The North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA) was signed in 1994 to develop
increased economic unification between the United States and two of its major trading partners—
Canada and Mexico. This treaty created a free-trade zone eliminating most tariffs among the
three countries. NAFTA also allows for a relatively free flow of labor, raw materials, and capital
among these nations. Most, but not all, tariffs and business restrictions have been eliminated.
NAFTA is designed to enlarge the markets and economic bases of the countries involved.
Consumers have benefited from an increased product variety and lower prices on many items.
Increased trade among the countries has created many new employment opportunities. However,
while many new jobs have been created, some are lower paying positions since the increased
availability of workers has resulted in declining wages in some industries.
Regional trade agreements, also called economic communities, include the European
Union (EU), which is the largest and most extensive. This economic community allows a free flow
of goods, services, and workers among the member nations in western Europe. As of 1999, the
EU consisted of 15 countries with others (mainly in eastern Europe) applying for future
membership.
Other examples of regional economic cooperation include MERCOSUR (involving
Argentina, Brazil, Paraguay, and Uruguay), the Economic Community of West African States
(ECOOWAS), the Association of Southeast Asian Nations (ASEAN), and the Central American
Common Market.
1. List the positive and negative aspects of free-trade agreements from the perspective of
business, consumers, workers, and society.
2. Conduct a Web search of current information on NAFTA and the European Union. Locate
and analyze information that would help companies do business in other countries? What
goods and services would be strong prospects for foreign trade? What restrictions might a
company face when doing business in these regions?
A Single Currency for Europe
After years of using the franc (France), the escudo (Portugal), and the markka (Finland),
these and several other European countries now have a common currency. As of January 1,
1999, the euro was introduced as the official monetary unit for eleven of the 15 member countries
of the European Union (EU). Britain, Denmark, and Sweden decided to stay with their existing
monetary units, while Greece (as of January 1, 1999) did not meet the economic requirements.
Over the next three years, businesses will post prices in both euros and the national
currency of the countries in the economic and monetary union (EMU). Also over that time,
financial institutions (such as banks and stock exchanges) will record transactions in euros. Banks
will offer accounts to customers in euro denominations.
By January 1, 2002, the euro bills and coins will be in circulation in these EU counties.
Then by July 1, 2002, existing bills and coins of these countries will no longer be acceptable. At
that time, the full impact of a unified monetary system in these countries will be evident.
The introduction of the euro is expected to make it easier for people to compare prices
when traveling in various countries in Europe. Travel agents already make traveler’s checks
available based on the euro. Most electronic banking transactions among these countries and
other nations are in euros.
This monetary union was established to make business activities in the EU easier, as the
conversion from one currency to another takes time and money. This new monetary system is
expected to also provide economic stability within the region. For a country to use the euro,
guidelines related to government debt and inflation must be met.
1. List factors that affect the value of a country’s currency. How might changing currency
values affect accounting procedures and the financial records of a company doing business in
several countries?
2. Conduct a Web search on the euro and the European Union. Obtain information related to
the value of the euro is relation to other currencies around the world.
India in the Global Economy
Since 1993, most cars manufactured by General Motors had a radiator cap produced by
Sundram, located in Madras, India. Each month, this company exports 300,000 caps to GM
headquarters in Michigan. These components are then distributed to automobile production
plants in North America, South America, and Asia. Sundram also provides parts to tractor maker
Caterpillar, Inc., and Ford Motor Company.
Most people wouldn’t expect India to be providing parts for modern vehicles since most
cars produced in the country look like 1950s models. However, the country has made a
commitment to expanding its involvement in international trade.
Another example of India’s participation in the global economy involves computer
software. After years of losing their top students to U.S. companies, many are returning home to
work for software companies that now have offices in India. With the English language very
common among the educated classes of India (the country was once a British colony), the
movement of students to the U.S. and back has been quite natural.
In addition, some U.S. trained computer experts have returned to India to start their own
software companies. Many of these entrepreneurs are obtaining start-up funding through their
U.S. connections. Exporting of software from India has grown from $164 million in 1991 to $2
billion in 1998, accounting for 4.5 percent of the country’s exports.
