The document discusses regional economic integration and cooperative agreements, using NAFTA as a case study. It outlines the key provisions and effects of NAFTA, including increased trade and foreign direct investment between the US, Canada, and Mexico. While NAFTA increased trade flows, its impact on employment was mixed, as some jobs were gained while others were lost to Mexico's lower labor costs. Overall, NAFTA established a large integrated regional market in North America.

1. Regional Economic Integration and Cooperative
Agreements
• US (50 states in continental US) + Alaska and Hawaii
• Common Currency
• Perfect Labor and Capital Mobility
• As compared to WTO agreements, faster progress is at regional level where
countries close together already engaged in a significant amount of trade
• Post World War II-1940’s-countries came together for economic
cooperation-Regional economic integration and commodity arrangements
• Economic integration-Political and economical agreement among countries
• Might reduce tariffs for members countries while keeping tariffs for non-
member countries
• Lowest level of cooperation is usually trade and highest level-beyond trade
• Commodity Agreements: Result in cooperation among producers of
commodities such as oil-producing countries or between producers and
consumers of commodities such as coffee and tin.

2. Regional Economic Integration and Cooperative
Agreements
• Regional Trading groups have an import influence on MNE’s
strategies
• Define size or regional market and rules to operate
• Companies need to adjust organizational structure and operating
strategy to take advantage of regional trade groups
• Companies in initial stages of expansion
• E.g.: EU and Ford
• 107 RTA’s-all RTA’s are registered with the WTO and majority are
bilateral
• 17-including EU involve 3 or more countries
• NAFTA and EU have high level of integration

3. Regional Economic Integration
• Geographic proximity is an important reason for economic
integration
• Distance for goods to travel is short
• Consumer tastes are similar and distribution channels can
easily be established
• Neighboring countries have common history and interests
and may be more willing to coordinate their policies
• Countries-not neighbors-form agreements-if their political
ideologies are similar
• E.g.: Cuba- communist, political and economic
philosophy-member for COMECON(the Council for
Mutual Economic Assistance) (Vietnam, Bulgaria, Soviet
Union, Hungary, Poland, Romania, Mongolia, Cuba, etc)

4. Regional Economic Integration-4 types
• 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. Can explore other forms of cooperation, such as reduction
on NTB or trade in services and investment but focus on clearly on
tariffs.
• 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. E.g.: NAFTA and EU
 A more extensive type of regional trade agreement :
• Common market: An economic bloc which also permits the free
flow of capital and labor. It is free to work in any country in the
common market without restriction. E.g.: MERCOSUR, EU
• Complete Economic Integration: Adopt common economic
policies. E.g.: EU-Common currency complete with a Common
Central Bank. High degree of Political integration among member
countries

5. Effects of Integration
• Affects member countries in social, culture, political
and economic ways
• E.g.: Prior to NAFTA, Canada has small but
successful film industry
• Reduction of entry barrier-US
• Quebec-requires all foreign films including US films to
bear a Canadian government issue classification
sticker before being sold or distributed in Canada
• MNEs are more concerned with economic effects
• Reduction of tariffs products static effects and
dynamic effects.

6. The Effects of Economic Integration
Static effects:
• Static effects may develop when either of two conditions occurs:
Trade Creation:
• Production shifts to more efficient producers for reasons of comparative
advantage, allowing consumers access to more goods at a lower price
than would have been possible without integration
• Companies protected in their domestic markets face real problem when
barriers are eliminated and they attempt to compete with more efficient
producers
Trade Diversion:
• Trade shifts to countries in the group at the expense of trade with
countries not in the group, even though the nonmember companies might
be more efficient in the absence of trade barriers.
Dynamic effects:
• They occur when trade barriers come down and size of the market
increases. Because of larger size of the market, companies can increase
their production, which will result in lower cost per unit, a phenomenon
8-6
called Economies of Scale.

