B416: The Evolution of Global Economies

Lecture 6 : International Trade Organisations & Trading Zones

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Learning Objectives• To identify the major characteristics and challenges of

the World Trade Organization• To discuss the pros and cons of global, bilateral, and

regional integration• To describe the static and dynamic impact of trade

agreements on trade and investment flows• To define different forms of regional economic

integration• To compare and contrast different regional trading

groups• To describe other forms of global cooperation such as

the United Nations and OPEC

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Types of Economic Integration• Economic integration

–the political and monetary agreements among nations and world regions in which preference is given to member countries

• Bilateral integration• Regional integration• Global integration

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The World Trade Organization

• World Trade Organization (WTO)– The major body for

• reciprocal trade negotiations• enforcement of trade agreements

• General Agreement on Tariffs and Trade (GATT) (Predecessor to the WTO)

• GATT - formed in 1947 to abolish quotas and reduce tariffs

• Most favored nation (MFN) clause - trade without discrimination

• Succeeded by WTO in 1995

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What Does The WTO Do?

WTO– continues the MFN clause of GATT– provides a mechanism for dispute settlement - Doha Round (agricultural

subsidies)The international GATT agreement is based on 3 principles:• Non-discrimination; as expressed in two sub-principles

– Most Favoured Nation (MFN) treatment– National treatment of foreign products; two main exceptions to the non-discrimination principle:– Free trade areas and customs unions– Developing countries

• Reciprocity (exception: developing countries)• Prohibition on trade restriction other than tariffs (exception in case of balance-of-

payments problems)Criticized for

– failing to pay enough attention to labor and environmental concerns– undermining global diversity– benefitting rich at the expense of the poor

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WTO/GATT negotiation rounds

0

20

40

60

80

100

0 20 40 60 80 100 120number of participants

dura

tion

(mon

ths)

Annecy

GenevaDillon

Geneva II

Torquay

Kennedy

Tokyo

Uruguay

WTO/GATT talks increasingly long and complex

Duration of GATT rounds and the number of countries involved

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Organization for Economic Cooperation and Development (1961; previously OEEC, 1948, to implement Marshall Aid Plan) – forum for developed countries (trade policy consultation & aid policy coordination); dark blue = initial members

OECD (location Paris) Member Countries

Source: Wikimedia Commons

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Bilateral Agreements & Regional Economic IntegrationBilateral agreements - can be between two individual countries or can involve one country dealing with a group of other countries• Also known as

– Preferential trade agreements (PTAs)– Free trade agreements (FTAs)

Regional trade agreements - integration confined to a region and involving more than two countries• Examples include

– European Union (EU)– European Free Trade Area (EFTA)– North American Free Trade Area (NAFTA)– Association of Southeast Asian Nations (ASEAN)– Common Market of Eastern and Southern Africa (COMESA)

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Regional Economic Integration• Major types of economic integration

– Free trade area - no internal tariffs

– Customs union - no internal tariffs plus common external tariffs

– Common market - customs union plus factor mobility

• Effects of regional integration – Static effects

• trade creation• trade diversion

– Dynamic effects– Economies of scale

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The Effects Of IntegrationImpact of Trade Agreements

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The European Union• European Union (EU)

– changed from the European Economic Community to the European Community to the European Union

– the largest and most successful regional trade group in the world

– provides free trade of goods, capital, and people– uses common external tariffs– has a common currency

• European Commission - provides political leadership, drafts laws, and runs the various daily programs of the EU

• Council of the EU - composed of the heads of state of each member country

• European Parliament - has legislative power, control over the budget, and is supervisor of executive decisions

• European Court of Justice - interprets and applies EU treaties

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The European Union

European Trade and Economic Integration

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The European Union

• Single European Act - designed to eliminate the remaining nontariff barriers to trade in Europe

• Lisbon Treaty - strengthens the EU’s governance process and improves the ability of the EU to make and implement decisions

• Treaty of Maastricht - fostered political and monetary union - the euro

• Companies doing business in the EU need to – determine where to produce products– determine what their entry strategy will be– balance the commonness of the EU with national

differences

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NAFTA • The North American Free Trade Agreement (NAFTA)

