The Global Trade Environment Module 3

2 Theory of Comparative Advantage “Even if a country is able to produce all its goods at lower costs than another country can, trade still benefits both countries based on comparative, not absolute costs.” David Recardo. In other words, countries should concentrate efforts on producing goods that have comparative advantage over other countries, and then export those goods in exchange for goods that command advantage in their native countries. Therefore, trade is a positive sum game.

3 Barriers to Trade Tariff Barriers Non-Tariff Barriers - Limitations on trade such as quotas -Customs and administrative entry procedures -Standards (sometimes, unduly stringent and discriminatory) -Government participation in trade (e.g., providing subsidies)

4 GATT General Agreement on Tariffs and Trade –treaty among nations to promote trade among members handled trade disputes lacked enforcement power replaced by World Trade Organization in 1995

5 World Trade Organization Provides forum for trade-related negotiations among 150 members –based in Geneva –serves as dispute mediators –empowered with ability to enforce rulings Countries found in violation of WTO rules are expected to change policies or else face sanctions

6 International Monetary Fund (IMF) Over 180 nations (presently 184) Purpose is to assist nations to become and remain economically viable (debt relief, currency problems) Stabilization of foreign exchange rates (floating exchange rates) Establishment of a freely convertible currency to facilitate international trade (Special drawing rights (SDR’s) – paper gold). composite of U.S.$, Euro, Yen, Sterling Pound (as of 1/23/07, 1SDR=1.5U.S. $ SDR’s can be used to: -pay debt -borrow other currencies -used as money for a transaction

7 World Bank Objective is to reduce poverty and improve living standards by sustainable growth and investment in people. Provide loans, technical assistance, policy guidance etc. Have five institutions performing specific functions (for example, providing assistance and loans for development projects undertaken by the governments of poor countries, private sector loans for poor countries etc.)

8 Preferential Trade Agreements Many countries seek to lower barriers to trade within their regions –Free Trade Areas –Customs Unions –Common Market –Economic Unions

9 Free Trade Area Two or more countries agree to abolish all internal barriers to trade amongst themselves Countries continue independent trade policies with countries outside agreement NAFTA

10 Customs Union Evolution of Free Trade Area Includes the elimination of internal barriers to trade (as in FTA) AND Establishes common external barriers to trade

11 Common Market Includes the elimination of internal barriers to trade (as in free trade area) AND Establishes common external barriers to trade (as in customs union) AND Allows for the free movement of factors of production, such as labor, capital, and information

12 Economic Unions Includes the elimination of internal barriers to trade (as in free trade area) AND Establishes common external barriers to trade (as in customs union) AND Allows for the free movement of factors of production, such as labor, capital, and information (as in common market) AND Coordinates and harmonizes economic and social policy within the union

13 Economic Unions (cont.) Full evolution of economic union –creation of unified central bank –use of single currency –common policies on issues ranging from agriculture to taxation –requires extensive political unity

14 Major Regions North America Latin America Asia-Pacific Western, Central, and Eastern Europe

15 North America Canada, United States, Mexico NAFTA established free trade area –all three nations pledge to promote economic growth through tariff reductions and expanded trade and investment –no common external tariffs –restrictions on labor and other movements remain

16 Latin America Caribbean, Central, and South America 4 preferential trade agreements in place –Central American Integration System –Andean Community –Common Market of the South –Caribbean Community and Common Market

17 Common Market of the South (Mercosur) Argentina, Brazil, Paraguay, Uruguay Chile and Bolivia - Customs union, seeks to become common market –internal tariffs eliminated –common external tariffs up to 20% established –in time, factors of production will move freely through member countries –associate members –participation in free trade area but not customs union

18 Asia-Pacific Includes 23 countries and 56% of world population –Japan –Newly industrializing economies –Association of Southeast Asian Nations

19 Japan Generates 14% of world’s GNP Key factors –population density –geographic isolation Strong culture requires flexibility and commitment from global marketers

20 Newly Industrializing Economies (NIEs) Strong economic growth in recent decades –foreign investment –export-driven industrial development Sometimes called the 4 Tigers of Asia –South Korea –Taiwan –Singapore –Hong Kong

21 Association of Southeast Asian Nations (ASEAN) Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Cambodia, Laos, Burma Goal to implement a free trade area –Tariffs of 20+% will be reduced to 0 - 5% Singapore represents great success among ASEAN nations

22 Europe European Union European Free Trade Area European Economic Area The Lome Convention Central European Free Trade Association (CEFTA)

23 European Union Initially began with the 1958 Treaty of Rome Objective to harmonize national laws and regulations so that goods, services, people and money could flow freely across national boundaries 1991 Maastricht Treaty set stage for transition to an economic union with a central bank and single currency (the Euro)

24 Current EU Members At present 27 and counting Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom

25 Countries in the EU

26 Preferential Trade Agreements: Strategic Implications for Business and Marketing The complexity in the marketplace will change For MNC’s enlarged markets Reduced or abolished country-by-country tariffs and restrictions Rules and regulations can be more sophisticated Production, financing, labor, and marketing decisions are affected. Competition will intensify Will still have to deal with national markets due to differences in language, customs, instability etc.

27 Preferential Trade Agreements: Opportunities Large mass markets (initial advantage to large MNC’s) Mass production and distribution (economies of scale) Lower prices will be beneficial to be competitive Major savings resulting from not having to develop different versions of the same product to satisfy national standards The initial disadvantage to smaller companies will disappear with mergers, joint ventures acquisitions etc. Coordinated programs to develop economic growth Protects businesses that operates within the borders

28 Preferential Trade Agreements: Threats or Market Barriers It could be difficult for smaller companies to meet new and more sophisticated product standards Exporters will find it very difficult to compete

29 Preferential Trade Agreements: Marketing Mix Implications Reduced number of brands Much less price differential (more standardized pricing) among member countries Integrated and competitive distribution system Competition among small and medium size retailers Internet marketing will grow