The Dynamic Environment of International Trade Week 2

General Agreement on Tariffs and Trade (GATT) Covers three basic areas: trade shall be conducted on a nondiscriminatory basis; protection shall be afforded domestic industries through customs tariffs, not through such commercial measures as import quotas; and consultation shall be the primary method used to solve global trade problems.

World Trade Organization (WTO) Unlike GATT, WTO is an institution, not an agreement It sets many rules governing trade between its 132 members WTO provides a panel of experts to hear and rule on trade disputes between members, and, unlike GATT, issues binding decisions

The IMF and the World Bank The International Monetary Fund (IMF) and the World Bank Group are two global institutions created to assist nations in becoming and remaining economically viable. These organizations play important roles in international trade: by helping maintain stability in the financial markets and by assisting countries that are seeking economic development and restructuring The International Monetary Fund (IMF) and the World Bank were both created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. The task of the IMF was to maintain order in the international monetary system, and that of the World Bank was to promote economic development. In the 60 years since their creation, both institutions have emerged as significant players in the global economy. The World Bank is the less controversial of the two sister institutions. It has focused on making low-interest-rate loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments (such as building dams or roads). The IMF is often seen as the lender of last resort to nation-states whose economies are in turmoil and currencies are losing value against those of other nations. Frequently, in the recent past, for example, the IMF has bailed out governments of troubled nation states, including Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, and Turkey.

World Trade Goes Bananas! The Banana wars and conflict between the U.S. and Europe started out as a simple tariff dispute between France and U.S. companies exporting bananas from Latin American countries to France France gave preferential treatment for bananas coming from its former colonies in the Caribbean and Africa The rest is history and politics, see more here: “Banana Wars” What started as a trade dispute ended up being so intertwined with politics. Small businesses that did not have lobbying power in Washington DC ended up being the victims of the tariff retaliation permitted by the WTO on products imported from Europe into the U.S. If one was a large feta cheese or olive oil importer, they had industry groups and lobbyists working on their behalf to prevent these products from Europe from being slapped with a large tariff increase. The whole deal caused many small businesses in the U.S. to go out of business.

Government Encouragement Governments can both encourage and discourage foreign investment The key reason to encourage foreign investment is to accelerate the country’s economic growth During the recent economic downturn, the U.S. government has been particularly creative in helping promote American exports

Introduction to International Law No single, uniform international commercial law governing foreign business transactions exists International marketers must comply with the laws of each country within which it operate It is impossible to explore the legal system of every country, but it is important to understand that the laws are different and the need to comply with the laws of each country.

Bases for Legal Systems Common law, derived from English law and found in England, the United States, Canada, and other countries once under English influence The basis for common law is tradition, past practices, and legal precedents set by the courts through interpretations of statutes, legal legislation, and past rulings. Common Law is based on historical or past practices. Therefore, under common law, all judgments in court are based on precedence. Common law seeks “interpretation through the past decisions of higher courts which interpret the same statutes or apply established and customary principles of law to a similar set of facts.”

Bases for Legal Systems Civil or code law, derived from Roman law and found in Germany, Japan, France, and in non-Islamic and non-­Marxist countries Code law is based on an all-inclusive system of written rules (codes) of law. All laws are codified, however, some broad interpretations are possible. More comparisons between common and code law are in the following slides.

Common Law Based on tradition, past practices and legal precedents set by courts through interpretation of past rulings/statutes, etc. Not All-Inclusive Code Law Based on an all-inclusive system of written rules (codes) of law. Legal system is divided into 3 codes: commercial, civil & criminal. Considered complete “catchall provisions” Some broad interpretations are possible. 7-10

Common Law Ownership is determined by use Agreements may be binding so long as proof of the agreement can be established. Code Law Based on an all-inclusive Ownership is determined by registration Agreements may not be enforceable unless properly notarized or registered. 7-11

Bases for Legal Systems Islamic law, derived from the interpretation of the Koran and found in Pakistan, Iran, Saudi Arabia, and other Islamic states

Level of Market Development* The level of market development roughly parallels the stages of economic development The more developed an economy, the more sophisticated and specialized the institutions become to perform marketing functions As countries develop, the distribution channel systems develop Marketing structures of many developing countries are simultaneously at many stages

Demand in Developing Countries* Estimating market potential in less-developed countries involves challenges Most of the difficulty is from the coexistence of three distinct kinds markets in each country: (1) the traditional rural/agricultural sector (2) the modern urban/high-income sector and (3) the often very large transitional sector usually represented by low-income urban slums One of the greatest challenges of the 21st century is to manage and market to the transitional sector in developing countries. The large-city slums perhaps present the greatest problems for smooth economic development. The biggest difficulty is also the growing disparity between the rich and the poor.

