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To profile the World Trade Organization To discuss the pros and cons of global, bilateral, and regional integration To describe the static and dynamic effects and the trade creation and diversion effects of bilateral and regional economic integration To define different forms of regional economic integration To present different regional trading groups, such as the European Union (EU), the North American Free Trade Agreement (NAFTA), and Asia-Pacific Economic Cooperation (APEC) To describe the rationale for and success of commodity agreements

Regional economic integration represents a relatively new phenomenon in the history of world trade and investment. Chapter Eight first examines the roles of the General Agreement on Tariffs and Trade and the World Trade Organization in determining the ground rules of the world trade environment. It then introduces the basic types of economic integration and explores the potential effects of the process. Next it examines in detail both the European Union (its structure and its operations) and the North American Free Trade Agreement and briefly describes a variety of other regional economic groups. The chapter concludes with a discussion of various commodity agreements and producer alliances, including the Organization for Petroleum Exporting Countries.

OPENING CASE: TOYOTA IN EUROPE Known for its low-cost, efficient production operations, and with 2004 global sales of approximately 6.78 million units and a net income of more than US $11 billion, Toyota Motor Corp. was not only the worlds third largest manufacturer of automobiles, it was the most profitable of all. Toyotas goal is to capture a 15 percent share of the global market and become the worlds top producer of automobiles by 2010. In 2004 Toyota had 46 production facilities located in 26 countries, including 9 in Western and Eastern Europe. Prior to 2002 Toyota had not posted a profit in Europe for more than three decades. However, during that time there was an agreement in effect between the Japanese government and the then European Community to severely limit the number of Japanese vehicles that could be exported to Europe. When the quota system and other restrictions


were lifted in 1999, Toyota responded by establishing a European Design and Development center in southern France and capturing distinct cost advantages by setting up additional production centers in East Europe. Toyotas European market share and profitability began to grow steadily, as Europeans became less loyal to their own regional brands in their search for more economical, higher quality cars. In fact, in 2005 Toyotas environmentally friendly hybrid vehicle, the Prius, was voted European Car of the Year. TEACHING TIPS: Carefully review the PowerPoint slides for Chapter Eight. Also, review the corresponding video clip, European Union [12:00]. I. INTRODUCTION Trade blocs are a significant influence on the strategies of MNEs because they define the size of regional markets and the rules by which companies must operate. Economic integration represents an agreement between or among nations within a geographic region, i.e., an economic bloc, to reduce and ultimately remove within the bloc tariff and nontariff barriers to the free flow of products, capital, and labor. Approaches to economic integration include global integration via the World Trade Organization, bilateral integration between two countries, and regional integration via an economic bloc. II. THE WORLD TRADE ORGANIZATION (WTO) The World Trade Organization has become the primary multilateral forum through which governments conclude trade agreements and settle associated disputes. A. GATT: The Predecessor The General Agreement on Tariffs and Trade (GATT) was established in 1947 by twenty-three signator nations as a multilateral agreement whose objective was to liberalize world trade. The fundamental principle of trade without discrimination was embedded in the most-favored-nation (MFN) clause, i.e., the principle that each member nation must open its markets equally to every other member nation. Eight major rounds of negotiations from 1947 to 1994 [see Table 8.1] led to a wide variety of multilateral reductions in both tariff and nontariff barriers. At the conclusion of the Uruguay Round in 1994, the World Trade Organization was created for the purpose of institutionalizing the GATT. B. The WTO The World Trade Organization (WTO) was founded in 1995 as a permanent world trade body for the purposes of (i) facilitating the development of a free and open international trading system according to the GATT and (ii) the adjudication of trade disputes between or among member nations. The WTO adopted the principles and agreements reached under the auspices of the GATT, but it expanded its mission to include trade in services, investment, intellectual property, sanitary measures, plant health, agriculture, textiles, and technical barriers to trade. Currently the 140+ member countries of the WTO collectively account for more than 90 percent of the value of world trade. Major decisionmaking units include: the Ministerial Conference, the General Council, the Goods


