Chapter 3The Global Trade

Environment: Regional Market Characteristics and

Preferential Trade Agreements

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IntroductionThis chapter looks at

Global trade organizationsFour types of agreementsIndividual countries and their preferential trade agreements

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WTO protesters

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GATT

General Agreement on Tariffs and Trade

Treaty among nations to promote trade among members established in 1947•Handled trade disputes•Lacked enforcement power•Replaced by World Trade

Organization in 1995

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The World Trade OrganizationForum for trade-related negotiations among 150 members

Based in GenevaServes as dispute mediator through DSBHas enforcement power and can impose sanctions

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WTO Structure

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Many countries seek to lower barriers to trade within their regionsPTAs give partners special treatment and may discriminate against othersMore than 150 PTAs have notified the WTO

Preferential Trade Agreements

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Free Trade Area

Two or more countries agree to abolish tariffs and other barriers to trade among themselvesCountries continue independent trade policies with countries outside agreementRules of origin requirements restrict transshipment of goods from the country with the lowest tariff to another

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Customs Union

Evolution of free trade areaIncludes the elimination of internal barriers to trade (as in FTA)AND establishes common external barriers to tradeEx: The EU and Turkey, the Andean Community, Mercosur, CARICOM, Central American Integration System (SICA)

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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

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Economic UnionIncludes 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

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Economic UnionFull evolution of economic union

Creation of unified central bankUse of single currencyCommon policies on issues such as agriculture, social policy, transport, competition, mergers, taxationRequires extensive political unityWould lead to a central government in time

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North America—NAFTACanada, United States, MexicoNAFTA established free trade area

All three nations pledge to promote economic growth through tariff reductions and expanded trade and investmentNo common external tariffsRestrictions on labor and other movements remain

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NAFTA Income and Population

2004 GNI 2004 Pop. 2004 GNI

(in millions) (in thousands) Per Capita

United States $12,168,482 293,655 41,440

Canada 905,042 31,974 28,310

Mexico 704,906 103,795 6,790__

Total/Mean GNP $13,778,430 429,424 $32,086

per capita

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U.S. Goods Exports in 2005

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U.S. Goods Imports in 2005

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Latin America: SICA, Andean Community, Mercosur, CAIRCOM

Includes the Caribbean as well as Central and South AmericaHistory of no growth, inflation, debt, and protectionism has given way to free markets, open economies, and deregulationSome concern for further growth with the rise of left-leaning politicians

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Central American Integration System (SICA)

El Salvador, Honduras, Guatemala, Nicaragua, Costa Rica, PanamaMoving toward a common marketCET of 0–15%Retains tariffs on goods also produced in importing country

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Andean CommunityBolivia, Colombia, Ecuador, Peru, Venezuela Customs union

Abolished foreign exchange, financial and fiscal incentives, and export subsidiesEstablished common external tariffs

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Common Market of the South (Mercosur)Argentina, Brazil, Paraguay, Uruguay, VenezuelaCustoms union, seeks to become common market

Internal tariffs eliminatedCommon external tariffs up to 20% establishedIn time, factors of production will move freely through member countries

Chile, Colombia, Ecuador, Peru, Bolivia Associate membersParticipate in free trade area but not customs union

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Caribbean Community and Common Market (CARICOM)

Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent, the Grenadines, Trinidad and TobagoReplaced Caribbean Free Trade Association

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CARICOM

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Asia-Pacific: The Association of Southeast Asian Nations (ASEAN)

Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, VietnamTrading partners United States, EU, ChinaGeographically close; historically divided“ASEAN plus six” (Japan, China, Korea, Australia, New Zealand, India) working toward an economic community

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SingaporeWorld’s second largest container portSecond highest standard of living in the region behind Japan4.2 million people93% literacy rateMore than 3,000 companiesCrime is nearly nonexistent

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The European Union (EU)

Initially began with the 1958 Treaty of RomeObjective to harmonize national laws and regulations so that goods, services, people, and money could flow freely across national boundaries1991 Maastricht Treaty set stage for transition to an economic union with a central bank and single currency (the euro)

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European Union

27 countries460 million peopleCombined GNI of

$11.7 trillionThe euro is not used by all countries yet; the euro zone includes 13 mostly Western European nations

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The European Free Trade Area and European Economic Area

Norway, Iceland, Liechtenstein, SwitzerlandFree trade area Members (excluding Switzerland) chose to establish European economic area (EEA)

Non-EU members of the EEA are expected to adopt EU guidelines

Norway, Iceland, Liechtenstein, and Switzerland maintain free trade agreements with other countries as well

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Lomé Convention and the Contonou Agreement

Lomé Convention (1975) was replaced by the Contonou Agreement in 2000An accord between EU and 71 countries in Africa, Caribbean, and the PacificPromotes trade and provides poor countries with financial assistance from a European development fund

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Central European Free Trade Association (CEFTA)

Hungary, Poland, the Czech Republic, Slovakia, SloveniaCreated after the political and economic reforms of the early 1990sAchieved the common goal of becoming EU members

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The Middle EastAfghanistan, Bahrain, Cyprus, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, the United Arab Emirates, Yemen

Primarily Arab, some Persian and Jews95% Muslim, 5% Christian and Jewish

Three key regional organizationsGulf Cooperation CouncilArab Maghreb UnionArab Cooperation Council

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Africa

54 nations over three distinct areasRepublic of South AfricaNorth AfricaBlack Africa or sub-Saharan Africa

Regional agreementsEconomic Community of West African StatesEast African CooperationSouth African Development Community

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Looking Ahead to Chapter 4

Social and cultural environments