International Business
Chapter Eight
Cross-national Cooperation
and Agreements
Chapter Objectives
• To profile the World Trade Organization
• To discuss the pros and cons of global, bilateral, and
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regional integration
To describe the static and dynamic effects and the trade
creation and diversion effects of bilateral and regional
economic integration
To define different forms of regional economic
integration
To present different regional trading groups, such as
the European Union (EU), the North American Free
Trade Agreement (NAFTA), and Asia-Pacific Economic
Cooperation (APEC)
To describe the rationale for and success of commodity
agreements
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Economic Integration
Economic integration: an agreement between
or amongst nations within an economic bloc to
reduce and ultimately remove tariff and nontariff
barriers to the free flow of products, capital, and
labor across the bloc
Approaches to economic integration include:
• global integration via the World Trade Organization
• bilateral integration between two countries
• regional integration via an economic bloc
Neighboring countries tend to ally with one another because of
their proximity, their somewhat similar tastes, the relative ease
of establishing channels of distribution, and a willingness to
cooperate with one another for the greater benefit of all parties.
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The General Agreement on Tariffs
and Trade (GATT)
General Agreement on Tariffs and Trade (GATT):
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established by twenty-three signator nations in
1947 as a multilateral agreement whose objective
is to liberalize world trade
Most-favored nation clause (MFN): the fundamental
principle of “trade without discrimination,” i.e., each
member nation must open its markets equally to every
other member nation
• Eight major rounds of negotiations from 1947 to 1994
led to a wide variety of multilateral reductions in both
tariff and nontariff barriers.
• The World Trade Organization was created in 1995 for
the purpose of institutionalizing the GATT.
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The World Trade Organization
(WTO)
World Trade Organization (WTO): a permanent body
founded in 1995 to (i) facilitate the development
of a free and open international trading system
according to the GATT and (ii) adjudicate trade
disputes between or amongst member nations
• normal trade relations: replacing the most-favorednation clause, the principle prohibits any sort of trade
discrimination
Exceptions:
– preferential treatment for products of emerging economies
– concessions granted to members of economic blocs
• dispute resolution: a clearly defined mechanism for the
settlement of disputes
[continued]
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The WTO: Decision-making Units
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Ministerial Conference
General Council
Goods Council
Services Council
Council on Trade-related Aspects of
Intellectual Property (TRIPS)
Countries may bring charges of unfair trade practices to a WTO
panel; accused countries may appeal; WTO rulings are binding.
If an offending country fails to comply with a judgment, the rights
to compensation and countervailing sanctions will follow.
8-6
GATT/WTO Milestones
• 1947 Havana, Cuba: 23 countries negotiated major
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reductions in trade barriers that are codified as the
General Agreement on Tariffs and Trade
1947 Geneva, Switz.: 23 members held first official
meeting of the founding nations
1949 Annecy, France: 13 members negotiated tariff
concessions
1951 Torquay, UK: 38 members negotiated tariff
reductions and concessions
1956 Geneva, Switz.: 26 members negotiated tariff
reductions and concessions
1960-61 Dillon Round (Geneva, Switz): 26 members
negotiated tariff reductions and concessions
[continued]
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• 1964-67 Kennedy Round (Geneva, Switz): 62 members
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reviewed new trade rules and passed an anti-dumping
agreement
1973-79 Tokyo Round: 102 members reduced customs
duties and nontariff barriers
1986-94 Uruguay Round: 123 members expanded
negotiations to include trade rules, services, intellectual
property, dispute resolution, textiles, and agriculture;
World Trade Organization was created
1995: World Trade Organization was formally
institutionalized
2001 Doha Development Agenda: 148+ members
continue to meet to resolve contentious issues between
developed and developing nations
8-8
Types of Regional Trade
Agreements
Agreements that primarily address barriers to trade:
• free trade areas: economic blocs in which all barriers to
trade, i.e., tariff and nontariff barriers, are abolished
amongst member nations, but each member determines
its own external trade barriers beyond the bloc
• customs unions: economic blocs in which all barriers to
trade, i.e., tariff and nontariff barriers, are abolished
amongst member nations, and common external barriers
are levied against non-member countries
A more extensive type of regional trade agreement :
• common market: an economic bloc which also permits
the free flow of capital and labor
[continued]
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The Effects of Economic Integration
static effects: the shifting of resources from inefficient to
efficient firms as trade barriers fall
-trade creation: production shifts from less efficient domestic
producers to more efficient regional producers
-trade diversion: trade shifts from more efficient external
sources to less efficient suppliers within the bloc
following the imposition of common external barriers
dynamic effects: the gains from overall market growth,
the expansion of production, the realization of greater
economies of scale and scope, and the increasingly
competitive nature of the market
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The European Union (EU)
The European Union (EU):
• represents the most advanced regional trade
and investment bloc in the world today
• evolved from the European Coal and Steel
Community to the European Economic Community (EEC) to the European Community (EC)
to the European Union (EU)
• has grown from six members in 1951 to twentyfive member nations in 2004
• has been moving toward a single market since
the passage of the Single European Act of 1987
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The EU’s Organizational Structure
• European Council: designed to lead the EU
[proposes legislation, monitors compliance]
• European Commission: functions as the EU’s
draftsman and servant
[sets priorities, gives direction, and resolves issues]
• European Parliament: the EU’s sounding board
[considers legislation, controls the EU budget, and supervises decisions]
• European Court of Justice: the supreme appeals
court for EU law
[ensures consistent interpretation and application of EU treaties]
These governance bodies set the parameters under
which MNEs must operate within the EU.