Council, the Services Council, and the Council on Trade-Related Aspects of Intellectual Property (TRIPS). 1. Normal Trade Relations. The WTO replaced the GATTs most-favorednation clause with the concept of normal trade relations (NTRs), which prohibits any sort of trade discrimination. With the following exceptions, it restricts this privilege to official members: Under the Generalized System of Preferences (GSP), manufactured goods of emerging economies are given preferential treatment (subject to lower barriers) over those from industrial countries in member markets. Concessions granted to members of economic blocs, such as the EU or NAFTA, are not extended to countries outside the blocs. Exceptions can be made in times of war or international tension. 2. Settlement of Disputes. Under the WTO there is now a clearly defined mechanism for the settlement of disputes. Countries may bring charges of unfair trade practices to a WTO panel; accused countries may appeal; WTO rulings are binding. If an offending country fails to comply with a judgment, the rights to compensation and countervailing sanctions will follow. 3. Doha Round. The Doha Round began in Doha, Qatar in 2001 to address disputes between developed and developing nations. Issues surrounding agricultural subsidies have been particularly difficult. III. THE RISE OF BILATERAL AGREEMENTS Currently, bilateral agreements, also known as Preferential Trade Agreements (PTAs) (and also referred to by some as Free Trade Agreements (FTAs)) are sometimes negotiated by partner nations as a way to circumvent the multilateral trading system and meet their mutual trading objectives. IV. REGIONAL ECONOMIC INTEGRATION Regional Trade Agreements or RTAs involve multiple countries engaged in the process of economic integration. Neighboring countries tend to ally with one another because of their proximity, their somewhat similar tastes, the relative ease of establishing channels of distribution, and a willingness to cooperate with one another for the greater benefit of the allied parties. The two basic types of regional economic integration that address barriers to trade are: Free Trade Agreements, in which all barriers to trade, i.e., tariff and nontariff barriers, are abolished among member nations, but each member determines its own external trade barriers beyond the bloc Customs Unions, in which all barriers to trade, i.e., tariff and nontariff barriers, are abolished among member nations, and common external barriers are levied against non-member countries. When moving beyond the reduction of tariff and nontariff barriers, a bloc may become a common market by also permitting the free flow of capital and labor. It may go even further by harmonizing commercial, monetary, and fiscal policies and establishing a common currency, plus a supranational political structure dedicated to dealing with common economic issues. [Note: many authors refer to a fourth and final stage beyond the common market as an economic union.]


A. The Effects of Integration Regional economic integration can affect member countries in social, cultural, economic, and/or political ways. (MNEs are, or course, particularly interested in the economic effects.) Static effects represent the shifting of resources from inefficient to efficient firms as trade barriers fall. Dynamic effects represent the gains from overall market growth, the expansion of production, the realization of greater economies of scale and scope, and the increasingly competitive nature of the market. Static effects may occur when either of two results occurs. 1. Trade creation. Trade creation occurs when production shifts from less efficient domestic producers to more efficient regional producers for reasons of absolute or comparative advantage. Because of the larger size of the market, competitors are able to reduce their unit costs by capturing economies of scale. As a result, customers gain access to a wider variety of lower cost, higher quality products. 2. Trade diversion. Trade diversion occurs when, as a result of the imposition of common external barriers, trade shifts from more efficient external sources to less efficient suppliers within the bloc. (When lower cost, externally-sourced products are suddenly confronted by trade barriers, the effective delivered cost of those products increases; thus, the quantity that can be purchased for a given amount of money is reduced.) B. Major Regional Trading Groups Trading groups can be organized by type and/or region. Firms are interested in regional trading groups because they can serve as potential markets, sources of raw materials and production factors, and facilities locations. V. THE EUROPEAN UNION The European Union represents the most advanced regional trade and investment bloc in the world today. It evolved from the European Economic Community (EEC) to the European Community (EC) to the European Union (EU). [Key milestones are summarized in Table 8.2.] Detailed information on the history, structure, and function of the EU is available on its extensive website. [See Map 8.1.] The European Free Trade Association (EFTA) consists of Iceland, Liechtenstein, Norway, and Switzerland; all but Switzerland are linked to the EU via a customs union known as the European Economic Area (EEA). A. The EUs Organizational Structure While the European Council is designed to lead the EU, the European Commission functions as its draftsman and servant, the European Parliament is its sounding board, and the European Court of Justice serves as the supreme appeals court for EU law. These governance bodies set the parameters under which MNEs must operate within the bloc. 1. The European Commission. The European Commission provides the EUs political leadership and direction; it consists of twenty members appointed by member countries for four-year renewable terms. The Commission is responsible for proposing EU legislation, implementing EU legislation, and monitoring compliance with EU laws by member nations.


