1. International Marketing Nicos Rodosthenous PhD 21/10/2014 3 21/10/2014Dr Nicos Rodosthenous1

2. Regional Market Characteristics and Preferential Trade Agreements 1. Introduction This chapter looks at: – Global trade organizations – Four types of agreements – Individual countries and their preferential trade agreements. The world trade environment begins at the global level with the WTO and its predecessor, the GATT. 21/10/2014Dr Nicos Rodosthenous2

3. Regional Market Characteristics and Preferential Trade Agreements 2. GATT General Agreement on Tariffs and Trade: Treaty among nations to promote trade among members established in 1947. GATT was intended to be a multilateral, global initiative, and GATT negotiators did succeed in liberalizing world merchandise trade. GATT was also an organization that handled 300 trade disputes—many involving food—during its half century of existence but, with no enforcement power. 21/10/2014Dr Nicos Rodosthenous3

4. Regional Market Characteristics and Preferential Trade Agreements 3. WTO GATT was replaced by World Trade Organization (WTO) on January 1, 1995. WTO is based in Geneva and it provides a forum for trade-related negotiations among its 150 members. WTO has a Dispute Settlement Body (DSB) that mediates complaints concerning unfair trade barriers and other issues between the WTO’s member countries. 21/10/2014Dr Nicos Rodosthenous4

5. Regional Market Characteristics and Preferential Trade Agreements WTO has enforcement power and can authorize trade sanctions against the member who violates the WTO rules. i.e. the case of United States versus European Union: In 2002, U.S. President Bush imposed 30 percent tariffs on a range of steel imports for a period of 3 years. The EU lodged a protest, and in 2003, the WTO ruled that the tariffs were illegal. President Bush responded by lifting the tariffs. 21/10/2014Dr Nicos Rodosthenous5

6. Regional Market Characteristics and Preferential Trade Agreements 4. Preferential Trade Agreements The GATT treaty promotes free trade on a global basis; in addition, countries in each of the world’s regions are seeking to liberalize trade within their regions. PTAs give partners special treatment and may discriminate against others. Recently more than 150 PTAs have notified the WTO. 21/10/2014Dr Nicos Rodosthenous6

7. Regional Market Characteristics and Preferential Trade Agreements 5. Free Trade Area A free trade area (FTA) is formed when two or more countries agree to eliminate tariffs and other barriers that restrict trade. The ultimate goal of this agreement is to have zero duties on goods that cross borders between the partners, by creating a free trade area. Countries continue independent trade policies with countries outside FTA agreement. 21/10/2014Dr Nicos Rodosthenous7

8. Regional Market Characteristics and Preferential Trade Agreements Rules of origin discourage the importation of goods into the member country with the lowest external tariff for transshipment to one or more FTA members with higher external tariffs. i.e. because Chile and Canada established an FTA in 1997, a Canadian-built Caterpillar grader tractor imported into Chile would not be subject to duty. If the same piece of equipment was imported from a factory in the United States, the importer would pay about $13,000 in duties. 21/10/2014Dr Nicos Rodosthenous8

9. Regional Market Characteristics and Preferential Trade Agreements Could Caterpillar send the U.S.-built tractor to Chile by way of Canada, thereby allowing the importer to avoid paying the duty? No, because the tractor would bear a “Made in the U.S.A.” certificate of origin indicating it was subject to the duty. Little wonder, then, that the U.S. government negotiated its own bilateral free trade agreement with Chile in 2003. 21/10/2014Dr Nicos Rodosthenous9

10. Regional Market Characteristics and Preferential Trade Agreements Today, there are a lot of FTAs agreements, many of which are bilateral. i.e. Mexico has free trade agreements with 31 countries. 6. Customs Union A customs union represents the logical evolution of a free trade area. In addition to eliminating internal barriers to trade, members of a customs union agree to the establishment of common external tariffs (CETs). 21/10/2014Dr Nicos Rodosthenous10

11. Regional Market Characteristics and Preferential Trade Agreements In 1996, for example, the EU and Turkey initiated a customs union in an effort to boost two-way trade above the average annual level of $20 billion. The arrangement called for the elimination of tariffs averaging 14 percent that added $1.5 billion each year to the cost of European goods imported by Turkey. 21/10/2014Dr Nicos Rodosthenous11

