CHAPTER 3

REGIONAL MARKET CHARACTERSTICS AND PREFERENTIAL TRADE AGREEMENTS

SUMMARY

This chapter examines the environment for world trade, focusing on the institutions and regional cooperation agreements that affect trade patterns.

The multilateral World Trade Organization,created in 1995 as the successor to the General Agreement on Tariffs and Trade, provides a forum for settling disputes among member nations and tries to set policy for world trade.

The world trade environment is also characterized by preferential trade agreementsamong smaller numbers of countries on a regional and sub-regional basis. These agreements can be conceptualized on a continuum of increasing economic integration.

Free trade areas such as the one created by the North American Free Trade Agreement (NAFTA) represent the lowest level of economic integration.

The purpose of a free trade agreementis to eliminate tariffs and quotas. Rules of origin are used to verify the country from which goods are shipped. A customs union (e.g. Mercosur) represents a further degree of integration in the form of common external tariffs.

In a common market such as Central American Integration System (SICA), restrictions on the movement of labor and capital are eased in an effort to further increase integration.

An economic union, such as the European Union (EU), the highest level of economic integration is achieved by unification of economic policies and institutions. Harmonization, the coming together of varying standards and regulations, is a key characteristic of the EU.

Other important cooperation arrangements include the Association of Southeast Asian Nations (ASEAN), the Cooperation Council for the Arab States of the Gulf (GCC). In Africa, the two main cooperation agreements are the Economic Community of West African States (ECOWAS) and the South African Development Community (SADC).

OVERVIEW

The year 2007 marketed the sixtieth anniversary of the General Agreement on Tariffs and Trade (GATT), a treaty among nations whose governments agree, at least in principle, to promote trade among members.

ANNOTATED LECTURE/OUTLINE

THE WORLD TRADE ORGANZIATION AND GATT

  • What is GATT?

The General Agreement on Tariffs and Trade (GATT) was treaty among nations whose governments agreed to promoted trade among members.

GATT was intended to be a multilateral, global initiative which liberalized world trade and handled 300 disputes over fifty years; however, GATT lacked enforcement power.

The successor to GATT, the World Trade Organization (WTO), born in 1995, provides a forum for trade-related negotiations among its 150 members and mediates trade disputes.

The Dispute Settlement Body (DSB) mediates complaints concerning unfair trade barriers; during a 60-day consultation period, parties engage in good-faith negotiations (see Table 3 -1).

Failing that, the DSB convenes a panel and acts on the panel’s recommendations; if after due process, the losing party violates WTO rules, the WTO can impose trade sanctions.

WTO trade ministers meet annually to work on improving world trade, but politicians in many countries resist the WTO’s plans to move swiftly in removing trade barriers.

The current round of WTO negotiations began in 2001; the talks collapsed in 2005, and attempts to revive them in 2006 were not successful.

PREFERENTIAL TRADE AGREEMENTS

The GATT treaty promotes free trade on a global basis; in addition, countries in each of the world's regions are seeking to liberalize trade within their regions.

  • What is a ‘preferential trade agreement’?

A preferential trade agreement is a mechanism that confers special treatment on select trading partners. By favoring certain countries, such agreements frequently discriminate against others.

Free Trade Area

  • How is a free trade area formed?

A free trade area (FTA) is formed when two or more countries agree to eliminate tariffs and other barriers that restrict trade.

A free trade area comes into being when trading partners successfully negotiate a free trade agreement (also abbreviated FTA), the ultimate goal of which is zero duties on goods that cross borders between the partners.

Rules of origin are used to discourage the importation of goods into the member country with the lowest external tariff for transshipment to one or more FTA members with higher external tariffs.

To date, dozens of free trade agreements, many of them bilateral, have been successfully negotiated.

Customs Unions

A customs union represents the logical evolution of a free trade area.

In addition to eliminating internal barriers to trade, members of a customs union agree to the establishment of common external tariffs (CETs).