European Council. Also known as the Council of Ministers, the European Council is composed of one representative from the government of each member state, but the particular membership varies according to the topic under consideration. The Council can adopt, amend, or ignore Commission-proposed legislation. It sets priorities, gives political direction, and resolves issues that the European Commission cannot. 3. The European Parliament. Composed of 626 members (allocated on the basis of country population) elected every five years, the European Parliament considers legislation presented by the European Commission; if the legislation is approved, it is then submitted to the European Council for final adoption. The Parliament also has control over the EU budget and supervises executive decisions. 4. The European Court of Justice. The European Court of Justice ensures consistent interpretation and application of EU treaties. Dealing mostly with economic matters, it serves as an appeals court for individuals, firms, and organizations fined by the Commission for infringing upon Treaty Law. B. The Single European Act The EU has been moving toward a single market ever since the passage of the Single European Act of 1987. It is designed to eliminate any remaining nontariff barriers to trade within the bloc. 1. Common Trade and Foreign Policy. The EUs influence in the world trade arena depends upon its ability to negotiate with its trade partners as a single entity. During the initial formation of the EU, the focus was primarily upon economic integration. Over time, however, member countries began to recognize the benefits that could be realized from a common foreign policy as well. In 1993 the EU began to formalize common objectives on armed conflicts, human rights, and other international foreign policy issues, although national attitudes often remain splintered. 2. The Euro. The Treaty of Maastricht of 1992 sought to foster both political and monetary union within the EU. While the move toward a common currency has partially eliminated different currencies as a barrier to trade, not all members have adopted the euro. (Members adopting the euro at the time of its launch on January 1, 1999, were Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain; Greece followed suit on January 1, 2001.) Now one of the most widely traded currencies in the world, the euro facilitates price transparency for customers and eases pricing decisions and transaction reconciliations for firms.



C. EU Expansion The EU expanded from 15 to 25 countries in 2004 by admitting countries primarily from central and eastern Europe. [See Map 8.1.] Although this expansion increased the EUs population by 74.3 million people and added more than $428 billion (US) to its economic output, the integration of such disparate countries will not be easy. Most are poor, agriculturally-based, newly democratized economies which, when taken together, will seriously strain the EUs financial resources. Another challenge is the issue of governance, because economically large members of the EU fear that the addition of so many new countries will weaken their control and influence. D. Trade Disputes between the EU and the U.S. Relations between the United States and the EU were strained in early 2001 when the United States attempted to impose heavy tariffs on steel imports and increased its protective farm subsidies. However, following warnings from the WTO, both actions were dropped. Then in 2004 the United States and the EU filed complaints with the WTO against each other regarding their long-standing dispute over aircraft subsidies. Given the likelihood that the WTO would come down hard on both sides, they have chosen instead to attempt to resolve the issue through a series of bilateral negotiations. E. Implications of the EU for Corporate Strategy There are at least three ways in which the competitive strategies of foreign firms that choose to do business within the EU are affected. First, they must deter-mine their production site location(s) on the basis of total costs that include labor, transportation, and other strategic factors. Second, foreign firms must decide upon an entry strategy, i.e., sole ownership vs. joint venture, acquisition vs. greenfield investments, licensing, or some other entry form. Third, firms must be sensitive to essential national differences, particularly in areas such as economic growth rates and cultural traditions. In addition, the trade-offs between the advantages of pan-European strategies and more localized strategies must be continually examined. F. Main Challenges Facing the EU Four basic challenges currently confront the EU. First is the transition of new entrants into the United States that are entering with significantly lower wage rates, lower taxes, but two to four times the growth rates of the EU-15. Privileges of guest workers from entering countries will be somewhat limited until 2010, and those countries will have to work hard to quality to enter the euro zone. Second is the adoption of a new constitution, which must be passed unanimously by all member states in order to take effect. While it will not replace individual national constitutions, member states are grappling with the degree of national sovereignty they are willing to surrender to Europe as a whole. Third is the issue of the Common Agricultural Policy (CAP), which is designed to (i) provide farmers with a reasonable standard of living on the one hand, and (ii) to provide consumers with safe, quality food at fair prices on the other. Agricultural subsidies in the EU are a major sticking point with both internal constituencies and non-member nations as well. Fourth is the fact that the four largest


