MGCR 382 Chapter Notes - Chapter 10: Maastricht Treaty, Transact, Euro Convergence Criteria

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MGCR382 Chapter 10 Notes: International Cooperation Among Nations
When a country adopts restrictions on international commerce, it can benefit at least some of its producers and workers.
But other countries may retaliate with similar restrictions. As restrictions proliferate, international trading opportunities
decline, and all countries end up losing.
The General Agreements on Tariffs and Trade and the World Trade Organization
To ensure that the post-World War II international peace would not be threatened by such trade wars, representatives of
the leading trading nations met in 1947 to create the International Trade Organization (ITO) mission was to promote
international trade; never came into being replaced by GATT
General Agreement on Tariffs and Trade the signatories to the GATT fought to reduce barriers to international trade.
The GATT provided a forum for trade ministers to discuss policies and problems of common concern replaced by the
World Trade Organization in 1995
The Role of Gatt
Promote a free and competitive international trading environment benefiting efficient producers, an objective
supported by many MNCs
Accomplished this by sponsoring multilateral negotiations to reduce tariffs, quotas, and other nontariff barriers
First focused on reducing the general level of tariff protection sponsored eight rounds of negotiations;
cumulative effect was a substantial reduction in tariffs (fell from an average of 40% to 3%)
To help international businesses compete in world markets regardless of their nationality, the GATT sough to
ensure that international trade was conducted on a nondiscriminatory basis
Most Favoured Nation (MFN) Principle requires that any preferential treatment granted to one country must be
extended to all countries. Under GATT rules, all members were required to utilize the MFN principle in dealing
with other members
Exceptions:
o To assist poorer countries in their economic development efforts, the GATT permitted members to lower
tariffs to developing countries without lowering them for more developed countries. Such reduced rates
offered to developing countries are known as the generalized system of preferences (GSP). Each country
is free to choose those developing countries to which it will apply GSP treatment. By reducing these
tariffs, the GSP increases the pressure on domestic firms that are vulnerable to import competition from
the developing countries. In contrast, MNCs can reduce their input and production costs by locating
facilities in countries benefiting from the GSP
o Comprehensive trade agreements that promote economic integration (EU, NAFTA)
Uruguay Round final round of negotiations (1986). Cut tariffs on imported goods. As average tariff rates
decline, however, most countries recognized that nontariff barriers had become a more important impediment to
the growth of world trade. Made substantial progress in abolishing quotas by encouraging countries to convert
existing quotas to tariff rate quotas; agreed to create the WTO
World Trade Organization 153 member and 30 observer countries
Goals:
Promote trade flows by encouraging nations to adopt nondiscriminatory, predictable trade policies
Reduce remaining trade barriers through multilateral negotiations. During the first several years of its existence
the WTO emphasized negotiations focused on specific sectors of the world economy. In 2001, the WTO initiated
the Doha round of negotiations deadlocked on various issues. While reducing tariffs on manufactured goods
exported to developing countries and freeing trade in services proved to be stumbling blocks, the most contentious
issue was freeing trade in agricultural goods. Trade in many agricultural products has been distorted by export
subsidies, import restrictions, and other trade barriers. The Cairns Group, a group of major agricultural exporters
led by Argentina, Australia, Brazil, Canada, and Thailand has pressured other WTO members to ensure Doha
significantly reduces barriers to agricultural trade
Establish impartial procedures for resolving trade disputes among members
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Responsible for trade in goods, trade in services, international intellectual property protection, and trade-related
investment. Enforcement powers are much stronger than those possessed by the GATT.
Trading System Principles
Without discrimination members should not discriminate between their trading partners nor discrimination
between their own and foreign products, services, or nationals
Freer members lower trade barriers through negotiations
Predictable members agree not to arbitrarily raise trade barriers against foreign companies, investors, and
governments
More competition the WTO discourages “unfair” practices
Beneficial for less-developed countries WTO gives less-developed nations more time to adjust, greater
flexibility, and special privileges
General Agreement on Trade in Services (GATS)
Uruguay developed a set of principles under which such trade should be conducted. One nondiscriminatory
approach is the use of national treatment, whereby a country treats foreign firms the same way it treats domestic
firms
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
Uruguay agreement substantially strengthened the protection granted to owners of intellectual property rights and
developed enforcement and dispute settlement procedures to punish violators. Unfortunately, many owners of
intellectual property believe that intellectual property theft has become more blatant and widespread
Trade-Related Investment Measures Agreement (TRIMS)
1/3 of annual trade in goods and services is between subsidiaries of a parent organization. The developing believe
that FDI can be an important mechanism for promoting economic growth, technology transfer, and
industrialization and thus were unwilling to yield much control over it. TRIMS is a start toward eliminating
national regulations on FDI that may distort or restrict trade
o Trade-balancing rules: countries many not require foreign investors to limit their imports of inputs to an
amount equal to their exports of local productions
o Foreign-exchange access: countries may not restrict foreign investors’ access to foreign exchange
o Domestic sales requirements: countries may not require the investor to sell a percentage of a factory’s
output in the local markets
May be violated
Enforcement of WTO Decisions
A country failing to live up to the agreement may have a complaint filed against it. If a WTO panel finds the
country in violation of the rules, the panel will likely ask the country to eliminate the trade barrier. If the country
refuses, the WTO will allow the complaining country to impose trade barriers on the offending country equal to
the damage caused by the trade barrier. Furthermore, the offending country is not allowed to counterreliate by
imposing new trade barriers against the complainant.
Environmentalists and human rights activists believe that the WTO needs to incorporate more sensitivity to
environmental and human needs in its decision-making. Labour unions and workers’ groups fear that the WTO’s
decisions weaken their bargaining power and threaten their members’ job security
Regional Economic Integration
Forms of Economic Integration important is the extent of economic integration among a bloc’s members, for it affects
exporting and investment opportunities available to firms from member and nonmember countries
Free trade area encourages trade among its members by eliminating trade barriers among them (NAFTA).
Although a free trade area reduces trade barriers among its members, each member is free to establish its own
trade policies against nonmembers. As a result, members of free trade areas are often vulnerable to the problem of
trade deflection, in which nonmembers reroute their exports to the member nation with the lowest external trade
barriers. To prevent trade deflection from destroying their members’ trade policies toward nonmembers, most free
trade agreements specify rules of origin, which detail the conditions under which a good is classified as a member
good or a nonmember good
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