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

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

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

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 http://www.wto.org. 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.

WTO Structure http://www.wto.org.

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.

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 1997. 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

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.

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.

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.

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

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 1989. 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.

NAFTA Income and Population 2004 GNI 2004 Pop. 2004 GNI (in millions) (in thousands) Per Capita United States $12,168,482 293,655 41,440 Canada 905,042 31,974 28,310 Mexico 704,906 103,795 6,790__ Total/Mean GNP $13,778,430 429,424 $32,086 per capita

U.S. Goods Exports in 2005

U.S. Goods Imports in 2005

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.

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 1997. The region’s attempts to achieve integration have been described as uncoordinated, inefficient, and costly.

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 1969. 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 1988. In 1992 the free trade area transitioned to a customs union.

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.

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.

CARICOM

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

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.

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)

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

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

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.

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.

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.

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.

Looking Ahead to Chapter 4 Social and cultural environments