BBB4M1-01 International Business
Chapter 5: International Agreements, Organizations, and Policies
5.3 International Trade Agreements
Countries and companies have negotiated trade agreements because they are
thinking beyond their borders and seeking out international opportunities. Some
of these agreements lead to the establishment of a number of trading blocs or
regions in which countries agree to support mutual economic growth by opening
their markets to cross-border trade and business development. Free trade
supports the free flow of goods and services, workers and investments within a
region. This means eliminating or reducing tariffs, duties and other barriers.
Free trade has often been referred to as reciprocity. Trade is reciprocal
according to the terms mutually agreed upon by countries. Even though
governments may have agreed on reciprocity or free trade, not everyone agrees
with the concept.
The opposite of free trade is protectionism, a government’s efforts to protect
domestic industries from foreign competition. For example, for years Japan was
very selective with its imports and sought to block the entry of many foreign
products that might compete with Japanese products. Today, trade with Japan is
more open.
Trade between two countries--Canada and the United
States, for example is referred to as bilateral trade. Trade
among more than two nations is referred to as multilateral
trade. Canada trades with many nations and for that reason
has many bilateral and multilateral trade relations.
Countries have increasingly entered into trade alliances and
in some cases have created trading blocs based on common
regional interests. The agreements and trade alliances
discussed in this section make up three dominant trading
regions or blocs whose member countries together account
for over 90 percent of global trade:
•
North American Free Trade Agreement (NAFTA)
•
European Union (EU)
•
Asia-Pacific Economic Cooperation (APEC)
North American Free Trade Agreement (NAFTA)
On January 1, 1994 the North American Free Trade Agreement created a free-trade
zone consisting of Canada, Mexico, and the United States. The objective of NAFTA is to
increase trade, reduce prices and costs through increased production, and meet the
challenges of global competition. Trade among NAFTA countries makes up about onethird of all international trade.
NAFTA covers trade in goods and services as well as investment, and it has provisions
for the protection of intellectual property, fair competition, and dispute resolution. The
agreement eliminates duties, barriers, and restrictions on almost all products and
services traded.
For custom officials to determine whether import tariff charges are applicable a
certificate of origin is required with shipments. Products produced outside of NAFTA
may incur a duty.
For a product to qualify as a NAFTA product, it must have been at least 50% produced
at a manufacturing plant in the region and be composed of materials or components
from the region. If a company’s products qualify for NAFTA treatment, then those
products will benefit from lower tariff rates.
Free Trade Area of the Americas (FTAA):
Discussions initiated at the 1994 Summit of the Americas in Miami are being
pursued with an aim to integrate the economies of the western hemisphere
into a single free trade zone, an extension of NAFTA to be known as the Free
Trade area of the Americas. The hope is to reach an agreement by 2005.
Finalizing such a treaty will require significant debate and negotiations (as
with all treaties and agreements) around issues dealing with the
environment, human rights, culture, and labour.
Between 1900 and 2000, Canada, the United States, and our 32 Latin
American and Caribbean partners saw out combined GDP output will grow
from $7.1 trillion to $11.4 trillion dollars. The affluent or wealthy nations
reaped most of the benefits, however, while the number of people living in
poverty grew.
The European Union (EU):
The European Union (EU) is a political and economic alliance in Europe
consisting of 15 countries (with 10 candidate countries), formerly known as
the European Community. These nations eliminated trade barriers among
the members. The EU represents a new Europe. One of its most significant
economic changes occurred in 1998 when the majority of the EU countries
became an economic and monetary union sharing a common currency
known as the euro.
The European Union has many advantages for the countries that belong.
One is size; its member countries now have access to nearly 380 million
consumers. Another advantage is that its manufacturers have uniform
standards for technical products in an attempt to ensure greater quality and
productivity.
The European Union (EU):
Now the world’s largest single market, the EU has surpassed the
United States in both gross domestic product and population, and
ranks as Canada’s second most important trading and investment
partner (after the United States).
Economics and technology are bringing down the “fences” (tariffs,
protectionism, currency exchange, and government regulations) that
use to “surround” countries. For the success of free trade
arrangements in a trading bloc such as the EU, citizens of different
countries will have to learn to work well with people who may be
very different from their own cultural or ethnic group.
The integrated European Union represents one of the world’s
largest markets. It has a currency that can compete with the U.S.
dollar and the Japanese yen. People and products can move more
freely within the region. This flexibility should help EU companies
and countries to strengthen their position in the global markets.
Asia-Pacific Economic Cooperation (APEC)
APEC is a forum for ministers and government officials of countries bordering the Pacific
Ocean to discuss regional policy. APEC was formed in 1989. It is not a trade agreement or
pact, and has no formal institutional structure. Its long-term purpose is to foster greater
economic cooperation in the Pacific Rim in the hope that such cooperation will spill over
into the entire international community.
The Pacific Rim includes the circle of earthquake zones and volcanoes that surrounds the
Pacific Ocean that is sometimes called a “ring of fire”. Recently it has become to be known
as a vast, powerful, and interconnected economic and cultural community that borders on
the Pacific Ocean. It includes East Asia, Australia, New Zealand, Papua New Guinea, and
North and South America.
Today APEC has more than 20 participating countries. Because of the inclusion of China,
APEC countries represent nearly half of the world’s marketplace, on the basis of their
population and output. Many APEC countries attract business because they are able to
offer “low cost” labour, but the region now offers increasing numbers of highly skilled
workers.
Asia-Pacific Economic Cooperation (APEC)
APEC countries are very different from each other in terms of size,
political system, language, culture, and history. The only thing that
connects them is their border on the Pacific Ocean.
In 1997, several Asian countries in this group had an economic crisis,
causing their currencies to devalue overnight. APEC countries still
continue to grow and influence the rest of the world.
Several APEC nations have taken the bilateral free trade route.
Singapore, Australia, and New Zealand have announced free trade
agreements that they hope will eventually become APEC wide. Another
Asian regional trade agreement is the Association of South East Asian
Nations (ASEAN). This includes Brunei, Indonesia, Malaysia, the
Philippines, Singapore, Thailand, and Vietnam. It has a total GDP of 1.8
trillion USD.
Efforts are being made to narrow the economic gap between members,
especially with regards to the level of digital and information
technology.