12. Regional Market Characteristics and Preferential Trade Agreements 7. 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. 21/10/2014Dr Nicos Rodosthenous12

13. Regional Market Characteristics and Preferential Trade Agreements 8. Economic Union 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) 21/10/2014Dr Nicos Rodosthenous13

14. Regional Market Characteristics and Preferential Trade Agreements AND coordinates and harmonizes economic and social policy within the union to facilitate the free flow of capital, labor, and goods and services from country to country. An economic union is a common marketplace not only for goods but also for services and capital. For example, if professionals are going to be able to work anywhere in the EU, the members must harmonize their practice licensing so that a doctor or lawyer qualified in one country may practice in any other. 21/10/2014Dr Nicos Rodosthenous14

15. Regional Market Characteristics and Preferential Trade Agreements The full evolution of an economic union would involve the creation of a unified central bank, the use of a single currency, and common policies on agriculture, social services and welfare, regional development, transport, taxation, competition, and mergers. A true economic union requires extensive political unity, which makes it similar to a nation. 21/10/2014Dr Nicos Rodosthenous15

16. Regional Market Characteristics and Preferential Trade Agreements The further integration of nations would be the formation of a central government that would bring together independent political states into a single political framework. 9. North America—NAFTA North America, which includes Canada, the United States, and Mexico, comprises a distinctive regional market. 21/10/2014Dr Nicos Rodosthenous16

17. Regional Market Characteristics and Preferential Trade Agreements USA is home to more global industry leaders than any other nation in the world. For example, U.S. companies are the dominant producers in the computer, software, aerospace, entertainment, medical equipment, and jet engine industry sectors. In 1988, the United States and Canada signed a free trade agreement (U.S.-Canada Free Trade Agreement, or CFTA) 21/10/2014Dr Nicos Rodosthenous17

18. Regional Market Characteristics and Preferential Trade Agreements More than $400 billion per year in goods and services flows between Canada and the United States, the biggest trading relationship between any two single nations. Canada takes 20 percent of U.S. exports, and the United States buys approximately 85 percent of Canada’s exports. 21/10/2014Dr Nicos Rodosthenous18

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21. Regional Market Characteristics and Preferential Trade Agreements In 1992, representatives from the United States, Canada, and Mexico concluded negotiations for the North American Free Trade Agreement (NAFTA). 21/10/2014Dr Nicos Rodosthenous21

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23. Regional Market Characteristics and Preferential Trade Agreements Why does NAFTA create a free trade area as opposed to a customs union or a common market? The governments of all three nations pledge to promote economic growth through tariff elimination and expanded trade and investment. At present, however, there are no common external tariffs nor have restrictions on labor and other factor movements been eliminated. The issue of illegal immigration from Mexico into the United States remains a contentious one. 21/10/2014Dr Nicos Rodosthenous23

24. Regional Market Characteristics and Preferential Trade Agreements The benefits of continental free trade will enable all three countries to meet the economic challenges of the decades to come. The agreement does leave the door open for discretionary protectionism however i.e. California avocado growers want government protection for a market worth $250 million; Mexican avocado growers can only ship their fruit to the United States during the winter months. Moreover, Mexican avocados are subject to quotas so only $30 million worth of avocados reach the United States each year. 21/10/2014Dr Nicos Rodosthenous24

25. Regional Market Characteristics and Preferential Trade Agreements Mexican farmer Ricardo Salgado complained, “The California growers want to control all of the supply—that way they get the best prices. We’d love to have a bigger selling season, but right now we have to wait for the U.S. Congress to give us permission.” In addition, Mexico imposed a 46.6 percent tariff on red and golden delicious apples. 21/10/2014Dr Nicos Rodosthenous25

26. Regional Market Characteristics and Preferential Trade Agreements 10. Latin America: SICA, Andean Community, Mercosur, CARICOM Latin America includes the Caribbean and Central and South America (because of NAFTA, Mexico is grouped with North America). The allure of the Latin American market has been its considerable size and huge resource base. After a decade of no growth the countries of Latin America have begun the process of economic transformation. 21/10/2014Dr Nicos Rodosthenous26

