Cross-National Cooperation and Agreements

Cross-National Cooperation and Agreements

Chapter 8

Cross-National Cooperation and Agreements

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Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

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Learning Objectives (1 of 2)

8-1 Define the three major types of international economic integration

8-2 Explain what the World Trade Organization is and how it is working to reduce trade barriers on a global basis

8-3 Summarize the major benefits of regional economic integration

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Learning Objectives for the chapter.

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Learning Objectives (2 of 2)

8-4 Compare and contrast different regional trading groups

8-5 Describe the forces that affect the prices of

commodities and their impact on commodity agreements

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Learning Objectives for the chapter.

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What is Economic Integration?

Objective 8-1

Economic Integration Definition

Major ways to approach agreements

Global integration

Bilateral integration

Regional integration

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Learning Objective 1: Define the three major types of international economic integration

Economic integration is a term used to describe the political and monetary agreements among nations and world regions in which preference is given to member countries. There are three major ways to approach such agreements:

Global integration—Countries from all over the world decide to cooperate through the World Trade Organization (WTO)

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

Regional integration—A group of countries located in the same geographic proximity decide to cooperate, as with the European Union

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GATT: Predecessor to WTO

Objective 8-2

GATT

General Agreement on Tariffs and Trade

Trade without Discrimination

Fundamental principle

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Learning Objective 2: Explain what the World Trade Organization is and how it is working to reduce trade barriers on a global basis

In 1947, 23 countries formed the General Agreement on Tariffs and Trade (GATT) under the auspices of the United Nations to abolish quotas and reduce tariffs. By the time the WTO replaced GATT in 1995, 125 nations had become members. Many believe that GATT’s contribution to trade liberalization enabled the expansion of world trade in the second half of the twentieth century.

The fundamental principle of GATT was that each member nation must open its markets equally to every other member nation. This principle of “trade without discrimination” was embodied in GATT’s most-favored-nation (MFN) clause—once a country and its trading partners had agreed to reduce a tariff, that tariff cut was automatically extended to every other member country, irrespective of whether the country was a signatory to the agreement.

GATT lead to the creation of the WTO, discussed next

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The WTO

Objective 8-2

WTO

World Trade Organization

Purpose

WTO and “most favored nation clause”

WTO and Dispute Settlement

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Learning Objective 2: Explain what the World Trade Organization is and how it is working to reduce trade barriers on a global basis

The WTO 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.

The World Trade Organization is the major body for

reciprocal trade negotiations,

enforcement of trade agreements.

Most Favored Nation: 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.

Dispute Settlement: 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.

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Benefits of Regional Economic Integration

Objective 8-3

Static Effects

Dynamic Effects

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Learning Objective 3: Summarize the major benefits of regional economic integration

Static and Dynamic Effects Regional economic integration reduces or eliminates barriers for member countries, producing both static and dynamic effects. Static Effects are the shifting of resources from inefficient to efficient companies as trade barriers fall. 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:

Trade Creation: Production shifts to more efficient producers for reasons of comparative advantage, allowing consumers access to more goods at lower prices than would have been possible without integration. Companies protected in their domestic markets face real problems when the 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 other countries, even though the nonmember companies might be more efficient in the absence of trade barriers.

Dynamic Effects:

Economies of Scale Dynamic effects of integration occur when trade barriers come down and markets grow

Increased Competition 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.

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The Impact of Trade Agreements

Objective 8-3

Figure 8.1 Impact of Free Trade Agreements

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Learning Objective 3: Summarize the major benefits of regional economic integration

This figure shows the impact of trade agreements.

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The European Union (EU)

Objective 8-4

The goals of the EU

Why the EU?

Governing bodies of the EU

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Learning Objective 4: Compare and contrast different regional trading groups

The European Union: Changed from the European Economic Community to the European Community to the European Union. It is the largest and most successful regional trade group. Characteristics of the EU:

Free trade of goods, services, capital, and people

Common external tariff

Common currency

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.

