1. Chapter 3 The Global Trade Environment: Regional Market Characteristics and Preferential Trade Agreements

2. Introduction This chapter looks at Global trade organizations
Four types of agreements
Individual countries and their preferential trade agreements
Insert photo 3-1
WTO protesters

3. GATT General Agreement on Tariffs and Trade
Treaty among nations to promote trade among members established in 1947
Handled trade disputes
Lacked enforcement power
Replaced by World Trade Organization in 1995

4. The World Trade Organization
Forum for trade-related negotiations among 150 members
Based in Geneva
Serves as dispute mediator through DSB
Has enforcement power and can impose sanctions
The website for the WTO is
The Dispute Settlement Body of neutral staff members mediates unfair trade barriers and other issues. For 60 days, parties are expected to negotiate in good faith. After that, the DSB will appoint a three-member panel of trade experts to hear the case behind closed doors. The panel must rule in nine months. The losing party has the right to turn to a seven-member appellate body. If, after due process, a country’s policies are found to violate WTO rules, it is expected to change those policies. If it does not, trade sanctions may be imposed.
Trade ministers meet annually to work on improving world trade. The Doha Round began in 2001, collapsed in 2005, and has not been restarted as of September 2007.

5. WTO Structure

6. Preferential Trade Agreements
Many countries seek to lower barriers to trade within their regions
PTAs give partners special treatment and may discriminate against others
More than 150 PTAs have notified the WTO
It is customary to notify the WTO when countries enter into PTAs. Strictly speaking, few fully conform to WTO requirements; none, however, have been disallowed.

7. Free Trade Area
Two or more countries agree to abolish tariffs and other barriers to trade among themselves
Countries continue independent trade policies with countries outside agreement
Rules of origin requirements restrict transshipment of goods from the country with the lowest tariff to another
Sometimes duties may be eliminated on the day of the agreement or phased out over time.
Chile and Canada established an FTA in A Caterpillar tractor made in Canada could be shipped to Chile duty free. A U.S.-made tractor could not be shipped through Canada to Chile because the Made in the USA label would subject it to about $13,000 in duties. Little wonder that the United States negotiated its own agreement with Chile that came into effect in 2003.
Other FTAs:
European Economic Union: the EU plus Norway, Liechtenstein, and Iceland
The Group of Three (G3): Colombia, Mexico, and Venezuela
The Closer Economic Partnership Agreement: China and Hong Kong

8. 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
Ex: The EU and Turkey, the Andean Community, Mercosur, CARICOM, Central American Integration System (SICA)
The EU’s and Turkey’s agreement eliminated tariffs averaging 14 percent that added $1.5 billion/year to the cost of European goods imported into Turkey.

9. 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
Current Central and South American customs unions may evolve into common markets.

10. 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)
AND coordinates and harmonizes economic and social policy within the union
In the European Union, countries must harmonize there licensing standards so that professionals such as doctors or lawyers qualified in one country may work in another. Harmonization is an important concept to be stressed.

11. Economic Union Full evolution of economic union
Creation of unified central bank
Use of single currency
Common policies on issues such as agriculture, social policy, transport, competition, mergers, taxation
Requires extensive political unity
Would lead to a central government in time

12. North America—NAFTA 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
The United States is home to more global industry leaders than any other nation and dominates in the computer, software, aerospace, entertainment, medical equipment, and jet engine industries.
The agreement does leave the door open for discretionary protectionism. California avocado growers won government protection for a $250 million market. Mexican avocado growers can ship only during the winter and only to the northeast United States and are subject to a $30 million quota. Mexico imposed tariffs on chicken leg quarters and on red and golden apples.
The United States and Canada formed the Canada–U.S. Free Trade Area in The $400 billion of goods traded each year is the biggest trading relationship between any two countries.
In 1994, the United States, Canada, and Mexico began trading under NAFTA. The NAFTA represents a combined population of roughly 430 million and a total GNI of almost $14 trillion.

13. NAFTA Income and Population
2004 GNI 2004 Pop GNI
(in millions) (in thousands) Per Capita
United States $12,168, , ,440
Canada , , ,310
Mexico , , ,790__
Total/Mean GNP $13,778, ,424 $32,086
per capita

14. U.S. Goods Exports in 2005

15. U.S. Goods Imports in 2005

16. Latin America: SICA, Andean Community, Mercosur, CAIRCOM
Includes the Caribbean as well as Central and South America
History of no growth, inflation, debt, and protectionism has given way to free markets, open economies, and deregulation
Some concern for further growth with the rise of left-leaning politicians
The allure of the Latin American market has been its considerable size and huge resource base. After a decade of no growth, crippling inflation, increasing foreign debt, protectionism, and bloated government payrolls, the countries of Latin America have begun the process of economic transformation. Balanced budgets are a priority and privatization is under way. Free markets, open economies, and deregulation have begun to replace the policies of the past. With the exception of Cuba, democratically elected governments are found throughout Latin America. Policymakers have recognized the benefits of free-market forces and the advantages of participating fully in the global economy. In many countries, tariffs that sometimes reached as much as 100 percent or more have been lowered to 10 to 20 percent. Global corporations are encouraged by import liberalization, the prospects for lower tariffs within subregional trading groups, and the potential for establishing more efficient regional production. Many observers envision a free trade agreement throughout the region.

