The push towards free trade

1. Lesson 3 The Global Trade Environment: Regional Market Characteristics and Preferential Trade Agreements

2. The push towards free trade • Proponents – better standards of living for all in the free trade zone • Opponents – shutting down local industry • E.g. – The FTAA • Americas Free Trade Zone • Cutback farm subsidies • Cheaper steel imports

3. Trade Agreements at three levels • Global Level: GATT, WTO • Regional Level: NAFTA, ASEAN, FTAA • Bilateral Level: between two countries • E.g. between US and Chile • Objective: To progressively dismantle trade barriers between countries and promote cross-border trade • Political resistance to free trade agreements – why?

4. GATT • General Agreement on Tariffs and Trade • treaty among nations to promote multilateral trade among members • Handled trade disputes • Lacked enforcement power • Replaced by World Trade Organization in 1995

5. The World Trade Organization • Provides forum for trade-related negotiations among 147 members • based in Geneva • serves as dispute mediators • empowered with ability to enforce rulings • Countries found in violation of WTO rules are expected to change policies or else face sanctions

6. Recent WTO Cases

7. Free Trade Areas • Preferential Trade Agreements: • Over an above GATT / WTO • discriminate between other countries; notify the WTO • Two or more countries agree to abolish all internal barriers to trade (duties) amongst themselves (e.g. Canada & Chile; Singapore & S. Korea) • Countries continue independent trade policies with countries outside agreement • Country of Origin stamp • Other examples: Closer Economic Partnership Agreement between Hong Kong & China; the EEA including the EU and three other countries, etc.

8. Customs Unions • Evolution of Free Trade Area • Includes the elimination of internal barriers to trade (as in FTA) AND • Establishes common external barriers to trade • E.g. EU, MERCOSUR, CARICOM, etc. Return

9. 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 • E.g. The European Common Market before it became the EU Return

10. Economic Unions • 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

11. Economic Unions • Full evolution of economic union • creation of unified central bank • use of single currency • common policies on issues ranging from agriculture to taxation • requires extensive political unity • EU – where is its HQ? • E.g. – Professional practice requires only one set of licenses to practice anywhere in the Union Return

12. General implications for marketers • Cheaper exports and imports • Preferential buying – assured demand • Soft loans on subsidized terms • Local incentives like tax holidays and other subsidies • Marketing mix – a push towards greater standardization. • Greater competition & specialization

13. General implications for marketers • If there is no FTA between your country and target country, there may be import / export restrictions • Outright ban • Duties / tariffs • Quotas • Other trade restrictions e.g. sale times • Information available from Dept. of Commerce

14. North America • 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 (e.g. illegal migration from Mexico) • Discretionary protectionism – avocados, apples, chicken leg quarters, etc.

15. NAFTA Income and Population An indicator of true economic integration of the FTA is the per capita GNP of each country. It should be as close as possible to the overall mean.

16. Latin America • Caribbean, Central, and South America, except Cuba • 4 preferential trade agreements in place • Central American Integration System • Andean Community • Common Market of the South • Caribbean Community and Common Market

17. Central American Integration System • Guatemala, Honduras, Panama, Costa Rica, El Salvador, Nicaragua • HQ – Guatemala City • Trying to move back to a common market • Common external tariffs (5% to 20%) and rules of origin • Still struggling to become viable. • Mean per capita GNP = $1.882; Nicaragua = $427; Costa Rica = $4102

18. Andean Community • Bolivia, Colombia, Ecuador, Peru, Venezuela • Customs union • Agreement abolished foreign exchange, financial and fiscal incentives, and export subsidies • Common external tariffs were established • Mean per capita GNP = $2,551; Ecuador = $996; Venezuela = $5247

19. Common Market of the South(Mercosur) • Argentina, Brazil, Paraguay, Uruguay • Customs union, seeks to become common market • internal tariffs eliminated • common external tariffs up to 20% established • in time, factors of production will move freely through member countries • Chile and Bolivia - • associate members • participation in free trade area but not customs union • Mean per capita GNP = $4,198; Bolivia = $1016; Argentina = $8,131