8. Major Trading Groups
• 2 ways to look at Trading Groups-by
location and by type
• By Location: Europe, Asia, North America,
Africa
• By type-free trade area, customs union,
common market, economic integration
• Offers location specific advantages to
foreign investors due to increased size

9. Major Trading Groups
1. Free Trade Area: European Free Trade
Association (EFTA), North American Free
Trade Agreement (NAFTA), Association
of South East Asian Nations(ASEAN)
2. Customs Union: MERCOSUR
3. Common market: Caribbean Community
and Common market, Central American
Common Market, Andean Group
4. Economic integration—European Union

10. North American Free Trade
Agreement (NAFTA)
• United States, Mexico and Canada-formed in 1994
• Initially had Automotive Products Trade Agreement, effective in 1965
• Qualified duty-free trade in specified automotive products
• 1980- US and Canada discussed free trade development in specific
industries such as steel and textiles
• 1987, negotiations were on boarder terms of trade
• 1st Jan 1989 negotiations resulted in Canada-US free Trade Agreement
(FTA)-eliminated barrier on bilateral trade
• 1st Feb 1991, Mexico approached US to establish FTA, which included
Canada too.
• 1st Jan 1994, North American Free Trade Agreement was made effective

11. Why Nafta?
• US-Canada and US-Mexico trade is more significant
• NAFTA is a powerful trading bloc with a combined population
and total GNP less than 25 member EU
• Tremendous size of US economy in comparison to those of
Mexico and Canada
• Canada has a much richer economy than that of Mexico, even
through its population is 1/3rd of that of Mexico
• Even though NAFTA is FTA instead of customs union or
common market, its cooperation extends far beyond reduction
of tariff and non-tariff barriers, including provisions for
services, investments and intellectual properties
• In addition, the agreement establishes a new dispute
resolution process.

12. Comparative NAFTA Data(1999
data)
Populati
on
GNP
(Billions
GNP per
Capita
• Rationale:
(Millions in USD) (USD) • US-Canadian trade is the
)
largest bilateral trade in
Canada 30,287 594,976 19640
the world
• US is Mexico’s and
Mexico 94,349 348,627 3700 Canada’s largest trading
partner
United 267, 636 7,783,092 29080
States
392,272 8,726,695 22,247

13. NAFTA-Static and Dynamic Effects
• Static Effect:
• Canadian and US consumers benefit from lower cost of agriculture from
Mexico which is a Static Effect of economic liberalization
• US producers also benefit form the large and growing Mexican market,
which has a huge appetite for US products-a dynamic effect
• Dynamic Effect:
• NAFTA is a good example of trade diversion
 Many US and Canadian companies have established manufacturing
facilities in Asia due to labor advantage
 These companies now go to Mexico rather than Asian countries
 E.g.: IBM –makes computer parts in Mexico-earlier made in Singapore
 IBM thus boosted Mexico’s exports to US from USD 350 million to USD
2 billion
 Gap Inc and Liz Claiborne are increasingly buying garments from
Mexican contracts than their ASIAN counterparts
 RC Willey, the US furniture retailers, also imports furniture from Mexico
as well as from China rather than importing everything from China
because of the reduction of tariff barriers and close proximity to Mexico

14. Coverage of NAFTA
• Market Access: Rules of origin, tariff and non-tariff
• Trade Rules: safeguards, subsidies antidumping duties, health and
safety standards
• Services-provides for the same safeguards for trade in services that
exist for trade in goods (consulting, engineering, etc)
• Investments-Establishes investment rules governing minority interests,
portfolio investments, real property and majority owned or controlled
investments from NAFTA countries + extends to investment by any
company in NAFTA, regardless of country of origin.
• Intellectual property: All countries will provide adequate and effective
protection and enforcement of intellectual property right.
• Dispute Settlement: Common process to be followed against an
offending party
• Mexico made significant strides in tariff reduction after joining GATT in
1986.
• Due to NAFTA-reduced tariffs on originating goods traded between
Mexico and Canada –immediately or in phase manner

15. Rules of Origin and Regional Value
Concept
• NAFTA is FTA and not custom union-each country has its own tariff to the rest
of the world.
• Products entering into Canada must have commercial or customs invoice that
identity's the ultimate origin
• Otherwise-third country would ship the products to the NAFTA country and from
there to other 2 countries-duty free
• Goods and services must originate in North America to get access to
lower tariffs
• Local Content:
• At least 50% of the net cost of most products must come from NAFTA
region
• Exceptions are 55% for footwear, 62.5% for passenger automobiles and light
trucks and engines and transitions for such vehicles and 60% for other vehicles
and automotive parts
• E.g.: Ford cars assembled in Mexico could use parts from Canada, US and
Mexico and labor & other factors from Mexico. For the car to enter Canada and
US, according to NAFTA, at least 62.5% of its value must come from North
America,