27. Regional Market Characteristics and Preferential Trade Agreements Privatization is underway, with free markets, open economies, and deregulation to replace the policies of the past. In many countries, tariffs have been lowered to 10% and 20%. With the exception of Cuba, most elected governments throughout Latin America are democratic. The four most important preferential trading arrangements in Latin America are the SICA, 21/10/2014Dr Nicos Rodosthenous27

28. Regional Market Characteristics and Preferential Trade Agreements the Andean Community, the Common Market of the South (Mercosur), and the Caribbean Community and Common Market (CARICOM). 11. Central American Integration System (SICA) In 1997, El Salvador, Honduras, Guatemala, Nicaragua, Costa Rica, Central American Common Market (CACM), with the addition of Panama was changed to the Central American Integration System (Sistema de la Integración Centroamericana or SICA). 21/10/2014Dr Nicos Rodosthenous28

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30. Regional Market Characteristics and Preferential Trade Agreements The Secretariat for Central American Economic Integration, in Guatemala City, helps to coordinate the movement toward a Central American common market. Common External Tariff was agreed of 0 to 15% for most goods and products. For example, the Costa Rican government had previously benefited from the revenues generated by triple-digit tariffs on automobiles imported from Japan and elsewhere. 21/10/2014Dr Nicos Rodosthenous30

31. Regional Market Characteristics and Preferential Trade Agreements There are still tariffs on imports of products— sugar, coffee, and alcoholic beverages, for example—that are also produced in the importing country. As one Guatemalan analyst remarked, “Only when I see Salvadoran beer on sale in Guatemala and Guatemalan beer on sale in El Salvador will I believe that trade liberalization and integration is a reality.” 21/10/2014Dr Nicos Rodosthenous31

32. Regional Market Characteristics and Preferential Trade Agreements 12. Andean Community The Andean Community was formed in 1969 to accelerate the development of member states Bolivia, Colombia, Ecuador, Peru, and Venezuela through economic and social integration. Members agreed to lower tariffs on intragroup trade and work together to decide what products each country should produce. At the same time, foreign goods and companies were kept out as much as possible. 21/10/2014Dr Nicos Rodosthenous32

33. Regional Market Characteristics and Preferential Trade Agreements One Bolivian described the unfortunate result of this lack of competition in the following way: “We had agreed, ‘You buy our overpriced goods and we’ll buy yours.’ In 2000, in an attempt to bring rampant inflation under control, the government adopted the U.S. dollar as Ecuador’s official currency. Overall, rural residents and the urban poor in the region have become frustrated and impatient with the lack of progress. 21/10/2014Dr Nicos Rodosthenous33

34. Regional Market Characteristics and Preferential Trade Agreements As one Andean scholar put it, “After 10 or 15 years of operating with free-market policies, paradise hasn’t come. People start wondering if the gospel was as good as advertised.” 13. Common Market of the South (MERCOSUR) The treaty signified the agreement by the governments of Argentina, Brazil, Paraguay, and Uruguay to form the Common Market of the South (Mercado Común del Sur or Mercosur) 21/10/2014Dr Nicos Rodosthenous34

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36. Regional Market Characteristics and Preferential Trade Agreements Internal tariffs were eliminated, and CETs of up to 20 percent were established. Today, about 90 percent of goods are traded freely; however, individual members of Mercosur can change both internal and external tariffs when it suits the respective government. Chile’s export-driven success makes it a role model for the rest of Latin America as well as Central and Eastern Europe. Colombia, Ecuador, Peru, and Bolivia have become associate members of Mercosur. 21/10/2014Dr Nicos Rodosthenous36

37. Regional Market Characteristics and Preferential Trade Agreements In 2004, Mercosur signed a cooperation agreement with the Andean Community. The EU is Mercosur’s number one trading partner; Mercosur signed an agreement with the EU to establish a free trade area by 2005. Germany and France are opposed to such an agreement on the grounds that low-cost agricultural exports will harm farmers in Europe. 21/10/2014Dr Nicos Rodosthenous37