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Global Marketing

Warren J. Keegan Mark C. Green

The Global Trade Environment

Chapter 3

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GATT

General Agreement on Tariffs and Trade

Treaty among nations to promote trade among members established in 1947

Handled trade disputes

Lacked enforcement power

Replaced by World Trade Organization in 1995

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The World Trade Organization

Forum for trade-related negotiations among 153 members

Based in Geneva

Serves as dispute mediator through DSB

Has enforcement power and can impose sanctions

The website for the WTO is www.wto.org

Location: Geneva, Switzerland Established: 1 January 1995 Created by: Uruguay Round negotiations (1986-94) Membership: 153 countries on 10 February 2011 Budget: 196 million Swiss francs for 2011 Secretariat staff: 640 Head: Pascal Lamy (Director-General)

Functions: • Administering WTO trade agreements • Forum for trade negotiations • Handling trade disputes • Monitoring national trade policies • Technical assistance and training for developing countries • Cooperation with other international organizations

The Dispute Settlement Body of neutral staff members mediates unfair trade barriers and other issues. For 60 days, parties are expected to negotiate in good faith. After that, the DSB will appoint a three member panel of trade experts to hear the case behind closed doors. The panel must rule in nine months. The losing party has the right to turn to a seven-member appellate body. If, after due process, a country’s policies are found to violate WTO rules, it is expected to change those policies. If it does not, trade sanctions may be imposed.

Trade ministers meet annually to work on improving world trade. The Doha Round began in 2001.

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WTO Structure

www.wto.org

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Many countries seek to lower barriers to trade within their regions

PTAs give partners special treatment and may discriminate against others

Over 300 PTAs have been notified to the WTO

Preferential Trade Agreements

It is customary to notify the WTO when countries enter into PTAs. Strictly speaking, few fully conform to WTO requirements; none, however, have been disallowed.

Hierarchy of PFTs

CET = Common External Tariffs

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Free Trade Area

Two or more countries agree to abolish tariffs and other barriers to trade amongst themselves

Countries continue independent trade policies with countries outside agreement

Rules of origin requirements restrict transshipment of goods from the country with the lowest tariff to another

NAFTA Protest in Ottawa

Sometimes duties may be eliminated on the day of the agreement or phased out over time.

Chile and Canada established an FTA in 1997. A Caterpillar tractor made in Canada could be shipped to Chile duty free. A U.S. made tractor could not be shipped through Canada to Chile because the Made in the USA label would subject it to about $13,000 in duties. Little wonder that the U.S. negotiated its own agreement with Chile that came into effect in 2003.

Other FTAs:

European Economic Union—the EU plus Norway, Liechtenstein, and Iceland

The Group of Three (G3)—Colombia, Mexico, and Venezuela

The Closer Economic Partnership Agreement—China and Hong Kong

U.S. and South Korea, Panama and Colombia long delayed FTAs were ratified by the U.S. Congress in Oct. 2011

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North America—NAFTA

Canada, United States, Mexico

NAFTA established a free trade area in 1994

All three nations pledge to promote economic growth through tariff reductions and expanded trade and investment

No common external tariffs

Restrictions on labor and other movements remain

U.S.-Mexico Border Crossing

The U.S. is home to more global industry leaders than any other nation and dominates in the computer, software, aerospace, entertainment, medical equipment, and jet engine industries.

The agreement does leave the door open for discretionary protectionism. California avocado growers won government protection for a $250 million market. Mexican avocado growers can only ship during the winter and only to the northeast U.S. and are subject to a $30 million quota. Mexico imposed tariffs on chicken leg quarters and on red and golden apples.

The U.S. and Canada formed the Canada-U.S. Free Trade Area in 1989. The $400 billion of goods traded each year is the biggest trading relationship between any two countries.

In 1994, the U.S., Canada, and Mexico began trading under NAFTA. NAFTA represents a combined population of roughly 430 million and a total GNI of almost $14 trillion.

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NAFTA Income and Population

Illegal immigration from Mexico remains a contentious issue.

