INTERNATIONAL BUSINESS ENVIRONMENT

INTERNATIONAL BUSINESS ENVIRONMENT Topic 5 Regional Trade Blocs and bilateral agreements INTRODUCTION Contemplating the failure of the Doha round of multilateral trade talks, which collapsed in Geneva in July 2008, Peter Mandelson, trade commissioner of the European Union (EU), predicted that by the time the talks resumed, the caravans will have moved on elsewhere. After the Geneva disappointment, some free traders find consolation in the success of bilateral and regional deals [ ]. Since the Doha round was launched almost seven years ago, over 100 such deals have come into force, lowering tariffs for some members of the World Trade Organisation (WTO) but not others. These preferential deals violate the principle of most-favoured nation (MFN), which holds that any favour offered to one member must be offered to all. http://www.economist.com/node/12060235 International Business Environment JG DITTER 2 1

DEFINITIONS AND EXAMPLES Section 1 REGIONAL TRADE BLOCS Participate in a special trade relationship established by a formal agreement that promotes and facilitates trade within that group of countries in preference to trade with outside nations by discriminating against non-members Have attained or have as a stated goal the deepening of trade liberalization or integration with the objective of establishing a free trade area, customs union, or common market Strive to reach common positions in negotiations with third countries, with other trade blocs, or in multilateral forums Attempt to coordinate national economic policies to minimize disruption to intra-bloc economic transactions http://www.stanford.edu/class/e297b/progress%20of%20the%20european%20union.htm International Business Environment JG DITTER 4 2

REGIONAL INTEGRATION STAGES 1. Free trade area (FTA): tariffs among member countries are removed, but members determine their own trade policies (tariffs) for nonmembers 2. Customs union (CU): an FTA + a common external tariff (CET) 3. Common market (CM): CU + free movement of production factors (labour and capital) 4. Economic Union: CM + single or coordinated economic and social policy(ies) 5. Full political union: single government International Business Environment JG DITTER 5 FOOD FOR THOUGHT Provided that regional trade blocs do not meet key WTO principles such as the "most favoured nation clause", why are they nonetheless accepted "GATT s Article XXIV allows regional trading arrangements to be set up as a special exception, provided certain strict criteria are met. [ ] if a free trade area or customs union is created, duties and other trade barriers should be reduced or removed on substantially all sectors of trade in the group. Non-members should not find trade with the group any more restrictive than before the group was set up. [ ]" http://www.wto.org/english/thewto_e/whatis_e/tif_e/bey1_e.htm International Business Environment JG DITTER 6 3

REGIONAL TRADE BLOCS vs. FREE TRADE Domino effect (Baldwin, 1993) Outsiders want to become insiders increasing the incentives to add members to the integration bloc. Enlarges the market causing other countries to be pulled in as well A preliminary step towards free trade? International Business Environment JG DITTER 7 THE EUROPEAN UNION 1950, May 9: Robert Schuman's call 1951: The European Coal and Steel Community (ECSC) is established (6 members) 1957: The Treaty of Rome establishes a European Economic Community (EEC) 1968: The Common Market (customs union) is officially achieved 1986: Single European Act 1993: The Single European Market is officially achieved 1999: The Single European Currency comes into force (Euro notes and coins are introduced in 2002) 2000: Lisbon Agenda (2000-2010) 2007: Treaty of Lisbon International Business Environment JG DITTER 8 4

A UNIQUE PARTNERSHIP A broad range of competences A wide-ranging and binding legislative body A sophisticated institutional machinery LARGE NUMBER OF PARTNERS DEEPLY INTEGRATED ECONOMIES http://europa.eu/about-eu/index_en.htm International Business Environment JG DITTER 9 MAJOR ACHIEVEMENTS The internal market of the European Union is a single market in which the free movement of goods, services, capital and persons is ensured and in which European citizens are free to live, work, study and do business. The euro is the single currency shared by (currently) 17 of the European Union's Member States, which together make up the euro area. The introduction of the euro in 1999 was a major step in European integration. http://europa.eu/legislation_summaries/internal_market/index_en.htm http://ec.europa.eu/economy_finance/euro/index_en.htm International Business Environment JG DITTER 10 5

