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Chapter 8

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Chapter 8

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  1. International Business Oded Shenkar and Yadong Luo Chapter 8 International Economic Integration and Institutions Chapter 8: International Economic Integration and Institutions

  2. Do You Know? • Why have world markets become more integrated today? How has this integration taken place? • Why did the U.S. push hard to form NAFTA? • What roles do the WTO, the World Bank, and IMF play in the world economy? Are they clubs of rich nations? Chapter 8: International Economic Integration and Institutions

  3. Do You Know? • Why do people debate whether regional blocs are compatible with globalization? • If you are an export manager in an Australian company, would you like to see the advent of more blocs in other regions? • How should MNEs strategically respond to regional integration? Chapter 8: International Economic Integration and Institutions

  4. International Economic Integration • Economic integration is a new reality in the international business market. • Business and governments have created a range of institutions, treaties, and agreements that help to • Overcome trade differences • Boost the free movement of trade, investment, and services across national boundaries Chapter 8: International Economic Integration and Institutions

  5. International Economic Integration • Economic integration is concerned with: • The removal of trade barriers or impediments between at least two participating nations • The establishment of cooperation and coordination between them • Integration creates high levels of globalization and regionalization. Chapter 8: International Economic Integration and Institutions

  6. International Economic Integration • Free Trade Area - removes trade impediments among member nations. (NAFTA ) • Customs Union - adds common external economic initiatives to all member nations. (Central American Common market) • Common Market - allows free trade of products and services and also allows free mobility of production factors like capital, labor and technology. • Economic Union - is a common market with unification of all monetary and fiscal policies. (European Union) • Political Union - is where participating nations literally become one nation in an economic and political sense, with common parliament and political institutions. Chapter 8: International Economic Integration and Institutions

  7. International Economic Integration Exhibit 8-1: Forces stimulating international economic integration Chapter 8: International Economic Integration and Institutions

  8. Global-Level Cooperation Among Nations • The World Trade Organization (WTO), the World Bank, and the International Monetary Fund (IMF) are three fundamental institutions affecting global cooperation of nations. • The IMF and World Bank serve as a financial base for cooperation. • The WTO serves as the institutional foundation of the world trading system. Chapter 8: International Economic Integration and Institutions

  9. The World Trade Organization (WTO) • A multilateral trade organization aimed at international trade liberalization. • Came into being in 1995, after a 48 year development that started with trade negotiations at the Geneva Conference in 1947 • Is a relative of the original International Trade Organization that was proposed there. • Successor organization to GATT. Chapter 8: International Economic Integration and Institutions

  10. The World Trade Organization (WTO) Exhibit 8-2: Multilateral negotiations under GATT Chapter 8: International Economic Integration and Institutions

  11. The World Trade Organization (WTO) • The WTO seeks to establish trade policy rules that help expand trade and improve world living standards. It does this through: • Administering Trade Agreements. • Serving As The Forum For Trade Negotiations. • Settling Trade Disputes. • Reviewing National Trade Policies. • Assisting Developing Nations On Trade Policy Issues. • Cooperating With Other International Organizations Chapter 8: International Economic Integration and Institutions

  12. The World Trade Organization (WTO) • In January of 2003, the WTO had 146 members accounting for over 95% of world trade. • More than 30 applicants are negotiating to become members. • Russia is not yet a member, neither is Vietnam nor the Bahamas. • China is a member, so is Cuba. Chapter 8: International Economic Integration and Institutions

  13. The World Trade Organization (WTO) • WTO Functions: • Reduce import duties. • Eliminate trade discrimination through most favored nation (treating everyone equally) and national treatments (where all products are considered “domestic” once they cross national borders). • Combat protection and trade barriers • Dumping – the sale of imported goods either at prices below what a company charges in home market or below cost • Provide forums for dealing with trade issues. • Provide dispute resolution services for members. Chapter 8: International Economic Integration and Institutions

  14. The World Trade Organization (WTO) • Bilateral and regional customs unions and common markets. • Lowered tariffs to developing nations without violating antidiscrimination rules. • Establishment of a Generalized System of Preferences for developing nations. • Escape clauses, so that new members can protect infant industries. Chapter 8: International Economic Integration and Institutions

  15. The International Monetary Fund (IMF) • The IMF seeks to: • Promote international monetary cooperation and expansion of international trade • Reduce inequity in member nations’ balances of payments. • Key institution in the international monetary system • Helps members defend their currencies against cyclical, seasonal, or random currency fluctuations. Chapter 8: International Economic Integration and Institutions

