International Business

Chapter Eight

Cross-national Cooperation and Agreements

World Trade Organization (WTO)

General Agreement on Tariffs and Trade (GATT) formed in 1947 was replaced by WTO in 1995. The goal of WTO is

WTO rulings are binding. If an offending country fails to comply with a judgment, the rights to compensation and countervailing sanctions will follow. Most-favored nation clause (MFN): is the fundamental principle of trade without discrimination. WTO Rounds-Doha Round (2001-till date)

To facilitate the development of a free and open trading system in the world To adjudicate trade disputes between or amongst member nations

Economic Integration

Economic integration: is an agreement between or amongst nations within an economic bloc to reduce and ultimately remove tariff and nontariff barriers. Factors favoring integration are: - Cultural similarity - Geographic proximity - Political will Approaches to economic integration include: global integration via the World Trade Organization bilateral integration between two countries regional integration via an economic bloc
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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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Types of Regional Economic Integration

Regional Cooperation: initial moves, no serious tariff implication Free Trade Area: no internal tariff Customs Union: no internal tariff and common external tariff Common Market: no internal tariff, common external tariff and factor mobility Economic Integration: no internal tariff, common external tariff, factor mobility, common fiscal and monetary policy, common currency, and political integration

Structure of European Union

European Parliament (elected by the peoples of the Member States) Council of the European Union (representing the governments of the Member States) European Commission (driving force and executive body) Court of Justice (ensuring compliance with the law) Court of Auditors (controlling sound and lawful management of the EU budget)

North American Free Trade Agreement (NAFTA)

Established in 1994 by United States, Canada and Mexico, phases in over a period of 15 years Claims a total GNI that is greater than that of the 25-member EU NAFTA covers: Market access (tariff and nontariff barriers) Trade rules (subsidies and antidumping) Services Investment Intellectual property Dispute resolution Good example of trade diversion

Regional Integration Groups

Americas

North American Free Trade Agreement (NAFTA) Central American Free Trade Agreement (CAFTA) MERCOSUR Latin American Integration Association (ALADI) Central American Common Market (CACM) Caribbean Community and Common Market (CARICOM) ANDEAN Group

Latin America

Regional Integration Groups

Europe

European Union (EU) European Free Trade Association (EFTA)

Association of Southeast Asian Nations (ASEAN) Asia Pacific Economic Cooperation (APEC) South Asian Association for Regional Cooperation (SAARC) Economic Cooperation Organization (ECO) Gulf Cooperation Council (GCC)

Asia

Africa

Southern African Development Community (SADC) Common Market for Eastern and Southern Africa (COMESA) Economic Community of West African States (ECOWAS)

MERCOSUR

Established in 1991
Brazil Argentina Paraguay Uruguay

Generates 80% of South Americas GNP Signed free trade agreements with Bolivia and Chile Negotiating with EU for free trade agreements

Association of South East Asian Nations (ASEAN)

Organized in 1967 Member countries are protected in terms of tariff and nontariff barriers Holds tremendous potential market opportunities with 500 million consumers

How to Study Regional Groups (an approach)

Study area History and background Membership: current and future Organizational structure Success/ failures, so far Present and future role in the region and the world Role beyond economics-politics, culture etc.
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EU

NAFTA

MERCOSUR

ASEAN

Chapter 8: Discussion Questions

1.

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4.

Define economic integration. Why nations pursue economic integration? Explain. Explain the static and dynamic effects of regional economic integration. Explain the five different types of regional economic integration. How can we can study regional groups? Specifically, explain the role of matrix we discussed in class.
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