Chapter 8 reading

Caribbean Community (CARICOM)

A customs union in the Caribbean region

The ______ adopted the principles and trade agreements reached under the auspices of GATT but expanded its mission to include trade in services, investment, intellectual property, sanitary measures, plant health, agriculture, and textiles, as well as technical barriers to trade. Its ________ members collectively account for most of the world trade.

WTO, 162,

NAFTA rationale:

U.S.-Canadian trade is the largest bilateral trade in the world. The United States is Mexico's and Canada's largest trading partner.

An example of a bilateral agreement is the ____________________, which is a free trade agreement and not a customs union.

U.S.-Colombia Trade Promotion Agreement

Restoring an effective means for trade liberalization led officials to create the__________ tip( replace GATT)

World Trade Organization (WTO) in 1995

Regional integration

a form of integration in which a group of countries located in the same geographic proximity decide to cooperate

Common Market

a group of countries that have eliminated tariffs and harmonized trading rules to facilitate the free flow of goods among the member nations

Economic integration

an economic arrangement between different regions marked by the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. The aim of economic integration is to reduce costs for both consumers and producers, as well as to increase trade between the countries taking part in the agreement.

Dynamic effects

are the overall growth in the market and the impact on a company caused by expanding production and by its ability to achieve greater economies of scale.

Static effects

are the shifting of resources from inefficient to efficient companies as trade barriers fall.

Approaches to economic integration—political and economic agreements among countries in which preference is given to member countries—may be

bilateral, regional, global.

Geographic proximity is an important reason for

economic integration.

European Union (EU)

(syn Common Market) an economic association established in 1957 by a number of Western European countries to promote free trade among its members

In _______, 23 countries formed the General Agreement on Tariffs and Trade (GATT) under the auspices of the United Nations to abolish quotas and reduce tariffs

1947

most-favored-nation (MFN) clause

A GATT (and now a WTO) requirement that a trade concession that is given to one country must be given to all other countries.

Andean Community (CAN)

A South American form of economic integration involving Bolivia, Colombia, Ecuador, Peru, and Venezuela

United Nations Conference on Trade and Development (UNCTAD)

A UN body that has been especially active in dealing with the relationships between developing and industrialized countries with respect to trade.

Pacific Alliance

A trade-oriented alliance formed in 2011 which includes Mexico, Colombia, Peru, and Chile with Costa Rica and Panama in the process of joining.

The EU has been very aggressive in enforcing antitrust laws in a variety of areas, including high-tech companies like Microsoft and Google on charges that they were harming competitors because of their dominant market positions, Apple and Amazon on suspicion that they were receiving unfair tax advantages from Ireland and Luxembourg respectively, and Facebook on allegations that it was violating privacy policies. Although most cases are still in process, the non-tax cases are always complicated because of the ever-changing landscape of technology, consumer behavior, and market demand. It is interesting to note that the EU is far more aggressive than the Fair Trade Commission in the United States, but it is also understandable that the EU would be more aggressive against foreign companies.

Antitrust Investigations

There are wider national differences in the EU due to language and history. But there are also widely different growth rates, although that varies from year to year. Also, slow economic growth since 2008 means that nobody is growing very fast. In recent years, for example, economic growth in Southern Europe, especially Greece, Cyprus, Italy, and Spain, has been in negative territory, Germany and France have been positive but relatively flat, and Ireland has been relatively robust.

Balancing "common" denominators with national differences

The European Union: need to know

Changed from the European Economic Community to the European Community to the European Union The largest and most successful regional trade group Free trade of goods, services, capital, and people Common external tariff Common currency

Both long-term trends and short-term fluctuations in commodity prices have important consequences for the world economy. On the demand side, commodity markets play an important role in industrial countries, transmitting business cycle disturbances to the rest of the economy and affecting the growth rate of prices. On the supply side, as noted above, primary products account for a significant portion of the GDP and exports of many commodity-producing countries.

