Fundamentals of International Business - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  CHAPTER 5: International Trade Agreements and Organizations Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Key Terms trade agreement North American Free Trade Agreement (NAFTA) European Union (EU) euro trade organizations World Trade Organization (WTO) Asia-Pacific Economic Co-operation (APEC) Group of Eight (G8) Group of Twenty (G20) Organization for Economic Co-operation and Development (OECD) World Bank International Monetary Fund (IMF) Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Chapter Objectives By the time you finish this chapter, you should be able to: Compare the characteristics of a multinational corporation participating in global business with those of a Canadian company focused on domestic business Describe international agreements and organizations that have influenced global business activity Describe Canada’s involvement in international trade organizations Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Globalization and International Trade Globalization, in an economic context, is the movement of goods, services, technology, investment, ideas, and people throughout the world. Used under license from Shutterstock, Inc. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Globalization and International Trade Positive effects of globalization Outsourcing Lower prices Improved human rights Increased productivity Innovation Better jobs Increased capital flow Negative effects of globalization Lost Canadian jobs Fear of job loss Loss of Canadian productivity Exploitation of cheap labour Increased pollution Unhealthy products Spread of disease Increase in the income gap Influence of multinational corporations on governments Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Globalization and International Trade Companies use three major types of globalization strategies: Global strategy Multidomestic strategy Transnational strategy Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Globalization and International Trade Global strategy Regards the world as one big market—all people want the same product and will respond to marketing in a similar way Product and marketing are uniform around the world Takes advantage of economies of scale (proportionate savings gained by producing larger quantities) Does not respond to individual cultures Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Globalization and International Trade Multidomestic strategy Customizes products, services, and marketing for the local culture—local management is most capable of determining what is best for the local subsidiary Effective when cultural differences are prominent Less political and exchange-rate risk Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Globalization and International Trade Transnational strategy Combines the best elements of the global and multidomestic strategies Respects needs of local market, while maintaining efficiencies of a global strategy Manufacturing takes place at least expensive source, human resources and marketing take place at the local level Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Agreements Trade agreement An enforceable treaty between two or more countries that involves the movement of goods and services, elimination of trade barriers, establishment of terms of trade, and encouragement of foreign investment. Agreements may be multilateral (involving three or more parties) or bilateral (involving two countries). Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Agreements The North American Free Trade Agreement (NAFTA) Launched in January 1994 between Canada, the United States, and Mexico Created world’s largest free trade area Sets rules surrounding movement of goods, services, and investments across North America Eliminates tariffs and other trade barriers, and promotes fair competition Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Agreements Advantages of NAFTA Has helped create higher paying jobs in education, engineering, and banking sectors in Canada Allows freer flow of goods and services across North America, providing better access to raw materials, talent, capital, and technology Trade has tripled between the three members since NAFTA’s inception Disadvantages of NAFTA Manufacturing jobs have been lost to Mexico, where labour costs are lower Without tariffs, many Mexican farmers could not compete and lost their livelihoods Canadian companies sold to foreign investors Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Agreements Tax Treaties A tax treaty is created to prevent double taxation and tax evasion for people who would pay taxes in Canada and another country. The treaty determines how much tax each country can collect. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Agreements The European Union (EU) A trade agreement signed in 1993 that now encompasses twenty-seven countries in Europe and a population of almost half a billion people. It has its own flag, anthem, and currency, and common financial, security, and foreign policies. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Agreements Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Agreements The euro The European currency unit adopted by the European Union and used in most EU countries. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Agreements Advantages of a common currency Disadvantages of a common currency Decreased risk of exchange-rate fluctuations Initial costs of implementation Price transparency Lack of national control Elimination of transaction costs Loss of tradition Increased markets Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Organizations Trade organizations Groups established to help with the free flow of goods and services. They may be global in scope or national organizations created by individual governments to help domestic companies expand into international markets. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Organizations World Trade Organization (WTO) An international organization established in 1995 (which now has over 150 member countries) that promotes trade liberalization throughout the world. The main purposes of the WTO are: To act as a forum for negotiations To provide a set of rules that have been negotiated and signed by the governments of member countries To offer a forum for dispute settlement Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Organizations Asia-Pacific Economic Co-operation (APEC) A trade organization, created in 1989, that unites twenty-one of the countries surrounding the Pacific Ocean to co-operate on regional trade. Its goals are to foster open and free trade among its members, increase prosperity and economic growth, and develop the Asia-Pacific community. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Organizations APEC member countries Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Organizations The Group of Eight (G8) A trade organization encompassing the major economies of the world, which meet to discuss macroeconomic issues such as economic growth, trade liberalization, and helping developing countries. Member Countries: France United States Canada Great Britain Italy Germany Japan Russia Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Organizations The Group of Twenty (G20) A trade organization established during the economic crisis of the 1990s to provide a discussion forum for the major economies of the world beyond the G8. The G20 focuses on: Economic and employment growth Elimination of trade barriers Reforming financial institutions and regulations Restructuring global financial organizations Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Organizations Canada’s Place in the G8 and G20 Canada’s GDP and population are low compared to other G8 and G20 countries Talk of replacing Canada in the G8, and placing it as a second-tier country in the G20 Would be detrimental to Canada, as its needs, concerns, and interests would not be given the same consideration as in the past Used under license from Shutterstock, Inc. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Organizations Organization for Economic Co-operation and Development (OECD) A trade organization with thirty member countries, established in 1961 to promote the advancement of democracy and market economies. OECD members have worked together to eliminate bribery, money laundering, and fraud, and to create a code of conduct for multinational companies. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Organizations The World Bank An organization with 186 member countries that provides monetary and technical support for developing countries. Provides loans and grants to assist with education, health, infrastructure, farming, environmental issues, resource management, and other economic concerns. Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

Fundamentals of International Business Trade Organizations International Monetary Fund (IMF) An organization whose purpose is to promote financial stability, prevent and solve economic crises, encourage growth, and assuage poverty. It does this by: Encouraging countries to adopt responsible economic policies Lending money to emerging and developing countries Providing technical training in areas such as banking regulations and exchange rate policies Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

The Role of the UN in International Business The UN has four main purposes: To keep peace throughout the world To develop friendly relations among nations To work together to help poor people live better lives, to conquer hunger, disease, and illiteracy, and to encourage respect for each other’s rights and freedoms To be a centre for helping nations to achieve these goals Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.

The Role of the UN in International Business UN is responsible for organizations that influence international business, including the International Labour Organization (ILO), the International Monetary Fund (IMF), and the World Bank UN devotes resources to improving the standard of living, the unemployment rate, and economic conditions throughout the world UN Economic and Financial Committee deals with issues such as international trade, globalization, and poverty elimination Chapter 5: INTERNATIONAL TRADE AGREEMENTS AND ORGANIZATIONS Fundamentals of International Business Copyright © 2010 Thompson Educational Publishing, Inc.