17. Central American Integration System (SICA)
El Salvador, Honduras, Guatemala, Nicaragua, Costa Rica, Panama
Moving toward a common market
CET of 0–15%
Retains tariffs on goods also produced in importing country
Originally established in the early 1960s, the five original countries decided to reestablish the Central American Common Market. The name was changed to SICA with the entrance of Panama in The region’s attempts to achieve integration have been described as uncoordinated, inefficient, and costly.

18. Andean Community Bolivia, Colombia, Ecuador, Peru, Venezuela
Customs union
Abolished foreign exchange, financial and fiscal incentives, and export subsidies
Established common external tariffs
The group was established in Members agreed to lower tariffs on intra-country trade and work together to decide what products each country should produce. Foreign goods and companies were kept out as much as possible, but all of these actions resulted in a lack of competition and kept prices high. The countries reconsidered the initiative in In 1992 the free trade area transitioned to a customs union.

19. Common Market of the South (Mercosur)
Argentina, Brazil, Paraguay, Uruguay, Venezuela
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
Chile, Colombia, Ecuador, Peru, Bolivia
Associate members
Participate in free trade area but not customs union
Established in 1956 with the signing of the Asunción Treaty, it will operate as a customs union rather than a true common market until there is free movement of goods, services, and factors of production.

20. Caribbean Community and Common Market (CARICOM)
Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent, the Grenadines, Trinidad and Tobago
Replaced Caribbean Free Trade Association
Total population: 15 million. Formed in 1972 but ineffective for first 20 years.

21. CARICOM

22. Asia-Pacific: The Association of Southeast Asian Nations (ASEAN)
Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam
Trading partners United States, EU, China
Geographically close; historically divided
“ASEAN plus six” (Japan, China, Korea, Australia, New Zealand, India) working toward an economic community

23. Singapore World’s second largest container port
Second highest standard of living in the region behind Japan
4.2 million people
93% literacy rate
More than 3,000 companies
Crime is nearly nonexistent
Singapore went from a British colony to a 240-square-mile industrial power in less than 30 years. It accounts for more than one-third of U.S. trading with ASEAN. 2003: $16.5 billion in U.S. exports; $15.1 in U.S. imports. 32 percent of imports are redirected to neighbors.

24. The European Union (EU)
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)

25. European Union 27 countries 460 million people Combined GNI of
$11.7 trillion
The euro is not used by all countries yet; the euro zone includes 13 mostly Western European nations

26. The European Free Trade Area and European Economic Area
Norway, Iceland, Liechtenstein, Switzerland
Free trade area
Members (excluding Switzerland) chose to establish European economic area (EEA)
Non-EU members of the EEA are expected to adopt EU guidelines
Norway, Iceland, Liechtenstein, and Switzerland maintain free trade agreements with other countries as well

27. Lomé Convention and the Contonou Agreement
Lomé Convention (1975) was replaced by the Contonou Agreement in 2000
An accord between EU and 71 countries in Africa, Caribbean, and the Pacific
Promotes trade and provides poor countries with financial assistance from a European development fund
Cuba is interested in joining the Contonou Agreement and CARICOM.

28. Central European Free Trade Association (CEFTA)
Hungary, Poland, the Czech Republic, Slovakia, Slovenia
Created after the political and economic reforms of the early 1990s
Achieved the common goal of becoming EU members
Global companies view Central and Eastern Europe as important sources of new growth. Early entrants may achieve first mover advantage. Although exporting has been favored, direct investment is rising. Consumers and businesses in the regions are embracing well-known global brands. Consumer goods tend to target the high-end segment. Industrial marketers focus on the largest firms.

29. The Middle East Three key regional organizations
Afghanistan, Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates, Yemen
Primarily Arab, some Persian and Jews
95% Muslim, 5% Christian and Jewish
Three key regional organizations
Gulf Cooperation Council
Arab Maghreb Union
Arab Cooperation Council
Countries fall into all categories of economic freedom as discussed in chapter 2.
The price of oil drives business. Bahrain, Iraq, Iran, Kuwait, Oman, Qatar, and Saudi Arabia hold significant world oil reserves. Saudi Arabia, with 22 million people and 25 percent of the world’s oil, is the most important market in the region.
Connection is a key word in conducting business in the Middle East. Forming relationships and establishing trust respect are key. Arab businesspeople do business in person, not over the phone or through correspondence. Women are not usually part of a business or social scene for traditional Arabs.

30. Africa 54 nations over three distinct areas Regional agreements
Republic of South Africa
North Africa
Black Africa or sub-Saharan Africa
Regional agreements
Economic Community of West African States
East African Cooperation
South African Development Community
11.7 million square miles, or three and one-half times the size of the United States
1.3 percent of world’s wealth
11.5 percent of world’s population
Average per capita income of less than $600
Arabs of northern Africa are politically and economically differentiated from the rest of the continent. Libya, Algeria, and Egypt benefit from oil resources.

31. Looking Ahead to Chapter 4
Social and cultural environments