LESSON 4 EASING WORLD TRADE RESTRICTIONS
WORLD TRADE ORGANIZATION
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The WTO, which is based in Geneva Switzerland was established on January 1, 1995. it succeeded the general
agreement on tariff and trade which was the interim world trade body since 1948 with 159 member countries as of
December 11, 2005. The WTO is the only organization dealing with the rules of trade between or among nations. It
is a member driven organization as all decisions are made by member governments. WTO also strives to reduce
trade barriers, whether they are tariff or non-tariff barriers.
FUNCTIONS OF WTO
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Administers WTO agreement
Serves as a forum for trade negotiations
Handles trade dispute
Monitors national trade policies
Provides technical assistance and training for developing countries
Cooperates with other international organizations.
INTERNATIONAL MONETARY FUND (IMF)
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The international monetary fund or IMF was conceived in July 1994 in the U.S. when delegates from 44
governments agreed on a framework on economic cooperation. This international institution allows currency to be
exchanged freely and easily between member countries. It oversees the international monetary system and
promotes both the elimination of exchange restrictions relating to trade in goods and services, and the stability of
exchanged rates.
THE IMF’S GENERAL ACTIVITIES
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Promoting international monetary cooperation
Facilitating the expansion and balanced growth of
international trade
Promoting exchange rate stability
Assisting in the establishment of a multilateral system of payments
Making its resources available (under adequate safeguards) to members experiencing balance of payments
difficulties.
IMF’S MAIN FUNCTIONS
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Surveillance
o This refers to the monitoring of economic and financial development and policies in member countries at
the global level.
Technical Assistance
o The IMF provides the governments and banks at its member countries with technical assistance and
training in its areas of expertise.
Lending
o The IMF lend to member countries with balance of payments problems. This pursues the two- pronged goal
of providing temporary financing and supporting policies that will correct the balance of payments
problems.
FORMATION OF TRADING BLOCS
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Trading Blocs
o A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental
organization, where barriers to trade (tariffs and other) are reduced or eliminated among the participating
states.
o Trade blocs can be stand-alone agreements between several states (such as the North American Free Trade
Agreement) or part of a regional organization (such as the European Union). Depending on the level of
economic integration, Lindert and Kindleberger (1982) have identified four different types of trade blocs,
namely: 1) free trade area, 2) customs union, 3) common market and 4) economic union.
FREE TRADE
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Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to
trade on all goods coming from other members.
The members remove all trade barriers among themselves, but their respective trade barriers to the non-member
countries are not dictated by their membership. In short, they can impose their own tariffs on no-member
countries.
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ADVANTAGES OF A FREE TRADE AREA
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Free trade means that countries can import and export goods without any tariff barriers or other non-tariff barriers
to trade. Essentially, free trade enables lower prices for consumers, increased exports, benefits from economies of
scale and a greater choice of goods.
PURPOSE OF FREE TRADE AREA
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Free trade is an economic theory that involves the analysis and function of importing and exporting goods without
restriction. Many nations engage in free trade to ensure their citizens have enough economic resources or
consumer goods for meeting various needs or wants.
EXAMPLES OF FREE TRADE AREA
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A free trade area (FTA) is where there are no import tariffs or quotas on products from one country entering
another.
o EFTA: European Free Trade Association consists of Norway, Iceland, Switzerland and Liechtenstein
o NAFTA: United States, Mexico and Canada (being renegotiated)
o SAFTA: South Asian Free Trade Area comprising Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan and Sri Lanka
o Pacific Alliance: Chile, Colombia, Mexico and Peru
There are many bi-lateral free trade agreements signed between two countries or between two regional trading
blocs e.g. the recently-signed Australia
o China Free Trade Agreement
CUSTOMS UNION
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In customs union, common tariff system and common markets (which, in addition to the common tariffs, also
allow free movement of resources such as capital and labor between member countries). A free-trade zone with
common tariffs is a customs union
EXAMPLE OF CUSTOMS UNION
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The most famous example of a customs union is the European Union Customs Union (EU). Trade among the
member states of the EU flows tariff free, and regardless of which country in the EU imports a product, the same
tariff is paid.
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Great Britain is no longer in a customs union with the European Union. Northern Ireland is also no longer legally in
the EU Customs Union, but remains an entry point into it, creating a de facto customs border down the Irish Sea.
EXAMPLE OF CUSTOMS UNION EUROPEAN UNION CUSTOMS UNION (EU)
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There are no tariffs or non-tariff barriers to trade between members of the customs union and – unlike a free-trade
area – members of the customs union impose a common external tariff on all goods entering the union.
During the Brexit transition period, which runs until 31 December 2020, the United Kingdom continues to
participate in the Customs Union. As of September 2020, the Trade negotiation between the UK and the EU has not
led to the conclusion of a free trade agreement and, in the absence of such an agreement, the UK will leave the
EUCU at the end of 2020 with no deal.
There were 27 EU member states (excluding UK already)
Customs and Economic Union of Central Africa
o Cameron
o Gabon
o Central Africa Republic
o People’s Republic at Cargo
WHAT IS THE DIFFERENCE BETWEEN A FREE TRADE AREA AND A CUSTOMS UNION?
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The difference between the two is that in a customs union, the participating countries set a common customs tariff
(a single external tariff applied by all members) against third countries, while in an FTA, they do not.