16. Special Provisions of NAFTA
• FTA are for reducing tariffs
• Two sides agreements were later included in NAFTA due to strong objectives:
Labor unions and environmentalists
• Opponents were worried about potential loss of jobs in Canada and US to Mexico as a
result of Mexico's cheap wages, poor working conditions and lax environmental
enforcement
• Companies may move from US and Canada to Mexico
• Labor Lobby: Included labor standards and Environmental Lobby: Upgrade of
environment standards in Mexico and strengthening of compliance
• NAFTA commission, cabinet-level body-meets once a year-to implement the agreements
and side agreements and supervise the implementation progress
• Side agreement 1: Improving working conditions and living standards, promoting
compliance with effective enforcement of labor laws, promoting the Agreement’s
principles through cooperation and coordination and promoting publication and exchange
of information to enhance mutual understanding of the Parties Law
• Environmental Side agreement 2: Includes promotion of sustainable development,
cooperation on the conservation, protection and enhancement of the environment and
effective enforcement of an compliance with domestic laws.
• Transparency and public participation in the development and improvement of
environmental laws and policies
• NAFTA Secretariat administer the NAFTA dispute resolution process
• Solve the matter without Secretariat as with secretariat the roles are same as that of
WTO

17. Merchandise trade between US and Canada and
between US and Mexico
1993 % of 1994 1995 1996 1997 1998 % of %
Amount Total Amount Amount Amount Amount Amount Total Growth
1993-
1998
Canada
Exports 101.2 22.2 114.8 127.6 135.2 152.1 156.8 23.4 54.9
to US
Imports 113.3 19.2 131.1 147.1 158.7 170.1 175.8 19.2 55.2
to US
Mexico
Exports 41.5 9.1 50.7 46.2 56.8 71.1 78.4 11.7 88.9
to US
Imports 40.4 6.9 50.1 62.8 75.1 86.7 95.5 10.4 136.4
to US
Total
World
Exports 456.8 502.4 575.8 612.1 679.7 670.2 46.7
to
Imports 589.4 668.6 749.6 803.3 876.4 917.2 55.6
to

18. Impact of NAFTA on Trade, Investment and
Jobs
• Reducing trade barrier in Mexico would result in an increase in exports
to Mexico, resulting in creation of jobs in US and Canada
• Increased exports to Mexico from both US and Canada
• Investments increase
• Decentralization of Canada and US as they move to Mexico to take
advantage of cheaper cost
• Observations from the Table shown in previous slide:
1. US exports to Canada and imports from Canada have not changed
2. US exports to Mexico and imports from Mexico have changed
3. Mexico replaced Japan as second largest market for US exports and
being 3rd most important supplier to US after Canada, Japan
4. US exports rose faster to Canada and Mexico as compared to rest of
world. Same phenomenon was observed for imports
5. Mexico currency crisis in 1994, exports dropped but gain regained to
larger extend

19. Hourly compensation costs for Production workers in
Manufacturing, in USD
Country Wage
Germany 28.28
Japan 19.37
United States 18.24
Canada 16.55
Mexico 1.75
Hong Kong 5.42
Korea 7.22
Singapore 8.24
Taiwan 5.89

20. Impact of NAFTA on Trade, Investment and
Jobs…contd…
• NAFTA members have become much more significant trading
partners with each other
• Overall trade with NAFTA members has increased faster than trade
with rest of the world
• Exports to NAFTA members have increased, but imports have
increased faster.
• The investment and employment pictures are far more complicated.
• Investment Picture:
• Mexico-IBM
• Foreign investment into Mexico has risen from USD 4 billion per year
in 1993 to USD 10 billion per year in 1988
• Mexico-12th important location for US FDI as Brazil is more important
but Germany and Japan are investing in Mexico
• US FDI Contribution: Mexico: 2.6% Vs Canada 10.6%

