ib s5 regional trading blocks

8/6/2019 IB S5 Regional Trading Blocks

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IBSession Date

Six 18.5.2011.

Chapter

Regional Trading Blocks: Functions and structures.Free Trade Area; Customs union; Common market;Economic Union; EU; Cartels, Producers Alliances, ICC


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TRADING BLOCKS


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ECONOMIC INTEGRATION BY

REGION1. Less Distance to be travelled by thegoods or services

2. Consumers tastes may be similar,similar channels, similar marketingprogrammes, similar market and

commercial institutions andinfrastructure3.Common history and interest therefore

greater willingness to co-operate


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Preferential Trade Agreements

(PTA)Free Trade Agreements (FTA)

Customs Union

Common Market

Economic Integration


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The Effects of IntegrationCananda-Qubec Film Industry after NAFTA

Ireland Corporate Tax Rates after EUBanana imports in EU colonies at the cost

of South/Central American republics

Static Effects

Resource shifting from inefficient to efficientorganizations as trade barriers fall


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Static effects develop when either

of the two conditions exist

Trade creation

Economies of scale, Experience curve, Learningcurve come into play

Trade diversion


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The Effects of Integration

Dynamic Effects

Increase in efficiencyChange in Organizational StructureIncrease in competition

More M &AsMercosur- Argentina (37.4M), Paraguay, Uruguayand Brazil (221 M)


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Major Regional Trading GroupsAll can be classified by location or type

EUROPEAN UNION (EEC, EC)

Structure

European Commission > Political leadershipEuropean Council > MinistryEuropean ParliamentEuropean Court of Justice


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European Commission

Initiating proposals for legislation

Guardian of the treaties

Manager and Executor of Unionpolicies and of international trade

relationships

Manages EU budget, Manages the EU

& Negotiate trade agreements


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European Council

Composed of different ministers in

the home country - more democraticas they are elected members inhome country


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European Parliament

626 members5 yearsDepend on population of the country

European Court of JusticeInterpretation and application of EU treatiesDeals with economic matters and individuals and

corporations can bring issues to itIs a last court of appeal for fines and infringementon common treaty laws of EUIndividual and MNC/Corporate both can bring

issues to it related to trade and export and import


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COMMON POLICIES FORTRADE AND COMMERCE

CustomsPostsDifferent certification procedures

Rates of value-added taxExcise duties

Unification of :


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Euro

Political union and monetary union

Replacement of national currencies by common

currency- making exchange rate mechanism irrelevantas a barrier to trade reducing volatility

27 countries can not have 27 currencies and 1

monetary policy

Members are part of European Monetary Union


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Annual Govt. deficit must not exceed 3% of GDP

Total outstanding Govt. Debt must not exceed 60% of GDP

Inflation must remain within 1.5% of 3 best performing EU

countries

Average nominal long-term interest rate must be within 2%of the average rate in the 3 countries with the lowest inflationrates

Exchange rate stability must be maintained (at least two years,the country concerned has kept within the normalfluctuation margins of the European Exchange Rate Mechanism)

Euro is administered by European Central Bank (ECB)

Applicant Criteria


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Implications on Corporate Strategy

M&As, JVs, Spin-Offs, Takeovers

Within European countries Exchange and otherinstitutions to compete with US corporations

Europe is still imperfect, fragmented & inefficientmarket compared to US

Asian and US companies going for M&A for PanEurope presence

Still not as homogeneous as USA

Culture, economic growth splinters EU. Balancingbetween understanding the differences and

commonality


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NORTH AMERICAN FREE TRADE

AGREEMENT (NAFTA)

NAFTA ExpansionFTAA (34 countries)800 Million population

US$11 Trillion GDP

Impact on Businesses


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REGIONAL ECONOMIC GROUPS INLATIN AMERICA, ASIA, AND AFRICA

Latin American Free Trade Association (LAFTA)

Caribbean Free Trade Association (CARIFTA)

Latin American Integration Association (ALADI)

Caribbean Community and Common Market (CARICOM)

MERCOSUR>Brazil, Argentina, Paraguay, UruguayIs a sub regional group of ALADI(80% of South America GDP)FTA with Bolivia and ChileNegotiating with EU- Trying to be a Customs Union

Andean Common Market (ANCOM)


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Association of South East Asian Nation(ASEAN) 1967

Not as successful as EU or NAFTABrunei, Indonesia, Laos, Malaysia, Myanmar,Philippines, Thailand, Singapore, Vietnam (500 m)

ASEAN Free Trade Area (AFTA)

APEC (Asia Pacific Economic Cooperation)1989 Pacific Rim

Southern African Development Community

Common Market for Eastern and Southern

Africa


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Economic Community of West African StatesOrganizations for African Unity

South Asian Economic UnionDifficulties with African Trading Blocks

Struggling to establish apolitical identityCivil War and CorruptionMore concerned with political survival andissues rather than trade and growthDictatorshipsGreater reliance for trade on former colonialpowersSmall and underdeveloped

Making no economic impact on region as a

whole


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COMMODITY AGREEMENTSBetween producer and consumer countries of primarycommodities that come together to stabilize commodity pricesand supply

Oil, Natural gas, Tobacco, Coffee, Tea, Aluminum, Sugar

Commodities are increasingly becoming less important to developing anddeveloped countries

Moving to services and technically superior products

LDCs /80% of African countries depend on commodities

Reduced prices of commodities help reduced price of manufacturedproducts- steel or rubber in automobile- beneficial to consumer but hurtsthe developing countries due to fall in prices


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Producers AlliancesOPEC :Producer cartelUnion of Banana Exporting Countries

International Commodity ControlAgreements (ICCAs)International Cocoa Organization

42 countriesRepresent 80% global cocoa production and 70% cocoaconsumption

International Sugar Organization


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FUNCTIONS OF PRODUCERS ALLIANCES& ICCAs

1. Stabilization of commodity prices through exercise ofmarket power by a monopolistic producer or producercartel or through international commodity agreements

2. Stabilization of producer revenues through the use ofrisk-management instruments, such as commoditiesfutures

3. Stabilization of government revenues throughprecautionary savings funds

4. Stabilization of domestic producer and consumer pricesthrough variable export taxes or tariffs, agriculturalmarketing boards, or domestic stockpiles andstabilization funds


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Quota SystemProducing countries divide output and sales to

control and stabilize pricesSuccessful only when there is an industry leaderwith large output or large consumption

Members must co-operateDe Beers - DiamondAustralia - WoolOPEC - Oil

Producers Cartel (OPEC - 41% of crude & 15% gas) Not only in Middle East

Algeria, Nigeria, Venezuela, IndonesiaBP, EXXON, Mobil, Shell

Caspian Sea, Gulf of Mexico, Angola

ib s5 regional trading blocks

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