CURRENT CHALLENGES The euro was launched in 1999 to increase prosperity by smoothing the flow of trade and capital within Europe. But as Europe lurches from crisis to crisis, ties are fraying. Trade and investment between euro-zone nations has diminished which means the euro zone is slowly losing its main reason for being, regardless of whether it remains intact on paper. http://www.businessweek.com/articles/2013-04-04/howeuropes-trade-and-investment-ties-have-frayed International Business Environment JG DITTER 11 THE EUROPEAN FREE TRADE ASSOCIATION Founded in 1961 by Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the UK to promote of free trade and economic integration Currently made up of Iceland, Norway, Switzerland and Liechtenstein The Agreement on the European Economic Area (EEA)*, which entered into force on 1 January 1994, brings together the 27 EU Members and 3 EFTA countries Iceland, Liechtenstein and Norway in a single internal market, referred to as the "Internal Market" * Switzerland is not part of the EEA Agreement, but has signed several bilateral agreements with the EU International Business Environment JG DITTER 12 6

THE CEFTA (CENTRAL EUROPEAN FREE TRADE AGREEMENT) It is a trade agreement between non- EU European countries in Southeast Europe. The original CEFTA agreement was signed by Visegrád Group countries (Poland, Hungary and Czech and Slovak republics) on 21 December 1992 As of 1 May 2007, the parties of the CEFTA agreement are: Albania, Bosnia and Herzegovina, Croatia, Macedonia, Moldova, Montenegro, Serbia and UNMIK on behalf of Kosovo CEFTA has served as a preparation for full European Union membership International Business Environment JG DITTER 13 AMERICAN BLOCS Andean Community of Nations (former Andean Pact): formed in 1969 using the EU model, more or less failed by the mid-1980s, was re-launched in 1990 and now operates as a customs union MERCOSUR: originated in 1988 as a free trade pact between Brazil and Argentina, was expanded in 1990 to include Paraguay and Uruguay Central American Trade Market (CAFTA) : aims to lower trade barriers between the U.S. and members CARICOM: aims to establish a customs union In 2006, six CARICOM members formed the Caribbean Single Market and Economy (CSME) - to lower trade barriers and harmonize macro-economic and monetary policy between members Talks began in April 1998 to establish a Free Trade Area of The Americas (FTAA) that have not yet led to any tangible development International Business Environment JG DITTER 14 7

AMERICAN BLOCS ( CTD) The North American Free Trade Agreement Became law on January 1, 1994 Gathers three partner: the United States, Canada, and Mexico Aims to: Abolish tariffs on goods traded between members Remove barriers on the cross-border flow of services Protect intellectual property rights Remove restrictions on FDI between the three member countries Establish commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored International Business Environment JG DITTER 15 THE COSTS/BENEFITS OF NAFTA The celebrations of NAFTA's 10 th anniversary are far more muted than those involved in its creation might have hoped. In the United States, the North American Free Trade Agreement has failed to fulfill the most dire warnings of its opponents and the most fervent expectations of its supporters. [ ] There is some good news. In America, the "giant sucking sound of jobs being pulled out of this country" that Ross Perot predicted never quite materialized. The first six years of NAFTA saw unemployment in the United States fall to new lows. [ ] NAFTA has brought some benefits to Mexico as well; it was trade with America, fueled by NAFTA [ ] that was responsible for Mexico's quick recovery after the financial crisis of December 1994. But while Mexico benefited in the early days, especially with exports from factories near the United States border, those benefits have waned, both with the weakening of the American economy and intense competition from China. Meanwhile, poor Mexican corn farmers face an uphill battle competing with highly subsidized American corn, while relatively better-off Mexican city dwellers benefit from lower corn prices. By JOSEPH E. STIGLITZ, New York Times, January 6, 2004 International Business Environment JG DITTER 16 8

AFRICAN BLOCS Southern African Development Community (SADC), Southern African Customs Union (SACU) and Common Monetary Area (CMA), Preferential Trade Area for Eastern and Southern African States (PTA) and Common Market for Eastern and Southern Africa (COMESA), Economic Community of West African States (ECOWAS), Union Douanière et Economique de l'afrique Centrale (UDEAC) (Customs and Economic Union of Central Africa), East African Community International Business Environment JG DITTER 17 BLOCS IN THE ASIA-PACIFIC REGION 1. The Association of Southeast Asian Nations (ASEAN) Formed in 1967 to foster cooperation between member countries (incl. trade and industrial policies) An ASEAN Free Trade Area (AFTA) between the six original members of ASEAN came into effect in 2003 Current members: Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Myanmar, Laos, and Cambodia 2. The Asia-Pacific Economic Cooperation (APEC) Established in 1989 to increase multilateral cooperation in view of the economic rise of the Pacific nations and the growing interdependence within the region 21 members incl. the United States, Japan, and China International Business Environment JG DITTER 18 9

