INTERNATIONAL COOPERATION AMONG NATIONS

CHAPTER 6:INTERNATIONAL COOPERATION AMONG NATIONS

LEARNING OBJECTIVES

• To explain the importance of GATT to international businesses and the role of WTO

• To contrast the different forms of economic intergration among cooperating countries

• To analyze the opportunities created by completion of the EU´s internal market

• To describe other major trading blocs

• To understand the impact of economic integration on firms

General Agreement on Tariffs and Trade

A multilateral treaty designed to minimize trade barriers

• Went into effect in 1948 in Havana, Cuba

• Nations meet every few years and new treaties are signed. Last major round was in Uruguay, 1994. 125 countries signed the treaty. Today we have more 132 country members

• The goal is to promote a free and competitive trading environment. A reduction of tariffs, from over 40% in 1948 to 3% in 1995 was observed, with dramatic increase in world trade.

• It seeks to ensure that international trade is conducted on a nondiscriminatory basis. This is mainly achieved through the Most Favored Nation principle.

• In 1995, GATT was replaced by WTO for monitoring the implementation of GATT agreements.

Two exceptions to the above principle:

1.When a country reduces tariffs for a poor developing country.2.When a country reduces or eliminates tariffs for a country that belongs to the same economic integration.

Question: How about the case where an MNC goes to a poor developing country favored by this exception? (Loophole)

A note on Most Favoured Nation Principle

If preferential treatment is seen by one country to another then it should be extended to all countries

• Further reduced tariffs from 4,7 to 3%

Focused more on reducing nontariff barriers to trade:

• Agricultural area: Agreement to reduce price supports and export subsidies by 20 to 40%

•Services trading: Discussions were complex due to the variety of services (telecommunications, insurance, movies..) Negotiations continue…

•Intellectual Property Rights: Fight piracy with severe penalties. Eliminate it in the next 20 years.

The Uruguay Round(Punta del Este)

Free Trade AreaElimination of tariffs and NTBs among countries (NAFTA, EFTA) in bloc. Each member is free to have its own (different) trade policies with nonmembers, though. Trade deflection is observed.

Custom UnionElimination of tariffs plus the establishment of common external tariff structure toward nonmembers

Common MarketAll previous, plus freedom of movement for factors of production among members

Economic UnionAll previous, plus unity of monetary and fiscal policy taxation & social welfare

Political UnionEconomic + Political integration under one

government

USA

EU

EU in 1990

Forms of Economic Integration

The European Union

• The most important (richest market) bloc in the world•Origins go back to 1952 with the European Coal and Steel Community• Established in 1957 (6 countries) under the Treaty of Rome (Community) •In 1986 the White Paper was signed for accelerated progress on ending all trade barriers and restrictions•In 1993 the Treaty of Maastricht (Denmark) came into force for Europe´s economic and political integration. The name changed to European Union•Estimated that all members will have a common currency (Euro) by 2002.•Negotiations are taking place for acceptance of additional members

Criteria upon which participation in Economic and Monetary Union is determined

• Inflation : (over a year) must not be more than 1,5% above the three best-performing countries

• Interest rates: (one year) must not be above 2% of the best three member states

• Member States budget deficits: should not exceed 3% of GDP, unless they are exceptional

• Public debt: should not exceed 60% of GDP or should be approaching the reference value at a satisfactory speed

Institutions Governing the EU

Council of Ministers (Union)

• Foreign ministers represent their country• Presidency rotates every 6 months•Votes are according to the population of members•The most powerful body

European Commission (Brussels)

•Drafts legislation for proposal to the Council• Oversees the implementation of policies• Members voting (chosen by governments on 5-year term (Eurocrafts)

European Parliament (meets in Strasbourg –staff is in Luxembourg

• The watchdog on EU expenditures• 625 members elected on 5-year terms in national elections• Weakest body

Court of Justice

• Consists of 16 judges on –year terms•Judges cases and makes sure the law is followed

• Implemented in 1994 to eliminate barriers to trade between Canada, Mexico and the United States

• The first group to include developed and less developed countries

• Specific rules and regulations were laid down to avoid invasion of nonmember countries due to trade deflection

North American Free Trade AgreementNAFTA

Impact of Economic Integration on Firms

Do trading blocs benefit or hurt the MNCs and the worlds?

• Within the bloc we observe trade creation: Production moves from high to low-cost producers. This benefits the final consumer and enables efficient producers to compete abroad

• From a global perspective we observe trade diversion: Production moves from external (nonmembers) low cost producers to high cost (members) producers.