Chapter 3

The Global Trade Environment

Learning Objectives (1 of 2)
3.1 Explain the role of the WTO in facilitating global trade
relations among nations.
3.2 Compare and contrast the four main categories of
preferential trade agreements.
3.3 Explain the trade relationship dynamics among
signatories of NAFTA.
3.4 Identify the four main preferential trade agreements in
Latin America and the key members of each.
3.5 Identify the main preferential trade agreements in the
Asia-Pacific region.
Learning Objectives (2 of 2)
3.6 Describe the various forms of economic integration in
Europe.
3.7 Describe the activities of the key regional
organizations in the Middle East.
3.8 Identify the issues for global marketers wishing to
expand in Africa.
GATT
▪ General Agreement on Tariffs and Trade
▪ Treaty among nations to promote trade among
members established in 1947
▪ Handled trade disputes
▪ Lacked enforcement power; nicknamed the “General
Agreement to Talk and Talk”
▪ Disputes lasted for years
▪ Replaced by World Trade Organization in 1995
The World Trade Organization
▪ Forum for trade-related negotiations among 160
members
▪ Based in Geneva
▪ Serves as dispute mediator through DSB
▪ 60-day negotiation period; advances to a 3-member
panel for resolution within 9 months; may advance to
the Appellate Body
▪ Has enforcement power and can impose sanctions
▪ Formed on 1-1-1995
Preferential Trade Agreements
▪ Many countries seek to lower barriers to trade within
their regions
▪ PTAs give partners special treatment and may
discriminate against others
▪ Over 300 PTAs have been notified to the WTO
▪ Meet every 2 years but haven’t been successful
Hierarchy of PFTs
Free Trade Area
▪ 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 Protesters opposed a trade
requirements restrict agreement in Vienna, 2016
transshipment of goods from
the country with the lowest
tariff to another
Customs Union
▪ Evolution of Free Trade Area
▪ Includes the elimination of internal barriers to trade
(as in FTA)
▪ And establishes common external barriers (C ETs) to
trade
▪ Examples: The EU and Turkey, the Andean
Community, Mercosur, Caricom, Central
American Integration System (SICA)
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 (1 of 2)
▪ 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 (2 of 2)
▪ 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
Benefits of preferential trade
agreements
▪ Markets are enlarged through preferential tariff treatment for
participating members, common tariff barriers against
outsiders, or both.
▪ Unrestricted free trade will allow countries to specialize in the
production of goods and services that they can produce most
efficiently
▪ Opening a country to free trade stimulates economic growth
in the country, which in turn creates dynamic gains from trade.
▪ Nations with complementary economic bases are least likely
to encounter frictions in the development and operation of a
common market unit.
▪ Flows of FDI can transfer technological, marketing and
managerial know-how to host nations.
▪ Stimulates Economic Growth
Disadvantages of preferential trade
agreements
▪ Painful adjustments. It might require standardising
certain aspects within the market group.
▪ Potential loss of sovereignty: a nation might need to
comply to conditions imposed by other nations within the
group to make certain changes in its labour laws, for
instance, in order to have trade barriers removed against
its products shipped to the other markets.
▪ Shifts in employments: labour from cheaper member
countries might shift to the country with higher labour
costs. These expensive labour might lose their jobs.
Benefits for international marketers
(from outside the grouping)
▪ Economic integration creates large mass markets for the
marketer.
▪ It is easier for the international marketer to deal with a
greater and more uniform market, rather than being
troubled by all different kinds of tariffs, standards, and
restrictions of smaller markets (i.e., nations). Greater
potential of standardising a product. This leads to
efficiency in business / marketing activities.
▪ A multinational market group, by specialization and
keener cooperation, gains a higher economic base. Thus
a higher standard of living is established. The inhabitants
will then have more purchasing power, creating a demand
for more goods; therefore, a market for outside imports will
be created
Problems for international marketers
(from outside the grouping)
▪ The policy of having no internal trade barriers is
expected to be self-sufficient as a result of the increase
in trade within the market, hence hampering imports
from international markets outside the multination group.
▪ The reduction or removal of trade barriers (tariffs)
between member nations within the market group will
potentially make goods from these nations more
favourable to the consumer than those coming from
outside.
▪ Countries within the region have preferential
treatment.
 Benefits and problems for international
marketers (from inside the grouping)
▪ Two benefits for marketers from within the integration:
▪ Creation of a mass market (free trade, minimal or no
barriers).
▪ A more unified market that will lead to greater efficiency in
the business / marketing activities.
▪ Problems
▪ Reduction/removal of barriers will give competitors from the
other member countries the opportunity to compete in their
domestic market.
▪ This may lead to increased price competition.
U.S. Goods Exports and Exports
in 2016
Figure 3-2 United States’ Top Import/Export Partners
Latin America: SICA, Andean
Community, Mercosur, Caricom
▪ 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
North America
Figure 3-3 NAFTA Income and Population
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
Central American Integration
System
Figure 3-4 SICA Income and Population
DR-CAFTA
▪ SICA members El Salvador, Honduras, Guatemala,
Nicaragua, Costa Rica joined the Dominican Republic
and the United States in a FTA
▪ 80% of US goods and 50% + of agricultural goods are
duty free
▪ Paperwork is reduced
▪ Reduced risks mean more direct foreign investment
Andean Community
▪ Bolivia, Colombia, Ecuador, Peru
▪ 50th anniversary in 2019
▪ Customs Union
▪ Abolished foreign exchange, financial and fiscal
incentives, and export subsidies, lower tariffs
▪ Established common external tariffs
Common Market of the South
(Mercosur)
▪ Argentina, Brazil, Paraguay, Uruguay, Venezuela
▪ Begun in 1995
▪ 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
▪ EU is the #1 trading partner

