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Learning Concepts – Chapter 8
1. Understand why and how world markets are becoming more integrated.
2. Understand roles that the IMF, World Bank, and WTO play in global integration.
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International Economic Integration and Institutions.
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Learning Concepts – Chapter 8 (cont)
3. Understand the debate over whether regional trade blocs are conducive to globalization.
4. Understand a few strategic responses to regional integration that Multinational Enterprise’s create.
International Economic Integration and Institutions.
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Regional Economic Integration: 3M
In the Opening Case, 3M was highlighted as appropriately integrating operations in response to European integration. Essentially, they integrated upstream operations (e.g. sourcing, inbound logistics) and specialized production facilities for economies of scale. For downstream operations, they created integrated …/…
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Regional Economic Integration: 3M
customer service and distribution functions that allowed them to overcome country-by-country differences and address what they call a “pan-European market” with a “Pan-European communications strategy.
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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 and boost the free movement of trade, investment, and services across national boundaries.
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Economic Integration: A Definition
Economic integration is concerned with the removal of trade barriers or impediments between at least two participating nations and the establishment of cooperation and coordination between them. Integration creates high levels of globalization and regionalization.
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Economic Integration: Levels
Free Trade Area, removes trade impediments among member nations. Example: NAFTA.
Customs Union, adds common external economic initiatives to all member nations. Example: 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.
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Economic Integration: Levels
Economic Union, is a common market with unification of all monetary and fiscal policies. Example: the European Union.
Political Union, is where participating nations literally become one nation in an economic and political sense, with common parliament and political institutions. Example: ???
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Economic Integration: A Requirement
“While there are various forms of economic integration, they all require one thing: multilateral cooperation through rules and policies.”
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Economic Integration: Cooperation
Integration cooperation on a global, regional, or commodity level.
Global cooperation occurs through international economic agreements or organizations like the WTO.
Regional cooperation occurs through common markets or unions.
Commodity cooperation occurs among commodity lines, like oil, diamonds, agricultural products, or machinery.
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Global Level Cooperation
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.
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The World Trade Organization
The WTO is a multilateral trade organization aimed at international trade liberalization. It came into being in 1995, after a 48 year development that started with trade negotiations at the Geneva Conference in 1947, and is a relative of the original International Trade Organization that was proposed there. It is a successor organization to GATT.
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What the WTO Does:
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. …/…
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What the WTO Does:
WTO Membership, 2002 (picture of the WTO seal, available at http://www.wto.org).
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 or the Bahamas. China is a member, so is Cuba.
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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. Provide forums for dealing with trade issues. Provide dispute resolution services for members.
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The WTO Allows:
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.
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The International Monetary Fund (IMF)
The IMF seeks to promote international monetary cooperation and expansion of international trade and to reduce inequity in member nations’ balances of payments. It is a key institution in the international monetary system, and helps members defend their currencies against cyclical, seasonal, or random currency fluctuations.
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What the IMF Does:
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.
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What the IMF Does:
IMF Membership, 2002 (picture of the IMF seal, available at http://www.IMF.org).
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).
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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.
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The World Bank
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), and the Multilateral Investment Guarantee Agency (MIGA). These agencies are known as the World Bank Group. Their common objective is to help raise standards of living in developing nations by channeling financial resources to them from developed countries.
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What the World Bank Does:
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.
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What the IDA/IFC/MIGA Do:
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.
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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 by promoting economic development, employment expansion, living standards improvement, financial stability, and extension of world trade on a multilateral and nondiscriminatory basis.
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Other International Economic Organizations
The United Nations Conference on Trade and Development (UNCTAD). This is a forum for examination of economic problems plaguing developing countries and solving them through negotiations with developed nations that benefit from trade with them.
Food and Agricultural Organization of the United Nations (FAO), collects, analyzes, interprets, and disseminates information on nutrition, food, and agriculture.
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Other International Economic Organizations
World Health Organization (WHO), assists people in achieving a high state of health.
International Labor Organization (ILO), promotes employment, living standards, working conditions and social security in member nations.
International Organization for Standardization (ISO), promotes the development of standardization to facilitate goods exchange throughout the world. …/…
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Other International Economic Organizations
World Intellectual Property Organization (WIPO), promotes the protection of intellectual property through cooperation among nations and intellectual property unions.
World Tourism Organization (WTO), promotes the develops tourism and a contributor to economic growth, international understanding and peace.
United Nations Environment Program (UNEP), preserves the environment and natural resources of the world through international cooperation.
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Regional Level Cooperation
This has been accomplished through: Postwar Regional Integration, which has created
the EU, NAFTA, CARICOM, CACM, LAIA, MERCOSUR, ECO, CER, ASEAN, APEC, and the Israel-United States Free Trade Agreement.
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NAFTA
Established in 1992, implemented in 1994, NAFTA created a tri-national market area of more than 360 million people with combined annual purchasing power of about $6.5 trillion. NAFTA dismantles trade barriers for industrial goods, and has agreements on services, investments, intellectual property rights, and agriculture. There are side agreements on labor adjustments, environmental protection, import surges, child labor, minimum wages, productivity, and health and safety standards.
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The European Union
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, which created the European Common Market, complete with 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.
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Provisions of the EU under Maastricht
1. Creates the common European Currency, the ECU, or Euro.
2. Gives every citizen in member states a European Passport and free movement from one country to another within the EU.
3. Contains provisions of cooperation in justice and domestic affairs.
4. Employs the EU to play a more active role in trans-European transportation and environmental protection. …/…
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Provisions of the EU under Maastricht
1. Increases the power of a European Parliament to enact legislation.
2. Removes all restrictions on capital movements among member states.
3. Establishes a European Central Bank responsible for monetary policy and transforms the EU into the European Economic and Monetary Union under which member currencies are tied to one another at a standard exchange rate.
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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.
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Asian Economic Cooperation Agreements
APEC (Asia Pacific Economic Cooperation Forum) was founded in 1994 and consists of 18 member nations. Its purpose is to enhance 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.
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ASIA is unique in world trade 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.
Formal agreements are: The Tumen River Area Development Project, the Baht Economic Zone, the Mekong River Basin Project, and the Southern, Northern, and Eastern Growth Triangles.
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Latin American Integration 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.
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Does Regional Economic Cooperation Work?
A qualified “yes”. 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.
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Commodity Level Cooperation – The Cartel
OPEC. MFA, the Multifiber Arrangement. Wheat Trade Convention (WTC). International Sugar Agreement (ISA). International Cocoa Agreement (ICCA). International Tin Agreement (ITA). International Natural Rubber Agreement (INRA). The deBeers Diamond Cartel.
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How do Multinational Enterprises Respond?
1. Defensive Export Substituting, where firms defend market share previously achieved through exports, by establishing operations within regions.
2. Offensive Export Substituting, ensures market penetration through foreign direct investment before markets are officially integrated.
3. Rationalized Foreign Direct Investment, where Multinational Enterprises heighten resource commitment to operations to achieve new economies of scale in the wake of regionalization.
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How do Multinational Enterprises Respond?
Reorganization Investment, where organization re-align their organizational structures to reflect the regional market.
