International Business Chapter 10

General Agreement on Tariffs and Trade (GATT) = international agreement that sponsors negotiations to promote world trade.
The GATT’s goal was to promote a free and competitive international trading environment benefiting efficient producers, an objective supported by many multinational corporations (MNCs); the GATT accomplished this by sponsoring multilateral negotiations to reduce tariffs, quotas, and other nontariff barriers.

To help international businesses compete in world markets regardless of their nationality, the GATT sought to ensure that international trade was conducted on a nondiscriminatory basis; this was accomplished through use of the most favored nation (MFN) principle.
Most favored nation (MFN) principle – requires that any preferential treatment granted to one country must be extended to all countries.
There are two important exceptions to the MFN principle:-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 (generalized system of preferences).-The second exemption is for comprehensive trade agreements that promote economic integration, such as the EU and NAFTA.

The eighth and final round of GATT negotiations began in Uruguay in 1986; the participants agreed to create the WTO; the World Trade Organization came into being on January 1, 1995.

• Headquartered in Geneva, Switzerland, as of May 2006 the WTO includes 149 member and 32 observer countries.
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• Members are required to open their markets to international trade and to follow the WTO’s rules.
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• The WTO has three primary goals:
• 1) Promote trade flows by encouraging nations to adopt nondiscriminatory, predictable trade policies.
• 2) Reduce remaining trade barriers through multilateral negotiations
• 3) Establish impartial procedures for resolving trade disputes among members.

• The WTO faces a variety of challenges.
• One is dealing with sectors of the economy that seemingly receive government protection in every country. Two such sectors are agriculture and textiles.
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• The Cairns Group of major agricultural exporters led by Argentina, Australia, Brazil, Canada, and Thailand = pressuring other WTO members to ensure the Doha Round significantly reduces barriers to agricultural trade.
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• Similarly, trade in textiles had been governed since 1974 by the Multifibre Agreement, which created a complex array of quotas and tariffs.
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• Another challenge facing the WTO is reducing barriers to trade in services.
• The Uruguay Round 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.

• The TRIMS agreement in the Uruguay Round is but a modest start toward eliminating national regulations on FDI that may distort or restrict trade.
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• The TRIMS agreement affects:
• -Trade-balancing rules: Countries may not require foreign investors to limit their imports of inputs to an amount equal to their exports of local production.
• -Foreign-exchange access: Countries may not restrict foreign investors’ access to foreign exchange.
• -Domestic sales requirements: Countries may not require the investor to sell a percentage of a factory’s output in the local market.

Regional trading blocs differ significantly in form and function.
The characteristic of most importance to international businesses is the extent of economic integration among a bloc’s members.
This is of utmost importance because it affects exporting and investment opportunities available to firms from member and nonmember countries.
There are five different forms of regional economic integration: free trade area, customs union, common market, economic union, and political union.

• A free trade area encourages trade among its members by eliminating trade barriers among them.
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• At the lowest level there is the preferential trade area, this means that the members charge each other lower tariffs than those applicable to non-members, however there is no free movement of goods within the area.
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• A free trade area means that the barriers and quotas to mutual trade are removed.
• Ex: members of the North American Free Trade Area (NAFTA), Canada, Mexico & United States, pledge to do away with barriers to mutual trade.
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• Unlike a customs union, each member continues to determine its own commercial relations with non-members.
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• Trade deflection – nonmembers reroute (or deflect) their exports to the member nation with the lower external trade barriers.
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• Rules of origin – detail the conditions under which a good is classified as a member good or a nonmember good.

• A customs union combines the elimination of internal trade barriers among its members with the adoption of common external trade policies toward nonmembers.
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• A customs union goes further than a Free Trade Area and requires its members to implement a common external tariff on imports from outside the Union, whereby the aim is to facilitate goods to move freely throughout the union.

• Common market – form of regional economic integration that combines features of a customs union with elimination of barriers inhibiting the movement of factors of production among members
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• The creation of a common market is the next step, whereby the obstacles for the free movement of labor, capital, services and persons are eliminated.
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• The instruments necessary to establish a common market are: a trade liberalisation programme; common external tariff; the coordination of macroeconomic policy; and the adaptation of sectoral agreements.
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• The single market with the "four freedoms" - the free movement of goods, services, persons and capital - forms the core of the European Common Market.

• An economic union represents full integration of the economies of two or more countries.
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• The establishment of an economic union entails a common currency and/or the harmonization and unification of monetary, fiscal and social policies
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Ex: the Economic and Monetary Union within the EU

• A political union is the complete political as well as economic integration of two or more countries, thereby effectively making them on country.
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• As already indicated, the weaker forms of international political integration refer to cooperation between states and formations of state-based regimes.
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• The deeper forms of integration refer to the constitution of new political entities, which have a certain degree of independence in regard to the individual states.
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• Thus, political integration involves the strengthening of a political system, in particular the scope and capacity of its decision-making process.
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• Besides this institutional aspect of integration, there is as well the normative dimension of creating a political community.