Commodities and the World Economy

Implications of the EU for corporate strategy:

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

The Challenge Export Reliance

Countries in Latin America and the Caribbean rely heavily on countries outside the region for trade. For example, Jamaica, a member of CARICOM, exports 49.3 percent of its merchandise to the United States and 18 percent to the EU. Although Trinidad and Tobago is the third major exporter of merchandise to Jamaica, no other member is significant as either a destination or a source for its exports. The same could be said for most of Latin America. The United States and EU represent significant markets for most of its countries.

One strategy is to produce in a central location in Europe to minimize transportation costs and the time it takes to move products from one country to another. However, the highest costs are in central Europe. As we saw in our opening case, for instance, manufacturing wages in the German auto industry were much higher than the lower wages among Eastern European members. That's why Toyota opted to set up operations in lower-wage countries such as the Czech Republic and Poland.

Determining where to produce

Doing business in the EU can influence corporate strategy, especially for outside MNEs, in three ways:

Determining where to produce Determining whether to grow through new investments, through expanding existing investments, or through joint ventures and mergers. Balancing "common" denominators with national differences

When Toyota initially set up its manufacturing platform in Europe, it entered into a joint venture with PSA Peugeot-Citroën to build a new factory in the Czech Republic in order to take advantage of the European carmaker's supplier network. The market is still considered fragmented and inefficient compared with the United States, so most experts feel that mergers, takeovers, and spinoffs must continue in Europe, and U.S. companies are buying European companies to gain a market presence and to get rid of competition.

Determining whether to grow through new investments, through expanding existing investments, or through joint ventures and mergers.

One function of the WTO that is garnering growing attention is the organization's dispute settlement mechanism, in which countries may bring charges of unfair trade practices to a WTO panel, and accused countries may appeal. There are time limits on all stages of deliberations, and the WTO's rulings are binding. If an offending country fails to comply with the panel's judgment, its trading partners have the right to compensation. If this penalty is ineffective, then the offending country's trading partners have the right to impose countervailing sanctions. However, the effectiveness of this system is under serious debate, given the ambiguity and time-consuming nature of certain cases.

Dispute Settlement

European Free Trade Association—FTA involving Iceland, Liechtenstein, Norway, and Switzerland, with close ties to the _______.

EU

The EU encompasses many governing bodies, among which are the

European Commission, European Council, European Parliament, European Court of Justice, and European Central Bank

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.

Customs Union

In addition to eliminating internal tariffs, member countries levy a common external tariff on goods being imported from nonmembers in order to establish a customs union. For example, when the EU was organized in 1957, it began to remove internal tariffs among member states, but in 1967 it eliminated the remaining internal tariffs and established a common external tariff, meaning that goods shipped into one member country from abroad are free from tariffs in the rest of the member countries. Now the EU negotiates as one region in the WTO and other regional and bilateral agreements rather than as separate countries.

Another important effect of an RTA is greater efficiency due to increased competition. Many MNEs in Europe have attempted to grow through mergers and acquisitions to achieve the size necessary to compete in the larger market. Companies in Mexico were forced to become more competitive with the passage of NAFTA due to competition from Canadian and U.S. companies. This could result in investment shifting from less efficient to more efficient companies, or it could result in existing companies becoming more efficient.

Increased Competition

World Trade Organization (WTO)

International organization derived from the General Agreement on Tariffs and Trade (GATT) that promotes it free trade around the world.

Organization of the Petroleum Exporting Countries (OPEC)

It is a group of 13 oil-producing countries that have significant control over supply and band together to control output and price. Its members include Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Several of the largest oil-exporting countries, including Russia, Norway, Canada, the United States, and Mexico, are not members of OPEC.

Then GATT slowly ran into problems why?

Its success led some governments to devise craftier methods of trade protection. World trade grew more complex, and trade in services—not covered by GATT rules—grew more important.

The WTO continued the MFN clause of GATT, which implies that member countries should trade without discrimination, basically giving foreign products "national treatment." Although the WTO restricts this privilege to official members, some exceptions are allowed, especially for developing countries or countries that are part of a regional or bilateral trading group.

