Chapter Eight Cross-National Cooperation and Agreements: Objectives
Chapter Eight Cross-National Cooperation and Agreements: Objectives
Chapter Eight Cross-National Cooperation and Agreements: Objectives
CROSS-NATIONAL COOPERATION
AND AGREEMENTS
OBJECTIVES
To identify the major characteristics and challenges of the World Trade Organization
To discuss the pros and cons of global, bilateral, and regional integration
To describe the static and dynamic impact of trade agreements on trade and
investment flows
To define different forms of regional economic integration
To compare and contrast different regional trading groups
To describe other forms of global cooperation, such as the United Nations and
(OPEC)
CHAPTER OVERVIEW
Regional economic integration represents a relatively new phenomenon in the history of
world trade and investment. Chapter Eight first examines the roles of the General
Agreement on Tariffs and Trade and the World Trade Organization in determining the
ground rules of the world trade environment. It then introduces the basic types of
economic integration and explores the potential effects of the process. Next it examines
in detail both the European Union (its structure and its operations) and the North
American Free Trade Agreement and briefly describes a variety of other regional
economic groups. The chapter concludes with a discussion of various commodity
agreements and producer alliances, including the Organization for Petroleum Exporting
Countries.
CHAPTER OUTLINE
OPENING CASE: TOYOTAS EUROPEAN DRIVE
Known for its low-cost, efficient production operations, Toyota surpassed GM as the
largest car manufacturer in the world in 2008. Toyota was also the most profitable;
however, 2009 brought a loss and corresponding layoffs. Toyota has 53 production
facilities located in 27 countries, including 8 in Western and Eastern Europe. Prior to
2002, Toyota had not posted a profit in Europe for more than three decades. However,
during that time there was an agreement in effect between the Japanese government and
the then European Community to severely limit the number of Japanese vehicles that
could be exported to Europe. When the quota system and other restrictions were lifted in
1999, Toyota responded by establishing a European Design and Development center in
southern France and capturing distinct cost advantages by setting up additional
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production centers in East Europe. Toyotas European market share and profitability
began to grow steadily, as Europeans became less loyal to their own regional brands in
their search for more economical, higher quality cars. In fact, in 2005 Toyotas
environmentally friendly hybrid vehicle, the Prius, was voted European Car of the Year.
A useful Web site for the opening case is www.toyota.eu/ where students can
explore the European operations of the company in greater detail. Carefully
review the PowerPoint slides for Chapter Eight.
I.
INTRODUCTION
Trading groups are a significant influence on the strategies of MNEs because they
define the size of regional markets and the rules by which companies must operate.
Economic integration is the political and economic agreements among countries
that give preference to member countries in the agreement. Approaches to economic
integration include global integration via the World Trade Organization, bilateral
integration via cooperation between two countries, and regional integration via
cooperation between countries in the same geographic proximity.
1. Most Favored Nation. The WTO continued the MFN clause of GATT
which suggests that member countries trade without discrimination giving
foreign products national treatment. With the following exceptions, it
restricts this privilege to official members:
Developing countries manufactured products have been given
preferential treatment over those from industrial countries.
Concessions granted to members within a regional trading alliance, such
as the EU, have not been extended to countries outside the alliance.
Countries can raise barriers against other member countries if they feel
they are trading unfairly. Exceptions can be made in times of war or
international tension.
2. Dispute Settlement. Under the WTO there is now a clearly defined
mechanism for the settlement of disputes. Countries may bring charges of
unfair trade practices to a WTO panel; accused countries may appeal; WTO
rulings are binding. If an offending country fails to comply with a
judgment, the rights to compensation and countervailing sanctions will
follow. The Doha Round began in Doha, Qatar in 2001 to address disputes
between developed and developing nations. Issues surrounding agricultural
subsidies were particularly difficult. As of 2009, the Doha agenda is on
hold until the economic crisis is resolved. There is still hope that the Doha
agenda is not dead and can be used to reduce trade barriers and increase
world trade.
