International Business

Chapter Eight
Cross-national Cooperation
and Agreements
Chapter Objectives
• 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

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Economic Integration
Economic integration: an agreement between or
amongst nations within an economic bloc to reduce
and ultimately remove tariff and nontariff barriers to
the free flow of products, capital, and labor across
the bloc
Approaches to economic integration include:
• global integration via the World Trade Organization
• bilateral integration between two countries
• regional integration via an economic bloc
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 all parties.

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The General Agreement on Tariffs
and Trade (GATT)
General Agreement on Tariffs and Trade (GATT):
established by twenty-three signator nations in 1947
as a multilateral agreement whose objective is to
liberalize world trade
• Most-favored nation clause (MFN): the fundamental
principle of “trade without discrimination,” i.e., each
member nation must open its markets equally to every
other member nation
• Eight major rounds of negotiations from 1947 to 1994 led
to a wide variety of multilateral reductions in both tariff
and nontariff barriers.
• The World Trade Organization was created in 1995 for
the purpose of institutionalizing the GATT.
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The World Trade Organization
(WTO)
World Trade Organization (WTO): a permanent body
founded in 1995 to (i) facilitate the development of
a free and open international trading system
according to the GATT and (ii) adjudicate trade
disputes between or amongst member nations
• normal trade relations: replacing the most-favored-
nation clause, the principle prohibits any sort of trade
discrimination
Exceptions:
– preferential treatment for products of emerging economies
– concessions granted to members of economic blocs
• dispute resolution: a clearly defined mechanism for the
settlement of disputes [continued]

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The WTO: Decision-making Units

• Ministerial Conference
• General Council
• Goods Council
• Services Council
• Council on Trade-related Aspects of Intellectual
Property (TRIPS)
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.

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GATT/WTO Milestones
• 1947 Havana, Cuba: 23 countries negotiated major
reductions in trade barriers that are codified as the
General Agreement on Tariffs and Trade
• 1947 Geneva, Switz.: 23 members held first official
meeting of the founding nations
• 1949 Annecy, France: 13 members negotiated tariff
concessions
• 1951 Torquay, UK: 38 members negotiated tariff
reductions and concessions
• 1956 Geneva, Switz.: 26 members negotiated tariff
reductions and concessions
• 1960-61 Dillon Round (Geneva, Switz): 26 members
negotiated tariff reductions and concessions
[continued]

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• 1964-67 Kennedy Round (Geneva, Switz): 62 members
reviewed new trade rules and passed an anti-dumping
agreement
• 1973-79 Tokyo Round: 102 members reduced customs
duties and nontariff barriers
• 1986-94 Uruguay Round: 123 members expanded
negotiations to include trade rules, services, intellectual
property, dispute resolution, textiles, and agriculture;
World Trade Organization was created
• 1995: World Trade Organization was formally
institutionalized
• 2001 Doha Development Agenda: 148+ members
continue to meet to resolve contentious issues between
developed and developing nations
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Types of Regional Trade
Agreements
Agreements that primarily address barriers to trade:
• free trade areas: economic blocs in which all barriers to
trade, i.e., tariff and nontariff barriers, are abolished
amongst member nations, but each member determines
its own external trade barriers beyond the bloc
• customs unions: economic blocs in which all barriers to
trade, i.e., tariff and nontariff barriers, are abolished
amongst member nations, and common external barriers
are levied against non-member countries
A more extensive type of regional trade agreement :
• common market: an economic bloc which also permits
the free flow of capital and labor
[continued]

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The Effects of Economic Integration

static effects: the shifting of resources from inefficient to

efficient firms as trade barriers fall
-trade creation: production shifts from less efficient domestic
producers to more efficient regional producers
-trade diversion: trade shifts from more efficient external
sources to less efficient suppliers within the bloc
following the imposition of common external barriers

dynamic effects: 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

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