Most Favored Nation

Although______________________ , it's important to understand that the world is dependent on the following main sources of energy: oil (31.1 percent), coal (28.9 percent), natural gas (21.4 percent), and everything else (18.6 percent). In terms of crude oil, OPEC is an important player.

OPEC supplies oil and natural gas

The UN family of organizations is too large to list, but it includes the WTO, the International Monetary Fund, and the World Bank (the latter two discussed in subsequent chapters). These organizations are all part of the Economic and Social Council, one of six principal organs of the UN System, which also includes the General Assembly, the Security Council, and the International Court of Justice. The UN has 193 member states represented in the General Assembly, including 15 that compose the Security Council. There are 5 permanent members of the Security Council—China, France, the Russian Federation, the United Kingdom, and the United States—and 10 other members elected by the General Assembly to serve 2-year terms.33

Organization and Membership (UN)

example of a producer cartel that relies on quotas to influence prices.

Organization of the Petroleum Exporting Countries (OPEC)

Mercosur

Pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area

Because of the economic and human destruction left by World War II, European political leaders realized that greater cooperation among their countries would help speed up recovery. Many organizations were formed, including the European Economic Community (EEC), which eventually emerged as the organization that would bring together the countries of Europe into the most powerful trading bloc in the world. Several other countries, including the United Kingdom, formed the European Free Trade Association (EFTA) with the limited goal of eliminating internal tariffs. But most of those countries eventually became part of the EU. Those that have decided not to leave EFTA (Iceland, Liechtenstein, Norway, and Switzerland) still have a free trade agreement with each other. All but Switzerland are part of the European Economic Area, which provides them access to the "four freedoms" of the EU: the free movement of goods, services, persons, and capital. However, it does not include other areas of cooperation, such as a customs union and monetary union.8

Predecessors

OPEC controls prices by establishing production quotas on member countries. Saudi Arabia has historically performed the role of the dominant supplier in influencing supply and price. Periodically OPEC oil ministers gather together to determine the quota for each country based on estimates of supply and demand. Politics is also an important dimension of the deliberations. OPEC member countries with large populations need large oil revenues to fund government programs. As a result, they are tempted to exceed their export quotas to generate more revenues.

Price Controls and Politics

The downside of high oil prices for OPEC:

Producers investing in countries outside of OPEC Complication of balancing social, political, and economic objectives

NGOs—private nonprofit institutions that are independent of the government. Give an example

Red cross

European Union, the North American Free Trade Agreement (NAFTA), and the ASEAN (Association of Southeast Asian Nations) Free Trade Area (AFTA).

Regional trade agreements

However, regional integration might actually help the WTO achieve its objectives in three major ways:

Regionalism can lead to liberalization of issues not covered by the WTO. Regionalism is more flexible, given that it typically involves fewer countries with similar conditions and objectives. Regional deals lock in liberalization, especially in developing countries.

_____________ is the largest producer of oil, closely followed by Russia and the United States. Saudi Arabia is also the largest net exporter of oil, followed by Russia and the United Arab Emirates.

Saudi Arabia

UNCTAD established a _______________________________to address the issues facing developing countries because of high dependence on​ commodities, especially agricultural​ commodities, for export revenues. Given such​ reliance, UNCTAD is concerned that it will be impossible to resolve poverty​ issues, especially in​ Africa, without dealing with fluctuating commodity prices.

Special Unit on Commodities

NAFTA provides the _________________________________. For example, Canadian and U.S. consumers benefit from lower-cost agricultural products from Mexico, a static effect of economic liberalization. U.S. producers also benefit from the large and growing Mexican market, which has a huge appetite for U.S. products—a dynamic effect.

Static and dynamic effects of economic integration

n order to facilitate the free flow of people from country to country within the EU, the Schengen Agreement was signed in 1990 with gradual implementation allowing citizens to cross internal borders without having to go through border checks. Not all members of the EU, including the UK and Ireland, have opted to be in the Schengen Area, whereas some non-EU states, such as the EFTA countries, are part of it.