– includes Canada, the U.S., and Mexico– involves free trade in goods, services, and investments– includes countries of different sizes and wealth

• Some U.S. trade and investment has been diverted to Mexico• Free trade area

– rules of origin• Regional content

– at least 50% of the net cost of most products must come from the NAFTA region

• Additional provisions– Workers rights– The environment– Dispute resolution mechanism

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Regional Economic Integration In The Americas

There are six major regional economic groups in the Americas

– Caribbean Community (CARICOM)– Central American Common Market (CACM)– Central American Free Trade Agreement (CAFTA –

DR)– Andean Community (CAN)– Southern Common Market (MERCOSUR)– Latin American Integration Association (LAIA)

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Regional Economic Integration In The Americas

Economic Integration in Central America and the Caribbean

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Regional Economic Integration In The AmericasLatin American Economic Integration

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Regional Economic Integration In Asia

• Regional integration in Asia includes• the Association of Southeast Asian Nations

(ASEAN)– ASEAN Free Trade Area

• the Asia Pacific Economic Cooperation (APEC)– open regionalism

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Regional Economic Integration In AsiaThe Association of Southeast Asian Nations

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ASEAN countries

ASEAN countries; population (million) and trade ($ billion), 2009

0 50 100 150 200 250

Brunei Dar.

Singapore

Lao PDR

Cambodia

Malaysia

Myanmar

Thailand

Viet Nam

Philippines

Indonesia

populaton

trade

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Regional Economic Integration In Africa

• Several efforts at economic integration exist– Pan Arab Free Trade Area (PAFTA)– Arab League– Gulf Cooperation Council (GCC)– African Union (AU)

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Regional Economic Integration In Africa

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COMESA countries

Comesa countries; population (million) and trade ($ billion), 2008

0 10 20 30 40 50 60 70 80 90

Seychelles

Comoros

Djibouti

Swaziland

Mauritius

Eritrea

Libya

Burundi

Rwanda

Zimbabwe

Zambia

Malawi

Madagascar

Uganda

Kenya

Sudan

Congo (D.R.)

Ethiopia

Egypt

trade

population

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Other Forms Of International Cooperation• The United Nations (UN)

– established in 1945– promotes peace and security– UNCTAD

• helps developing countries participate in international trade

• Nongovernmental Organizations (NGOs)– private, nonprofit institutions that are independent of the government

• Commodities – raw materials or primary products that enter into trade

• Many commodity agreements exist to– discuss issues– disseminate information– improve product safety

• Organization Of The Petroleum Exporting Countries (OPEC)

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Size of regional trade blocks (2009)

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The Future: Regional Integration And The WTO

• Regional integration could help the WTO – Regionalism can lead to liberalization of issues not

covered by the WTO– Regionalism is more flexible– Regional deals lock in liberalization

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United Nations• Formed 1945; Location – New York• Almost all countries members (China replaced Taiwan, 1971)• Deals with virtually all aspects of human life and organization• Programs and funds (UNCTAD, UNDP, UNHCR, UNICEF..)• Commissions (development, human rights, status of women..)• Regional commissions (Africa, Europe, Caribbean ..)• Specialized agencies (ILO, FAO, UNESCO, WHO, Worldbank, IMF..)

LDCs dissatisfied (1950s/60s; Singer-Prebisch); 1964 first UN Conference on Trade and Development (UNCTAD)

• Terms of trade deterioration (limited empirical support)• Tariff escalation (high on processed goods, low on materials)• Against GATT non-discrimination (want favourable treatment) • Most important now: multinationals & World Investment Report

And Now…Work Outside the Lecture

Preparation For

Padagogic Style

Preparation Time Budget

Individual Task

Group Task Output Week 6 Preparation Activity

Read Chapter 8 International Business - 14th Edition by Daniels, Radebaugh &

Sullivan, (available via DawsonEra)

Seminar 6 30 Minutes Read above Material + Seminar material

Workshop 6 1 HourOnline Collaboration Activities relating Group

Presentation in Week 6

2 HourLecture 6

End of presentation

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