The EU encompasses many governing bodies, among which are the European Commission, European Council, European Parliament, European Court of Justice, and European Central Bank

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Other Aspects of the EU

Objective 8-4

Antitrust Investigations

Monetary Union

Schengen Area

Expansion

Bilateral Agreements

Transatlantic Trade and Investment Partnership

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Learning Objective 4: Compare and contrast different regional trading groups

Antitrust Investigations 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.

Monetary Union: The Euro 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 trade barrier for its adopters. As of 2016, 19 of 28 EU members had adopted the euro

The Schengen Area In 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

Expansion One of the EU’s major challenges is expansion. 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

Bilateral Agreements In addition to reducing trade barriers for member countries, the EU has signed numerous bilateral free trade agreements with other countries outside the region.

The Transatlantic Trade and Investment Partnership (T-TIP) 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.

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The European Union Countries

Objective 8-4

Map 8.1 European Trade and Economic Integration

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Learning Objective 4: Compare and contrast different regional trading groups

This map shows the participating countries in the EU.

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NAFTA

Objective 8-4

What is NAFTA?

North American Free Trade Agreement

Reasons and Goals for NAFTA

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Learning Objective 4: Compare and contrast different regional trading groups

The North American Free Trade Agreement

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.

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.

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.

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Other Aspects of NAFTA

Objective 8-4

Rules of Origin

Impact of NAFTA

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Learning Objective 4: Compare and contrast different regional trading groups

Rules of Origin and Regional Content An important component of NAFTA is the concept of rules of origin and regional content. Because it is a free trade agreement and not a customs union, each country sets its own tariffs to the rest of the world. Rules of origin” ensure that only goods that have been the subject of substantial economic activity within the free trade area are eligible for the more liberal tariff conditions created by NAFTA. This is a major contrast with the EU, which is a customs union rather than just an FTA. Regional Value Content Requirement One aspect of rules of origin in NAFTA refers to the Regional Value Content requirement. According to regional content rules, at least 50 percent of the net cost of components, raw materials, and labor of most products must come from the NAFTA region to qualify for the FTA.

The Impact of NAFTA There are pros and cons to any trade agreement, and NAFTA is no exception. It is obvious that trade and investment have increased significantly since the agreement was signed in 1994. U.S. goods and services trade with NAFTA totaled $1.6 trillion in 2009 (according to the latest data available). U.S. goods trade with the two partners totaled $918 billion in 2010, with the United States recording a trade deficit in goods. Immigration A major challenge to NAFTA is immigration. As trade in agriculture increased with the advent of NAFTA, more than a million farm jobs disappeared in Mexico due to U.S. competition.

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Economic Integration in Caribbean and Central America

Objective 8-4

Map 8.2 Economic Integration in Central America and the Caribbean

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Learning Objective 4: Compare and contrast different regional trading groups

This map shows the variety of economic integration in the Caribbean and Central America.

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CARICOM

Objective 8-4

Map 8.2 Economic Integration in Central America and the Caribbean

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Learning Objective 4: Compare and contrast different regional trading groups

The Caribbean Community (CARICOM) is working hard to establish an EU-style form of collaboration, complete with full movement of goods and services, the right of establishment, a common external tariff, free movement of capital and labor, a common trade policy, and so on.

Countries in Latin America and the Caribbean rely heavily on countries outside the region for trade, so this agreement is important.

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Economic Integration in Latin America

Objective 8-4

Map 8.3 Latin American Economic Integration

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Learning Objective 4: Compare and contrast different regional trading groups

This map shows the variety of economic integration in Latin America.

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Economic Integration: MERCOSUR, Pacific Alliance and CAN

Objective 8-4

What is Mercosur?

What is the Pacific Alliance?

What is CAN?