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A customs union is different from a free trade area, in which means no tariffs are charged on goods and services
moving within the area. ... Revenues from import tariffs are combined for all member states. The countries in a
customs union negotiate as a bloc when discussing trade deals with countries outside the union.
3. COMMON MARKET
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A ‘common market’ (or single market) is the first significant step towards full economic integration, and occurs
when member countries trade freely in all economic resources – not just tangible goods.
This means that all barriers to trade in goods, services, capital, and labor are removed. In addition, as well as
removing tariffs, non-tariff barriers are also reduced and eliminated.
For a common market to be successful there must also be a significant level of harmonization of micro-economic
policies, and common rules regarding monopoly power and other anti-competitive practices.
There may also be common policies affecting key industries, such as the Common Agricultural Policy (CAP) and
Common Fisheries Policy (CFP) of the European Single Market
A SINGLE MARKET
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Joining a common (or single) market is perhaps the most significant step a national economy can take towards
integrating with its neighbors.
A single market may be defined as a formal arrangement between sovereign nations to allow members free access
to each other’s markets. Free access relates to the unrestricted movement of goods and services, as well as the free
movement of labor and real and intellectual capital.
EXAMPLE OF SINGLE MARKET
o The European single market, also called the ‘internal market’, is the most well-known and significant of the
world’s existing single markets. Other examples of single markets include the 12 Caribbean nations that
make up CARICOM, and the 11 members of the ASEAN Economic Community (AEC). (ASEAN stands for the
Association of South East Asian Nations, and was founded in 1967).
o The AEC, which is now called the “AEC 2015” comprises the original 6 major nations – Indonesia, Thailand,
the Philippines, Malaysia, Singapore and Vietnam – along with Brunei, Laos, Myanmar, Timor-Leste and
Cambodia.
WHAT IS THE DIFFERENCE BETWEEN THE CUSTOM UNION AND COMMON MARKET?
o A custom union is where all obstacles of free movement of goods and services are removed and a common
external tariff is agreed. A common market is union of partners with free movement of goods, services, and
the addition of free movement of labor and capital.
ECONOMIC UNION
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Economic union is a type of trade bloc which is composed of a common market with a customs union. The
participant countries have both common policies on product regulation, freedom of movement of goods, services
and the factors of production (capital and labor) and a common external trade policy.
An economic union is an agreement between two or more nations to allow goods, services, money and workers to
move over borders freely. The countries may also coordinate social and financial policies to support this common
market. The European Union (EU) is an example of an economic union.
EXAMPLE OF ECONOMIC UNION
o European Union (EU) The European Union is the world's largest trade bloc. ...
o CARICOM Single Market and Economy (CSME) ...
o Central American Common Market. ...
o Eurasian Economic Union (EEU) ...
o Gulf Cooperation Council (GCC)
COMPARISON OF THE TRADING BLOCS
o An economic union is different from a customs union since, in the latter, member countries are allowed to
move goods across borders, but they do not share a currency. ... An economic union is the last step in the
process of economic integration, after free trade area, customs union, and common market.
ENTRY MODES IN INTERNATIONAL MARKETING
Different mode
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Franchising
Licensing
Manufacturing
Management Contracts
Exporting
FRANCHISING
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Franchising is a forum of business by which the owner of a product, service or method obtains distribution through
affiliated dealers. Under franchising, all patents, trademark, manufacturing now-how and service are made
available to foreign companies in return for royalties to the mother or parent company.
ADVANTAGES
DISADVANATAGES
• Low Financial Risk
• Limited market opportunities/profits
• Low-cost way to assess market potential
• Dependence on franchisee
• Avoid tariffs, NTBs, restrictions on foreign
• Potential conflicts with franchisee
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investment
• Possibility of creating future competitor
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Maintain more control than with licensing
Franchise provides knowledge of local market
LICENSING
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Licensing, in the other hand, entails only a part of a whole franchising aspect. A licensee may only get the patent,
trademark or the manufacturing know-how of the mother company.
Licensing is when a firm called the licensor, leases the right to use its intellectual property-technology, work
methods, patents, copyrights, brand names or trademarks to another firm called licensee in return for a fee
The property licensed may include:
o Patents
o Trademarks
o Copyright
o Technology
o Technical know-how
o Specific business skills
EXAMPLES:
o Company using the design of a popular character e.g. Mickey Mouse on their products
ADVANTAGES:
o It requires little capital
o It is the quickest and easiest way to enter a foreign market
o It enables the firm to gain knowledge of and access to the local market
o It provides a means of entry when import restrictions forbid any other ways or when a country is sensitive
to foreign ownership
o It offers saving on tariff, transport and local production costs.
CONTRACT MANUFACTURING
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The product is manufactured for the foreign market by a local firm under contract with the international company,
the company may also become the sales or marketing subsidiary of the mother company.
Contact Manufacturing is outsourcing entire or part of manufacturing operations
o E.G. pharmaceuticals, personal care products etc
o The Ipad and Iphone which are products from Apple Inc. are manufactured in China by Foxconn. Hence,
Foxconn is a contract manufacturer and Apple benefits from a lower cost of manufacturing devices.
MANAGEMENT CONTRACT
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A management contract is an agreement between two companies whereby one company provides managerial
assistance, technical expertise and specialized services to the second company for a certain period of time in return
for monetary compensation.
EXPORTING
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Exporting refers to the marketing of goods and services produces in one country into another country. It allows a
company to enter foreign markets with a minimum change in product lines, company organization, and investment
or company mission. Exporting has several modes of entry, namely:
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