economies of the EU dwarf the others in both population and national income. As countries strive to harmonize their tax, fiscal, and monetary policies, the challenge to successfully balance countervailing forces will, in some ways at least, continue to be difficult. VI. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) Effective as of January 1, 1994, the North American Free Trade Agreement (NAFTA) incorporates Canada, Mexico, and the United States into a regional trade bloc of countries of quite different sizes and sources of national wealth. More than a mere free trade agreement and claiming a total GNI greater than that of the 25-member EU, NAFTA calls for the elimination of tariff and nontariff barriers, the harmonization of trade rules, the liberalization of restrictions on services and foreign investment, the enforcement of intellectual property rights, a dispute settlement process, regional labor laws and standards, and strengthened environmental standards. A. Rules of Origin and Regional Content NAFTAs rules of origin require that at least 50 percent of the net cost of most products originate within the region if those products are to be eligible for the more liberal tariff conditions within the bloc. B. Special Provisions of NAFTA The NAFTA is a unique sort of trade agreement in that it also addresses two side issues: (i) regional labor laws and standards and (ii) strengthened environmental standards. C. Impact of NAFTA While trade amongst the NAFTA members has increased significantly, the investment and employment pictures are less clear. Although some investment funds have been flowing out of Mexico since the maquiladora plants were stripped of their duty-free status in 2001, other investment funds have been flowing into Mexico from countries such as Germany and Japan, and from companies such as Wal-Mart, which is now the largest employer in Mexico. Further, illegal immigration continues to be a problem in the United States, as Mexican workers illegally cross the border in their search for work. D. NAFTA Expansion Representatives from 34 North, Central, and South American countries continue to negotiate in an attempt to create the Free Trade Agreement of the Americas (FTAA). Although the war on terror has slowed that effort, Canada and Mexico have both entered into free trade agreements with Chile. Further, Mexico entered into a free trade agreement with the EU on July 1, 2001; all tariffs on their bilateral trade will end by 2007. E. Implications of NAFTA for Corporate Strategy The existence of NAFTA is causing firms from all three member countries to reexamine their trade and investment strategies. A number of industries (e.g., automotive products and electronics) already view the region as one large market and have rationalized their production processes, products, and financing accordingly. Although much low-end manufacturing has moved south to Mexico, more sophisticated manufacturing and services operations are increasing in the United States. In addition, Canadian firms along the U.S.-Canadian border are


generating more competition for U.S. firms along their mutual border than are Mexican firms along the U.S.-Mexican border. Further, as Mexican incomes have continued to rise, Mexican demand for Canadian- and U.S.-sourced products has increased as well. Finally, it should also be noted that since Chinas admission to the WTO in 2002, competition for investment and markets across the entire NAFTA region has shifted significantly. VII. REGIONAL EONOMIC INTEGRATION IN THE AMERICAS Although there are six major regional economic groups in the Americas [see Maps 8.2 and 8.3], regional integration in Latin America has not been particularly successful, because many countries rely more on the United States for trade than on members of their own groups. The Caribbean Community and Common Market (CARICOM) and the Central American Common Market (CACM) are both found in Central America. The two major blocs in South America are the Andean Community (CAN) and the Southern Common Market (MERCOSUR). In addition, the Latin American Integration Association (LAIA) encompasses 10 South American countries, plus Mexico and Cuba. The primary reason for each of these groups entering into collaboration is market size. The largest of the groups, MERCOSUR, is comprised of Brazil, Argentina, Paraguay, and Uruguay; it generates 80 percent of South Americas GNI and has signed free trade agreements with Bolivia and Chile. In 2004 the members of the Andean Community (CAN), MERCOSUR, and other South American countries attempted to launch the 12-nation South American Community of Nations (CSN). However, its prospects for success are questionable as the participation of several countries is at best lukewarm. VIII.REGIONAL ECONOMIC INTEGRATION IN ASIA Regional economic integration has not been as successful in Asia as in the EU or the NAFTA region because most Asian countries have relied on U.S. and European markets for their exports. The Association of Southeast Asian Nations (ASEAN) was first organized in 1967. [See Map 8.4.] On January 1, 1993, it officially formed the ASEAN Free Trade Area (AFTA) for the purpose of cutting tariffs on interregional trade to a maximum of 5% by 2008. Comprised of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, ASEAN holds great promise for market and investment opportunities because of its large market size. The Asia Pacific Economic Cooperation (APEC) community was founded in 1989 to promote multilateral economic cooperation in trade and investment in the Pacific Rim. Comprised of 21 countries that border the Pacific on both the east and the west, APEC leaders have committed themselves to achieving free and open trade in the region by 2010 for the industrial nations and by 2020 for the remaining member countries. However, progress toward free trade is hampered by the number of members, the geographic distances between nations, and the lack of a binding treaty. Nonetheless, because APEC includes more than half of the worlds population and approximately 60 percent of its GNI, it has enormous potential to become a significant economic bloc.