Some of the customs unions discussed in this chapter are the Andean Community, the Central American Integration System (SICA), Mercosur, and CARICOM.

Common Market

A common market is the next level of economic integration.

In addition to the removal of internal barriers to trade and the establishment of common external tariffs, the common market allows for free movement of factors of production, including labor and capital.

Economic Union

An economic union builds upon the elimination of the internal tariff barriers, the establishment of common external barriers, and the free flow of factors. It seeks to coordinate and harmonize economic and social policy within the union to facilitate the free flow of capital, labor, goods, and services from country to country.

  • The full evolution of an economic union would involve what?

The full evolution of an economic union would involve the creation of a unified central bank, the use of a single currency, and common policies on agriculture, social services and welfare, regional development, transport, taxation, competition, and mergers.

A true economic union requires extensive political unity, which makes it similar to a nation. The further integration of nations that were members of fully developed economic unions would be the formation of a central government that would bring together independent political states into a single political framework.

The European Union is approaching its target of completing most of the steps required to become a full economic union.

NORTH AMERICA

North America, which includes Canada, the United States, and Mexico, comprises a distinctive regional market.

The U.S. has more industry leaders than any other nation, dominating the computer, software, aerospace, entertainment, medical equipment, and jet engine industry sectors.

  • In what year did CFTA formally come into existence?

The U.S.-Canada Free Trade Area (CFTA) came into existence in 1989, resulting in over $400 billion per year trade between the two countries.

  • Who are the top three trading partners of the U.S.?

Canada is the number one trading partner of the U.S.; Mexico is second, and Chinaranks third.

American companies have more invested in Canada than in any other country.

The North American Free Trade Agreement (NAFTA) became effective in 1994; the result is a free trade area with a combined population of 430 million and a total GNP of roughly $14 trillion (see Table 3-4 and Figure 3-2).

  • Why does NAFTA create a free trade area as opposed to a customs union or a common market?

The governments of all three nations pledge to promote economic growth through tariff elimination and expanded trade and investment. At present, however, there are no common external tariffs nor have restrictions on labor and other factor movements been eliminated.

Illegal immigration from Mexico remains a contentious issue.

NAFTA allows for discretionary protectionism (e.g., California avocado growers won protection, allowing Mexican avocados into the U.S. during the winter only in the northeast at a quota).

LATIN AMERICA: SICA, Andean Community, Mercosur, CARICOM

Latin America includes the Caribbean and Central and South America; the market is sizeable, has a huge resource base, and Latin America has begun economic transformation.

Balanced budgets are a priority, and privatization is underway. Free markets, open economies, and deregulation are replacing past policies; tariffs are now reduced to 10 to 20 percent.

Global corporations see import liberalization, prospects for lower tariffs within sub-regional trading groups, and the potential for more efficient production. Many envision a free trade area throughout the hemisphere.

  • What are the most important trading arrangements in Latin America?

Important trading arrangements include:

  • Central American Integration System (SICA)
  • Andean Community
  • The Common Market of the South (Mercosur)
  • The Caribbean Community and Common Market (CARICOM).

Central American Integration System

Central America is trying to revive its common market, which originally had five members:

  • What countries originally comprised the Central American Integration System?
  • El Salvador
  • Honduras
  • Guatemala
  • Nicaragua
  • Costa Rica

In 1997, with Panama as a member, the group changed its name to the Central American Integration System (SICA). (Table 3-5 shows the income and population data in the region).

Common rules of origin allow for freer movement of goods among SICA countries which agreed to a common external tariff of 5 to 20 percent for most goods by the mid-1990s.

Still, attempts to achieve integration are uncoordinated, inefficient, and costly (e.g., there are still tariffs on imports of products – sugar, coffee, and alcoholic beverages.)

Andean Community

The Andean Community was formed in 1969 to accelerate development of member states through economic and social integration. (Figure 3-4 and Table 3-6).

  • What countries make up the Andean Community?