  16. The International Monetary Fund (IMF) • The IMF seeks to establish sound monetary practices among member nations it does this through: • Promoting exchange stability • Maintaining orderly exchange arrangements • Helping members avoid serious exchange depreciations • Placing reserves at the disposal of member nations who are in financial crisis, subject to safeguards and repayment Chapter 8: International Economic Integration and Institutions

  17. The International Monetary Fund (IMF) • In January of 2003, the IMF had 160 members accounting for over 95% of currency exchange. • The IMF is headed by a Board of Governors, which is composed of representatives of all member nations. • The IMF requires all members to cooperate with the Fund in order to promote a stable exchange rate system. • Largest members: United States, United Kingdom, Japan, Germany, France (and 155 others). Chapter 8: International Economic Integration and Institutions

  18. The International Monetary Fund (IMF) • The IMF allows: • Special Drawing Rights (SDRs), which are a unit of account and allow countries to peg their currencies against the five largest IMF members. • IMF members settle transactions with SDR for exchanges among themselves. Chapter 8: International Economic Integration and Institutions

  19. The World Bank Group • The World Bank is formally known as the International Bank for Reconstruction and Development. • It is tied with three affiliates • The International Development Association (IDA) • The International Finance Corporation (IFC) • The Multilateral Investment Guarantee Agency (MIGA). • Their common objective is to help raise standards of living in developing nations by channeling financial resources to them from developed countries. Chapter 8: International Economic Integration and Institutions

  20. The World Bank Group • The World Bank is owned by the governments of 160 nations. • Its capital is provided by subscription, and it finances its operations primarily through world capital markets. • It is also financed by interest payments from borrower nations. • Loans are geared toward advanced developing nations and must be used for productive purposes like financing infrastructure, telecommunications, ports and power. Chapter 8: International Economic Integration and Institutions

  21. The World Bank Group • The IDA concentrates on productive project in the least developed nations. • The IFC assists in economic development of maturing countries by investing in private sector investments. • The MIGA specializes in encouraging equity investment and foreign direct investment to developing countries by mitigating trade barriers. Chapter 8: International Economic Integration and Institutions

  22. Other International Economic Organizations • The Organization for Economic Cooperation and Development (OECD) • Aids in the achievement of the highest and soundest possible growth in economies of member countries • Promotes economic development, employment expansion, living standards improvement, financial stability, and extension of world trade on a multilateral and nondiscriminatory basis. • The United Nations Conference on Trade and Development (UNCTAD) • A forum for examination of economic problems plaguing developing countries • Solves them through negotiations with developed nations that benefit from trade with them. Chapter 8: International Economic Integration and Institutions

  23. Other International Economic Organizations Exhibit 8-3: Summary of specialized international economic organizations Chapter 8: International Economic Integration and Institutions

  24. Postwar Regional Integration • A total of 109 agreements were reports to GATT from 1947 through 1994. • Features of regional integration: • Postwar regional integration has centered in western Europe. • Many developing countries renewed their interest in regional integration since the Uruguay Round began. • The level of economic integration varies widely among agreements. Chapter 8: International Economic Integration and Institutions

  25. North America: The North American Free Trade Agreement (NAFTA) • Established in 1992, implemented in 1994, NAFTA created a tri-national (Canada, Mexico, and the United States) market area • more than 360 million people • combined annual purchasing power of about $6.5 trillion. • Dismantles trade barriers for industrial goods, and has agreements on services, investments, intellectual property rights, and agriculture. • Side agreements on labor adjustments, environmental protection, import surges, child labor, minimum wages, productivity, and health and safety standards. Chapter 8: International Economic Integration and Institutions

  26. Europe: The European Union (EU) • Established in 1957 as the European Economic Community (EEC), it became the European Community (EC) in 1995. • It originally had 15 member states. • In 1992, the Maastricht Treaty created the European Common Market • monetary union, establishment of common foreign and security policy, common citizenship, and cooperation on justice and social affairs. • The new name for the EC, after Maastricht, is the European Union. Chapter 8: International Economic Integration and Institutions

  27. Europe: The European Union (EU) Exhibit 8-5: The European Union Chapter 8: International Economic Integration and Institutions

  28. Europe: The European Union (EU) • Creates the common European Currency, the ECU, or Euro. • Gives every citizen in member states a European Passport and free movement from one country to another within the EU. • Contains provisions of cooperation in justice and domestic affairs. • Employs the EU to play a more active role in trans-European transportation and environmental protection. Chapter 8: International Economic Integration and Institutions