IX. REGIONAL ECONOMIC INTEGRATION IN AFRICA There are several regional trade groups in Africa that are registered with the WTO, including the Southern Africa Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA), the Economic and Monetary Community of Central Africa, and the West African Economic and Monetary Union (WAEMU). With the notable exception of South Africa, markets are small, and many nations rely more on trade links with former colonial powers than with each other. Created in 2002 by 53 African nations, the African Union took the place of the Organization of African Unity (OAU) and focuses its energy and resources on (i) political issues in Africa (notably colonialism and racism) and (ii) the pursuit of market liberalization and economic growth in Africa. POINTCOUNTERPOINT: Is CAFTA a Good Idea? POINT: The Central American Free Trade Agreement (CAFTA) will link the United States, Costa Rica, El Salvador, Guatemala, Nicaragua, and the Dominican Republic via a free trade agreement. It will open the door for increased trade between the United States and the region, and it will stimulate economic growth in Central America by encouraging foreign direct investment, offering shorter international supply chains, and encouraging political reform in an area historically plagued by dictatorships and civil wars. Further, the growth that CAFTA will foster in Central American industries will directly benefit those U.S. exporters whose products are used in their production processes. COUNTERPOINT: CAFTA is not a good idea because of the vastly different interests among countries. Opening the market wont help U.S. agriculture, which actually needs an increase in world market prices; Central American economies are too small to affect prices. Further, given its balance of payments deficit, the United States cant tolerate many more imports. CAFTA is also a bad move for labor and workers rights because it will trigger the loss of manufacturing jobs in the United States and the loss of agricultural jobs in Central America. Finally, stringent intellectual property clauses included in the agreement threaten access to affordable life-saving medicine in the Central American nations.

X. COMMODITY AGREEMENTS A commodity agreement is designed to stabilize the price and supply of a primary commodity such as petroleum, natural gas, coffee, cocoa, tea, or sugar because both long-term trends and short-term fluctuations in their prices have important consequences for the world economy. A. Producers Alliances and ICCAs While producers alliances represent exclusive membership agreements between or among producing countries (a cartel), international commodity control agreements (ICCAs) represent agreements between or among producing and consuming countries. A notable example of the former is the Organization of Petroleum Exporting Countries (OPEC); examples of the latter are the


International Cocoa Organization (ICO) and the International Sugar Organization (ISO). ICCAs may attempt to control prices by stockpiling buffer stocks, imposing a quota system, or providing special services for member countries. Under a buffer stock system, an organization buys or sells a commodity for the purpose of minimizing price fluctuations, but under a quota system, producing countries divide total output and sales in order to control the price. The effecttivenesseffectiveness of any agreement depends upon the particular commodity involved, the availability of close substitutes, and the willingness of members to comply with their allotted quotas. B. The Organization of Petroleum Exporting Countries (OPEC) The Organization of Petroleum Exporting Countries (OPEC) represents a producer cartel, i.e., a group a commodity-producing countries with significant control over output and price. Currently OPECs oil exports represent about 48.7 percent of the oil traded internationally. Member countries include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC controls prices by establishing production quotas on member countries. Because of the importance of commodities to the production process, it is critical that managers understand the factors that influence their prices. LOOKING TO THE FUTURE: Will the WTO Overcome Bilateral and Regional Integration Efforts? Although the objective of the WTO is to reduce barriers to trade in goods, services, and investment, regional groups do that and more. Regional economic integration deals with the specific problems facing member countries, while the WTO concerns itself with trade issues facing the world as a whole. As a result, regional integration, which is more flexible, may help the WTO achieve its objectives as the process leads to the liberalization of issues not covered by the WTO. Regional economic integration can also serve to lock in trade liberalization across developing countries. Although the EU and NAFTA are the key regional groups in which significant integration has occurred, both Russia and China will surely be key countries to add to the future mix, whether they become active participants in the regional integration process or not.