The member countries of the Andean Community are:

  • Bolivia
  • Colombia
  • Ecuador
  • Peru
  • Venezuela

Members lowered tariffs on intra-group trade and decided what products each country should produce. Foreign goods and companies were kept out as much as possible.

A sub-regional free trade zone was formed, abolishing foreign exchange, financial and fiscal incentives, and export subsidies by 1992. Common external tariffs were established.

While Peru has one of the fastest-growing economies in the region, Ecuador has experienced years of economic and political instability.

  • How have rural residents and the urban poor viewed the progress of the Andean Community?

Overall, rural residents and the urban poor in the region have become frustrated and impatient with the lack of progress.

Common Market of the South (Mercosur)

March 2006 marked the fifteen anniversary of the signing of the Asunción Treaty.

  • What countries were the original members of Mercosur?

The treaty signified the agreement by the governments of (see Table 3-7 and Figure 3 -4):

  • Argentina,
  • Brazil,
  • Paraguay, and
  • Uruguay.

Internal tariffs were eliminated, and common external tariffs of up to 20 percent were established; in theory goods, services, and factors of production will move freely.

Until this goal is achieved, Mercosur will operate as a customs union.

Trade among member nations peaked at $20 billion in 1998.

A major impediment to further integration is the lack of economic and political discipline and responsibility – a situation reflected in the volatile currencies of Mercosur countries.

Argentina provides a case study in how a country can emerge from an economic crisis as a stronger global competitor. In 2002, Argentina devalued its currency by 29 percent for exports and capital transactions. (Table 3 – 7).

  • Why was Chile not allowed to become a full member of Mercosur?

In 1996, Chile became an associate member of Mercosur; policymakers blocked full membership because Chile had lower external tariffs that the rest of Mercosur.

Chile had been negotiating for inclusion in NAFTA; however, after Mexico’s deficit with the U.S. became a trade surplus, U.S. interest in expanding NAFTA cooled.

Chile’s export-driven success makes it a role model for the rest of Latin America as well as Central and Eastern Europe. Bolivia, Colombia, Ecuador, and Peru are associate members of Mercosur, because they recently agreed to merge with the Andean Community.

The EU is Mercosur’s number-one trading partner.

  • What country is the newest member of Mercosur?

Venezuela became a full Mercosur member in 2006. Flush with revenues from oil exports, Venezuela is expected to have a positive impact on regional integration.

Caribbean Community and Common Market (CARICOM)

  • Who are the member countries of CARICOM?

CARICOM was formed in 1973 with the following member states:

  • Antigua and Barbuda
  • Bahamas
  • Barbados
  • Belize
  • Dominica
  • Grenada
  • Guyana
  • Haiti
  • Jamaica
  • Montserrat
  • St. Kitts and Nevis
  • St. Lucia
  • St. Vincent and the Grenadines
  • Trinidad and Tobago

The population of the entire 15-member CARICOM is about 15 million; disparate levels of economic development can be seen by comparing GNP per capita in Antigua and Haiti.(Table 3-8).

  • What does CARICOM have as its main objective?

To date, CARICOM's main objective has been to achieve a deepening of economic integration by means of a Caribbean common market. However, CARICOM was largely stagnant during its first two decades of existence.

In 1998, leaders agreed to establish an economic union with a common currency. A recent study of the issue has suggested, however, that the limited extent of intra-regional trade would limit the potential gains from lower transaction costs.

English-speaking CARICOM members defend their privileged position with the U.S.(e.g., Guatemala).

As of 2000, the Caribbean Basin Trade Partnership Act exempts textile and apparel exports from the Caribbean to the U.S. from duties and tariffs. (Figure 3-5).

Current Trade-Related Issues

One of the biggest issues pertaining to trade is the Free Trade Area of the Americas. Many Latin American countries—Brazil in particular—are frustrated by America’s broken promises.

As a result, Brazil and Mercosur advocate slower three-stage negotiations to include:

  • discussions on customs forms and deregulation;
  • dispute settlement and
  • rules of origin; and tariffs.