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Learning Objective 4: Compare and contrast different regional trading groups

Mercosur The major trade group in South America is Mercosur, which was established in 1991 by Brazil, Argentina, Paraguay, and Uruguay. Its major goal is to become a customs union with free trade within the bloc and a common external tariff. Mercosur is classified as a customs union by the WTO for trade in goods and as an economic integration agreement for trade in services.

Pacific Alliance Mercosur has problems. It included Venezuela as a full member, and temporarily suspended Paraguay. Brazil and Argentina have serious problems with protectionism. Frustration over these and other issues in both CAN and Mercosur has lead to the creation in 2012 of the Pacific Alliance, comprising Mexico, Colombia, Peru, and Chile. These countries refer to themselves as more hospitable to trade and investment due to their adherence to democracy and the rule of law rather than the more populist and protectionist philosophies of other countries in CAN and Mercosur.

Andean Community (CAN) Although the Andean Community (CAN) is not as significant economically as Mercosur, it is the second most important official regional group in South America

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Asia’s Economic Integration Agreements

Objective 8-4

ASEAN Free Trade Area

Asia Pacific Economic Cooperation (APEC)

Trans-Pacific Partnership (TPP)

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Learning Objective 4: Compare and contrast different regional trading groups

ASEAN Free Trade Area: On January 1, 1993, ASEAN officially formed the ASEAN Free Trade Area (AFTA) with the goal of cutting tariffs on all intra-zonal trade to a maximum of 5 percent by January 1, 2008. The weaker ASEAN countries would be allowed to phase in their tariff reductions over a longer period. By 2005, most products traded among the AFTA countries were subject to duties from 0 to 5 percent, so AFTA has been successful in its objectives.

Asia Pacific Economic Cooperation (APEC): Formed in November 1989 to promote multilateral economic cooperation in trade and investment in the Pacific Rim,27 Asia Pacific Economic Cooperation (APEC) is composed of 21 countries that border both Asia and the Americas. All but three members of AFTA are members of APEC, plus Canada, the United States, Mexico, Peru, and Chile in the Americas; Australia and New Zealand; and China, Japan, Korea, Russia, and Chinese Taipei. It is a large and powerful organization that is focused on a wide range of activities related to trade and investment, security, energy, sustainability, anticorruption, and transparency, among other things.

Trans-Pacific Partnership (TPP): The TPP was initiated by the United States to spur economic growth and create jobs, and it involves Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. The formation of the initiative was announced in 2011, the agreement was concluded in October 2015 and signed by the trade ministers in February 2016. However, the TPP will not actually come into effect until it is approved by the government of each member, which is a difficult political task, especially during a contentious election year in the United States.

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ASEAN Free Trade Area

Objective 8-4

Map 8.4 The Association of Southeast Asian Nations

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Learning Objective 4: Compare and contrast different regional trading groups

This map shows the ASEAN Free Trade Area.

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Africa Regional Integration

Objective 8-4

Map 8.5 Regional Integration in Africa

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Learning Objective 4: Compare and contrast different regional trading groups

This map shows the regional integration of Africa.

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The United Nations

Objective 8-4

What is it?

UN Purpose

UN Family of Organizations

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Learning Objective 4: Compare and contrast different regional trading groups

The United Nations The first form of cooperation worth exploring is the United Nations, which was established in 1945 in response to the devastation of World War II to promote international peace and security and to help solve global problems in such diverse areas as economic development, antiterrorism, and humanitarian actions. If the UN performs its responsibilities, it should improve the environment in which MNEs operate around the world, reducing risk and providing greater opportunities

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.

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Commodity Agreements

Objective 8-5

What are commodities?

Purpose of Commodities Agreements

OPEC

Organization of the Petroleum Exporting Countries

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Learning Objective 5: Describe the forces that affect the prices of commodities and their impact on commodity agreements.

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

Many commodity agreements now exist for the purpose of

discussing issues,

disseminating information, and

improving product safety.

The Organization of the Petroleum Exporting Countries (OPEC) is an example of a producer cartel that relies on quotas to influence prices. 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.

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Copyright

Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved.

Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved.


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