CLOSING CASE: Wal-Mart de Mexico Because of its sheer size and volume purchases, as well as its unique distribution system, Wal-Mart has been able to reduce its prices so successfully that in 2001, it became the largest company in the world. Wal-Mart first entered the Mexican market in 1990; by 2004 it had become Mexicos largest retailer. Mexicos retail sector has greatly benefited from the increasing trade liberalization under NAFTA, as well as the improvements to its transportation infrastructure encouraged by NAFTA. In addition, NAFTA improved opportunities for foreign investment in Mexico. One of the countrys largest retail chains,


Comercial Mexicana S.A. (Comerci), has found it increasingly difficult to remain competitive since Wal-Marts aggressive entry into its market. Wal-Marts strong operating presence and low prices since the lifting of tariffs under NAFTA have put such strong competitive pressures on Comerci that it must now decide whether its participation with the recently formed purchasing consortium, Sinergia, will be sufficient for its survival.

Questions 1. How has the implementation of NAFTA affected Wal-Marts success in Mexico? The NAFTA has facilitated Wal-Marts success in Mexico in various ways. First, it reduced tariffs on American-sourced goods from 10% to 3%. Second, it encourages Mexico to improve its transportation system and infrastructure, thus helping solve Wal-Marts logistical problems. Third, it eases restrictions on foreign direct investment; as a result, many of Wal-Marts foreign suppliers have built plants in Mexico, where they can better serve the whole of the NAFTA region. How much of Wal-Marts success is due to NAFTA, and how much is due to WalMarts inherent competitive strategy? In other words, could any other U.S. retailer have the same success in Mexico post-NAFTA, or is Wal-Mart a special case? The same benefits that have accrued to Wal-Mart following the implementation of the NAFTA are also available to other competitors. However, Wal-Mart uses its sheer size and volume of purchases to negotiate prices to rock-bottom levels that are not available to smaller competitors. It also works closely with suppliers on inventory levels, using an advanced information system that informs suppliers when additional merchandise will be needed, thus allowing them to plan production runs more accurately and pass along the captured cost reductions. Then, rather than pocketing the accrued cost savings, Wal-Mart reduces its prices. Retailers who wish to compete with Wal-Mart will either have to meet Wal-Marts prices or position themselves in a different segment of the market. What has Comerci done in its attempt to remain competitive? What are the advantages and challenges of such a strategy, and how effective do you think it will be? Comerci has attempted to lower its prices, but for many items, it simply lacks the negotiating power with its suppliers to get prices as low as Wal-Marts. Faced with extinction, Comerci has banded together with two other Mexican supermarket chains, Soriana and Gigante, to form a purchasing consortium (Sinergia) that allows them to jointly negotiate better bulk prices from suppliers. To prevent pricefixing and monopolistic behavior, Mexicos Federal Competition Commission (CoFeCo) requires that Sinergia issue regular reports regarding the nature of its purchasing agreements and that it sign confidentiality agreements with the participating retailing chains. As a representative body with no assets, Sinergias purchases are currently limited to local suppliers; its future is uncertain. Whether students feel that such a strategy will be effective or not will depend on the perspective they take. If they focus primarily on




costs, they may be of the opinion that the strategy will be sufficient. If, however, they are also concerned about issues such as product and store differentiation and the regulatory role of government, then they may be of the opinion that it is insufficient. 4. What else do you think Comercial Mexicana S.A. should do, given the competitive position of Wal-Mart? Comercial Mexicana is considering three basic options as it tries to survive in the new competitive environment driven by the presence of Wal-Mart in Mexico: remaining independent, merging with a local retail chain, or merging with a foreign retail chain. First, the firm needs to carefully examine the market and determine (a) ways in which it can differentiate itself from Wal-Mart (such as Targets slightly upscale market approach) and (b) whether it possesses or at least has access to sufficient assets to survive in the current environment. As part of that decision-making process, Comercial Mexicana also needs to consider both the available sourcing and market opportunities it enjoys, given its location within the NAFTA region. Finally, it should assess (a) what it can offer and (b) what it would desire from a local or foreign partner. With that information in hand, Comercial Mexicana will be in a better position to make effective operating decisions.

