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Chapter 10

MGCR382 Chapter 10 Notes - International Cooperation Among Nations.docx

7 Pages

Management Core
Course Code
MGCR 382
Nicholas Matziorinis

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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 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  Customs union – combines the elimination of internal trade barriers among its members with the adoption of common external trade policies toward nonmembers. Because of the uniform treatment of products from nonmembers, a customs union avoids the trade deflection problem. A firm from a nonmember country pays the same tariff rate on exports to any members of the customs union o Most important was the Zollverein  unification was hastened, which tightened the economic bonds among the Germanic principalities and facilitated their political union  Common market – members of a common market eliminate internal trade barriers among themselves and adopt a common external trade policy towards nonmembers. It eliminates barriers that inhibit the movement of factors of production among its members. Workers may move from their homeland and practice their profession or trade in any of the other member nations. Firms may locate production facilities, invest in other businesses, and utilizer their technologies anywhere within the common market. Productivity is expected to rise because factors of production are free to locate where the returns to them are the highest (European Economic Area)  Economic union – represents full integration of the economies of two or more countries. In addition to eliminating internal trade barriers, adopting common external trade policies, and abolishing restrictions on the mobility of factors of production among members, an economic union requires its members to coordinate their economic policies (monetary policy, fiscal policy, taxation and social welfare) in order to blend their economies into a single entity  Political union – complete political as well as economic integration of two or more countries, thereby effectively making them one country The Impact of Economic Integration on Firms  Lowering tariffs within the regional trading bloc opens the markets of member countries to all member country firms. Firms can lower their average production and distribution costs by capturing economies of scale as they expand their customer base within the trading bloc. The lower cost structure will also help the firms compete internationally outside the trading bloc. However, elimination of trade barriers also exposes a firm’s home market to competition from firms located in other member countries, thus threatening less efficient firms  A regional trading bloc may also attract FDI from nonmember countries, as firms outside the bloc seek the benefits of insider status by establishing manufacturing facilities within the bloc. Most non-European MNCs have invested heavily in the EU to take advantage of Europe’s increased economic integration  Typically, each form of economic integration confers benefits on the national economy as a whole but often hurts specific sectors and communities within that economy. As a result, negotiating any form of economic integration is not easy. Special-interest groups that feel they will be harmed by an agreement will lobby against it. As a result of such internal political pressures, few economic integration treaties are “pure”; most contain some exemptions to quiet politically powerful domestic special-interest groups The European Union  Most important regional trading bloc; 27 member countries, combined population of 499 million, one of the world’s richest markets, total GDP IS 28% of world economy  Creation was motivated by the desires of war-weary Europeans to promote peace and prosperity through economic and political cooperation  Benelux nations (Belgium, Netherlands, and Luxembourg) and France, West Germany, and Italy signed the Treaty of Rome in 1957  established the European Economic Community and called for the development of a common market among the six member states Governing the European Union – members are sovereign nations that have agreed to cede certain of their powers to the EU. EU can be characterized both as an intergovernmental government (because it is a government of national governments) and as a supranational government (because it exercises power above the national level)  European Council – consists of the heads of government or of state of each of the member states, the President of the European Council, and the President of the European Commission. The EU’s High Representative of the Union for Foreign Affairs and Security Policy also participates. Normally convening twice a year, the European Council shapes the EU’s political priorities and policy agendas. Decisions are usually base
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