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

In Chapter 2 Market definition – People or organizations with needs and wants; both have the willingness and ability to buy or sell The global economic environment plays a large role in the development of new markets for organizations

Economic Systems 4 main types of economic systems Market Capitalism Centrally planned socialism Centrally planned capitalism Market socialism

Economic Systems Resource Allocation Market Command Centrally Private Planned Capitalism Private Resource Ownership State Market Capitalism This classification is based on the dominant method of resource allocation (market versus command) and the dominant form of resource ownership (private versus state). Centrally Planned Socialism Market Socialism

Big Emerging Markets China India Indonesia South Korea Brazil Mexico Argentina South Africa Poland Turkey These countries are known as Big Emerging Markets (BEMs) because of the incredible growth potential within each market. Each one has experienced rapid economic growth during the past decade. These BEMs cut across the four stages of economic development; per capita income ranges from $10,879 in South Korea to $489 in India. China is the largest, with a population of 1.3 billion people; Argentina is the smallest, with a population of 38 million people. Despite these contrasts, experts predict that the BEMs will be key players in global trade even as their track records on human rights, environmental protection, and other issues come under closer scrutiny by their trading partners. The BEM government leaders will also come under pressure at home as their developing market economies create greater income disparity. ██ Emerging markets██ Developed markets

Rapidly Developing Economies The term "rapidly developing economies" is now being used to denote emerging markets such as The United Arab Emirates, Chile and Malaysia that are undergoing rapid growth.

Stages of Market Development World Bank has defined four categories of development High-income countries Upper-middle income countries Lower-middle income countries Low-income countries Based upon Gross National Product (GNP) Although the income definition for each of the stages is arbitrary, countries within a given category generally have a number of characteristics in common. Thus, the stages provide a useful basis for global market segmentation and target marketing.

Influencing the World Economy Group of Seven (G-7) Organization for Economic Cooperation and Development The Triad

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

The World Trade Organization Mission: The WTO states that its aims are to increase international trade by promoting lower trade barriers and providing a platform for the negotiation of trade and to their business Provides forum for trade-related negotiations among 150 members based in Geneva serves as dispute mediators empowered with ability to enforce rulings Countries found in violation of WTO rules are expected to change policies or else face sanctions

Members

Recent WTO Cases ACP: Africa, Caribbean and Pacific

Preferential Trade Agreements Many countries seek to lower barriers to trade within their regions Free Trade Areas Customs Unions Common Market Economic Unions A preferential trade agreement is a mechanism that confers special treatment on select trading partners. By favoring certain countries, such agreements frequently discriminate against others. For that reason, it is customary for countries to notify the WTO when they enter into preference agreements. Over the past 10 years, more than 150 preferential trade agreements have been notified to the WTO.

North America 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 agreement was approved by both houses of the U.S. Congress and became effective on January 1, 1994. The result is a free trade area with a combined population of roughly 425 million and a total GNP of $11.9 trillion

Economic Integration in the Americas The North American Free Trade Agreement (NAFTA) created the world’s largest free market. 390 million U.S., Canadian, and Mexican consumers

NAFTA Income and Population

Major Trade Partners of NAFTA Trade = Imports + Exports

The Maquiladoras Maquiladoras (Mexican factories which take in imported raw materials and produce goods for export) have become the landmark of trade in Mexico A maquiladora or maquila Maquiladoras used to be concentrated in Mexican towns along the United States–Mexico border, but they are now found in more areas all over Latin America. The main use of these assembly plants is to assemble imported parts. Maquiladora factories encompass a variety of industries including electronics, transportation, textile, and machinery, among others. Maquiladoras can be 100% foreign-owned (usually by U.S. companies) in most countries. Using maquiladoras is an example of offshoring. Other countries such as Japan, Germany, and Korea have maquiladoras as well, but the majority of maquiladoras are located in Mexico and are associated with United States' companies.

Latin America Caribbean, Central, and South America 4 preferential trade agreements in place Central American Integration System Andean Community Common Market of the South Caribbean Community and Common Market 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 underway. 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. Policy makers 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.

Andean Community Bolivia, Colombia, Ecuador, Peru, Customs union Agreement abolished foreign exchange, financial and fiscal incentives, and export subsidies Common external tariffs were established From January 1, 2005free flow of people From January 1, 2005, the citizens of the five member countries can enter the other Andean Community member states without the requirement of visa. The passengers should present the authorities their national ID cards.

Members of Andean Community In April 2006 President Hugo Chávez announced that Venezuela would withdraw from the Andean Community, claiming the FTA agreements signed by Colombia and Peru with the USA caused irreparable damage to the community.

