1 regional market characteristics and preferential trade agreements the trade environment

1

Regional Market

Characteristics and

Preferential Trade

Agreements

The Trade Environment

©2011 Pearson Education, Inc.

Introduction

• This chapter is about:– Global trade

organizations– Four types of

agreements– Individual countries

and their preferential trade agreements


GATT

• General Agreement on Tariffs and Trade– Treaty among nations to promote trade

among members established in 1947•Handled trade disputes•Lacked enforcement power•Replaced by World Trade

Organization in 1995


The World Trade Organization

• Aims are to increase international trade by promoting lower trade barriers and providing a platform for the negotiation of trade and to their business www.wto.org

• Provides forum for trade-related negotiations among 153 members (& 30 observers, most seeking membership)– Based in Geneva– Serves as dispute mediator through DSB (Dispute

Settlement Body)– Has enforcement power and can impose sanctions

• Countries found in violation of WTO rules are expected to change policies or else face sanctions


3-6

WTO Structure


GATT and WTO Trade RoundsName Start Duration Countries Subjects covered Achievements

Geneva April 1947 7 months 23 TariffsSigning of GATT, 45,000 tariff concessions

affecting $10 billion of trade

Annecy April 1949 5 months 13 TariffsCountries exchanged some 5,000 tariff

concessions

TorquaySeptember

19508 months 38 Tariffs

Countries exchanged some 8,700 tariff concessions, cutting the 1948 tariff levels

by 25%

Geneva II January 1956 5 months 26Tariffs,

admission of Japan$2.5 billion in tariff reductions

DillonSeptember

196011

months26 Tariffs

Tariff concessions worth $4.9 billion of world trade

Kennedy May 196437

months62

Tariffs,Anti-dumping

Tariff concessions worth $40 billion of world trade

TokyoSeptember

197374

months102

Tariffs, non-tariff measures, "framework"

agreements

Tariff reductions worth more than $300 billion dollars achieved

UruguaySeptember

198687

months123

Tariffs, non-tariff measures, rules, services,

intellectual property, dispute settlement, textiles, agriculture, creation of WTO, etc

The round led to the creation of WTO, and extended the range of trade negotiations,

leading to major reductions in tariffs (about 40%) and agricultural subsidies, an agreement to allow full access for textiles and clothing from developing countries, and an extension of intellectual property

rights.

DohaNovember

2001? 141

Tariffs, non-tariff measures, agriculture,

labor standards, environment, competition, investment, transparency,

patents etc

The round is not yet concluded.


WTO -- Doha Development Round

• The WTO conducts negotiations through rounds. • The Doha Development Round commenced at

Doha, Qatar in November 2001 and is still continuing. – Objective is ğ to lower trade barriers around the world,

permitting free trade between countries of varying prosperity.

– The intent of the round according to its proponents was ğ to make trade rules fairer for developing countries.

• As of 2008, talks have paused over a divide between the developed nations led by the European Union, the United States and Japan and the major developing countries (represented by the G20 developing nations), led and represented mainly by India, Brazil, China and South Africa.


• Many countries seek to lower barriers to trade within their regions

• A preferential trade agreement ğ a mechanism that give special treatment on selected trading partners. – By favoring certain countries, such agreements

frequently discriminate against others.

• It is customary for countries to notify the WTO when they enter into preference agreements (over 150 PTAs have been notified to the WTO)

Preferential Trade Agreements


Preferential Trade Agreements

• Types for preferential trade agreements

– Free Trade Areas– Customs Union– Common Market– Economic Unions


Free Trade Area (FTA)

• Two or more countries agree to abolish tariffs and other barriers to trade amongst themselves

• Countries continue independent trade policies with countries outside agreement

• Rules of origin requirements restrict transshipment of goods from the country with the lowest tariff to another

NAFTA Protest in Ottawa


Examples of FTAs

• The European Economic Area– An FTA that includes the 27-nation European

Union plus Norway, Liechtenstein, and Iceland

• The Group of Three (G3)– an FTA encompassing Colombia, Mexico, and

Venezuela

• The Closer Economic Partnership Agreement (CEPA)– a free trade agreement between China and

Hong Kong.