NAFTA allows for discretionary protectionism (e.g., California avocado growers won protection, allowing Mexican avocados into the U.S. during the winter only in the northeast at a quota).

In 1988, the United States and Canada signed a free trade agreement (U.S.-Canada Free Trade Agreement, or CFTA); the Canada-U.S. Free Trade Area formally came into existence in 1989. This helps explain the fact that more than $400 billion per year in goods and services flows between Canada and the United States, the biggest trading relationship between any two single nations. Canada takes 20 percent of U.S. exports and the United States buys approximately 85 percent of Canada’s exports. This table illustrates the economic integration of North America: Canada is the number one trading partner of the United States, Mexico is second, and China ranks third. American companies have more invested in Canada than in any other country.

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Customs Union

Evolution of Free Trade Area

Includes the elimination of internal barriers to trade (as in FTA)

AND establishes common external barriers to trade

Examples: The EU and Turkey, the Andean Community, Mercosur, CARICOM, Central American Integration System (SICA)

The EU’s and Turkey’s agreement eliminated tariffs averaging 14% that added $1.5 billion/year to the cost of European goods imported into Turkey.

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Common Market

Includes the elimination of internal barriers to trade (as in free trade area)

AND establishes common external barriers to trade (as in customs union)

AND allows for the free movement of factors of production, such as labor, capital, and information

Current Central and South American customs unions SICA, CARICOM, and the Andean Community may evolve into common markets.

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Economic Union

Includes the elimination of internal barriers to trade (as in free trade area)

AND establishes common external barriers to trade (as in customs union)

AND allows for the free movement of factors of production, such as labor, capital, and information (as in common market)

AND coordinates and harmonizes economic and social policy within the union

In the European Union, countries must harmonize their licensing standards so that professionals such as doctors or lawyers qualified in one country may work in another. Harmonization is an important concept to be stressed.

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Economic Union

Full evolution of economic union

creation of unified central bank

use of single currency

common policies on issues such as agriculture, social policy, transport, competition, mergers, taxation

requires extensive political unity

would lead to a central government in time

European Union Flag

The EU has not ratified the European Constitution. It was approved by 16 countries but derailed after voters in France and the Netherlands vetoed it.

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U.S. Goods Exports in 2009 $1.27 Trillion

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U.S. Goods Imported in 2009 $2.1 Trillion

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Latin America: SICA, Andean Community, Mercosur, CARICOM

Includes the Caribbean, Central, and South America

History of no growth, inflation, debt, and protectionism has given way to free markets, open economies, and deregulation

Some concern for further growth with the rise of left-leaning politicians

The allure of the Latin American market has been its considerable size and huge resource base. After a decade of no growth, crippling inflation, increasing foreign debt, protectionism, and bloated government payrolls, the countries of Latin America have begun the process of economic transformation. Balanced budgets are a priority and privatization is underway. Free markets, open economies, and deregulation have begun to replace the policies of the past. With the exception of Cuba, democratically elected governments are found throughout Latin America. Policy makers have recognized the benefits of free-market forces and the advantages of participating fully in the global economy. In many countries, tariffs that sometimes reached as much as 100 percent or more have been lowered to 10 to 20 percent.

Global corporations are encouraged by import liberalization, the prospects for lower tariffs within subregional trading groups, and the potential for establishing more efficient regional production. Many observers envision an FTA throughout the region.

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Central American Integration System (SICA)

El Salvador, Honduras, Guatemala, Nicaragua, Costa Rica, and Panama

Moving towards a common market

Common External Tariff of 0 to 15%

Retains tariffs on goods also produced in importing country

Originally established in the early 1960s, the five original countries decided to reestablish the Central American Common Market in 1991. The name was changed to SICA with the entrance of Panama in 1997. The region’s attempts to achieve integration have been described as uncoordinated, inefficient, and costly.

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Andean Community

Bolivia, Colombia, Ecuador, Peru

Customs Union

Abolished foreign exchange, financial and fiscal incentives, and export subsidies

Established common external tariffs

The group was established in 1969. Members agreed to lower tariffs on intra-country trade and work together to decide what products each country should produce. Foreign goods and companies were kept out as much as possible, but all of these actions resulted in a lack of competition and kept prices high. The countries reconsidered the initiative in 1988. In 1992 the free trade area transitioned to a customs union. The region’s rural residents and urban poor, however, are frustrated by the lack of progress.