III. THE RISE OF BILATERAL AGREEMENTS
Currently, bilateral agreements, also known as preferential trade agreements
(PTAs) (and also referred to by some as free trade agreements (FTAs)) are
sometimes negotiated by partner nations as a way to circumvent the multilateral
trading system and meet their mutual trading objectives.
IV. REGIONAL ECONOMIC INTEGRATION
Regional trade agreements or RTAs involve multiple countries engaged in the
process of economic integration. Neighboring countries tend to ally with one
another because of their proximity, their somewhat similar tastes, the relative ease of
establishing channels of distribution, and a willingness to cooperate with one another
for the greater benefit of the allied parties. The two basic types of regional economic
integration that address barriers to trade are:
Free Trade Agreements, in which all barriers to trade, i.e., tariff and nontariff
barriers, are abolished among member nations, but each member determines its
own external trade barriers with non-FTA countries.
Customs Unions, in which all barriers to trade, i.e., tariff and nontariff barriers,
are abolished among member nations, and common external barriers are levied
against non-member countries.
1. Common Market (or Economic Integration Agreement). When
moving beyond the reduction of tariff and nontariff barriers, a common
market may be created, allowing for the free flow of capital and labor. It
may go even further by harmonizing commercial, monetary, and fiscal
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3.
4.
5.
6.
entered into an agreement with the European Free Trade Association (with the
exception of Switzerland) to form the European Economic Area (EEA).
7. How to do Business with the EU: Implications for Corporate
Strategy. There are at least three ways in which the competitive strategies of
foreign firms that choose to do business within the EU are affected. First,
they must determine their production site location(s) on the basis of total costs
that include labor, transportation, and other strategic factors. Second, foreign
firms must decide upon an entry strategy, i.e., new investments, expanding
existing investments, or joint ventures and mergers. Third, firms must be
sensitive to essential national differences, particularly in areas such as
economic growth rates and cultural traditions. In addition, the trade-offs
between the advantages of pan-European strategies and more localized
strategies must be continually examined.
B. North American Free Trade Agreement (NAFTA)
Effective as of January 1, 1994, the North American Free Trade Agreement
(NAFTA) incorporates Canada, Mexico, and the United States into a regional
trade bloc of countries of quite different sizes and sources of national wealth.
1. Why NAFTA? More than a mere free trade agreement and claiming a total
GNI greater than that of the 27-member EU, NAFTA calls for the
elimination of tariff and nontariff barriers, the harmonization of trade rules,
the liberalization of restrictions on services and foreign investment, the
enforcement of intellectual property rights, and a dispute settlement process.
NAFTA makes logical sense in terms of geographical location and trading
importance. Two-way trade between the United States and Canada is the
largest in the world. NAFTA extends its cooperation beyond tariff
reductions to include provisions for services, investments, and intellectual
property. NAFTA has provided both static and dynamic effects. Canada and
the U.S. benefit from the lower-cost agricultural products from Mexico and
U.S. producers benefit from the growing Mexican market. NAFTA is a
good example of trade diversion in which Canadian and U.S. companies
have shifted some production facilities to Mexico from Asia due to the
benefits of the trade agreement.
2. Rules of Origin and Regional Content. NAFTAs rules of origin
require that at least 50 percent of the net cost of most products originate
within the region if those products are to be eligible for the more liberal
tariff conditions within the bloc.
3. Special Provisions. NAFTA is a unique sort of trade agreement in that it
also addresses two side issues: (i) regional labor laws and standards and (ii)
strengthened environmental standards.
4. The Impact of NAFTA. Due to low wages in Mexico, U.S. companies
invested significantly in the country. FDI from the U.S. accounts for about
62% of all foreign direct investment in Mexico. While trade and investment
amongst the NAFTA members has increased significantly, the employment
picture is less clear. Although some investment funds have been flowing
out of Mexico since the maquiladora plants were stripped of their duty-free
status in 2001, other investment funds have been flowing into Mexico from
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shifted its focus from one of isolation to being open to foreign trade and
investment.