1. Research on the economic and cultural environment of India (or another country with a
developing economy). What factors provide a foundation for the country’s expansion of
international trade?
2. Design a poster or Web site that promotes the economic benefits of India (or another
country).
Zero Interest Rates
Can you imagine borrowing $1,000, and after a year still owing only about $1,000? In
early 1999, the governor of the Bank of Japan lowered the overnight unsecured call rates to 0.08
percent (almost zero). The unsecured call rate is the interest rate at which banks lend each other
to cover differences in their accounts resulting from deposit and withdrawal transactions.
Interest rates represent the cost of money. They are influenced mainly by the supply and
demand for money. As people spend less (and save more), interest rates tend to decline as the
supply of available funds increases. However, when consumers, companies, and governments
increase their spending, interest rates tend to rise. This increase in spending results in higher
demand for money and borrowing, pushing interest rates upward.
The lowering of this key interest rate was an attempt to get Japan’s economy growing
again. The country has encountered increases in business bankruptcies and a higher
unemployment rate.
The Ministry of Finance in Japan also announced that it would start buying government
bonds. This action, which puts more money in circulation, is also an attempt to lower interest
rates and hopefully to encourage spending and economic expansion. The government made the
choice to buy government bonds rather than printing additional money which could cause
inflation.
1. Research the current level of interest rates in various countries. What factors affect these
rates? How do these rates affect business opportunities and economic growth?
2. Create a display of domestic and international factors that would be affected by higher or
lower interest rates.
Agriculture and Tourism Collide
People travel thousands of miles to see a giraffe or a lion in Kenya. However, to local
businesspeople these creatures can be pests. The lions kill goats and sheep making business
difficult for farmers trying to maintain their herds and fields.
While hunting these endangered animals has been illegal since 1977, Kenya’s wildlife has
been disappearing steadily as the country’s population increases. With the daily survival of many
farmers dependent on their livestock, they must decide between preserving the wildlife or feeding
their families. Over the past 20 years, about 40 percent of the range animals have disappeared
with another two or three percent reduction each year.
With limited farmland, a growing population, and very poor economic conditions in recent
years, the people of Kenya have become desperate. Few agricultural products flourish in this
climate and terrain, therefore livestock farming is vital to the survival of many Kenyan citizens.
Those living in severe poverty use the endangered animals as an illegal food source.
Kenya sets aside eight percent of its land for national parks. However, these protected
areas are not large enough for the migration of the endangered wildlife. As the animals venture
outside of the parks, they face the hazard of extinction.
1. Research the influence of business activities on changes in environmental settings, such as
cultivating the rain forest or reducing the population of endangered species. How can
companies survive financially while also maintaining environmental balance?
2. Research actions global companies have taken to adapt to environmental concerns in various
regions of the world.
3. Prepare a short report or presentation about what a global company is doing to address
environmental concerns.
Handling Cash Receipts in Chile
Dividing responsibility when handling cash is a fundamental accounting principle. These
procedures generally involve several people to assure accuracy and to prevent stealing.
Implementation of cash receipts procedures may vary from culture to culture.
When making a purchase at a department store in Santiago, Chile, a tourist encountered
what seemed like an unusual situation. The shopper took the shirt to a clerk, and tried to hand
her the money. The clerk took the shirt, but not the money, and went to another area. Then, a
different clerk wrote up a sales slip. Next, the shirt with the sales slip was then taken to a third
person at the cash register areas who collected the Chilean pesos from the customer. The
transaction was finally complete.
In the United States, store sales are frequently handled by one person. However, in Chile
and many other countries around the world, procedures for handling cash receipts vary. These
differences may be dictated by local customs or laws requiring certain documents. In Chile,
customers are given both a cash register receipt and a hand written, government-mandated receipt
to verify the sale for tax purposes. If an item is purchased using a credit card, three receipts may
be involved.
1. Interview one or more people who have lived in or visited other countries to obtain
information about the business practices in their other cultures.
2. Conduct a Web search to obtain information about accounting procedures in other countries.
How do cultural traditions or government regulations influence recordkeeping and financial
reporting activities?