NAFTA* When NAFTA was ratified and became effective in 1994, it became a single market of 360 million people with a $6 trillion GNP NAFTA required the three countries to remove all tariffs and barriers to trade over 15 years In 2008, all tariff barriers were officially dropped The purpose was to: generate income and employment gains Enhance global competitiveness of NAFTA firms The purpose of the NAFTA was to generate income and employment gains and enhance global competitiveness of NAFTA firms. Combined intra-regional trade represents 40 percent of NAFTA exports. 378 million people and a combined GDP of US$7.68 trillion. Each member will have it’s own tariff arrangements with non-member countries. Mexican export grew to both the U.S. and Canada. Mexico was expected to grow at 6 percent annually.

United States–Central American Free Trade Agreement– Dominican Republic Free Trade Agreement (DR-CAFTA)* In August 2005, President George Bush signed into law a comprehensive free trade agreement among Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, and the United States The agreement includes a wide array of tariff reductions aimed at increasing trade and employment among the seven signatories

Southern Cone Free Trade Area (Mercosur)* Mercosur (including Argentina, Bolivia, Brazil, Chile, Paraguay, and Uruguay) is the second-largest common-market agreement in the Americas after NAFTA The Treaty of Asunción, which provided the legal basis for Mercosur, was signed in 1991 and formally inaugurated in 1995. The treaty calls for a common market that would eventually allow for the free movement of goods, capital, labor, and services among the member countries, with a uniform external tariff Because Mercosur members were concerned about sacrificing sovereign control over taxes and other policy matters, the agreement envisioned no central institutions similar to those of the European Union institutions.

Southern Cone Free Trade Area (Mercosur) Mercosur has become the most influential and successful free trade area in South America. With the addition of Bolivia and Chile in 1996, Mercosur became a market of 220 million people with a combined GDP of nearly $1 trillion and the third largest free trade area in the world. More recently Colombia and Ecuador have become associate members, with Venezuela to follow shortly Mexico has observer status as well In addition, negotiations have been under way since 1999 for a free trade agreement between the European Union and Mercosur, the first region-to-region free trade accord. Although negotiations will not be easy, Mercosur and the European Union should be able to reach an accord. Mercosur has assumed the leadership in setting the agenda for the creation of a free trade area of the Americas or, more likely, a South American Free Trade Area (SAFTA).

Latin American Economic Cooperation Other Latin American market groups (Exhibit 9.7) Latin American Integration Association (LAIA) The long-term goal of the LAIA is a gradual and progressive establishment of a Latin American common market There was is the differential treatment of member countries according to their level of economic development The provision that permits members to establish bilateral trade agreements among member countries Caribbean Community and Common Market (CARICOM) It has worked toward a single-market economy and in 2000 established the CSME (CARICOM Single Market and Economy) with the goal of a common currency for all members. The introduction of a common external tariff structure was a major step toward that goal.

NAFTA to FTAA or SAFTA? Initially NAFTA was envisioned as the blueprint for a free trade area extending from Alaska to Argentina The first new country to enter the NAFTA fold was to be Chile, then membership was to extend south until there was a Free Trade Area of the Americas (FTAA) by 2005 Will there will be an FTAA or a tri-country NAFTA in the north and a South American Free Trade Area (SAFTA) led by Brazil and the other member states of Mercosur in the south? Future political and economic policies will determine the future of all of these plans

Strategic Implications for Marketing As a country develops, incomes change, population concentrations shift , expectations for a better life adjust to higher standards, new infrastructures evolve, and social capital investments are made Large households can translate into higher disposable incomes Markets are changing rapidly, and identifiable market segments with similar consumption patterns are found across many countries Emerging markets will be the growth areas of the 21st century For example, members of the middle class in emerging markets do not own two automobiles and suburban homes, and healthcare and housing in some cases are subsidized, freeing income to spend on refrigerators, TVs, radios, better clothing, and special treats. Exhibit 9.5 illustrates the percentage of household income spent on various classes of goods and services.