4. Latin America Integration Association (LAIA). Members from
MERCOSUR, CAN, Chile, Cuba, and Mexico are part of LAIA. The hope
was to go beyond an FTA to become a common market. This association
was previously known as South American Community of Nations (CSN).
POINTCOUNTERPOINT: Is CAFTA-DR a Good Idea?
POINT: The Central American Free Trade Agreement (CAFTA) will link the United
States with five countries in Central America plus the Dominican Republic in the
Caribbean via a free trade agreement. It will open the door for increased trade between
the United States and the region, and it will stimulate economic growth in Central
America by encouraging foreign direct investment, offering shorter international supply
chains, and encouraging political reform in an area historically plagued by dictatorships
and civil wars. Further, the growth that CAFTA will foster in Central American
industries will directly benefit those U.S. exporters whose products are used in their
production processes.
COUNTERPOINT: CAFTA is not a good idea because of the vastly different interests
among countries. Opening the market wont help U.S. agriculture, which actually needs
an increase in world market prices; Central American economies are too small to affect
prices. Further, given its balance of payments deficit, the United States cant tolerate
many more imports. CAFTA is also a bad move for labor and workers rights because it
will trigger the loss of manufacturing jobs in the United States and the loss of agricultural
jobs in Central America. Finally, stringent intellectual property clauses included in the
agreement threaten access to affordable life-saving medicine in the Central American
nations.
east and the west. Progress toward free trade is hampered by the number of
members, the geographic distances between nations, and the lack of a
binding treaty. Nonetheless, because APEC includes 43% of the worlds
tradee, it has enormous potential to become a significant economic bloc.
APEC is trying to establish open regionalism whereby individual member
countries can determine whether to apply trade liberalization to non-APEC
countries on an unconditional, most-favored-nation basis or a reciprocal,
free trade agreement basis.
3. Pan-Arab Free Trade Area. This group is comprised of several North
African and Middle-East nations, with a goal of reducing trade barriers. The
Gulf Cooperation Council is a smaller trading block that has a lower
population, but large oil reserves.
E. Regional Economic Integration in Africa
There are several regional trade groups in Africa that are registered with the
WTO, including the Southern Africa Development Community (SADC), the
Common Market for Eastern and Southern Africa (COMESA), the Economic
and Monetary Community of Central Africa, and the West African Economic
and Monetary Union (WAEMU). [See Map 8.5] The problem with these groups
is that they rely more on their former colonial powers and other developed
markets for trade than they do on each other.
1. The African Union. Created in 2002 by 53 African nations, the African
Union took the place of the Organization of African Unity (OAU), which
focused its energy and resources on political issues in Africa (notably
colonialism and racism). The new AU is modeled loosely on the EU,
although this type of integration may prove difficult in Africa.
F. Other Forms of International Cooperation
1. The United Nations.
The UN was established in 1945 to promote international peace and security
and to help with global issues such as economic development, antiterrorism,
and humanitarian relief. There are 192 member states in the UN General
Assembly. The UN Conference on Trade and Development (UNCTAD) was
established to tackle problems of the developing world concerning trade
issues.
2. Non-Government Organizations (NGOs)
Non-government, non-profit volunteer organizations such as the Red Cross
are private institutions that can be involved in transnational activities. Several
NGOs have a focus on the rights of workers in less developed countries.
3. Global Compact. The UN Global Compact is a strategic policy initiative
for businesses chaired by high profile members of the business community.
The focus is on areas of human rights, labor, environment, and anticorruption. Currently the Compact identifies 10 key principles that should
govern the behavior of companies.
VI. COMMODITY AGREEMENTS
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challenges faced by the WTO not only come in the form of the growing strength of
regional trading blocks, but also the strong divisions between developed and developing
countries. Countries like Brazil and India fear further reduction of tariffs will cause their
markets to be swamped by Chinese goods.