20. Common Market of the South(Mercosur) • Volatility of currencies, lack of economic and political discipline • Dec. 1994 – Merged with the Andean Community to form the South American Community of Nations (patterned after the EU) • Interaction with objectives of the FTAA • US Foreign Office - http://www.mre.gov.br/cdbrasil/itamaraty/web/ingles/relext/mre/orgreg/mercom/

21. Caribbean Community and Common Market (CARICOM) • Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts, St. Lucia, St. Vincent, the Grenadines, Trinidad, Tobago • Replaced Caribbean Free Trade Association • Agreed to establish economic union with common currency in 1998 • Mean per capita GNP = $2,113; Haiti = $511; Bahamas = $15,327

22. Asia-Pacific • Includes 23 countries and 56% of world population • Japan • Newly industrializing economies • Association of Southeast Asian Nations

23. 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

24. 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

25. Association of Southeast Asian Nations (ASEAN) • Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Cambodia, Laos, Burma • Goal is to become a Common Market • Singapore represents great success among ASEAN nations • Mean per capita GNP = $1,180; Cambodia = $283; Singapore = $26,562

26. European Union • 25 member countries, Ukraine wants to join • Objective 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) • Mean per capita GNP = $21,941; Portugal = $11,369; Luxembourg = $40,947

27. European Union – Some Marketing Implications • Standardized product content, packaging and labeling – economies of production and distribution • Currency risk minimized • Biggest challenge: take advantages of standardization opportunities while still adapting to local cultural issues (are the French different from Germans?) • US firms need to be aware of duties levied on imports into the EU • http://en.wikipedia.org/wiki/European_Union

28. Central European Free Trade Association (CEFTA) • Hungary, Poland, Czechoslovakia • Allows for cooperation in many areas including: • infrastructure and telecommunications • sub-regional projects • inter-enterprise cooperation • tourism and retail trade

29. The Middle East • Afghanistan, Cyprus, Bahrain, 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 • 3 key regional organizations • Gulf Cooperation Council • Arab Maghreb Union • Arab Cooperation Council

30. Marketing issues in the Middle East • Haggling • Build connections & relationships • Personal rapport, trust and mutual respect required • Male–dominated business world • Spoken word more important than the written word

31. Africa • 53 nations over three distinct areas • Republic of South Africa • North Africa • Black Africa • Regional agreements • Economic Community of West African States • East African Cooperation • South African Development Community

32. Economic Community of West African States (ECOWAS) • Benin, Burkina Faso, Cape Verde, The Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, Togo • Free trade area with unified monetary zone • Uneven growth – some countries did well (Benin, Ghana), some declined (Liberia, Sierra Leone). • Mean per capita GNP = $306; Guinea = $2,606; Sierra Leone = $128

33. East African Cooperation • Kenya, Uganda, Tanzania • Free trade area with possibility of expansion to a customs union

34. South African Development Community (SADC) • Angola, Botswana, Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, South Africa, Seychelles, Swaziland, Tanzania, Zambia, Zimbabwe • Objectives include harmonization and rationalization of policies and strategies • South African Trade Protocol, which calls for an 85% reduction of internal trade barriers, went into effect on September 1, 2000 • Ultimately seeks to form an economic union with a single currency • Mean per capita GNP = $895; Congo = $94; Seychelles = $7,781

35. SADC • African Growth and Opportunities Act: “Trade Not Aid” • the creation of a free trade area by 2008; • establishment of a SADC customs union and implementation of a common external tariff by 2010; • elimination of exchange controls on intra-SADC transactions by 2006; • establishment of a SADC central bank and preparation for a single SADC currency by 2016; • the creation of a SADC regional development fund and self-financing mechanism by 2005; • and a common market pact by 2012. • http://www.eia.doe.gov/emeu/cabs/sadc.html

36. Some Marketing Implications in Africa (except RSA) • Low literacy levels – packaging & labeling implications • Very high political risk • Bureaucracy • Corruption • Undeveloped infrastructure