The Schengen Area

One of the more intriguing potential agreements involves the United States and the EU. Even though tariffs between the two superpowers are already low (the United States and the EU have the world's largest trading relationship and account for nearly half of the world's economic output), the new agreement would eliminate the remaining tariffs, boost trade between the regions, and aid in harmonizing product standards between them. U.S. labor unions would be more willing to support such an agreement because of the region's similar labor and environmental standards and because an agreement could result in billions of dollars in yearly growth and thousands of jobs.16 As the United States and the EU began negotiations in 2013, however, a number of challenges began to arise. The French, backed by the European Parliament, want to continue providing subsidies and quotas to support its film and music industries and thus exclude the cultural industries from any future trade talks. On the other side, U.S. farmers are very upset about European agricultural safety standards and view them as protectionist. Obviously, any agreement will be difficult to reach, in spite of the hope for expanding economic growth in the regions.17

The Transatlantic Trade and Investment Partnership (T-TIP)

It's logical that most trade groups contain countries in the same area of the world. Neighboring nations tend to ally for several reasons:

The distances that goods need to travel are short. Consumers' tastes are likely to be similar, and distribution channels can easily be established.

Free Trade Agreement (FTA)

The goal of an FTA is to abolish all tariffs between member countries. It usually begins modestly by eliminating them on goods that already have low tariffs, and there is usually an implementation period during which all tariffs are eliminated on all products included in the agreement. Moreover, each member country maintains its own external tariffs against non-FTA countries. About 90 percent of the RTAs identified by the WTO are free trade agreements.

Regional content:

The percentage of value that must be from North America for the product to be considered North American in terms of country of origin. 50 percent for most products, 62.5 percent for autos.

Static effects may develop when either of two conditions occurs:

Trade Creation

A potential regional economic trade group involving the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

Trans-Pacific Partnership

The Council of the European Union, or European Summit, is composed of the heads of state of each member country. T or F

True

The UN was established in 1945 following World War II to promote international peace and security. It deals with economic development, antiterrorism, and humanitarian movements. true or false

True

Political and social forces also affect oil prices. true or false

True, The civil war in Libya impacted oil markets in 2011, causing oil prices to spike due to the fear that the unrest could spread to other big Middle East oil producers. The same was true when Russia invaded the Ukraine and annexed Crimea, resulting in sanctions against Russia. Companies that had hoped to cash in on Russian oil were forced to pull back until political relations between Russia and the West could be normalized, if ever.

Bilateral Integration

Two countries decide to cooperate more closely together, usually in the form of tariff reductions

The European Parliament

composed of 751 members from all member nations; they are elected every five years, and membership is based on country population. Its three major responsibilities are legislative power, control over the budget, and supervision of executive decisions. Members are grouped by political affiliation (such as Christian Democrats, greens, etc.) rather than by nationality. The commission presents community legislation to the Parliament, which must approve the legislation before it is submitted to the council for adoption.10

. Neighboring ___________ often share a common history, language, culture, and currency.

countries

Many commodity agreements now exist for the purpose of

discussing issues, disseminating information, improving product safety.

Rules of Origin

ensure only goods that have been subject of substantial economic activity within the free trade area are eligible for the more liberal tariff conditions.

The Court of Justice

ensures consistent interpretation and application of EU treaties. Member states, EC institutions, and individuals and companies may bring cases to the Court, which serves as an appeals court for individuals, firms, and organizations fined by the commission for infringing treaty law.

The UN Conference on Trade and Development, or UNCTAD

established in 1964 to integrate developing countries into the global economy. UNCTAD's main activities include globalization and development strategies, trade in goods and services, commodities, investment and enterprise development, and trade logistics and human resource development.

