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International BusinessPart Three

Theories and Institutions: Tradeand Investment

Chapter EightCross-National Cooperation and

Agreements

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Chapter Objectives To identify the major characteristics and challenges of the World

Trade Organization To discuss the pros and cons of global, bilateral, and regional

integration To describe the static and dynamic impact of trade agreements on

trade and investment flows To define different forms of regional economic integration To compare and contrast different regional trading groups, including

but not exclusively the European Union (EU), the North AmericanFree Trade Agreement (NAFTA), the Southern Common Market(MERCOSUR), and the Association of South East Asian Nations(ASEAN)

To describe other forms of global cooperation, such as the UnitedNations and the Organization of Petroleum Exporting Countries(OPEC)

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GATT

The General Agreement on Tariffs andTrade (GATT), begun in 1947, created acontinuing means for countries tonegotiate the reduction and elimination oftrade barriers and to agree on simplifiedmechanisms for the conduct of

international trade

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WTO

The World Trade Organization (WTO)replaced GATT in 1995 as a continuingmeans of trade negotiations that aspires tofoster the principle of trade withoutdiscrimination and to provide a bettermeans of mediating trade disputes and of

enforcing agreements

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Regional Economic Integration

Efforts at regional economic integrationbegan to emerge after World War II ascountries saw benefits of cooperation and

larger market sizes The major types of economic integration

are:

the free trade areathe customs unionthe common market

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The Effects of Integration

Once protection is eliminated amongmember countries, trade creation allowsMNEs to specialize and trade based oncomparative advantage

Trade diversion occurs when the supply ofproducts shifts from countries that are notmembers of an economic bloc to thosethat are

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European Union Regional, as opposed to global, economic integration

occurs because of the greater ease of promotingcooperation on a smaller scale

The European Union (EU) is an effective commonmarket that has abolished most restrictions on factormobility and is harmonizing national political, economic,and social policies

The EU is comprised of 27 countries, including 12countries from mostly Central and Eastern Europe that

joined since 2004 The EU has abolished trade barriers on:

intrazonal tradeinstituted a common external tariffcreated a common currency, the euro

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Implications of the EU forcorporate strategy

Companies need to determine where toproduce products.

Companies need to determine what theirentry strategy will be.

Companies need to balance thecommonness of the EU with nationaldifferences.

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The North American Free TradeAgreement (NAFTA)

The North American Free Trade Agreement (NAFTA) is designed toeliminate tariff barriers and liberalizeinvestment opportunities and trade inservices

Key provisions in NAFTA are labor andenvironmental agreements

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Regional economic integration in theAmericas

Caribbean Community (CARICOM) Central American Common Market (CACM) Central American Free Trade Agreement

(CAFTA-DR) Andean Community (CAN) The Southern Common Market (MERCOSUR) The proposed South American Community of

Nations.

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Regional economic integration inAsia & Africa

Association of Southeast Asian Nations(ASEAN)

Asia Pacific Economic Cooperation(APEC)

The African Union

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Forms of International Cooperation

The United Nations is comprised ofrepresentatives of most of the countries inthe world and international trade anddevelopment in a number of significantways

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Commodity Agreements

Many developing countries rely oncommodity exports to supply the hardcurrency they need for economic

development Instability in commodity prices has

resulted in fluctuations in export earnings

OPEC is an effective commodityagreement in terms of attempting tostabilize supply and price