WEB CONNECTION Teaching Tip: Visit for additional information and links relating to the topics presented in Chapter Eight. Be sure to refer your students to the online study guide, as well as the Internet exercises for Chapter Eight.


_________________________ CHAPTER TERMINOLOGY: economic integration, p.269 global integration, p.269 bilateral integration, p.269 regional integration, p.269 World Trade Organization (WTO), p.269 General Agreement on Tariffs and Trade (GATT), p.269 most-favored-nation clause (MFN), p.269 normal trade relations (NTR), p.271 bilateral agreement, p.272 preferential trade agreement (PTA), p.272 free trade agreement (FTA), p.272 regional trade agreement (RTA), p.272 customs union, p.273 common market, p.273 static effects, p.273 dynamic effects, p.273 trade creation, p.273 trade diversion, p.273 economies of scale, p.274 European Union (EU), p.274 European Economic Community (EEC), p.274 European Free Trade Association (EFTA), p.274 European Community (EC), p.274 European Commission, p.276 European Council, p.276 Council of Ministers, p.276 European Parliament, p.277 European Court of Justice, p.277 Single European Act of 1987, p.277 Euro, p.277 Treaty of Maastricht of 1992, p.277 _________________________ European Economic Area (EEA), p.279 Common Agricultural Policy (CAP), p.282 North American Free Trade Agreement (NAFTA), p.283 maquiladora, p.285 Free Trade Agreement of the Americas (FTAA), p.286 Caribbean Community and Common Market (CARICOM), p. 287 Central American Common Market (CACM), p.287 Latin American Integration Association (LAIA), p.287 South Common Market, p. 287 (MERCOSUR), p.288 Andean Community (CAN), p.289 South American Community of Nations (CSN), p.289 Association of Southeast Asia Nations (ASEAN), p.291 ASEAN Free Trade Area (AFTA), p.291 Asia Pacific Economic Cooperation (APEC), p.292 African Union, p.294 commodity agreement, p.294 producers alliances, p.294 international commodity control agreement (ICCA), p.294 buffer stocks, p.294 quota system, p.295 Organization of Petroleum Exporting Countries (OPEC), p.296


ADDITIONAL EXERCISES: The Economic Integration Process Exercise 8.1. In 1998 the World Trade Organization issued a ruling in which it stated that the U.S. was wrong to prohibit shrimp imports from countries that failed to protect sea turtles from entrapment in the nets of shrimp boats. The basic position of the WTO was that while environmental considerations are important, the primary aim of international trade agreements is the promotion of economic development through unfettered free trade. Ask students to debate the position of the WTO in decoupling trade and environmental policy. Exercise 8.2. Ask students to compare the foreign market entry strategies of exporting, licensing, and foreign direct investment in (a) a free trade area, (b) a customs union, and (c) a common market. What barriers and incentives do they expect to encounter? (Be sure students assume the perspective of a firm located outside of the regional bloc.) Exercise 8.3. Prior to the breakup of the U.S.S.R., COMECON (also known as the Council for Mutual Economic Assistance (CMEA)) held the Soviet bloc together economically. It represented a trade association that existed to help fulfill the output goals of the central planning authorities of Russia and its satellite nations. Ask students to discuss the reasons they believe that COMECON disintegrated in a postSoviet environment. Exercise 8.4. Ask students to consider the major geographic areas of the world: Europe, Asia (including Oceania), Africa, South America, and North America. Then have them speculate about the extent to which they expect regional economic integration to progress in each of those areas (a) in 10 years and (b) in 25 years time. Finally, ask them to discuss the extent to which they expect global economic integration to progress during the next 25 years. Which organization(s) do they expect will play a major role in that process?