Chapter 3 The Global Trade Environment

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 World Trade Organization (WTO) WTO was created in 1995 as the successor of GATT to provide a forum for settling disputes among member nations Attempts to set policy for world trade Successfully reduced tariffs among member nations from 40% to 5%

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 Preferential Trade Agreements Free Trade Area Customs Union Common Market Economic Union

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 Free Trade Area (FTA) Lowest level of economic integration Formed when two or more countries abolish all internal barriers to trade among themselves Countries in a FTA can maintain independent trade policies with respect to non-FTA countries –North American Free Trade Agreement (NAFTA)

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 Customs Union Represents the logical evolution of a free trade area In addition to eliminating internal barriers to trade, members of a customs union establish common external barriers –How could NAFTA become a customs union?

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 In addition to removal of internal barriers to trade and the establishment of common external barriers Common market allows for free movement of factors of production, including labor, capital and information –How could NAFTA become a common market? Common Market

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 Economic Union Highest level of economic integration Builds upon the elimination of internal tariff barriers, the establishment of common external barriers, and the free flow of factors Seeks to coordinate and harmonize economic and social policy within the union –European Union

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 North America Canada is the number one trading partner of the United States Mexico is second, while Japan is third

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 NAFTA NAFTA was approved and became effective on January 1, 1994 Result is a FTA with a combined population of nearly 400 million and a total GNP of $8.3 trillion

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 NAFTA’s Effect on Profitability for U.S. Auto Manufacturers based on a 5000 employee plant CountryHourDay (8hr)Week (5d)Year (52w) Mexico$8,700$69,600$348,000$18 million U.S.$77,700$621,600$3.1 million $161 million Savings$69,000$552,000$2.8 million $146 million Note: Mexican worker wage based on $1.74/hr and U.S. worker wage based on $15.54/hr

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 Auto Manufacturing CEO Choices Regarding NAFTA Managerial capitalism versus the stakeholder theory What choices do auto manufacturing CEO’s have regarding the relocation of U.S. auto manufacturing plants to Mexico?

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 Asia-Pacific Four Tigers (South Korea, Taiwan, Singapore, and Hong Kong) –Also known as “newly industrializing economies Association of Southeast Asian Nations is a FTA

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 The European Union (EU) Objective of EU member countries is to harmonize national laws and regulations European Monetary System was based on European Currency Unit (ECU) –ECU is a unit of account comprised of a hypothetical basket of “weighted” currencies

2002 – Chapter 3Andrew P. Yap - FIU – MAR Maastricht Treaty Set the stage for the transition of EU from EMS to an economic and monetary union (EMU) –EMU includes a European central bank and a single European currency known as the euro –As of 2002, three of 15 EU countries still have not adopted the euro as their official currency

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 The Middle East Business is driven by the price of oil High oil revenue countries include –Bahrain, Iraq, Iran, Kuwait, Oman, Qatar, and Saudi Arabia Would these countries be considered industrial or post- industrial countries? –Saudi Arabia has 16 million people and 25 percent of the world’s known oil reserves

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 Marketing Issues in the Middle East Connection is a key word in conducting business in the Middle East Developing relationships with key business and government figures is essential to doing business in the Middle East

2002 – Chapter 3Andrew P. Yap - FIU – MAR 4156 Issues to Avoid in the Middle East Avoid bringing up subjects of business before getting to know your Arab host Don’t ask questions or make comments concerning a man’s wife or female children Avoid pursuing the subjects of politics or religion Avoid any discussion of Israel