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European Union Milestones
1951: Belgium, France, West Germany, Italy, Luxembourg,
and the Netherlands signed the Treaty of Paris to
establish the European Steel and Coal Community.
1957: The Six signed the Treaty of Rome to establish the
European Economic Community (EEC).
1960: The Stockholm Convention established the
European Free Trade Association (EFTA).
1962: The Common Agricultural Policy (CAP) was adopted.
1966: The EEC became the European Community (EC);
agreement was reached on a value-added tax (VAT).
1967: All remaining internal tariffs were abolished, and
common external barriers were imposed.
[continued]
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1972: The currency “snake” was established.
1979: The European Monetary System came into effect;
the first European Parliament was elected by universal
suffrage.
1990: The first phase of European Monetary Union came
into effect; Germany was unified.
1993: The Single European Market came into force.
1999: The single European currency [EURO] came into
effect.
2002: EURO coins and notes entered circulation; all IS
member states ratified the Kyoto Protocol.
Source: http://europe.eu.int/abc/history.
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Map 8.1: European Trade
and Economic Integration
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The Single European Act of 1987
• Common Trade and Foreign Policy: The initial focus of
the EU was primarily upon economic integration. In
1993, however, the EU began to formalize common
objectives on armed conflicts, human rights, and other
international foreign policy issues.
• The Euro. The Treaty of Maastricht of 1992 sought to
foster both political and monetary union within the EU.
Members that adopted the euro on January 1, 1999,
were: Austria, Belgium, Germany, Finland, France,
Ireland, Italy, Luxembourg, the Netherlands, Portugal,
and Spain; Greece followed on January 1, 2001.
Now one of the most widely traded currencies in the world, the euro has
-contributed to price transparency for customers
-eased pricing decisions and transaction reconciliations for firms
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Challenges Facing the EU
• the transition of economically disparate entrants
into the EU
• the unanimous adoption of a new constitution
• the resolution of the Common Agricultural Policy
(CAP) with internal constituencies on the one hand
and non-members nations on the other
• the harmonization of fiscal, monetary, and
commercial policies
The Common Agricultural Policy (CAP) represents a set of rules
and mechanisms designed to:
- regulate the production, trade, and processing of agricultural
products in the EU
- provide farmers with a reasonable standard of living
and consumers with safe, quality food at fair prices
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2003 Comparative Statistics
by Trade Group
BLOC
POP. IN MIL.
GNI
($US BIL.)
PER CAPITA GNI
($US)
______________________________________________________________________________________________________________________________________________
EU-15
EU-25
379.7
454.0
$10,116
$10,544
$26,641
$23,224
NAFTA
Canada
Mexico
USA
424.9
31.6
102.3
291.0
$12,340
$ 757
$ 637
$10,946
$29,042
$23,930
$ 6,230
$37,610
MERCOSUR
224.0
$
$ 2,848
[+2004 ADMITS]
638
Source: 2005 World Bank Development Report.
