Cross-National Cooperation and Agreements Chapter 8 Cross-National Cooperation and Agreements Chapter 7: Cross National Cooperation and Agreements

Copyright © 2015 Pearson Education, Inc. Learning Objectives Discuss the three major approaches to economic integration Identify the major characteristics and challenges of the World Trade Organization Discuss the pros and cons of global (the WTO), bilateral, and regional integration Identify how the different approaches to economic integration can be a free trade agreement, a customs union, or a common market The Learning Objectives for this chapter are To identify the major characteristics and challenges of the World Trade Organization To discuss the pros and cons of global, bilateral, and regional integration To describe the static and dynamic impact of trade agreements on trade and investment flows To define different forms of regional economic integration To compare and contrast different regional trading groups To describe other forms of global cooperation such as the United Nations and OPEC Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Learning Objectives Describe the static and dynamic impact of trade agreements on trade and investment flows Compare and contrast different regional trading groups Describe other forms of global cooperation such as the United Nations and OPEC Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. Introduction Economic integration the political and monetary agreements among nations and world regions in which preference is given to member countries Bilateral integration Regional integration Global integration Trade groups influence the strategies of multinational companies so it’s important to understand economic integration and its scope. The are three types of economic integration. At the bilateral level two countries decide to cooperate more closely. At the regional level, a group of countries located in the same geographic area cooperate. At the global level, countries from all over the world cooperate through the World Trade Organization. Copyright © 2015 Pearson Education, Inc.

The World Trade Organization World Trade Organization (WTO) The major body for reciprocal trade negotiations Reciprocal trade agreement, international commercial treaty in which two or more nations grant equally advantageous trade concessions to each other. It usually refers to treaties dealing with tariffs. For example, one nation may grant another a special schedule of tariff concessions in return for equivalent advantages. Originally reciprocity agreements involved bilateral tariff reductions that were not to be extended to third countries. The World Trade Organization, or WTO, encompasses and extends the General Agreement on Tariffs and Trade, also known as GATT. Copyright © 2015 Pearson Education, Inc.

The World Trade Organization World Trade Organization (WTO) The major body for reciprocal trade negotiations enforcement of trade agreements General Agreement on Tariffs and Trade (GATT) The World Trade Organization, or WTO, encompasses and extends the General Agreement on Tariffs and Trade, also known as GATT. Copyright © 2015 Pearson Education, Inc.

GATT: Predecessor to the WTO formed in 1947 to abolish quotas and reduce tariffs Most favored nation (MFN) clause trade without discrimination Ran into problems: Craftier complex methods of trade protection Trade in services grew exponentially Succeeded by WTO in 1995 The GATT was formed by 23 countries in 1947 as mechanism for negotiating the reduction and elimination of trade barriers and for agreeing on the conduct of international trade. The central tenet of GATT was the MFN clause that required members to open their markets equally to all other members. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. What Does The WTO Do? WTO continues the MFN clause of GATT provides a mechanism for dispute settlement Doha Round agricultural subsidies Criticized for failing to pay enough attention to labor and environmental concerns undermining global diversity benefitting rich at the expense of the poor The WTO, which has 153 members, follows the MFN principle of GATT and strives to provide a better means of mediating trade disputes and of enforcing agreements. The WTO does make some exceptions to the MFN principle. For example, developing countries’ manufactured products have been given preferential treatment over those from industrial countries, concessions granted to members within a regional trading alliance, such as the EU, have not been extended to countries outside the alliance, and countries are permitted to raise barriers against member countries which they feel are trading unfairly. The most recent set of negotiations for the WTO began in 2001 in Doha, Qatar. The Doha Round, which focuses on giving a boost to developing nations, has been challenging and has stalled numerous times. One of the major sources of tension involves agricultural subsidies. The WTO has been the subject of much criticism in the past. Copyright © 2015 Pearson Education, Inc.

The Rise Of Bilateral Agreements can be between two individual countries or can involve one country dealing with a group of other countries Also known as Preferential trade agreements (PTAs) A preferential trade area (also preferential trade agreement, PTA) is a trading bloc that gives preferential access to certain products from the participating countries. This is done by reducing tariffs but not by abolishing them completely. A PTA can be established through a trade pact. Free trade agreements (FTAs) Countries are increasingly willing to sidestep the multilateral system and engage in bilateral agreements in order to achieve their objectives. Copyright © 2015 Pearson Education, Inc.

The Rise Of Bilateral Agreements Also known as Free trade agreements (FTAs) A free-trade area is the region encompassing a trade bloc whose member countries have signed a free trade agreement (FTA). Such agreements involve cooperation between at least two countries to reduce trade barriers – import quotas and tariffs – and to increase trade of goods and services with each other. Countries are increasingly willing to sidestep the multilateral system and engage in bilateral agreements in order to achieve their objectives. Copyright © 2015 Pearson Education, Inc.

Regional Economic Integration Regional trade agreements integration confined to a region and involving more than two countries Examples include European Union (EU) European Free Trade Area (EFTA) North American Free Trade Area (NAFTA) Association of Southeast Asian Nations (ASEAN) Common Market of Eastern and Southern Africa (COMESA) Regional trade agreements or RTAs, also known preferential trade agreements, give member countries special treatment. They began to emerge after World War II when nations saw the benefits of cooperation and larger market sizes. Copyright © 2015 Pearson Education, Inc.

Regional Economic Integration Major types of economic integration Free trade area no internal tariffs Customs union no internal tariffs plus common external tariffs Common market customs union plus factor mobility The major types if economic integration are the free trade area, the customs union, and the common market. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. The European Union European Union (EU) changed from the European Economic Community to the European Community to the European Union the largest and most successful regional trade group in the world provides free trade of goods, capital, and people uses common external tariffs has a common currency It’s much easier to form regional trading groups than larger ones. One of the most comprehensive and successful regional groups is the European Union which began as a free trade agreement and has since expanded to become a common market that has abolished restrictions on factor mobility and harmonized national, political, economic, and social policies. The EU has 27 members some of which have joined forces on the bloc’s common currency, the euro. Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc. The European Union Companies doing business in the EU need to determine where to produce products determine what their entry strategy will be balance the commonness of the EU with national differences Multinationals need to understand how the EU can influence their corporate strategy. For example, should they produce in a central location and incur the cost and time to move products from country to country? Should they acquire a local company as a way to get into the market? What do the different growth rates across member countries mean? Copyright © 2015 Pearson Education, Inc.