ASIA-PACIFIC: The Association of Southeast Asian Nations (ASEAN)

The Association of Southeast Asian Nations (ASEAN) was established in 1967 as an organization for economic, political, social, and cultural cooperation among its member countries.

  • Who were the original members of ASEAN?

The original six members of ASEAN were:

  • Brunei
  • Indonesia
  • Malaysia
  • the Philippines
  • Singapore
  • Thailand
  • What was the first Communist nation to join ASEAN?

Vietnam became the first Communist nation in the group when it was admitted to ASEAN in July 1995. (Figure 3-6 and Table 3 -9).

Cambodia and Laos were admitted at the organization's thirtieth anniversary meeting in July 1997.

Burma (known as Myanmar by the ruling military junta) joined in 1998.

  • Who are ASEAN’s top three trading partners?

Individually and collectively, ASEAN countries are active in regional and global trade. ASEAN's top trading partners include the United States ($52.8 billion in 2002 exports), the European Union ($48 billion in exports), and China ($23 billion).

In 1994, economic ministers from the member nations agreed to implement an ASEAN Free Trade Area (AFTA) by 2003, 5 years earlier than previously discussed.

  • What is “ASEAN plus three”?
  • What countries were added to result in “ASEAN plus six”?

Recently, Japan, China, and Korea were informally added to the member roster; some observers called this configuration “ASEAN plus three.” When the roster expanded again to include Australia, New Zealand, and India, it was dubbed “ASEAN plus six.”

In fewer than three decades, Singapore has transformed itself from a British colony to a vibrant, 240-square-mile industrial power.

Singapore has an extremely efficient infrastructure – the Port of Singapore is the world's second-largest container port (Hong Kong's ranks first) – and a standard of living second in the region only to Japan’s.

Singapore accounts for more than one-third of U.S. trading activities with ASEAN countries.

Marketing Issues in the Asia-Pacific Rim

Mastering the Japanese market takes flexibility, ambition, and a long-term commitment. Japan has changed from being a closed market to one that’s just tough, with barriers in attitudes and laws. Japan requires top-quality products and services, tailored to local tastes.

Countless visits and socializing with distributors are necessary to build trust, and marketers must master the keiretsu system of tightly knit corporate alliances.

WESTERN, CENTRAL, AND EASTERN EUROPE

The countries of Western Europe are among the most prosperous in the world. Entering the first decade of the twenty-first century, the governments of Western Europe have achieved unprecedented levels of economic integration.

The European Union (EU) (Table 3-10).

The EU began in 1958 with the Treaty of Rome and original members Belgium, France, Holland, Italy, Luxembourg, and West Germany.

In 1973, Great Britain, Denmark, and Ireland were admitted, followed by Greece in 1981 and Spain and Portugal in 1986.

The objective is to harmonize national laws and regulations so that goods, services, people, and eventually money can flow freely across national boundaries.

The EU encourages a community-wide labor pool and establishes rules of competition patterned after U.S. antitrust law. Improvements to highway and rail networks are underway.

Finland, Sweden, and Austria joined in 1995

Cyprus, the Czech Republic, Estonia, Hungary, Poland, Latvia, Lithuania, Malta, the SlovakRepublic, and Slovenia became full EU members on May 1, 2004. Bulgaria and Romania joined in 2007.

Today, the 27 nations of the EU represent 490 million people and a combined GNI of $15.0 trillion.

The 1991 Maastricht Treaty prepared the transition to an economic and monetary union (EMU) with a European central bank and a new currency, the euro.

The euro brings the benefits of eliminating currency conversion costs and exchange rate uncertainty.

In 2002, euro coins and paper money were issued to replace national currencies such as the French franc.

Marketing Issues in the European Union

The business environment in Europe has undergone considerable transformation since 1992, with significant implications for all elements of the marketing mix. (Table 3 -11).

Marketing mix issues must be addressed in Europe's single market (e.g., content and other product standards that varied among nations must be harmonized). Harmonization means that content and other product standards that varied among nations have been brought into alignment. (Table 3-11).