  29. Europe: The European Union (EU) • Increases the power of a European Parliament to enact legislation. • Removes all restrictions on capital movements among member states. • Establishes a European Central Bank responsible for monetary policy • Transforms the EU into the European Economic and Monetary Union under which member currencies are tied to one another at a standard exchange rate. Chapter 8: International Economic Integration and Institutions

  30. Europe: The European Union (EU) • Five EU Institutions • The European Parliament, elected by the people of member states. • The Council of the Union, elected by the governments of member states. • The European Commission (an executive body). • The Court of Justice, interpretation of the Law. • The Court of Auditors, which manages the EU budget. Chapter 8: International Economic Integration and Institutions

  31. Asia Pacific • APEC (Asia Pacific Economic Cooperation Forum) was founded in 1994 and consists of 18 member nations. • Enhances the progress made in the Uruguay round of GATT. • Association of Southeast Asian Nations (ASEAN) was founded in 1967 by Malaysia, Indonesia, Philippines, Singapore, and Thailand. • The purpose is to promote peace, stability, and economic growth in the region. Chapter 8: International Economic Integration and Institutions

  32. Asia Pacific Exhibit 8-6: The Asia-Pacific Economic Cooperation (APEC) Chapter 8: International Economic Integration and Institutions

  33. Asia Pacific • Asia accounts for 20% of world trade. • It has substantial trade liberalization. • There are less formal agreements bilaterally and multilaterally in abundance. Examples are SAARC, and the China Circle. • It has also created numerous sub-regional economic trade zones, which are named transnational export processing zones, natural economic territories, or growth triangles. Chapter 8: International Economic Integration and Institutions

  34. Latin America • Early attempts were the Latin American Free Trade Association (LAFTA) and the Central American Common Market (CACM). Both failed economically and politically. • LAFTA was superceded by the Latin American Integration Association (LAIA), whose goal was to increase bilateral trade among member nations. • MERCOSUR was established in 1995 as an organization to promote trade in South America. Chapter 8: International Economic Integration and Institutions

  35. Latin America Exhibit 8-7: Free trade blocs in the Americas Chapter 8: International Economic Integration and Institutions

  36. Africa and the Middle East • The Economic Community of West African States (ECOWAS) - Established in 1975 by west African states • Central African Economic and Customs Union (UDEAC) – established in 1966 in former French Africa • Preferential Trade Area (PTA) – established 1981 from former members of the East African Economic Community (formed in British East Africa, dissolved in 1979) • Gulf Cooperation Council (GCC) – Middle East free trade area established in 1981 Chapter 8: International Economic Integration and Institutions

  37. Regionalization vs. Globalization • Regionalization is a prominent feature in the world economy today. All WTO members will also be members of a regional bloc or agreement. • Regionalization is compatible with economic growth and globalization, but insiders gain many more benefits than outsiders. Chapter 8: International Economic Integration and Institutions

  38. Commodity-Level Cooperation Among Nations • Commodity cartel – a group of producing countries that wish to protect themselves from the fluctuations in prices of certain commodities traded internationally • Crude oil, coffee, rubber, cocoa • Can control prices through production quotas and limiting overall output. Chapter 8: International Economic Integration and Institutions

  39. Organization of Petroleum Exporting Countries (OPEC) • Inter-governmental organization consisting of 13 members. • Strongest collective force impacting prices in the oil market. • OPEC members control more than 40% of the world’s oil production Chapter 8: International Economic Integration and Institutions

  40. Organization of Petroleum Exporting Countries (OPEC) Chapter 8: International Economic Integration and Institutions

  41. The Multifiber Arrangement (MFA) • Agreement countries to control exports of textiles and apparel from developing countries to developed countries • Established in 1972 • Covers about two-thirds of textile and apparel traded internationally Chapter 8: International Economic Integration and Institutions

  42. Strategic Responses of MNEs • Defensive Export Substituting, where firms defend market share previously achieved through exports, by establishing operations within regions. • Offensive Export Substituting, ensures market penetration through foreign direct investment before markets are officially integrated. • Rationalized Foreign Direct Investment, where Multinational Enterprises heighten resource commitment to operations to achieve new economies of scale in the wake of regionalization. Chapter 8: International Economic Integration and Institutions

  43. Chapter 8: International Economic Integration and Institutions