involving more than two countries
Examples 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)

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.

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Regional Economic Integration

Learning Objective:

Identify how the different approaches to economic integration can be a free trade agreement, a customs union, or a common market

Learning Objective : To define different forms of regional economic integration.

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Regional Economic Integration

Major types of economic integration
Free trade area
no internal tariffs
Customs union
no internal tariffs plus common external tariffs
Common market
customs union plus factor mobility

The major types if economic integration are the free trade area, the customs union, and the common market.

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The Effects Of Integration

Learning Objective:

Describe the static and dynamic impact of trade agreements on trade and investment flows

Learning Objective : To describe the static and dynamic impact of trade agreements on trade and investment flows.

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The Effects Of Integration

Effects of regional integration
Static effects
trade creation
trade diversion
Dynamic effects
Economies of scale

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 company’s 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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The Effects Of Integration

Impact of Trade Agreements

This Figure shows the impact of free trade agreements.

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Major Regional Trading Groups

Learning Objective:

Compare and contrast different regional trading groups

Learning Objective : To compare and contrast different regional trading groups.

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The European Union

European Union (EU)
changed from the European Economic Community to the European Community to the European Union
the largest and most successful regional trade group in the world
provides free trade of goods, capital, and people
uses common external tariffs
has a common currency

It’s 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 bloc’s common currency, the euro.

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The European Union

European Trade and Economic Integration

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.

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The European Union

European Commission
provides political leadership, drafts laws, and runs the various daily programs of the EU
Council of the EU
composed of the heads of state of each member country
European Parliament
has legislative power, control over the budget, and is supervisor of executive decisions
European Court of Justice
interprets and applies EU treaties

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.

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The European Union

Single European Act
designed to eliminate the remaining nontariff barriers to trade in Europe
Lisbon Treaty
strengthens the EU’s governance process and improves the ability of the EU to make and implement decisions
Treaty of Maastricht
fostered political and monetary union
the euro

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.

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The European Union

Companies doing business in the EU need to
determine where to produce products
determine what their entry strategy will be
balance the commonness of the EU with national differences

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?

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NAFTA

The North American Free Trade Agreement (NAFTA)
includes Canada, the U.S., and Mexico
involves free trade in goods, services, and investments
includes countries of different sizes and wealth
Some U.S. trade and investment has been diverted to Mexico
Free trade area
rules of origin

The North American Free Trade Area, or NAFTA, went into effect in 1994, and is the largest bilateral trade agreement in the world. It’s designed to eliminate tariff barriers and liberalize investment opportunities and trade in services. Today, the U.S. is Mexico’s and Canada’s 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.

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NAFTA

Regional content
at least 50% of the net cost of most products must come from the NAFTA region
Additional provisions
Workers rights
The environment
Dispute resolution mechanism

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.

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Regional Economic Integration In The Americas

There are six major regional economic groups in the Americas
Caribbean 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)

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.

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Regional Economic Integration In The Americas

Economic Integration in Central America and the Caribbean

This Map shows the countries belonging to CACM, CARICOM, and CAFTA-DR.

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Regional Economic Integration In The Americas

Latin American Economic Integration

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

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Regional Economic Integration In Asia

Regional integration in Asia includes
the Association of Southeast Asian Nations (ASEAN)
ASEAN Free Trade Area
the Asia Pacific Economic Cooperation (APEC)
open regionalism

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 world’s output and merchandise trade, it’s 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.

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Regional Economic Integration In Asia

The Association of Southeast Asian Nations

This Map shows the members of ASEAN.

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Regional Economic Integration In Africa

Several efforts at economic integration exist
Pan Arab Free Trade Area (PAFTA)
Arab League
Gulf Cooperation Council (GCC)
African Union (AU)

The large number of nations combined with the region’s 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.

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Regional Economic Integration In Africa

Regional Integration in Africa

This Map shows efforts at economic integration in Africa.

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Other Forms Of
International Cooperation

Learning Objective:

Describe other forms of global cooperation such as the United Nations and OPEC

Learning Objective : To describe other forms of global cooperation such as the United Nations and OPEC.

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Other Forms Of
International Cooperation

The United Nations (UN)
established in 1945
promotes peace and security
UNCTAD
helps developing countries participate in international trade
Nongovernmental Organizations (NGOs)
private, nonprofit institutions that are independent of the government

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.

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Commodities
And The World Economy

Commodities
raw materials or primary products that enter into trade
Many commodity agreements exist to
discuss issues
disseminate information
improve product safety
OPEC

Developing countries frequently rely on commodity exports for the hard currency they need for economic development. If commodity prices aren’t stable, then earnings aren’t stable either.

To try to ensure greater stability in commodity prices, various agreements have been established. Most haven’t been very successful, but one, OPEC, has been.

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Organization Of The Petroleum Exporting Countries

OPEC
producer cartel that relies on quotas to influence prices
establishes production quotas for member countries
produces about 33.6% of the world’s crude and19% of its natural gas
Downside of high prices
incentive to invest in non-OPEC countries
balancing social, political, and economic objectives

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 group’s objectives.

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The Future: Regional Integration And The WTO

Regional integration could help the WTO
Regionalism can lead to liberalization of issues not covered by the WTO
Regionalism is more flexible
Regional deals lock in liberalization

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.

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

Trade barriers drop for member

countries (static effect)

Trade Creation

Trade Impact Investment Impact

Trade Creation

Trade Diversion

Trade barriers remain higher

for nonmember countries

(static effect)

Market size increases

(dynamic effect)

Investment shifts from less efficient to more efficient firms, possibly leading to foreign direct investment (FDI)

FDI increases from firms outside the free trade agreement to avoid barriers

Home-country firms increase FDI to achieve economies of scale

Members of the European Union (EU)

EU-Approved Applicants

Members of the Central European Free Trade Association (CEFTA)

Members of the European Free Trade Association (EFTA)

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