BEYOND RTBS: BILATERAL TRADE AGREEMENTS Singapore - Chinese Taipei Goods & Services FTA & EIA 22-Apr-2014 Mexico - Central America Goods & Services FTA & EIA 20-janv-2014 El Salvador - Cuba Goods PSA 27-nov-2013 New Zealand - Chinese Taipei Goods & Services FTA & EIA 25-nov-2013 Costa Rica - Singapore Goods & Services FTA & EIA 16-sept-2013 Mexico - Uruguay Goods & Services FTA & EIA 28-juin-2013 Chile - Nicaragua (Chile - Central America) Goods & Services FTA & EIA 14-juin-2013 Free Trade Area between members of the CIS Goods FTA 06-juin-2013 Costa Rica - Peru Goods & Services FTA & EIA 05-juin-2013 Turkey - Mauritius Goods FTA 30-May-2013 Malaysia - Australia Goods & Services FTA & EIA 13-May-2013 Korea, Republic of - Turkey Goods FTA 30-Apr-2013 Ukraine - Montenegro Goods & Services FTA & EIA 25-Apr-2013 EU (28) Enlargement Goods & Services CU & EIA 25-Apr-2013 Panama - Guatemala (Panama - Central America) Goods & Services FTA & EIA 22-Apr-2013 Canada - Panama Goods & Services FTA & EIA 10-Apr-2013 Canada - Jordan Goods FTA 10-Apr-2013 http://rtais.wto.org/ui/publicallrtalist.aspx International Business Environment JG DITTER 19 DRIVERS AND LIMITATIONS Section 2 10

QUESTIONS Why do nations gather into regional trade blocs? What do trade blocs mean for business organisations? What are the pros and cons of regional trade blocs vs. global free trade? International Business Environment JG DITTER 21 REGIONAL INTEGRATION: POLITICAL DRIVERS REGIONAL TRADE BLOC Within the zone Creates incentives for political cooperation and reduces the likelihood of violent conflict With 3 rd nations Gives individual member countries greater political influence International Business Environment JG DITTER 22 11

REGIONAL INTEGRATION: ECONOMIC DRIVERS Protects the regional economy from competition from other national economies or regional blocs REGIONAL TRADE BLOC Static gains from trade Tariffs are removed, prices are reduced, new products are available Dynamic gains from trade Fosters intra-regional trade, competition and specialisation Economies of scale, optimal use of countries' factor endowments International Business Environment JG DITTER 23 GAINS FROM TRADE (REMINDER) Country 1 A B C D Country 2 A B C D Country 1 A Country 2 B A C B D Country 3 Without trade: Small and monopolistic domestic markets No economies of scale Limited range of products, high prices Different national standards A C B D Country 4 International Business Environment JG DITTER 24 C Country 3 With trade: Static gains: lower prices due to tariff cuts Dynamic gains: lower prices due to economies of scale, competitive pressure and specialization Innovation, broader range of products Homogeneous standards D Country 4 12

TRADE CREATION / DIVERSION BARRIERS LIFTED FOR MEMBER STATES Barriers remain for third countries Trade creation - Static gains Market size increase Trade diversion Trade creation - Dynamic gains (economies of scale) International Business Environment JG DITTER 25 THE TRADE DIVERSION ISSUE Trade diversion means that the adoption of a regional trade bloc (RTB) is likely to diverts trade, away from a more efficient supplier outside the RTB, towards a less efficient supplier within the RTB Regional economic integration is beneficial if trade creation exceeds trade diversion International Business Environment JG DITTER 26 13