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The North American Free Trade
Agreement (NAFTA)
• was preceded by the Canada-U.S. Free Trade
Agreement of 1989
• incorporates Canada, Mexico, and the United
States into a regional trade bloc
• became effective on January 1, 1994
• addresses free trade in good and services and
investment rules
• claims a total GNI that is greater than that of
the 25-member EU
• phases in over a period of 15 years
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NAFTA specifies:
• market access via the elimination
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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
a dispute settlement process
regional labor laws and standards
strengthened environmental standards
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Regional Economic
Integration in
North America
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Regional Economic Integration
in the Americas: Central America
The two major blocs in Central America are:
• Caribbean Community and Common Market
(CARICOM)
[Costa Rica, El Salvador, Guatemala, Nicaragua]
• Central American Common Market
(CACM)
[Comprised of 14 member nations]
The post-WWII strategy of using import substitution to resolve
balance-of-payments problems was doomed in many Latin American
nations because of the small size of many of their national markets.
Economic cooperation is needed to enlarge potential market size.
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Map 8.2: Economic Integration in
Central America and the Caribbean
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Regional Economic Integration
in the Americas: South America
The two major blocs in South America are:
• Southern Common Market (MERCOSUR)
[Comprised of Brazil, Argentina, Paraguay, and Uruguay,
MERCOSUR generates 80 percent of South America’s GNI
and has signed free trade agreements with Bolivia and Chile.]
• Andean Community (CAN)
[Bolivia, Columbia, Ecuador, Peru, Venezuela]
The 12-member Latin American Integration Association (LAIA)
encompasses the countries of MERCOSUR and the Andean
Community plus Mexico and Cuba.
Regional integration in Latin America has not been particularly
successful because many countries rely more on the U.S. for
trade than on members of their own groups.
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Map 8.3: Latin American
Economic Integration
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Regional Economic Integration in
Asia: ASEAN
The Association of Southeast Asian Nations
(ASEAN)
– was first organized in 1967
– is now comprised of Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, the
Philippines, Singapore, Thailand, and Vietnam
– formed the ASEAN Free Trade Area (AFTA) on
January 1, 1993, for the purpose of cutting tariffs on
inter-regional trade to a maximum of 5% by 2008
ASEAN holds great promise for market and investment
opportunities because of its large market size.
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Regional Economic Integration in
Asia: APEC
Asia Pacific Economic Cooperation (APEC):
– was founded in 1989 to promote multilateral
economic cooperation in trade and investment
amongst 21 countries bordering the Pacific Rim
on either the east or the west
– is committed to achieving free and open trade in the
region by 2010 for the industrial nations and by 2020
for the remaining member countries
– includes more than half of the world’s population and
approximately 60 percent of the world’s GNI
APEC’s progress is hampered by the number of members, the
geographic distances between nations, and its lack of a binding treaty.
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Map 8.4: The Association of
Southeast Asian Nations
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Regional Economic Integration in
Africa
Regional trade groups in Africa that are registered
with the WTO include:
• Southern Africa Development Community (SADC)
• Common Market for Eastern and Southern Africa
(COMESA)
• Economic and Monetary Community of Central Africa
• West African Economic and Monetary Union (WAEMU)
With the notable exception of South Africa, markets are small,
and many nations rely more on trade links with former colonial
powers than with each other.
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Map 8.5: Regional Economic
Integration in Africa
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Commodity Agreements
commodity agreement: a form of economic cooperation
designed to stabilize the price and supply of primary
commodities through the use of buffer stocks and/or
quota systems
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producers’ alliances: exclusive membership agreements
between or amongst producing countries (a cartel)
- Organization of Oil Exporting Countries (OPEC): a producer
cartel whose members include Algeria, Indonesia, Iran, Iraq,
Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab
Emirates, and Venezuela
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international commodity control agreements (ICCAs):
agreements between or amongst producing and consuming
countries
- International Cocoa Organization (ICO)
- International Sugar Organization (ISO)
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Implications/Conclusions
• The effects of regional economic integration can
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be economic, cultural, and/or political in nature.
Regional (as opposed to global) economic
integration occurs because of the greater ease
of promoting cooperation on a smaller scale.
Member states must determine the degree
of national sovereignty they are willing to
surrender in order to capture the benefits
of economic integration.
[continued]
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• A common market goes further than free trade
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areas and customs unions by permitting the
free flow of capital and labor and possibly
harmonizing commercial, monetary, and fiscal
policies and establishing a common currency
plus a supranational political structure dedicated
to dealing with common economic issues.
Commodity agreements exist to help developing
countries stabilize prices, supplies, and hence
their export earnings.
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