▪ Bolivia, Chile, Ecuador, Peru

▪ Associate members
▪ Participate in free trade area but not customs union
Figure 3-5 Mercosur and Andean
Community Income and Population
Caricom
▪ Founded in 1973 by 15 members
▪ 17 million population
▪ Stagnant for 20 years
▪ Customs Union in 1991 with common external tariffs
▪ Rejected the idea of an economic union in 1998 as a
single currency would not be especially beneficial
▪ Caribbean Basin Trade Partnership Act exempts
textile and apparel exports to the U.S. market access
from duties and tariffs. Caribbean Basin Initiative of 20
nations includes Caricom.
Asia-Pacific: The Association of
Southeast Asian Nations (ASEAN)
▪ Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar,
Philippines, Singapore, Thailand, Vietnam
▪ “ASEAN plus six” (Japan, China, Korea, Australia, New
Zealand, India) working towards an economic
community
▪ China/ASEAN FTA established in 2010 removes 90% of
tariffs on traded goods
ASEAN
Figure 3-7 ASEAN Income and Population
Singapore
▪ World’s 2nd largest container port
▪ 2nd highest standard of living in the region behind Japan
▪ 5.4 million people
▪ 95% literacy rate
▪ Over 3,000 companies
▪ Crime is nearly nonexistent
The European Union (EU) (1 of 3)
▪ Initially began with the Lithuania joined the euro
1958 Treaty of Rome zone on January 1, 2015.
▪ 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 in 2002)
The European Union (EU) (2 of 3)
▪ 28 countries will become 27 after Brexit
▪ 450 million people
▪ $15 trillion GNI
▪ Euro currency, 1999
▪ Harmonization of laws and regulations
▪ Price transparency
▪ No customs at national borders
The European Union (EU) (3 of 3)
Figure 3-8 The 28-Nation EU: Income and Population
(Pre-Brexit)
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, many Persians and some Jewish
▪ 95% Muslim, 5% Christian and Jewish
▪ Wide variation in Economic Freedom rankings
▪ Bahrain is 18th, UAE is 25th, Saudi Arabia is 77nd
▪ Oil prices drive commerce
▪ 25% of world’s oil in Saudi Arabia
▪ Arab Spring 2011
▪ Gulf Cooperation Council key regional organization
Gulf Cooperation Council
▪ Established in 1981 Figure 3-9 GCC Income and
by 6 countries with Population
45% of world’s oil,
only 18% of output
▪ 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

▪ Arabs in the north differ politically and economically from the

rest of the continent
▪ Mena: Middle East and North Africa
▪ Viewed as a regional entity

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