21. Impact of NAFTA on Trade, Investment
and Jobs
• The impact of NAFTA on employment has been difficult to measure
• More jobs have been created than lost to NAFTA, but difficult to measure
• USD 1 billion US exports= 14,000 US jobs
• 1993-1998: Total exports of US to Mexico and Canada=USD 92.5
Billion=1.3 Million job
• Imports are also significant
• Wage difference between Mexico
• Even Mexico had tough time -when NAFTA required Mexico to strip the
companies on Mexican border of their duty-free status, foreign
companies started looking elsewhere
• Sanyo, Canon and French battery producer -Saft left Mexico and
relocated to China, Vietnam and Guatemala, where labor was cheap.
• Immigration-Illegal immigration to US and Canada

22. NAFTA Expansion
• Expand into Central and South America-
bilateral trade arrangements-hubs and
Spokes arrangements with US as hub and
others as spokes
• Canada and Mexico have entered into
FTA with Chile, perceived to be next
country to join NAFTA
• MEXICO+EU FTA

23. Implications of NAFTA on Corporate
strategy
• Companies would look at NAFTA as one big regional market allowing
companies to rationalize production, financing, especially seen in automotive
products and electronics, especially computer
• Each country in NAFTA ships more automotive parts in specialized production
to other two countries that any other manufactured goods
• Employment in auto industry has increased in US since NAFTA
• Auto manufacturing has moved from all over the world to Mexcico-500,000
Mexican make parts and assemble vehicle for all world's major producers-
62.5% regional content has forced European and Asia automakers' to bring in
parts supplier and set up assembly operation in Mexico
• Canadian Entrepreneur established a metal–stamping plant in Puebla, Mexico,
to supply Volkswagen, the German auto manufacturer
• VW plant assembles revitalized Beetle supplied to US market
• Daimler-Chrysler is producing 45,000 cars and 200,000 trucks in Mexico
• Chrysler-produces new model: Pt Cruiser, in Toluca, Mexico for export to
Canada, US and Europe-single plant to supply to entire world
• Some US companies are leaving US and Canada and moving to Mexico: E.g.:
GE-Apparel and furniture industry

24. Implications of NAFTA on
Corporate strategy
• Low end manufacturing moving to South, more
Sophisticated manufacturing and services are increasing
in US
• 35000 jobs were lost in South east, but 65,000 high tech
jobs were also created
• Sophisticated US companies would run Canadian and
Mexican companies out of business
• Looking at Mexico as one single consumer market
• Initial excitement was low wage and now as incomes rise
demand for foreign products rise.
• Canadian and US trade deficits falls-market becomes
balance

25. Commodity Agreements
• Producers of primary commodities have also come together in an
attempt to stabilize commodity prices and supply
• Crude petroleum, natural gas, copper, tobacco, coffee, cocoa, tea and
sugat-25% of world merchandise trade and especially for developing
country
• Commodity agreement: It is 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
• 2 types
• 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)
8-25

26. • Buffer Stock: A commodity agreement by which reserve stocks of the
goods are bought and sold to regulate the price.
• Quota System: Producing countries divide total output by sales to
stabilize the prices
• Cooperation to prevent sharp fluctuations
• Effective when a single country has a large share of world production
so that it is able to control supply easily
• E.g.: Wool-Controlled by Australia
• Diamonds-Debeers Company in South Africa
• Type of commodity also influences a commodity’s agreement
effectiveness-substitute

27. OPEC
• Producer cartel
• OPEC is large category of energy commodities, which includes coal
and natural gas
• OPEC is more than Middle East
• Members: Algeria, Iran, Iraq, Kuwait, Saudi Arabia, UAE, Venezuela,
Indonesia, Libya, Nigeria, Qatar
• Saudi Arabia has maximum control
• OPEC oil minister gather together to determine the quota for each
country based on estimates of supply and demand
• OPEC with large population need large oil revenues
• Exceed export quota to generate more revenues
• 1990..why did Iraq invade Kuwait?
• OPEC member countries produce 40% of world’s crude oil and 14%
of natural gas revenues