CLOSING CASE: Wal-Mart Goes South
Because of its sheer size and volume purchases, as well as its unique distribution system,
Wal-Mart has been able to reduce its prices so successfully that in 2001, it became the
largest company in the world. Mexicos first Sams Club, a subsidiary of Wal-Mart,
opened in 1991 in Mexico City. Mexicos retail sector has greatly benefited from the
increasing trade liberalization under NAFTA, as well as the improvements to its
transportation infrastructure encouraged by NAFTA. In addition, NAFTA improved
opportunities for foreign investment in Mexico. One of the countrys largest retail
chains, Comercial Mexicana S.A. (Comerci), has found it increasingly difficult to remain
competitive since Wal-Marts aggressive entry into its market. Wal-Marts strong
operating presence and low prices since the lifting of tariffs under NAFTA have put such
strong competitive pressures on Comerci that it must now decide whether its participation
with the recently formed purchasing consortium, Sinergia, will be sufficient for its
survival.
Questions
1.
2.
How much of Wal-Marts success is due to NAFTA, and how much is due to WalMarts inherent competitive strategy? In other words, could any other U.S. retailer
have the same success in Mexico post-NAFTA, or is Wal-Mart a special case?
The same benefits that have accrued to Wal-Mart following the implementation of
the NAFTA are also available to other competitors. However, Wal-Mart uses its
sheer size and volume of purchases to negotiate prices to rock-bottom levels that are
not available to smaller competitors. It also works closely with suppliers on
inventory levels, using an advanced information system that informs suppliers when
additional merchandise will be needed, thus allowing them to plan production runs
more accurately and pass along the captured cost reductions. Then, rather than
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pocketing the accrued cost savings, Wal-Mart reduces its prices. Retailers who wish
to compete with Wal-Mart will either have to meet Wal-Marts prices or position
themselves in a different segment of the market. (LO: 3, Learning Outcome: To
describe the static and dynamic impact of trade agreements on trade and investment
flows, AACSB: Analytical Skills)
3.
What has Comerci done in its attempt to remain competitive? What are the
advantages and challenges of such a strategy, and how effective do you think it will
be?
Comerci has attempted to lower its prices, but for many items, it simply lacks the
negotiating power with its suppliers to get prices as low as Wal-Marts. Faced with
extinction, Comerci has banded together with two other Mexican supermarket
chains, Soriana and Gigante, to form a purchasing consortium (Sinergia) that allows
them to jointly negotiate better bulk prices from suppliers. To prevent pricefixing
and monopolistic behavior, Mexicos Federal Competition Commission (CoFeCo)
requires that Sinergia issue regular reports regarding the nature of its purchasing
agreements and that it sign confidentiality agreements with the participating retailing
chains. As a representative body with no assets, Sinergias purchases are currently
limited to local suppliers; its future is uncertain. Whether students feel that such a
strategy will be effective or not will depend on the perspective they take. If they
focus primarily on costs, they may be of the opinion that the strategy will be
sufficient. If, however, they are also concerned about issues such as product and
store differentiation and the regulatory role of government, then they may be of the
opinion that it is insufficient. (LO: 3, Learning Outcome: To describe the static and
dynamic impact of trade agreements on trade and investment flows, AACSB:
Analytical Skills)
4.
What else do you think Comercial Mexicana S.A. should do, given the competitive
position of Wal-Mart?
Comercial Mexicana is considering three basic options as it tries to survive in the
new competitive environment driven by the presence of Wal-Mart in Mexico:
remaining independent, merging with a local retail chain, or merging with a foreign
retail chain. First, the firm needs to carefully examine the market and determine (a)
ways in which it can differentiate itself from Wal-Mart (such as Targets slightly
upscale market approach) and (b) whether it possesses or at least has access to
sufficient assets to survive in the current environment. As part of that decisionmaking process, Comercial Mexicana also needs to consider both the available
sourcing and market opportunities it enjoys, given its location within the NAFTA
region. Finally, it should assess (a) what it can offer and (b) what it would desire
from a local or foreign partner. With that information in hand, Comercial Mexicana
will be in a better position to make effective operating decisions. (LO: 3, Learning
Outcome: To describe the static and dynamic impact of trade agreements on trade
and investment flows, AACSB: Reflective Thinking)