Common Market of the South (Mercosur) Argentina, Brazil, Uruguay, and Paraguay sign a three-step treaty 1991-94 creation of a FTA 1995 CU eventually common market (modeled after the EU)

MERCOSUR Argentina, Brazil, Paraguay, Uruguay 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 and Bolivia - associate members participation in free trade area but not customs union

Caribbean Community and Common Market (CARICOM) Replaced Caribbean Free Trade Association Agreed to establish economic union with common currency in 1998 Currently CARICOM has 15 full members:  Antigua and Barbuda (4 July 1974)  The Bahamas (4 July 1974)  Barbados (1 August 1973)  Belize (1 May 1974)  Dominica (1 May 1974)  Grenada (1 May 1974)  Guyana (1 August 1973)  Haiti (provisional membership on 4 July 1998, full membership on 2 July 2002)  Jamaica (1 August 1973)  Montserrat (a territory of the United Kingdom) (1 May 1974)  Saint Kitts and Nevis (26 July 1974 as Saint Christopher-Nevis-Anguilla)  Saint Lucia (1 May 1974)  Saint Vincent and the Grenadines (1 May 1974)  Suriname (4 July 1995)  Trinidad and Tobago (1 August 1973) There are five associate members:  British Virgin Islands (July 1991)  Turks and Caicos Islands (July 1991)  Anguilla (July 1999)  Cayman Islands (16 May 2002)  Bermuda (2 July 2003) There are seven observers:  Aruba  Colombia  Dominican Republic  Mexico  Netherlands Antilles  Puerto Rico  Venezuela Caricom members and observers ██ full members ██ associate members ██ observers

NICs: Newly Industrialized Countries Africa: South Africa,  Egypt North America: Mexico (OECD member, 1994) South America: Argentina, Brazil Asia: China, The GCC states, India; Republic of, Malaysia, Philippines and Thailand Europe: Turkey (EU official candidate)

Asia-Pacific Includes 23 countries and 56% of world population Japan Newly industrializing economies Association of Southeast Asian Nations

Japan Generates 14% of world’s GNP Key factors population density geographic isolation Recent economic struggles despite status as high income country Strong culture requires flexibility and commitment from global marketers

Newly Industrializing Economies (NIEs) Strong economic growth in recent decades foreign investment export-driven industrial development Sometimes called the 4 Tigers of Asia South Korea Taiwan 亞洲四小龍 Singapore Hong Kong

亞洲四小龍 (4 Little Dragons of Asia) The common characteristics of the East Asian Tigers are: Focused on exports to richer industrialized nations Trade surplus with aforementioned countries Sustained rate of double-digit growth for decades Non-democratic and relatively authoritarian political systems during the early years High level of U.S. treasury bond holdings High savings rate A high degree of what is referred to as economic freedom. Hong Kong, Singapore, Taiwan and South Korea are 1st, 2nd, 37th, and 45th respectively.

Association of Southeast Asian Nations (ASEAN) ASEAN Free Trade Area (AFTA) became fully operational on January 1, 2003 Tariffs of 20+% will be reduced to 0 - 5% (2006 for Vietnam, 2008 for Laos and Myanmar, and 2010 for Cambodia). Singapore represents great success among ASEAN nations

ASEAN (2006) ASEAN Regional Forum: ██ ASEAN countries ██ Other ASEAN Regional Forum participants

Europe European Union European Free Trade Area European Economic Area The Lome Convention Central European Free Trade Association (CEFTA)

European Union 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)

EU

EU Statistics Turkey

European Free Trade Area and the European Economic Area EFTA: 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 EEA Members: Iceland, Liechtenstein and Norway, without Switzerland – and the 27 EU Member States along with the European Community. Norway, Iceland, Liechtenstein, and Switzerland maintain free trade agreements with other countries as well Its original membership was United Kingdom, Denmark, Norway, Sweden, Austria, Switzerland and Portugal. Finland became an associate member in 1961 (it later became a full member in 1986), and Iceland joined in 1970. The United Kingdom and Denmark joined the European Community in 1973 (together with Ireland), and hence ceased to be EFTA members. Portugal also left EFTA for the European Community in 1986. Liechtenstein joined in 1991 (previously its interests in EFTA had been represented by Switzerland). Finally, Austria, Sweden and Finland joined the European Union in 1995 and hence ceased to be EFTA members.

The Lome Convention 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 Currently working to establish a successor agreement The Lomé Convention is a trade and aid agreement between the European Union (EU) and 71 African, Caribbean, and Pacific (ACP) countries, first signed in February 1975 in Lomé, Togo.

