International Management Phatak, Bhagat, and Kashlak

The Global Macro-Economic Environment Chapter 2 The Global Macro-Economic Environment

Chapter Learning Objectives Discuss potential effects of the growth of regional trade blocs on global free trade. Explain the differences and similarities between a free trade area, a customs union, a common market, an economic union and a political union. Describe the static and dynamic benefits of regional economic integration as well as the supply-side led benefits that will accrue to member countries. Describe the key features of the Uruguay Round of the GATT and the WTO and their implications for the conduct of business between member countries.

Chapter Learning Objectives (contd.) Discuss the significance of the WTO to international trade. Describe the important characteristics of NAFTA and the European Union. Discuss the ways in which the major regional economic agreements can be expected to improve business opportunities, and problems associated with their implementation. Examine the phenomenon of Globalization and its meaning. Evaluate the significance of country-specific economic features and competitiveness rankings to international companies.

Chapter Topics A New Global Economy The General Agreement on Tariffs and Trade and the World Trade Organization Country-Level Economic Integration The Effects of Economic Integration Major Regional Economic Agreement Initiatives Will Regional Trade Blocs Promote Global Free Trade? Globalization Country-Specific Economic Environments and Country Competitiveness

Major Developments Favoring Free Trade The emergence of the World Trade Organization (WTO) The emergence of regional trade blocs, such as the North American Free Trade Agreement (NAFTA), the expanded EU, and other regional trade agreements like MERCUSUR in South America

Reasons Why Trade Blocs Get Formed Geographical proximity and often the sharing of common borders as in the European Union and NAFTA Common economic and political interests as in the European Union and the ASEAN Similar ethnic and cultural backgrounds as in the Free Trade of the Americas Similar levels of economic development as in the European Union Similar views on the mutual benefits of free trade as in NAFTA Regional political needs and considerations as in the ASEAN

Fig. 2-1: A Hierarchy of Regional Economic Integration Initiatives Free Trade Area Elimination of Trade Barriers Customs Union + Common External Trade Positions Common Market + Labor/Capital Mobility Economic Union + Coordinated Economic and Fiscal Policy Political Union + Coordinated Political and Social Policy

Table 2-1: Types of Trade Blocs Level of Integration No Tariffs and Quotas Common Tariffs and Quotas No Restrictions on Factor Movements Harmonized/unified Eco. Policies & Institutions Unified Eco. & Political Policies & Institutions Free Trade Area Yes No Customs Union Common Market Economic Union Political Union

Fig. 2-2: Regional Economic Integration Benefits Removal of Trade And Investment Barriers Competition Increases/ More Investors New Product Development Industry Innovation Increases New Process Development Initial Costs Drop Prices Drop Reallocation/Consolidation of Resources (Comparative Advantage) Demand Increases Production Levels Rise Lower Costs And Supply-Side Led Growth Economies of Scale Benefits

Major Regional Economic Agreement Initiatives The North American Free Trade Agreement (NAFTA) U.S.A, Canada, and Mexico Went into effect on January 1, 1994 Free Trade Area of the Americas Proposal to expand NAFTA to include all countries in the Western Hemisphere, except Cuba This region accounts for 37% of all U.S. trade, $155 billion in American investment, 800 million people, and a $13 trillion economy

Major Regional Economic Agreement Initiatives (contd.) The Association of Southeast Asian Nations (ASEAN) Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Laos, Myanmar, and Cambodia Total population of 500 million, area of 4.5 million square kilometers, GDP of U.S. $737 billion, a total trade of U.S. $ 720 billion Mercado Comun del Sur (MERCOSUR) Argentina, Brazil, Paraguay, and Uruguay

Major Regional Economic Agreement Initiatives (contd.) Market of nearly 200 million people, area of about 12.5 million square miles, combined gross regional product in excess of $800 billion, and Latin America’s largest industrial base The European Union (EU) 15 countries currently members Market area of 320 million people Historically known as the Common Market Created after World War II Similarities between EU and the United States

Major Regional Economic Agreement Initiatives (contd.) Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, and Slovenia set to join EU on May 1, 2004 Bulgaria and Romania hope to do so by 2007 To join the EU, countries need to fulfill economic and political conditions known as the ‘Copenhagen Criteria.’

Table 2-2: Exports within Trade Blocs 1990 1995 1996 1997 1998 1999 NAFTA 226273 394472 437804 496423 521649 581162 EU 981260 1259699 496424 1226988 1376314 ASEAN 28648 81911 86923 88770 71669 81929 MERCOSUR 4127 14199 17075 20772 20352 15313

GATT The General Agreement on Tariffs and Trade (GATT) was the outcome of the failure of negotiating governments to create the International Trade Organization. (ITO). The Breton Wood Conferences had introduced the idea for an organization to regulate trade as part of a larger plan for economic recovery after World War II. As governments negotiated the ITO, 15 negotiating states began parallel negotiations for the GATT as a way to attain early tariff reductions. Once the ITO failed in 1950, only the GATT agreement was left. The GATT's main objective was the reduction of barriers to international trade. This was achieved through the reduction of tariff barriers

Globalization Globalization (or globalisation) in its literal sense is the process or transformation of local or regional phenomena into global ones. It can be described as a process by which the people of the world are unified into a single society and function together. This process is a combination of economic, technological, sociocultural and political forces. Globalization is often used to refer to economic globalization, that is, integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology

Globalization (Cont.) The growing economic interdependence of countries worldwide, the increasing integration of economic life across political boundaries, through the increasing volume and variety of cross-border transactions in goods, services, capital flows, and rapid and widespread diffusion of technology

Specific Drivers of Globalization Tremendous growth in international trade and commerce Innovations in information technology and transportation Porous borders between countries The globalization of financial markets The creation of a global labor force Rapidly falling freight costs

Factors Multinationals Must Consider Prior to Deciding Entry Mode Determine the key success factors for the business, i.e. the conditions that must be present in the foreign market in order to succeed in achieving the objectives of the market entry Study whether these conditions exist in the target market Determine changes in implementation strategies that would be required in order to succeed in the target market

Table 2-6: 2003 Competitive Ranking of Countries (top twenty) Country Competitiveness Ranking United States 1 Finland 2 Taiwan 3 Singapore 4 Sweden 5 Switzerland 6 Australia 7 Canada 8 Norway 9 Denmark 10

Competitiveness Ranking Table 2-6 (contd.) Country Competitiveness Ranking United Kingdom 11 Iceland 12 Japan 13 Germany 14 Netherlands 15 New Zealand 16 Hong Kong 17 Austria 18 Israel 19 Chile 20

Key Terms and Concepts GATT WTO WTO – Settlement of Disputes Free Trade Area Customs Union Common Market Economic Union

Key Terms and Concepts (contd.) Political Union Economic Integration NAFTA EU ASEAN Globalization