Turkey

• Turkey has bilateral agreements with the following countries and blocs: – Bosnia and Herzegovina – Croatia – Egypt – Israel – Morocco – Macedonia – Palestinian Authority – Tunisia – The European Free Trade Association – GCC (Gulf Cooperation Council) - proposed


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Customs Union

• Evolution of Free Trade Area• Includes the elimination of internal

barriers to trade (as in FTA)• AND establishes common external

barriers to trade• Examples: The EU and Turkey, the Andean

Community, Mercosur, CARICOM, Central American Integration System (SICA)


List of Customs Unions

• Southern African Customs Union • East African Community • Gulf Cooperation Council • MERCOSUR • Central American Customs Union • EU - Turkey Customs Union (since 1996) • EU - Andorra Customs Union • EU - San Marino Customs Union • Economic and Monetary Community of Central Africa

(CEMAC) • West African Economic and Monetary Union (UEMOA) • Andean Community (CAN) • Israel - Palestinian territories (since 1994) • Switzerland - Liechtenstein (since 1924)


Common Market

• Includes the elimination of internal barriers to trade (as in free trade area)

• AND establishes common external barriers to trade (as in customs union)

• AND allows for the free movement of factors of production, such as labor, capital, and information


Economic Union

• Includes the elimination of internal barriers to trade (as in free trade area)

• AND establishes common external barriers to trade (as in customs union)

• AND allows for the free movement of factors of production, such as labor, capital, and information (as in common market)

• AND coordinates and harmonizes economic and social policy within the union


Economic Union

• Full evolution of economic union– creation of unified central bank– use of single currency– common policies on issues such as

agriculture, social policy, transport, competition, mergers, taxation

– requires extensive political unity– would lead to a central government in

time

European Union Flag


North America—NAFTA

• Canada, United States, Mexico• NAFTA established free trade area

–All three nations pledge to promote economic growth through tariff

reductions and expanded trade and investment–No common external

tariffs–Restrictions on labor and other movements remain

U.S.-Mexico Border Crossing


NAFTA

• The North American Free Trade Agreement (NAFTA) created the world’s largest free market.– 430 million U.S., Canadian, and Mexican

consumers


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NAFTA Income and Population


Latin America

• Includes the Caribbean, Central, and South America

• History of no growth, inflation, debt, and protectionism has given way to free markets, open economies, and deregulation

• Some concern for further growth with the rise of left-leaning politicians


Latin America

• Includes the Caribbean as well as Central and South America

• 4 preferential trade agreements in place– The Central American Integration System

(SICA)– The Andean Community– The Common Market of the South

(MERCOSUR)– The Caribbean Community and Common

Market (CARICOM)


Central American Integration System (SICA)

• El Salvador, Honduras, Guatemala, Nicaragua, Costa Rica, and Panama

• Moving towards a common market

• Common External Tariff of 0 to 15%

• Retains tariffs on goods also produced in importing country


Andean Community

• Bolivia, Colombia, Ecuador, Peru, Venezuela

• Customs Union– Abolished foreign

exchange, financial and fiscal incentives, and export subsidies

– Established common external tariffs


Common Market of the South (MERCOSUR)

• Argentina, Brazil, Paraguay, Uruguay, Venezuela

• Customs union, seeks to become common market– Internal tariffs eliminated– Established common external tariffs up to 20%– In time, factors of production will move freely

through member countries

• Chile, Colombia, Ecuador, Peru, Bolivia – Associate members– Participate in free trade area but not customs

union


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MERCOSUR

*Indicates mean


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Caribbean Community and Common Market (CARICOM)


CARICOM


Asia-Pacific

• Includes 23 countries and 56% of world population– Japan – Newly industrializing economies– Association of Southeast Asian

Nations (ASEAN)


Asia-Pacific: The Association of Southeast Asian Nations (ASEAN)

• Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam

• Trading partners U.S., EU, China• Geographically close; historically

divided• “ASEAN plus 6” (Japan, China, Korea,

Australia, New Zealand, India) working towards an economic community


3-35

ASEAN


Singapore

• Represents great success among ASEAN nations

• World’s 2nd largest container port

• 2nd highest standard of living in the region behind Japan

• 4.2 million people• 93% literacy rate• Over 3,000 companies• Crime is nearly

nonexistent


Japan

• Generates 14% of world’s GNP

• Key factors– population density– geographic isolation

• Recent economic struggles despite status as high income country

• Strong culture requires flexibility and commitment from global marketers


Newly Industrializing Economies (NIEs)

• Strong economic growth in recent decades– foreign investment– export-driven industrial development

• Sometimes called the 4 Tigers of Asia– South Korea– Taiwan– Singapore– Hong Kong


NICs: Newly Industrialized Countries

• Africa: South Africa, Egypt• North America: Mexico• South America: Argentina, Brazil• Asia: China, India, Malaysia, Philippines

and Thailand• Europe: Turkey


Europe

• European Union• European Free Trade Area• European Economic Area• The Lome Convention• Central European Free Trade

Association (CEFTA)


The European Union (EU)

• Initially began with the 1958 Treaty of Rome

• Objective is to harmonize national laws and regulations so that goods, services, people, and money could flow freely across national boundaries

• 1991 Maastricht Treaty set stage for transition to an economic union with a central bank and single currency (the Euro)


European Union

• 27 countries• 491 million people• Combined GNI of $14.7 trillion• Euro currency,

1999• Harmonization of

laws and regulations


European Union


European Free Trade Area and the European Economic Area

• EFTA: Norway, Iceland, Liechtenstein, Switzerland

• Free trade area • Members (excluding Switzerland) chose to

establish European Economic Area (EEA)– Non-EU members of the EEA are expected to

adopt EU guidelines– EEA Members: Iceland, Liechtenstein and

Norway, without Switzerland – and the 27 EU Member States along with the European Community.

• Norway, Iceland, Liechtenstein, and Switzerland maintain free trade agreements with other countries as well


Lomé Convention and the Contonou Agreement

• Lomé Convention (1975) was replaced by the Contonou Agreement in 2000

• An accord between EU and 71 countries in Africa, Caribbean, and the Pacific (first signed in feb.1975 in Lomé, Togo)

• Promotes trade and provides poor countries with financial assistance from a European development fund


Central European Free Trade Association (CEFTA)

• Hungary, Poland, the Czech Republic, Slovakia, Slovenia, Romania, Bulgaria

• Created after the political and economic reforms of the early 1990s

• Achieved the common goal of becoming EU members


Central European Free Trade Association (CEFTA)

• Allows for cooperation in many areas including:– infrastructure and

telecommunications– sub-regional projects– inter-enterprise

cooperation– tourism and retail

trade


The Middle East

• Afghanistan, Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates, Yemen– Primarily Arab, some Persian and Jews– 95% Muslim, 5% Christian and Jewish– 34.7 million people, 24 million in Saudi Arabia– 25% of world’s oil in Saudi Arabia– Strong impact of world economic crisis on

Dubai


Gulf Cooperation Council

•Established in 1981 by 6 countries with 45% of world’s oil

•These countries are attempting to diversify industries


Africa

• 54 nations over three distinct areas– Republic of South Africa– North Africa– Black Africa or sub-Saharan Africa

• Regional agreements– Economic Community of West African States– East African Cooperation– South African Development Community


Economic Community of West African States (ECOWAS)

• Free trade area with unified monetary zone

• ECOWAS Travel certificate has entered into circulation in Burkina Faso, Gambia, Ghana, Guinea, Niger, Nigeria and Sierra Leone.

• ECOWAS Passport is printed and operational in Benin, Mali and Senegal


ECOWAS


East African Community

• plans to introduce a monetary union with a common currency by 2009

• plans for a common market and a political union with a common President (initially on a rotation basis) & a common parliament by 2010


South African Development Community SADC

1 regional market characteristics and preferential trade agreements the trade environment

Documents

trade rules

international trade

free trade

negotiation of trade

world trade organizationaims

traderelated negotiations

lower trade barriers

range of trade negotiations