A BOOST ON FOREIGN DIRECT INVESTMENT BARRIERS LIFTED FOR MEMBER STATES Barriers to trade remain for third countries Investment shift to most efficient firms/locations Market size increase FDI from 3 rd countries Intra-regional FDI International Business Environment JG DITTER 27 THE EUROPEAN ENERGY MARKET CASE Mergers and acquisitions in Europe [in 2006] were worth $1.59 trillion, overtaking the value of deals in America (at $1.54 trillion), according to Dealogic, a data firm. Of the top ten deals launched worldwide in 2006, five were European, and of those two were cross-border e.on of Germany bidding for Endesa of Spain and Dutch based Mittal for Arcelor of Luxembourg. [ ] With full liberalisation of Europe's energy market looming later this year, electricity and gas companies are seeking to become stronger before facing more competition. By contrast, consolidation in banking and telecoms has been relatively slow. The Economist, February 8, 2007 International Business Environment JG DITTER 28 14

ASSIGNMENT TOYOTA'S CASE 1. What were the steps of Toyota's rise as one of the largest European carmakers? 2. What were the respective consequences thereof for Toyota's competitors and consumers across Europe? http://2.bp.blogspot.com/-3v1ukwzmacq/te-o5cy5dui/aaaaaaaabja/iod7a47naqs/s1600/toyota+europe.jpg International Business Environment JG DITTER 32 BUSINESS OPPORTUNITIES Access to large integrated market Access to productive resources Mergers and acquisitions Product standardisation Reduced obstacles to international sourcing Restructuring and consolidation Marketing strategy standardisation Easier relocation of production capacities Economies of scale Optimisation of value network Economies of scale Economies of scale Economies of learning International Business Environment JG DITTER 33 15

THREATS AND LIMITATIONS Market integration leads to tougher competition, that business organisations must adapt to Legislation (competition law, environmental standards, ) may constrain business strategies "Trade fortress" effect: outside firms could be shut out of the regional market Remaining differences in culture and competitive practices may prevent economies of scale International Business Environment JG DITTER 34 CULTURAL ISSUES: ATAG'S CASE ( CW HIL L) International Business Environment JG DITTER 35 16

OBSTACLES TO REGIONAL INTEGRATION Concerns about national sovereignty and protection of cultural identity Resistance from groups within a nation that might be harmed with economic integration Existence of socioeconomic gap between rich and poor nations Impact of new members on the trade bloc (changing priorities and interests) International Business Environment JG DITTER 36 QUESTIONING REGIONAL TRADE BLOCS [1] Some issues cannot be handled at regional level Create a discriminatory environment for non-members Induce the development of strong domestic lobbies resistant to liberalization at the multilateral level Divert negotiating energy and resources from multilateral forums Replace national protectionism by regional one competing trade blocs International Business Environment JG DITTER 37 17

QUESTIONING REGIONAL TRADE BLOCS [2] "Vicious circle" Outsiders want to sign their own agreements to prevent trade distortion "Spaghetti bowl" Overlapping / complex systems of trade concessions, web of incoherent rules and intricate rules of origin; Self-erosion of previously existing preferences International Business Environment JG DITTER 38 THE "SPAGHETTI BOWL" EFFECT EU US JP S-K International Business Environment JG DITTER 39 18

CONCLUSION FTAs, which have been proliferating since the 1990s, are a popular and politically acceptable way for countries to give an edge to firms based inside their borders, at a time when "protectionism" is universally acknowledged as a dirty word. [ ] Free trade agreements allow countries to be "preferentialist" instead of downright protectionist. The Columbia University economist and free trade advocate Jagdish Bhagwati has likened them to termites nibbling away at the nondiscrimination principles on which the World Trade Organization depends. Others question whether FTA rules giving preferential treatment to goods manufactured in specific countries do more to benefit tariff-savvy multinationals than to aid indigenous development. Harvard Business Review, 00178012, Jul/Aug2009 International Business Environment JG DITTER 40 ASSIGNMENT THE TTIP 1. What are the economic underpinnings of the Transatlantic trade and investment partnership (TTIP) negotiations initiated between the EU and US? 2. To what extent would this partnership be consistent with (1) the aims and rationale of European economic integration and (2) the objectives and underlying principles of the WTO? 3. What are the primary issues to be addressed by these negotiations? Why are they debated? 4. Can you make use of the "new trade" and "country size" theories to explain the French government s request that cultural/media industries (i.e. the movie industry) are not included in the deal? International Business Environment JG DITTER 41 19