08 Cross-National Cooperation and Agreements
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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
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08 Cross-National Cooperation and Agreements
- 1. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-1 Chapter 8 Cross-National Cooperation and Agreements
- 2. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-2 Learning Objectives 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
- 3. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-3 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
- 4. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-4 The World Trade Organization Learning Objective 1: To identify the major characteristics and challenges of the World Trade Organization
- 5. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-5 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)
- 6. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-6 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
- 7. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-7 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
- 8. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-8 The Rise Of Bilateral Agreements Learning Objective 2: To discuss the pros and cons of global, bilateral, and regional integration
- 9. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-9 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)
- 10. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-10 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)
- 11. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-11 Regional Economic Integration Learning Objective 4: To define different forms of regional economic integration
- 12. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-12 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
- 13. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-13 The Effects Of Integration Learning Objective 3: To describe the static and dynamic impact of trade agreements on trade and investment flows
- 14. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-14 The Effects Of Integration Effects of regional integration Static effects trade creation trade diversion Dynamic effects Economies of scale
- 15. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-15 The Effects Of Integration Impact of Trade Agreements
- 16. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-16 Major Regional Trading Groups Learning Objective 5: To compare and contrast different regional trading groups
- 17. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-17 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
- 18. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-18 The European Union European Trade and Economic Integration
- 19. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-19 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
- 20. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-20 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
- 21. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-21 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
- 22. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-22 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
- 23. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-23 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
- 24. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-24 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)
- 25. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-25 Regional Economic Integration In The Americas Economic Integration in Central America and the Caribbean
- 26. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-26 Regional Economic Integration In The Americas Latin American Economic Integration
- 27. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-27 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
- 28. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-28 Regional Economic Integration In Asia The Association of Southeast Asian Nations
- 29. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-29 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)
- 30. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-30 Regional Economic Integration In Africa Regional Integration in Africa
- 31. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-31 Other Forms Of International Cooperation Learning Objective 6: To describe other forms of global cooperation such as the United Nations and OPEC
- 32. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-32 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
- 33. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-33 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
- 34. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-34 Organization Of The Petroleum Exporting Countries OPEC producer cartel that relies on quotas to influence prices establishes production quotas for member countries Saudi Arabia produces about 42% of the world’s crude and18% of its natural gas Downside of high prices incentive to invest in non-OPEC countries balancing social, political, and economic objectives
- 35. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-35 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
- 36. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 8-36 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.
Editor's Notes
- Chapter 8: Cross National Cooperation and Agreements
- 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
- 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.
- Learning Objective 1: To identify the major characteristics and challenges of the World Trade Organization.
- The World Trade Organization, or WTO, encompasses and extends the General Agreement on Tariffs and Trade, also known as GATT.
- 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.
- 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.
- Learning Objective 2: To discuss the pros and cons of global, bilateral, and regional integration.
- Countries are increasingly willing to sidestep the multilateral system and engage in bilateral agreements in order to achieve their objectives.
- 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.
- Learning Objective 4: To define different forms of regional economic integration.
- The major types if economic integration are the free trade area, the customs union, and the common market.
- Learning Objective 3: To describe the static and dynamic impact of trade agreements on trade and investment flows.
- 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. .
- This Figure shows the impact of free trade agreements.
- Learning Objective 5: To compare and contrast different regional trading groups.
- 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.
- 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.
- 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.
- 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.
- 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?
- 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.
- 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.
- 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.
- This Map shows the countries belonging to CACM, CARICOM, and CAFTA-DR.
- This Map shows the members of CAN, MERCOSUR, and LAIA.
- 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.
- This Map shows the members of ASEAN.
- 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.
- This Map shows efforts at economic integration in Africa.
- Learning Objective 6: To describe other forms of global cooperation such as the United Nations and OPEC.
- 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.
- 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.
- 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.
- 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.