Cross National Cooperation and Agreements

International Business International Business

Chapter EightChapter Eight

Cross-national Cooperation Cross-national Cooperation and Agreementsand Agreements

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World Trade Organization (WTO)World Trade Organization (WTO)

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

The goal of WTO is…The goal of WTO is…• To facilitate the development of a free and open trading To facilitate the development of a free and open trading

system in the worldsystem in the world• To adjudicate trade disputes between or amongst To adjudicate trade disputes between or amongst

member nationsmember nations WTO rulings are binding. If an offending country WTO rulings are binding. If an offending country

fails to comply with a judgment, the rights to fails to comply with a judgment, the rights to compensation and countervailing sanctions will compensation and countervailing sanctions will follow.follow.

Most-favored nation Most-favored nation clause (clause (MFNMFN): ): is the is the fundamental principle of “trade without fundamental principle of “trade without discrimination.”discrimination.”

WTO Rounds-Doha Round (2001-till date)WTO Rounds-Doha Round (2001-till date)

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Economic Integration Economic Integration

Economic integration:Economic integration: is an agreement between is an agreement between or amongst nations within an or amongst nations within an economic bloceconomic bloc to to reduce and ultimately remove tariff and nontariff reduce and ultimately remove tariff and nontariff barriers. Fbarriers. Factors favoring integration are:actors favoring integration are:

-- Cultural similarityCultural similarity-- Geographic proximityGeographic proximity-- Political willPolitical will

Approaches to Approaches to economic integrationeconomic integration include: include:• global integrationglobal integration via the World Trade via the World Trade

OrganizationOrganization• bilateral integrationbilateral integration between two countriesbetween two countries• regional integrationregional integration via an via an economic bloceconomic bloc

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Effects of Economic IntegrationEffects of Economic Integration

Static effects:Static effects: the shifting of resources from the shifting of resources from inefficient to efficient firms as trade barriers fall inefficient to efficient firms as trade barriers fall

Trade creation:Trade creation: production shifts from less efficient production shifts from less efficient domestic producers to more efficient regional producersdomestic producers to more efficient regional producersTrade diversion:Trade diversion: trade shifts from more efficient trade shifts from more efficient external sources to less efficient suppliers within the external sources to less efficient suppliers within the bloc following the imposition of common external bloc following the imposition of common external barriers barriers

Dynamic effects:Dynamic effects: the gains from overall market the gains from overall market growth, the expansion of production, the growth, the expansion of production, the realization of greater economies of scale and realization of greater economies of scale and scope, and the increasingly competitive nature of scope, and the increasingly competitive nature of the marketthe market

Types of Regional Economic Types of Regional Economic IntegrationIntegration

Regional Cooperation:Regional Cooperation: initial moves, no initial moves, no serious tariff implicationserious tariff implication

Free Trade Area:Free Trade Area: no internal tariff no internal tariff Customs Union:Customs Union: no internal tariff and no internal tariff and

common external tariffcommon external tariff Common Market:Common Market: no internal tariff, no internal tariff,

common external tariff and factor mobilitycommon external tariff and factor mobility Economic Integration:Economic Integration: no internal tariff, no internal tariff,

common external tariff, factor mobility, common external tariff, factor mobility, common fiscal and monetary policy, common fiscal and monetary policy, common currency, and political integrationcommon currency, and political integration

Structure of European UnionStructure of European Union European Parliament (elected by the European Parliament (elected by the

peoples of the Member States) peoples of the Member States) Council of the European Union Council of the European Union

(representing the governments of the (representing the governments of the Member States)Member States)

European Commission (driving force and European Commission (driving force and executive body)  executive body) 

Court of Justice (ensuring compliance with Court of Justice (ensuring compliance with the law)the law)

Court of Auditors (controlling sound and Court of Auditors (controlling sound and lawful management of the EU budget)lawful management of the EU budget)

North American Free Trade Agreement North American Free Trade Agreement (NAFTA)(NAFTA)

Established in 1994 by United States, Canada and Established in 1994 by United States, Canada and Mexico, phases in over a period of 15 yearsMexico, phases in over a period of 15 years

Claims a total GNI that is greater than that of the Claims a total GNI that is greater than that of the 25-member EU25-member EU

NAFTA covers:NAFTA covers:• Market access (tariff and nontariff barriers)Market access (tariff and nontariff barriers)• Trade rules (subsidies and antidumping)Trade rules (subsidies and antidumping)• ServicesServices• InvestmentInvestment• Intellectual propertyIntellectual property• Dispute resolutionDispute resolution

Good example of trade diversionGood example of trade diversion

Regional Integration GroupsRegional Integration Groups

AmericasAmericas North American Free Trade Agreement (NAFTA)North American Free Trade Agreement (NAFTA) Central American Free Trade Agreement (CAFTA)Central American Free Trade Agreement (CAFTA)

Latin AmericaLatin America MERCOSURMERCOSUR Latin American Integration Association (ALADI)Latin American Integration Association (ALADI) Central American Common Market (CACM)Central American Common Market (CACM) Caribbean Community and Common Market Caribbean Community and Common Market

(CARICOM)(CARICOM) ANDEAN GroupANDEAN Group

Regional Integration GroupsRegional Integration Groups

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

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

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

MERCOSURMERCOSUR

Established in 1991Established in 1991• BrazilBrazil• ArgentinaArgentina• ParaguayParaguay• UruguayUruguay

Generates 80% of South America’s GNPGenerates 80% of South America’s GNP Signed free trade agreements with Bolivia Signed free trade agreements with Bolivia

and Chileand Chile Negotiating with EU for free trade Negotiating with EU for free trade

agreementsagreements

Association of South East Asian Association of South East Asian Nations (ASEAN)Nations (ASEAN)

Organized in 1967Organized in 1967 Member countries are protected in Member countries are protected in

terms of tariff and nontariff barriersterms of tariff and nontariff barriers Holds tremendous potential market Holds tremendous potential market

opportunities with 500 million opportunities with 500 million consumersconsumers

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How to Study Regional Groups How to Study Regional Groups (an approach)(an approach)

Study areaStudy area EUEU NAFTANAFTA MERCOSURMERCOSUR ASEANASEAN

History and backgroundHistory and background

Membership: current and Membership: current and futurefuture

Organizational structureOrganizational structure

Success/ failures, so farSuccess/ failures, so far

Present and future role in Present and future role in the region and the worldthe region and the world

Role beyond economics--Role beyond economics--politics, culture etc.politics, culture etc.

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Chapter 8: Discussion QuestionsChapter 8: Discussion Questions

1.1. Define economic integration. Why Define economic integration. Why nations pursue economic integration? nations pursue economic integration? Explain.Explain.

2.2. Explain the static and dynamic effects of Explain the static and dynamic effects of regional economic integration.regional economic integration.

3.3. Explain the five different types of Explain the five different types of regional economic integration. regional economic integration.

4.4. How can we can study regional groups? How can we can study regional groups? Specifically, explain the role of matrix we Specifically, explain the role of matrix we discussed in class. discussed in class.