Central European Free Trade Association (CEFTA) Allows for cooperation in many areas including: infrastructure and telecommunications sub-regional projects inter-enterprise cooperation tourism and retail trade

The Middle East 3 key regional organizations Afghanistan, Cyprus, Bahrain, 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 3 key regional organizations Gulf Cooperation Council Arab Maghreb Union Arab Cooperation Council

مجلس التعاون الخليجي (Cooperation Council for the Arab States of the Gulf GDP: $536,223 Yemen is currently (as of 2006) in negotiations for GCC membership, and hopes to join by 2016

اتحاد المغرب العربي (Arab Maghreb Union ) Arab Maghreb Union is a Pan-Arab trade agreement aiming for economic and political unity in Northern Africa.

Arab Cooperation Council (ACC) founded in February 1989 by North Yemen, Iraq, Jordan, and Egypt the organization did not survive the crisis that followed Iraq's invasion of Kuwait on August 2, 1990

Africa 53 nations over three distinct areas Regional agreements Republic of South Africa North Africa Black Africa Regional agreements Economic Community of West African States East African Cooperation South African Development Community

Economic Community of West African States (ECOWAS) Free trade area with unified monetary zone ECOWAS Travel certificate has entered into circulation in Burkina Faso, Gambia, Ghana, Guinea, Niger, Nigeria and Sierra Leone. ECOWAS Passport is printed and operational in Benin, Mali and Senegal

ECOWAS

East African Community plans to introduce a monetary union with a common currency by 2009 plans for a common market and a political union with a common President (initially on a rotation basis) & a common parliament by 2010

South African Development Community (SADC) Mechanism to promote trade, cooperation, and economic integration by black-ruled states Ultimately seeks to form customs union

SADC

Looking Ahead to Chapter 4 Social and Cultural Environments

Free Trade Areas Two or more countries agree to abolish all internal barriers to trade amongst themselves It is the second stage of economic integration Countries continue independent trade policies with countries outside agreement

Free Trade Areas Turkey has bilateral agreements with the following countries and blocs: Bosnia and Herzegovina Croatia Egypt Israel Morocco Macedonia Palestinian Authority Tunisia The European Free Trade Association GCC (Gulf Cooperation Council) - proposed To date, dozens of free trade agreements, many of them bilateral. have been successfully negotiated; for example, Mexico has free trade agreements with 31 countries. The table above lists free trade areas that the United States and Chile have, respectively, established with other countries. Additional examples of FTAs include the European Economic Area, a free trade area that includes the 25-nation European Union plus Norway, Liechtenstein, and Iceland; and the Group of Three (G3), an FTA encompassing Colombia, Mexico, and Venezuela; and the Closer Economic Partnership Agreement, a free trade agreement between China and Hong Kong. Return

Customs Unions Evolution of Free Trade Area Includes the elimination of internal barriers to trade (as in FTA) AND Establishes common external barriers to trade A customs union is a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas. Common competition policy is also helpful to avoid competition deficiency. Purposes for establishing a customs union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries. It is the third stage of economic integration.

List of Customs Unions Southern African Customs Union East African Community Gulf Cooperation Council MERCOSUR Central American Customs Union EU - Turkey Customs Union (since 1996) EU - Andorra Customs Union EU - San Marino Customs Union Economic and Monetary Community of Central Africa (CEMAC) West African Economic and Monetary Union (UEMOA) Andean Community (CAN) Israel - Palestinian territories (since 1994) Switzerland - Liechtenstein (since 1924) Return

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 A single market is a customs union with common policies on product regulation, and freedom of movement of all the four factors of production (land, enterprise, capital and labor). Sometimes a single market is differentiated as a more advanced form of common market. In comparison to common a single market envisions more efforts geared towards removing the physical (borders), technical (standards) and fiscal (taxes) barriers among the member states. These barriers obstruct the freedom of movement of the four factors of production. To remove these barriers the member states need political will and they have to formulate common economic policies. This is the fourth stage of economic integration.

List of Common Markets the European Community (EC) European Economic Area (EEA) between the EC, Norway, Iceland and Liechtenstein the Caribbean Community single market (CARICOM) Benefits of a single market A single market has many benefits. For both business within the market and consumers, a single market is a very competitive environment. This means that inefficient companies will suffer a loss of market share and may have to close down. However, efficient firms can benefit from economies of scale, increased competitiveness and lower costs, as well as expect profitability to be a result. Consumers are benefited by the single market in the sense that the competitive environment brings them cheaper products, more efficient providers of products and also increased choice of products. What is more, businesses in competition will innovate to create new products; another benefit for consumers. Return

Economic Unions 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

Economic Unions Full evolution of economic union creation of unified central bank use of single currency common policies on issues ranging from agriculture to taxation requires extensive political unity Return