Venezuela withdrew in 2006. President Hugo Chavez declared the deal dead after Peru and Colombia began negotiating free trade agreements with the U.S. Venezuela is now becoming a member of Mercosur.

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Common Market of the South (MERCOSUR)

Argentina, Brazil, Paraguay, Uruguay, Venezuela

Customs union, seeks to become common market

Internal tariffs eliminated

Established common external tariffs up to 20%

In time, factors of production will move freely through member countries

Bolivia, Chile, Ecuador, Peru

Associate members

Participate in free trade area but not customs union

Established in 1956 with the signing of the Asunción Treaty. It will operate as a customs union rather than a true common market until there is free movement of goods, services, and factors of production. The four members began phasing in tariff reform in 1995.

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MERCOSUR

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Caribbean Community and Common Market (CARICOM)

, Mercosur, CARICOM, SICA, and the Andean Community are taking steps toward further intra-regional integration and also aligning with Europe.

Total population: 15 million

Formed in 1972 but ineffective for first 20 years.

Mercosur, CARICOM, SICA, and the Andean Community are taking steps toward further intra-regional integration and also aligning with Europe.

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CARICOM

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Asia-Pacific: The Association of Southeast Asian Nations (ASEAN)

Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam

Trading partners U.S., EU, China

Geographically close; historically divided

“ASEAN plus six” (Japan, China, Korea, Australia, New Zealand, India) working towards an economic community

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ASEAN

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Singapore

World’s 2nd largest container port

2nd highest standard of living in the region behind Japan

4.2 million people

93% literacy rate

Over 3,000 companies

Crime is nearly nonexistent

Singapore went from a British colony to a 240 sq. mile industrial power in less than 30 years.

It accounts for more than 1/3 of U.S. trading with ASEAN. 2010: $39 billion in U.S. exports; $27.1 billion in U.S. imports; 32% of imports are redirected to neighbors.

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The European Union (EU)

Initially began with the 1958 Treaty of Rome

Objective is to harmonize national laws and regulations so that goods, services, people, and money could flow freely across national boundaries

1991 Maastricht Treaty set stage for transition to an economic union with a central bank and single currency (the Euro)

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European Union

27 countries

500 million people

$15 trillion GNI

Euro currency, 1999

Harmonization of laws and regulations

Price transparency

No customs at national borders

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The Middle East

Afghanistan, Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates, Yemen

Primarily Arab, some Persian and Jews

95% Muslim, 5% Christian and Jewish

Oil prices drive commerce

25% of world’s oil in Saudi Arabia

Arab Spring 2011

Countries fall into all categories of economic freedom as discussed in Chapter 2.

The price of oil drives business. Bahrain, Iraq, Iran, Kuwait, Oman, Qatar, and Saudi Arabia hold significant world oil reserves. Saudi Arabia, with 22 million people and 25% of the world’s oil, is the most important market in the region.

Connection is a key word in conducting business in the Middle East. Forming relationships, establishing trust, and respect are key. Arab businesspeople do business in person, not over the phone or through correspondence. Women are not usually part of a business or social scene for traditional Arabs.

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Gulf Cooperation Council

Established in 1981 by 6 countries with 45% of world’s oil

These countries are attempting to diversify industries

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Africa

54 nations over three distinct areas

Republic of South Africa

North Africa

Black Africa or sub-Saharan Africa

Mena: Middle East and North Africa

Viewed as a regional entity

Regional agreements

Economic Community of West African States

East African Cooperation

South African Development Community

11.7 million sq. miles, or 3 ½ times the size of the U.S.

54 nations

1.3% of world’s wealth

11.5% of world’s population

Average per capita income of less than $600

Arabs of northern Africa are politically and economically differentiated from the rest of the continent. Libya, Algeria, and Egypt benefit from oil resources.

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Looking Ahead to Chapter 4

Social and Cultural Environments