One of the EU's major challenges is ___________. Official candidates for future membership currently include Turkey, Montenegro, Serbia, and the former Yugoslav Republic of Macedonia. Turkey is an interesting candidate since it straddles Europe and Asia, is 99.8 percent Muslim (mostly Sunni), and has a large population of 75.9 million people, second only to Germany with 80.89 million people. It has a strong manufacturing base and strong trade ties with Europe. As noted above, it may also be a key to help the EU come to grips with the humanitarian crisis with the Syrian refugees. Given its close proximity to the Syrian border, Turkey is in a unique position to help assimilate Syrian refugees with temporary work visas and then facilitate their return to Syria if and when political conditions stabilize there.

expansion

MNEs operate worldwide, they usually generate a large percentage of their revenues______________

in their home regions

North American Free Trade Agreement (NAFTA

includes Canada, the United States, and Mexico; went into effect on January 1, 1994; involves free trade in goods, services, and investment; is a large trading bloc but includes countries of different sizes and wealth.

global integration

interdependency among the countries of the world, especially within financial markets and telecommunications

The euro

is a common currency in Europe, is administered by the European Central Bank, was established on January 1, 1999, fesulted in new banknotes in 2002.

The European Council

is composed of representatives of each member country whose interests it represents. Along with the European Parliament, the council is responsible for passing laws and making and enacting major policies, including those in the areas of security and foreign policy. The respective ministers of each country meet periodically to discuss the issues facing those ministries (e.g., ministers of agriculture meet to discuss issues facing agriculture). The presidents and/or prime ministers meet up to four times a year to set broad policy.

Trade Creation

production shifts to more efficient producers for reasons of comparative advantage.

The European Commission

provides political leadership, drafts laws, and runs the various daily programs of the EU.

​OPEC, a group of 13​ oil-producing countries, relies on​ _______ to influence and control prices

quotas

The World Trade Organization is the major body for

reciprocal trade negotiations, enforcement of trade agreements.

Commodities

refer to raw materials or primary products that enter into trade, such as metals . Primary commodity exports—such as crude petroleum, natural gas, copper, iron ore, tobacco, coffee, cocoa, tea, and sugar—are still important to developing countries or agricultural products.

Regional economic integration can affect member countries in_______________________________

social, cultural, political, and economic ways.

Regional economic integration reduces or eliminates those barriers for member countries, producing both ______and dynamic effects.

static and dynamic

Two things have hindered the free flow of people across national borders in Europe in recent years:

terrorism and migration

economies of scale

the average cost per unit falls as the number of units produced rises; occurs in regional integration because of the growth in the market size.

Trade Diversion

trade shifts to countries in the group at the expense of trade with countries not in the group.

A major challenge to NAFTA is illegal immigration. true or false

true

Mercosur is a customs union among Argentina, Brazil, Paraguay, and Uruguay. true or false

true

Migration and terrorism are threatening the open borders that are at the heart of the Schengen Agreement. true or false

true

NAFTA calls for the elimination of tariff and nontariff barriers, the harmonization of trade rules, the liberalization of restrictions on services and foreign investment, the enforcement of intellectual property rights, and a dispute settlement process. true or false

true

NAFTA is a good example of trade diversion; some U.S. trade with and investment in Asia has been diverted to Mexico. true or false

true

OPEC is a producers' alliance in oil that has been successful in using quotas to keep oil prices high. true or false

true

Rules of origin—goods and services must originate in North America to get access to lower tariffs. true or false

true

The Andean Community is one of the original regional economic groups but has not been successful in achieving its original goals. true or false

true

The EU expanded from 15 to 25 countries in 2004 with countries from mostly Central and Eastern Europe. Romania and Bulgaria were admitted in 2007 and Croatia in 2013, bringing the number to 28. true or false

true

The European Court of Justice ensures consistent interpretation and application of EU treaties. true or false

true

The Treaty of Maastricht sought to foster political union and monetary union. true or false

true

The attempts of countries to stabilize commodity prices through producer alliances and commodity agreements have been largely unsuccessful. true or false

true

The three major responsibilities of the European Parliament are legislative power, control over the budget, and supervision of executive decisions. true or false

true

There are several African trade groups, but they rely more on their former colonial powers and other developed markets for trade than they do on each other. true or false

true